Commercial Law Reviewer

COMMERCIAL LAW
CODE OF COMMERCE
1

Prepared by the COM MERCIAL LAW SECTION: ATTY. MA. LULU G. REYES, Adviser; MAAN GRACE A. BAGUIOEN, Subject Chair;
CHRISTINE JOY S. BULAWE, Assistant Chair; JOCELYN B. BUCLIG, ADEL CRISTINA Z. DIO, RANDALL F. LIDUA, APRIL GWEN T.
MARQUEZ, WYLVER B. POOTEN, EVANGELINE A. SANTIAGO, CHERRYL JEANE S. SIMBE, OLIVE RUTH A. SONGUITAN, members.
All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2009.
Saint Louis University
2009 BAR OPERATIONS

Commerce
It is the exchange of goods, productions, or
property of any kind. It is intercourse by way of trade
traffic between different peoples or states and the
citizens or inhabitants thereof, including not only the
purchase, sale, and exchange of commodities, but also
the instrumentalities and agencies by which it is
promoted and the means and appliances by which it is
carried on, and transportation of persons as well as
goods. (Blacks Law Dictionary)
It is that branch of human activity, the purpose of
which is to bring products to the consumer by means of
exchanges or operations which tend to supply and extend
to him, habitually, with intent to gain, at the proper time
and place and in good quality and quantity. (1 Blanco 36)

Commercial law
It is a phrase used to designate the whole body of
substantive jurisprudence applicable to the rights,
intercourse, and relations of persons engaged in
commerce, trade, or mercantile pursuits. (Blacks Law
Dictionary)
It is that branch of private law which regulates
the juridical relations arising from commercial acts.
It includes trade (business traffic within the
limitations of the state) and commerce (intercourse with
foreign states).

Law Merchant (Lex Mercatoria)
It is an old international law of merchants and
mariners growing out of their customary practices; a law
practiced and enforced by businessmen and ship owners
in their own courts without professional judges or
lawyers. (Mellinkoffs Dictionary of American Legal Usage)

Acts of commerce / Commercial Transactions
The Code of Commerce does not attempt anywhere
to define what commercial transactions are. It only
specifies two general classes:
(1) Those contained in the Code of Commerce and
(2) All others of analoguous character.
An act need not be performed by a merchant in order
that it may be considered an act of commerce.

They are governed by:
(1) Code of Commerce,
(2) by commercial usages observed in each place, in
the absence of (1), and
(3) by the rules of civil law, in the absence of (1) & (2).

Sources of Commercial laws
1. Principal
a. Statute law
b. Agreements
c. Customs
d. Court decisions
2. Auxiliary
a. Natural law
b. Scientific law
c. Foreign statutory law and judicial decisions
d. Opinions of authorities

Characteristics of Commercial Law
1. Uniform act or contract is governed by the
same set of rules
2. Universal / International exists in every civilized
society
3. Equitable involve the exchange of values or
consideration
4. Customary embody rules that are followed
from time to time or are invoked in everyday
transactions
5. Progressive accumulates new ideas and keeps
abreast with contemporary development

Constitutional Provisions on Commerce and Trade
1. Sec. 1, A. XII and Secs. 19 & 20, A. II
- Economic nationalism as constitutional Policy on
national economy and commerce
2. Secs. 9 & 10, A. II
- Equitable distribution of wealth
3. Secs. 10 & 12, A. XII
- Filipino First policy and nationalization
4. Sec. 1, A. VIII
- Power of judicial review in key economic and
commercial matters

Portions of the Code of Commerce still in force
1. Merchants, Books of Merchants and General
Provisions on Contracts (Arts. 1-63)
2. Joint Account Associations (Arts. 239-243)
3. Commercial Barter (Art. 346)
4. Transfers of Non-negotiable Credits (Arts. 347-
348)
5. Commercial Contracts of Overland
Transportations (Arts. 349-379)
6. Letters of Credit (Arts. 567-572)
7. Maritime Commerce (Arts. 573-869)
8. Charter Party
9. Respondentia
10. Averages
11. Bottomry
12. Bill of Lading
13. Aval
14. Crossed Checks
15. Arrival Under Stress
16. Collision

Provisions in the Code of Commerce which have been
repealed by the New Civil Code
1. Sales
2. Partnership
3. Agency
4. Loan
5. Deposit and
6. Guaranty

Special Commercial Laws:
1. Corporation Code
2. Negotiable Instruments Law

CODE OF COMMERCE

COMMERCIAL LAW
CODE OF COMMERCE
2

2009 BAR OPERATIONS
3. Insurance Code
4. Public Service Law
5. General Banking Law
6. Securities Regulation Code
7. Insolvency Law
8. Retail Trade Nationalization Law
9. Chattel Mortgage Law
10. Warehouse Receipts Law

CIVIL LAW CODE OF COMMERCE
Acceptance made by
letter/telegram does NOT
bind the offeror EXCEPT from
the time it came to his
knowledge; contract is
presumed to have been
entered into in the place
where the offer was made
(Theory of Cognition)
Contracts are perfected from
the moment an answer is
made accepting the offer
(Theory of Manifestation)
If the obligation does not fix a
period, action filed with the
court for the fixing of the
period
Obligation without a fixed
period demandable:
a) 10 days after perfection, if it
gives rise to an ordinary action
b) on the next day, if it
involves immediate action
Default depends on the
actuations of the obligee or
creditor; no liability if no
demand EXCEPT if time is of
the essence in the contract
Every debtor in default
without need of demand
(mora ex re)

Merchants
1. Those who having capacity to engage in
commerce, habitually devote themselves
thereto.
2. Commercial or Industrial associations organized
in accordance with the Code of Commerce.

Classes of Merchants
1. Foreign Merchants
2. Filipino Merchants
3. Commercial and Industrial companies created in
accordance with the Code of Commerce and by
special laws

Essential Requisites to be considered a Merchant
1. Legal capacity
2. Habitually engaged in commerce

The legal presumption of habitually engaging in
commerce shall exist from the time the person who
intends to engage therein gives announcement, by
means of circulars, newspapers, handbills, poster
exhibited to the public, or by other means
whatsoever of an establishment, the purpose of
which is to conduct commercial transaction

Essential Requisites of a Merchant (accdg. to class)
1. Foreign Merchants
a) Engaging in Commerce
Foreigners and companies created abroad may
engage in commerce in the Philippines subject
to (1) the laws of their country with respect to
capacity to contract and
to the (2) provisions of the Code of Commerce as
regards the creation of their establishment in
foreign territory, mercantile operations and the
jurisdiction of the courts of the Philippines (3)
Corporation Code and other laws
- There is a need to obtain license from the SEC
- However, the Board of Investment may impose
requirements other that those set by the
Corporation Code (172 S 490)

b) Investing in the Philippines
Under the Foreign Investments Act of 1991,
foreigners are allowed to invest up to 100% of
the capital needs of the firm
However, they are still prohibited from
investing in industries covered by the
negative list which includes:
a. Those provided in the Constitution and
other Philippine laws
b. Defense related industries
c. Those with health and moral implications
d. Those with needing capital of not more
than $500,000
e. Industries in areas already adequately
covered

2. Filipino Merchants
a) Individual
i. Legal capacity to engage in commerce
ii. Habitual engagement therein
iii. Completed the age of 18 (as amended by R.A.
6809)
iv. Free disposition of his property
b) Association
i. Commercial or industrial company
ii. Created in accordance with existing
legislation
iii. Legal capacity to engage in commerce
iv. Habitual engagement therein

Persons disqualified to be merchants
1. ABSOLUTELY disqualified
Incapacity extends throughout the Philippines
Effect of act: null and void
i. Persons serving penalty of civil interdiction
ii. Insolvents
iii. Those absolutely disqualified by special laws
2. RELATIVELY disqualified
Incapacity extends only to the territory where the
officer s exercising his functions
Effect of act: violator subjected to disciplinary action /
punishment
i. judicial and prosecuting officials in active
service (Rule 5.02, Code of Judicial Conduct)
ii. administrative, economic and military chiefs
iii. government collection agents and custodian
of funds
iv. stock and commercial brokers
A. MERCHANTS AND COMMERCIAL TRANSATIONS
(Code of Commerce Articles 1-63)

COMMERCIAL LAW
CODE OF COMMERCE
3

2009 BAR OPERATIONS
v. those who by special laws cannot trade in
specified territories
vi. Members of the Congress (Sec.14, A.VI)
vii. President, Vice-President, members of the
Cabinet and their deputies/assistants
(Sec.13, A.VII)
viii. Members of Constitutional Commission
(Sec.2, A.IX)
ix. Ombudsman and (f)(g)(h) with respect to
any loan, guaranty or other form of financial
accommodation for any business purpose by
any government-owned or controlled bank
(Sec. 16, A.XI)

Commercial Registries
It is a book where entries are made of merchants
and of documents affecting their commercial
transactions; or an office established for the purpose of
copying and recording verbatim certain classes of
documents of commercial value.

Rules on Commercial Registries
A. Individual Merchants
Optional
Registration at the Bureau of Domestic Trade
(Metro Manila) or Register of Deeds (provinces)
No registration = no request of inscription of any
document in mercantile registry; no availment of
effects of registration
B. Juridical Persons
Compulsory for corporations and partnerships
with capital of P3,000 or more, or contributions
of real estate
Registration at the SEC
No registration = no creation of corporation; no
effect on the existence of a partnerships juridical
personality
C. Shipowners
Compulsory for Philippine vessels with gross
tonnage of more than 3 tons
Issuance of Certificate of Philippine Registry
compulsory if more than 15 tons gross; optional
if 15 tons gross or less

Books of Merchant
A. Code of Commerce
1. Book of inventories and balances containing
a statement of assets, liabilities and capital
2. Journal containing day-to-day operations
3. Ledger containing the accounts classified as
to objects or persons, transferred from the
journal
4. Book for letters or telegrams sent out
5. Other books required by special laws
B. Special Laws
1. Book of minutes in case of juridical persons,
containing the resolutions passed
2. Stock and Transfer Book if the juridical
person is a corporation
C. National Internal Revenue Code
1. Bookkeeping records authorized by the
Finance Department if merchant, natural or
juridical, has gross quarterly sales, earnings,
receipts or output NOT exceeding P5,000
2. Journal or ledger if the gross quarterly sales,
earning, receipts or output exceed P5,000
bur are below P25,000
3. Books must be audited and examined by an
independent certified public accountant if
the amount exceeds P25,000

Probative Value of Merchants Books
1. Evidence against the merchants themselves
2. Conflict between books of two merchants: those
kept properly shall prevail
3. If one merchant keeps books and the other does
not (and cannot explain their absence), the
books of the former shall be admitted against
the latter;
4. If both keep their books properly but the entries
conflict, the court shall accept other proofs

Commercial Contract
It is an agreement between two or more
merchants or non-merchants binding themselves to give
to do something in commercial transactions

Contract of Correspondence
It is a contract entered into by correspondence
like letters, telegrams, by messengers, etc. but not
including those made by phone or through agents .

When is a mercantile contract by correspondence
perfected?
Under the Code of Commerce, it is perfected from
the moment the offeree accepts the offer, EVEN BEFORE
KNOWLEDGE of said acceptance by the offeror.
This rule is applicable to all commercial contracts
except in deposit, guaranty, sale, loan, agency, and
partnership where the Civil Code rule as to the perfection
is applicable

Rules to be observed with respect to commercial
contracts
1. Governing law
Commercial contracts shall be governed by the
Code of Commerce; in default of such provisions,
by the commercial usages observed in each place;
and in the absence of both, by the general rules of
civil law.
2. Formalities and exceptions
Commercial contracts shall be valid and create an
obligation and cause of action in suits, whatever
may be the form or in whatever language they may
be executed, the class to which they correspond,
and the amount involved, PROVIDED their
existence is proves by some means established by
the civil law EXCEPT
a. Contracts which must be in form
necessary for their validity as provided by
the Code of Commerce or special law, or
b. Contracts executed abroad which require
instruments, forms or formalities for their

COMMERCIAL LAW
CODE OF COMMERCE
4

2009 BAR OPERATIONS
validity, although Philippine law does not
so require

3. Unlawful Agreements
These cannot serve as the basis of any obligation or
cause of action even they involve commercial
transactions
4. Contracts through correspondence
Contracts through entered into through
correspondence shall be perfected from the time
an answer is made accepting the proposition or the
conditions by which the latter may be modified.
5. Availment of indemnification clause
The aggrieved party may take legal steps to
demand (1) fulfillment of the contract or (2) the
indemnity as provided in the contract.
6. Standard Compliance
It shall be executed and complied with in good faith
according to the terms in which they are drafted,
without evading the honesty, proper and usual
meaning of written and spoken words with
arbitrary interpretations, nor limiting the effects
which are naturally derived from the manner in
which the contracting parties may have explained
their wishes and contracted their obligations
7. Commencement date of effects of default
a. In contracts in which a day is fixed for their
compliance by will of the parties or by law, on
the day following the one they fall due
b. In contracts in which no such day is fixed,
(1)from the day on which the creditor legally
makes demand upon the debtor or (2) notifies
him of the protest of losses and damages
made against him before a justice, notary or
other public official authorized to admit the
same

Joint Account Partnership or Joint Partnership
It is a business arrangement whereby two or
more persons interested themselves in the business of
another making contribution thereto and participating in
the results of the business.
A joint account is a transaction of merchants where
other merchants agree to contribute the amount of
capital agreed upon, and participating in the favorable
and unfavorable results thereof in the proportion they
may determine. (UP law center)

Features
1. It may be formed without any formality and
may be privately contracted orally or in writing
2. Only one ostensible member; others are silent
3. Only the ostensible partner can sue and be
sued
4. No common name
5. No common fund

Joint account/
joint adventure
Commercial
Partnership
Common name
None it is in the
name of the
ostensible
partner
Yes
Common fund None Yes
Juridical
personality
None Yes
Capacity to sue
and be sued
Only in the name
of the ostensible
partner
It may under the
partnership name
Liability of
partners to 3
rd

persons
Only the
ostensible
partner
All general
partners
Liquidation
Made by the
ostensible
partner
May be entrusted
to a partner/s
Transaction
involved
Often limited to
one transaction
Continuing
business of
various
transactions
Management
By the ostensible
partner alone
All partners
participate unless
there is a
managing partner

Case x-ref (Heirs of Tan Eng Kee vs. CA 341S740)

Letter of Credit
It is a letter issued by one merchant to another
for the purpose of attending to a commercial transaction
(A. 567, Code of Commerce)
It is an engagement by a bank or other person
made at the request of a customer that the issuer will
honor drafts or other demands for payment upon
compliance with the conditions specified in credit
Through a letter of credit, the bank merely substitutes its
own promise to pay for the promise to pay of one of its
customers who in return promises to pay the bank the
amount of funds mentioned in the letter of credit plus
credit or commitment fees mutually agreed upon.
(Prudential Bank vs. IAC GR no 74886 December 8, 1992)
It is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to have control
of the goods before paying. To break the impasse, the
buyer may be required to contract a bank to issue a letter
of credit in favor of the seller so that, by virtue of the
letter of credit, the issuing bank can authorize the seller
to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of
documents required by the letter of credit. The buyer and
the seller agree on what documents are to be presented
for payment, but ordinarily they are documents of title
B. LETTERS OF CREDIT
(Code of Commerce Articles 567-572)

COMMERCIAL LAW
CODE OF COMMERCE
5

2009 BAR OPERATIONS
evidencing or attesting to the shipment of the goods to
the buyer. Once the credit is established, the seller ships
the goods to the buyer and in the process secures the
required shipping documents or documents of title. To
get paid, the seller executes a draft and presents it
together with the required documents to the issuing
bank. The issuing bank redeems the draft and pays cash
to the seller if it finds that the documents submitted by
the seller conform to what the letter of credit requires.
The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer
acquires the said documents and control over the goods
only after reimbursing the bank. (Bank of America vs. CA GR no.
105395 December 10, 1993)

Stages
1. Contract of sale between the buyer and seller
2. Application for LC by the buyer with the bank
3. Issuance of LC by the bank
4. Shipping of goods by the seller
5. Execution of draft and tender of documents by the
seller
6. Redemption of draft (payment) and obtaining of
documents by the issuing bank
7. Reimbursement to the bank and obtaining of
documents by the buyer

Nature of letters of credit
1. It is an accessory contract.
2. It is NOT a negotiable instrument because it does
NOT have all the requisites of negotiability.

What characterizes letters of credit, as distinguished
from other accessory contracts, is the engagement of
the issuing bank to pay the seller once the draft and
the required shipping documents are presented to it.
In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main
sales contract. (Ibid)

Essential conditions of a letter of credit
1. That it be issued in favor of a definite person and not
to order
2. That it be limited to a fixed and specified amount or
to one or more undeterminable amounts but within
the maximum limits of which has to be stated
exactly.
3. Duration
a. 6 mos. if used in the Philippines or
b. 1 year if used abroad,
Unless the parties provide for a different period.

It becomes VOID in fact and in law when it is not
used within the period agreed upon or within the
duration aforementioned as provided by law.

Parties to a letter of credit
1. Buyer/importer/applicant
a. procures the letter of credit and
b. obliges himself to reimburse the issuing bank
upon receipt of the documents of title.
2. Issuing/opening bank
a. issues the letter of credit and
b. undertakes to pay the seller upon receipt of the
draft and proper documents of titles and to
surrender the documents to the buyer upon
reimbursement.
3. Seller/exporter/beneficiary
a. in compliance with the contract of sale ships the
goods to the buyer and
b. delivers the documents of title and draft to the
issuing bank to recover payment
4. Advising/notifying bank
Correspondent bank of the opening bank
through which it advises the beneficiary of the
letter of credit
NOT liable for a breach of the LC; bound only to
check the apparent authenticity of the LC
5. Confirming bank
Bank which confirms the LC issued upon the
request of the beneficiary
Liable for a breach of the LC
6. Paying bank
Bank on which the drafts are to be drawn, which
may be the opening bank or another bank NOT
in the city of the beneficiary
7. Negotiating bank
Bank in the city of the beneficiary which buys or
discounts the drafts contemplated by the LC, if
such draft is to be drawn on the opening bank or
on another designated bank NOT in the city of
the beneficiary

How the parties respective relationships are governed:
1. Bank and Importer/applicant
by the terms of the application and agreement
for the issuance of letters of credit
2. Bank and Exporter/beneficiary
by the terms of the letter of credit issued by the
bank
3. Applicant and Beneficiary
by the contract of sale

Independent contracts in a letter of credit
1. Contract of sale between the buyer and the seller
2. Contract of the buyer with the issuing bank
3. LC proper in which the bank promises to pay the
seller pursuant to the terms and conditions stated
therein (with a pour atrui stipulation in favor of the
seller)

Independence principle
The bank determines compliance with the letter
of credit only by examining the shipping documents
presented; it is precluded from determining whether the
main contract is actually accomplished or not. (Bank of
America supra)

COMMERCIAL LAW
CODE OF COMMERCE
6

2009 BAR OPERATIONS
In the operation of a letter of credit, the involved
banks deal only with documents and NOT on goods
described in those documents. (Ibid, BPI vs. De Reny GR no. l-
24821 October 16, 1970)

Rule of Strict Compliance
Documents tendered by the seller/beneficiary
must strictly conform to the terms of the LC. They must
include all the documents required by the letter of credit.
(Feati Bank vs. CA, April 30,1991).
A correspondent bank which departs from what
has been stipulated under the letter of credit acts on its
own risk and may not thereafter be able to recover from
the buyer or the issuing bank the money thus paid to the
beneficiary. (Ibid.)

Fraud Exception Principle
The untruthfulness of a certificate accompanying
a demand for payment under a standby credit may qualify
as FRAUD sufficient to support an injunction against
payment.
The remedy of injunction is availing when the
following are present:
1. Clear proof of fraud
2. Fraudulent abuse of the independent purpose of
the LC (not fraud under the main agreement)
3. Irreparable injury might follow if injunction is not
granted; or the recovery of damages would be
seriously damaged. (Transfield Phil. Inc. vs. Luzon Hydro
Corp., November 22, 2004)

Types of letters of credit

IRREVOCABLE REVOCABLE
obligates the issuing bank to
honor drafts drawn in
compliance with the credit
and can neither be cancelled
nor modified without the
consent of all parties,
including the beneficiary
can be cancelled or amended
at any time before payment; it
is intended to serve as a
means of arranging payment
but not as a guarantee of
payment
CONFIRMED UNCONFIRMED
issued by one bank can be
confirmed by another, in
which case both banks are
obligated to honor drafts
drawn in compliance with the
credit
obligation is only of the
issuing bank
REVOLVING NON-REVOLVING
valid for several transactions
over a given period of time
valid for one transaction only

CUMULATIVE NON-CUMULATIVE
a revolving letter of credit in
which case the undrawn
amount amounts is carried
over to future periods
a revolving letter of credit in
which case any amount not
used by the beneficiary during
the specified period may not
be drawn against a later
period
BACK TO BACK LETTER OF CREDIT
credit with identical documentary requirements and covering
the same merchandise as another LC, except for a difference in
the price of the merchandise as shown by the invoice and the
draft; the second letter can be negotiated only after the first is
negotiated
STANDBY LETTER OF CREDIT
a bank-issued option on a loan under the terms of which, the
beneficiary has the right to take down the loan if the
account party (party requesting for the issuance of SLC) fails
to meets its commitment, in which case the issuing bank
disburses a specified sum to the beneficiary and books an
equivalent loan to its customer, account party
while SLCs are a security arrangement as they secure
obligation of the borrowers to the lender, they are not
converted thereby into contracts of guaranty. That would
make them ulra vires acts, (as the banks are not allowed under
sec 745 of the General Banking Act to enter into a contract of
guaranty or suretyship except in certain instances) rather than
a letter of credit which is within the powers of a bank. SLCs
are primary obligations and not accessory contracts (Insular
Bank of Asia and America vs. IAC November 17, 1988)

COMMERCIAL LAW
BULK SALES LAW
7

2009 BAR OPERATIONS

Purpose of the law
1. To prevent the defrauding of creditors by the secret
sale or disposal or mortgage in bulk of all or
substantially all of a merchants stock of goods in
bulk until the creditor of the seller shall have been
paid in full
2. An exercise of the police power of the State (Liwanag
vs. Mengraj, June 20, 1941)

Nature
It is penal in nature and in derogation of the right
to alienate property without restriction.
Its provisions must be strictly construed against
the State and liberally in favor of the accused.

Sale and transfer in bulk
It is any sale, transfer, mortgage or assignment,
regardless of intent, whether done in good or bad faith,
of:
a. a stock of goods, wares, materials, provisions or
merchandise OTHER THAN in the ordinary
course of trade and the regular prosecution of
the business of the vendor, mortgagor,
transferor or assignor or
b. all or substantially all of the business or trade
theretofore conducted by the above mentioned
persons
c. all or substantially all of the fixtures and
equipment theretofore conducted by the
business the vendor, mortgagor, transferor or
assignor

Goods contemplated:
1. STOCK
that which are kept for sale (common use of
this term when applied to goods in a
mercantile house)
2. MERCHANDISE
those that are usually bought and sold in
trade by merchants
something sold everyday and is constantly
going out of the store and being replaced by
other goods
3. FIXTURES
such articles of merchandise usually
possessed and annexed to the premises
occupied by merchants to enable them beer
to store, handle and display their wares
although removable without material injury
to the premises at or before the end of
tenancy

LANDS and BUILDINGS are NOT goods/
merchandise/ fixtures; these are NOT covered by
the Bulk Sales Law.

Formal Requirements
1. Sworn written statement of the names and
addresses of all creditors of the seller and
respective amounts of debts to be furnished the
buyer/mortgagee and submitted to the Bureau
of Domestic Trade (DTI) before receiving the
purchase price
2. Pro-rata application of the proceeds to the bona
fide claim of creditors as shown in the verified
statement
***Non-compliance with (1) and (2) is with
criminal consequence.
3. Detailed inventory of stock to be sold or
mortgaged
4. Notice to the creditors at least 10 days before the
sale or transfer
5. Registration of the documents in Bureau of
Domestic Trade (DTI)
***Non-compliance with (3,)(4) and (5) is with
criminal consequence.

Effect of failure to comply with the general scheme of
the Bulk Sales Law
The sale shall be NULL and VOID; it can be nullified by
the creditors of the seller. The buyer merely becomes a
trustee of such goods in behalf of the creditors, without
prejudice to the right of the buyer to be reimbursed for
the amount it paid and to any action he may have against
the seller.
If the buyer already has disposed of the goods, the
buyer shall be made liable for the value of those disposed
by him forming part of the bulk.

Exempt from application of the Bulk Sales Law
1. When there is written waiver of the provision of
the Bulk Sales Law from his creditors as shown
by verified statements (Sec.2)
Effect of waiver: The buyer, mortgagee can
be protected from future claims of creditors
of the seller, transferor, or assignor
2. Sale or mortgage made in the ordinary course of
business
3. Sale made by executors, administrators,
receivers, assignees in insolvency, or public
officers, acting under judicial process (Sec. 8)
4. Sale by assignee in insolvency or those beyond
the reach of creditors
5. Sale or properties exempt from attachment or
execution (Sec. 13, Rule 39, Rules of Court)

Parties:
1. SELLER / MORTGAGOR
a. Right
= To recover the property sold/mortgaged
b. Duties
i. To return to the buyer/mortgagee the
price delivered
ii. To deliver to such vendee, mortgagee,
or agent a written statement, sworn to
substantially,
BULK SALES LAW
(Act No. 3952)

COMMERCIAL LAW
BULK SALES LAW
8

2009 BAR OPERATIONS
- the names and addresses of all creditors
to whom said vendor or mortgagor may
be indebted,
- together with the amount of
indebtedness due or owing , or to
become due or owing to said creditors.
iii. To make a full detailed inventory
thereof and to preserve the same
showing the quantity at least ten days
before the sale, transfer of the goods
iv. To notify every creditor whose name
and addresses is set forth in the verified
statement of the vendor at least ten
days before transferring possession
thereof of the price, terms condition of
the sale, transfer, mortgage, or
assignment.
v. The sworn statement containing the
names and addresses of all the creditors
shall be registered in the Bureau of
Commerce.
vi. To apply the purchase or mortgage
money to the pro rata payment of the
bona fide of the creditors of the vendor
or mortgagor
c. Liabiliy
= Criminal liability
d. Remedies available to avoid liability
i. Comply with the specified formalities
ii. Obtain a written waiver from ALL the
creditors

2. BUYER / MORTGAGEE
a. Rights
E Recover the price delivered PLUS
damages
Right in the property as against the
seller/mortgagors creditors
b. Duty
= To hold the property in trust for the
seller or mortgagor
c. Liabilities
i. Personal liability for value of the
property in trust if disposed
ii. Possible criminal liability

3. CREDITORS of seller/mortgagor
a. Who are creditors?
All of the sellers creditors at the time of
the sale/mortgage
Creditors whose claims came into
existence subsequent to the sale are
entitled to the benefits of the statute;
they need NOT be judgment creditors
and their claim need NOT be due
b. Rights
i. To be justly paid in full
ii. To file an action against the
seller/mortgagor under the Bulk Sales
Law
iii. To collect on the credit against the
debtor and to attach on the property
fraudulently sold/ mortgaged (Pp. vs
Mapoy, 73 P 678)
c. Remedies available
i. Action against the goods to subject
them to payment of a debt (execution,
attachment, garnishment or proceeding
in equity)
ii. Ordinary action to obtain money
judgment against the purchaser by the
creditors in violation of the Bulk Sales
Law if the purchaser has disposed of the
property held in trust

Offenses punishable under the Bulk Sales Law
1. Failure to deliver to the vendee, mortgagee or to
his agent or representative the sworn statement
provided for
2. To transfer title to the same without
consideration or for a nominal consideration only
3. Failure to apply the purchase or mortgage
money of the said property to the pro rata
payment of the bona fide claim or claims of the
creditors
4. Incomplete, false or untrue sworn written
statement; EFFECTS:
a. Without knowledge of buyer
Buyer will be protected if the statement
is fair upon its face
Remedy of creditor is to criminally
prosecute the seller and NOT against
the goods
b. With knowledge or imputed knowledge of
buyer
Buyer accepts at his own risk
Sale is valid between seller and vendor
Void as against the creditors
c. With names of certain creditors without
omitting notice
Sale is void as to such creditors
d. With respect to an innocent purchaser for
value from the original purchaser
Buyer is protected; creditor cannot
pursue property

Effects of violation(s)
1. Contract is
a. Valid between the seller and buyer
b. Valid between persons other than the
creditors
c. Void as to affected creditors of the
seller/mortgagor
2. Purchaser acts as a trustee or receiver for the
benefit of the creditors of the seller
3. Criminal liability, if expressly provided

Penalty
1. imprisonment of not less the six months, nor
more than five years, or
2. fine in a sum not exceeding five thousand pesos,
or
3. both, in the discretion of the court

COMMERCIAL LAW
WAREHOUSE RECEIPTS LAW
9

2009 BAR OPERATIONS

Purposes
1. To regulate the status, rights and liabilities of the
parties in a warehousing contract
2. To protect those who, in good faith and for value,
acquire negotiable warehouse receipts by
negotiation
3. To render the title o, and right of possession of,
property stored in warehouses more easily
convertible
4. To facilitate the use of warehouse receipts

Applicability
To ALL warehouses, public/private, bonded or
not
Articles 1507-1520 of the Civil Code apply in all
other cases where receipts are NOT issued by a
warehouseman.

Definition of terms:
1. Warehouseman
person lawfully engaged in the business of
storing goods for profit
- only a warehouseman may issue
warehouse receipts; those not
issued by a warehouseman are NOT
warehouse receipts. (Sec. 1)
- but a duly authorized officer or
agent of a warehouseman may
validly issue a warehouse receipt
(National Bank vs. Producers Warehouse
Association, January 9, 1922)
2. Warehouse
the building or place where goods are
deposited and stored for profit
3. Warehouse receipts
written acknowledgement by a
warehouseman that he has received and
holds certain goods therein described in
store for the person to whom it is issued; a
written contract between the owner of the
goods and the warehouseman to pay the
compensation for that service
4. Non-negotiable receipts
receipt in which it is stated that the goods
received will be delivered to the depositor,
or to any other specified person
5. Negotiable receipts
receipt in which it is stated that the goods
received will be delivered to the bearer or to
the order of any person named in such
receipt

Functions of warehouse receipts
1. They are simple CONTRACTS evidencing the
underlying contract of deposit/carriage.
2. They are EVIDENCE of receipt of goods.
3. Under A.1636 of the New Civil Code, they are
DOCUMENTS OF TITLE to goods.

Contents
1. Location of the warehouse where goods are stored
2. Date of issue of the receipt
-
3. Consecutive number of the receipts
4. Statements whether the goods received will be
delivered to the bearer, to a specified person, or to a
specified person or his order
5. Rate of storage charges
6. Description of the goods or of the packages
containing them
- The mere fact that the goods deposited are
incorrectly described does not make ineffective
the receipt, when the identity of the goods is
fully established by evidence. Its indorsement
and delivery shall constitute a sufficient transfer
of the title of the goods. (American Foreign Banking
Corporation vs. Herridge, December 20, 1924)
7. Signature of the warehouseman which may be made
by his authorized agent
8. Warehousemans ownership of or interest in the
goods
9. Statement of advances made and liabilities incurred

These are required for the protection of the depositor
and those succeeding to his rights.
If the warehouseman omits any of the required
information and injury is caused thereby to a person:
(a) the warehouseman shall be liable to the said
person for ALL damages caused by such
omission
(b) the validity and negotiability of the receipt are
NOT affected
(c) the contract is converted to ordinary deposit
(Gonzales vs. Go Fiong & Luzon Surety Co., August 30, 1958)

Inclusion of other terms
General Rule:
The warehouseman may insert any other terms
and conditions.
Exceptions:
1. Those contrary to the provisions of the
Warehouse Receipts Law
2. Those contrary to law, morals, good customs,
public order or public policy
3. Those exempting the warehouseman from
liability for misdelivery or for not giving statutory
notice in case of sale of the goods
4. Those exempting the warehouseman from
liability for negligence
5. Those which may impair the obligation of the
warehouseman to exercise that degree of care in
the safekeeping of goods entrusted to him
(Act no. 2137)

COMMERCIAL LAW
10

2009 BAR OPERATIONS
Degree of care required of a warehouseman in the
safekeeping of goods entrusted to him
The warehouseman is required to exercise that
degree of care which a reasonably careful man would
exercise in regard to similar goods of his own.

Form
Generally, the warehouse receipt is not required
to be in any particular form. However it should contain
the above cited contents.

Negotiability of warehouse receipts
1. Warehouse receipts are NOT negotiable instruments
under the Negotiable Instruments Law.
2. The warehouse receipt is negotiable under this Act; in
the passage of the warehouse receipts through the
channels of commerce, the law regards the property
which they describe as following them and gives to
their regular transfer by endorsement the effect of
manual delivery of the things specified in them.
3. No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if inserted,
shall be void.

Negotiable Instruments Warehouse Receipt
The subject is money The subject is merchandise
The instrument itself is
the object of value
The goods are the object of
value
Intermediate parties
become secondarily liable
Intermediate parties are
NOT liable for the
warehousemans failure to
deliver the goods.
Deliberate alteration
makes it null and void
Valid if altered BUT
enforceable only in
accordance with its original
tenor
If originally a bearer
instrument, it will remain
as such
Converted to an order
instrument IF specially
indorsed
Holder in due course may
obtain a better title
HDC obtains only the title
which the party negotiating
had over the goods

Kinds of receipts a warehouseman may issue
1. NON-NEGOTIABLE
one which provides that the goods will be
delivered to the depositor or to any other
specified person
should be stamped on its face non-negotiable;
otherwise, a holder believing it to be negotiable
may treat it as such (Sec. 7)
acquired through transfer and assignment, NOT
through negotiation; vests the transferee with
the ff. rights:
a. right of title to the goods, as against the
transferor
b. right to notify the warehouseman of the
transfer and acquire the direct
obligation of the warehouseman to hold
the goods for him
goods represented can be subject to attachment
or levy by execution (Sec.42)

2. NEGOTIABLE
one which that the goods will be delivered to the
bearer or to the order of any person named in the
receipt
failure to mark it as negotiable does NOT
render it non-negotiable for as long as it contains
words of negotiability (Sec. 5)
acquired through negotiation; vests the holder
with the ff. rights:
a. right of title to the goods of:
i. the person negotiating the receipt
ii. the person to whose order the goods
were to be delivered
b. right to have the warehouseman
directly obligated to hold possession of
the goods for him, as if the
warehouseman directly contracted with
him
goods represented cannot be subject to
attachment or levy by execution UNLESS in
proper circumstances (Sec.49)
when more than one is issued for the same
goods, the word duplicate should be placed
upon the face of every receipt, except on the first
one issued; otherwise, the warehouseman shall
be liable to a holder for value even after delivery
is made to the holder of the original receipt (Sec.6)

Advantages of a negotiable receipt from a non-
negotiable receipt
1. It protects a purchaser for value and in good faith
2. The goods covered by the receipt cannot be
garnished or levied upon under execution unless it
is surrendered, impounded or its negotiation
enjoined;
3. In case of negotiation, the holder acquires the
direct obligation of the warehouseman to hold
possession of the goods for him without notice to
such warehouseman.
4. The goods it covers are not subject to seller lien or
stoppage in transit

NEGOTIATION (Negotiable warehouse receipts)

A. HOW NEGOTIATED
1. DELIVERY, when the goods are deliverable to
a) the bearer, or
b) a specified person or order, and the latter or a
subsequent indorsee indorses it in blank or to
bearer
2. INDORSEMENT + DELIVERY
If the receipt is indorsed to a specified person, it
becomes an order receipt and negotiation can
only be effected by the indorsement of such
person in blank, to bearer or to another specified
person
Delivery alone is not sufficient
Effects of delivery without indorsement:
a) Transferee acquires title against transferor

COMMERCIAL LAW
11

2009 BAR OPERATIONS
b) Transferee can compel the transferor to
complete the negotiation by indorsement
c) Warehouseman has no direct obligation
3. PLEDGE
Negotiation of a receipt may also be by way of
pledge; as to the legal title to the property
covered by a warehouse receipt, a pledge is on
the same footing as a vendee EXCEPT that the
former is under obligation of surrendering his
title over the goods upon payment of the debt
secured. (BPI vs. Herridge, December 20, 1924)
BUT the pledgee or mortgagee does NOT
automatically become the owner of the goods,
but merely retains the right to keep them and
sell them (with consent of the owner) so as to
satisfy the obligation from the proceeds (PNB vs.
Sayo, July 9, 1998)
If the property is lost without the fault or
negligence of the pledgee or mortgagee, it is
regarded as lost on account of the real owner,
mortgagor or pledgor

B. WHO MAY NEGOTIATE
1. Owner
2. Any person to whom the possession or custody of the
receipt has been entrusted by the owner IF
a) by the terms of the receipt, the goods are
deliverable to the order of the person to whom
the possession/custody of the receipt has been
entrusted, or
b) the receipt is in such form that it may be
negotiated by delivery
3. Even a thief or fraud can negotiate the receipt if it is
in such a form that he need not forge any signature
(bearer instrument).

C. EFFECTS
1. Negotiation produces the effect of delivery: the
transferee becomes the owner of the goods.
2. Negotiation carries with it BOTH title to and
possession of the property.

D. RIGHTS
1. Person to whom a negotiable receipt has been
negotiated: (Sec41)
a. The title of the person negotiating the receipt
over the goods covered by the receipt;
b. The title of the person (depositor or owner) to
whose order by the terms of the receipt the
goods were to be delivered over such goods; and
c. The direct obligation of the warehouseman to
hold possession of the goods for him, as if the
warehouseman directly contracted with him.
2. Transferee of a negotiable receipt delivered
WITHOUT endorsement: (Sec43)
a. The right to the goods as against the transferor;
and
b. The right to compel the transferor to indorse the
receipt
- The negotiation shall take effect as of the time
when the endorsement is actually made.
- The endorsement of a receipt shall not make the
endorser liable for any failure on the part of the
warehouseman or previous endorsers of the
receipt to fulfill their respective obligations.
(Sec45)

E. WARRANTIES OF THE PERSON NEGOTIATING/
TRANSFERRING
1. That the receipt is genuine
2. That he has legal right to negotiate/transfer it
3. That he has NO knowledge of defects that may
impair the validity or worth of the receipt
4. That he has a right to transfer title to the goods and
that the goods are merchantable or fit for a particular
purpose whenever such warranties would have been
implied, if the contract of the parties had been to
transfer without a receipt of the goods represented
thereby

- The indorser does NOT warrant the
warehousemans complicity with the latters
duties.
- A holder for security who in good faith accepts
payment of a debt does NOT warrant:
a. The genuineness of the receipt
b. The quality or quantity of the goods
described therein

F. WARRANTIES IN DUPLICATE RECEIPTS
Sec 15 provides that if the term duplicate is
indicated in the receipts it warrants the ff:
a. That the duplicate is an accurate copy of
the original receipt; and
b. Such original receipt is uncancelled at
the date of the issue of the duplicate

G. EFFECT OF VENDORS LIEN
Where a negotiable receipt has been issued for the goods:
a. No sellers lien or right of stoppage in transitu shall
defeat the rights of any purchaser for value in good
faith to whom such receipt has been negotiated
whether it be prior or subsequent to the notification
to the warehouseman who issued such receipt;
b. The warehouseman shall NOT be obliged to deliver
or justified in delivering the goods to an unpaid seller
unless the receipt is first surrendered for cancellation.

TRANSFER (Non-negotiable warehouse receipts)

A. HOW TRANSFERRED/ASSIGNED
Delivery to the transferee accompanied by a deed of
assignment, donation or other form of transfer

B. TO WHOM DELIVERED
1. Depositor
2. Any other specified person

C. NON-NEGOTIABLE MARK
A non-negotiable receipt shall have plainly placed
upon its face by the warehouseman issuing it as non-
negotiable or not negotiable

COMMERCIAL LAW
12

2009 BAR OPERATIONS
Failure to do so, the holder of the receipt believing it
to be negotiable may, AT HIS OPTION, treat it as
imposing upon the warehouseman the same
liabilities he would have incurred had the receipt
been negotiable

D. RIGHTS OF THE TRANSFEREE (Sec42)
1. The title to the goods as against the transferor;
2. The right to notify the warehouseman of the transfer
thereof; and
3. The right, thereafter, to acquire the obligation of the
warehouseman to hold the goods for him.
- The right of the transferee is not absolute as it is
subject to the terms of any agreement with the
transferor. He merely steps into the shoes of the
transferor.

Rights of a warehouseman
1. To be paid
2. To exercise his lien on the goods deposited in
case of non-payment
3. To refuse delivery in proper legal circumstances

Obligations of a warehouseman
A. To issue a warehouse receipt in the required form for
goods received, and mark them accordingly (i.e. non-
negotiable, duplicate)
B. To exercise reasonable diligence towards such goods
C. To insure the goods in the following circumstances:
1. Where the law provides;
2. Where it was an inducement for the depositor to
enter into the contract;
3. Where it is an established practice
4. Where the warehouse receipt contains a
representation to that effect
D. To give up the proper notice in case of sale of the
goods, as provided
E. To NOT commingle the goods deposited UNLESS
they are fungible and of the same kind and grade (co-
ownership applies)
F. To deliver the goods to the person lawfully entitled
1. A warehouseman is bound to deliver the goods
UPON A DEMAND made either by:
a. The person lawfully entitled to the
possession of the goods or his agent (e.g.
buyer in an auction sale, donee of the goods)
b. A person who is entitled to delivery by the
terms of the non-negotiable receipt or who
has written authority from the person so
entitled either indorsed or written upon
another paper
c. A person in possession of a negotiable
receipt
2. Such demand must accompanied by:
a. an offer to satisfy the warehousemans lien
b. an offer to surrender the receipt, if
negotiable with such endorsements as
would be necessary for negotiation of the
receipts
c. a readiness and willingness to sign, when the
goods are delivered, an acknowledgment
that the goods had been delivered
3. Ownership is NOT a defense for the refusal to
deliver goods
When the warehouseman has rendered it
beyond his power to deliver the goods,
demand may be dispensed with. (A.1169,NCC)
Refusal or failure to deliver: the burden shall
be upon the warehouseman to establish the
existence of a lawful excuse for the refusal.
Neither can the warehouseman, as a
depositary for hire, set up an adverse title in
another as an excuse for his failure to deliver
the property to his bailor on demand. (Sec.19)
DOCTRINE OF ESTOPPEL:
The warehouseman cannot refuse to deliver
the goods on the ground that he has
acquired title or right to the possession of
the same unless such title or right is derived:
a. Directly or indirectly from a transfer
made by the depositor at the time of the
deposit for storage or subsequent
thereto;
b. From the warehousemans lien. (Sec.16)
4. The warehouseman may legally refuse to deliver
goods in the following circumstances:
a. When the holder of the receipt does NOT
satisfy the conditions prescribed in Section 8
of the Act
b. When the warehouseman has legal title in
himself on the goods, such title or right
being derived directly or indirectly from the
transfer made by the depositor at the time
or subsequent to the deposit for storage, or
from the warehousemans lien (Sec.16)
c. If the warehouseman had been requested by
a person lawfully entitled to a right of
property or possession in the goods NOT to
make delivery to any person (Sec.10)
d. If he had information that the delivery to be
made was to one NOT lawfully entitled to
the possession of the goods (Sec.10)
e. Where the goods have already been lawfully
sold to third persons to satisfy the
warehousemans lien; or disposed of
because of their perishable or hazardous
nature (Sec.36)
f. In case of adverse claimants (Secs.17 and 18)
g. In the valid exercise of the warehousemans
lien (Sec.31)
h. Delivery to a claimant with a better right
i. Attachment/levy of the goods by a creditor
where the document is surrendered/
impounded or its negotiation enjoined
(Sec.25)
j. Where the document of title is attached by a
creditor (Sec.26)
k. Failure was not due to any fault of the
warehouseman (Sec.26)
G. To take up and cancel the warehouse receipt when
the goods are delivered

COMMERCIAL LAW
13

2009 BAR OPERATIONS
Liabilities of a warehouseman
A. Liability for misdelivery or conversion
1. A warehouseman would be liable for misdelivery
or conversion if he delivers the goods to one who
is not in fact lawfully entitled to the possession of
the goods
Conversion is an unauthorized assumption
and exercise of the right of ownership over
goods belonging to another through the
alteration of their condition or exclusion of
the owners right.
2. He would also be liable for misdelivery even if he
delivers to a person holding a non-negotiable
receipt or a negotiable receipt if prior to such
delivery he had either:
a. Been requested, by or on behalf of the
person lawfully entitled to a right or
property or possession in the goods, not to
make such delivery; or
b. Had information that the delivery about to
be made was to one not lawfully entitled to
the possession of the goods
3. Steps a warehouseman may take to protect him
from misdelivery:
a. He could ascertain the validity of the adverse
claim or to bring legal proceedings to
compel claimants to interplead (sec 17)
b. He may require the claimants to interplead
(sec 18)

B. Liability for alteration of receipts
1. If the alteration is IMMATERIAL, that is, the
tenor of the receipt is not changed, whether
fraudulent or not, authorized or not, the
warehouseman is liable on the altered receipt
according to its original tenor
2. If the alteration is MATERIAL, that is the tenor of
the receipt is changed, but authorized, the
warehouseman is liable according to the terms of
the receipt as altered.
3. If the alteration is MATERIAL BUT INNOCENTLY
MADE THOUGH UNAUTHORIZED, the
warehouseman is liable on the altered receipt
according to its original tenor; and
4. If the alteration is MATERIAL AND
FRAUDULENTLY MADE, the warehouseman is
liable according to the original tenor of the
receipt to a purchaser of the receipt for value
without notice and even to the alterer and
subsequent purchases with notice.

C. Liability for lost or destroyed receipts
If the receipt is claimed to have been lost or
destroyed, it is essential that the court shall pass upon the
question and make sure that the receipt is really lost or
destroyed before the goods are delivered or a new receipt
is issued; a competent court may order the delivery of the
goods only:
1. Upon proof of the loss or destruction of the
receipt; and
2. Upon the giving of a bond with sufficient
sureties to be approved by the court

D. Liability as to duplicate
1. Failure to place the word duplicate in a duplicate
receipt will make the warehouseman liable for all the
damages to anyone who purchased such receipt
believing it to be an original, even if the purchase be
after the delivery of the goods by the warehouseman
to the holder of the original receipt. (Sec 6)
2. He shall be guilty of a crime punishable by fine or
imprisonment, or both, if he issues a duplicate or
additional negotiable receipt for goods knowing that
a former negotiable receipt for the same goods or
any part of then is outstanding or and uncancelled,
without plainly placing upon the face of the receipt
the word duplicate, EXCEPT in the case of a lost or
destroyed receipt after proceedings.

E. Liability to rightful claimants
1. INTERPLEADER this is a remedy given to the
warehouseman in case there is more than one person
who claims title or possession of the goods either as a
defense to an action brought against him for non-
delivery or as an original suit; this would require the
different claimants to litigate among themselves.
2. Sec.18 provides that if someone other than the
depositor or person claiming has a claim to the title
or possession of the goods, the warehouseman shall
be excused from liability for refusing to deliver the
goods until he has a reasonable time to ascertain the
validity of the adverse claim or bring legal
proceedings to compel claimants to interplead.

F. Liability for non-existence or misdescription of
goods
GR: The warehouseman is under obligation to deliver
the identical property stored with him and if he fails
to do so, he is liable directly to the owner or holder of
a receipt for damages.
EXC: If the description consists merely of marks or
labels upon the goods or upon the packages
containing them, the warehouseman is not liable
even if the goods are not of the kind as indicated in
the marks or labels.

G. Liability for loss due to lack of care
GR: The warehouseman is required to exercise
ordinary or reasonable care in the custody of goods,
that is, the care a reasonably careful owner would
exercise over similar goods of his own. This is the
diligence of a good father of a family
EXC: In the absence of any agreement to the
contrary, the warehouseman is not liable for any loss
or injury to the goods which could not have been
avoided by the exercise of such care.

H. Liability to depositors of commingled goods
PURPOSE: to permit at all times the identification
and redelivery of the goods deposited
GR: A warehouseman shall keep the goods so far
separate from goods of other depositors, and from
other goods of the same depositor for which a
separate receipt has been issued.

COMMERCIAL LAW
14

2009 BAR OPERATIONS
EXC:
1. If authorized by agreement or by custom, or
2. If the goods are fungible goods with other goods
of the same kind and grade.
a. The various depositors of the mingled
goods shall own the entire mass in
common and each depositor shall be
entitled to such portion as the amount
deposited by him bears to the whole.
b. The warehouseman shall be severally
liable to each depositor for the care and
redelivery of his share of such mass to the
same extent and under the same
circumstances as if the goods had been
kept separate.

I. Liability for failure to mark a receipt intended to be
non-negotiable as non-negotiable
The holder of the receipt believing it to be negotiable
may, at his option, treat it as imposing upon the
warehouseman the same liabilities he would have
incurred had the receipt been negotiable.
The holder referred herein cannot be the original
holder because, as the depositor, he is presumed to
know whether he is getting a negotiable or a
non0negotiable receipt.

J. Failure to take up and cancel a negotiable receipt
when goods are delivered, OR failure to take up
and cancel a negotiable receipt or to place upon it a
statement of what goods have been delivered,
when the goods are partly delivered
GR: The warehouseman shall be liable for failure to
deliver the goods to any one who purchases for value
in good faith such receipt whether the purchaser
acquired title to the receipt before or after delivery of
the goods by the warehouseman. He shall also be
guilty in such case of crime punishable by fine or
imprisonment.
Exceptions:
1. Where the goods have been lawfully sold to
satisfy a warehousemans lien; or
2. Where the goods have been lawfully sold or
disposed of because of their perishable or
hazardous nature.

K. Liability for issuing receipts for goods not received
by him or are not under his actual control at the
time of issuance of the receipt

L. Liability for issuing receipts for the
warehousemans goods which do not state that
fact
A warehouseman shall be guilty of a crime
punishable by fine or imprisonment, or by both,
if he issues a negotiable receipt for the same
goods deposited with or held by him of which he
knows he is the owner, solely or jointly or in
common with others, if he fails to state such
ownership in the receipt

M. Liability for delivery of goods without obtaining
negotiable receipt or knowing that a negotiable
receipt is outstanding and uncancelled
Exceptions:
1. Where the goods have been lawfully sold to
satisfy a warehousemans lien or
2. The goods have been lawfully sold or disposed of
because of their perishable or hazardous nature
or
3. In case of lost or destroyed receipt after
proceedings

Attachment or levy of goods deposited
A. Negotiable receipt
The warehouseman has the direct obligation to hold
possession of the goods for the original owner or for
the person to whom the negotiable receipt of title
has been duly negotiated.(Sec 41)
GR: While in possession of such, the goods CANNOT
be attached or levied upon under an execution
unless:
1. The document be first surrendered; or
2. The negotiation is enjoined;
3. The document is impounded by the court.
EXCEPTIONS:
1. If the person depositing is not the owner of the
goods or one who has no right to convey title to
the goods binding upon the owner;
2. Actions for recovery or manual delivery of goods
by the real owner;
3. Cases where the attachment is made before the
issuance of the negotiable receipt of title
A creditor whose debtor is the owner of a negotiable
receipt CAN attach the negotiable receipt in the
debtors possession and NOT the goods covered by
such receipt. (Sec.26) This provision expressly gives the
court full power to aid by injunction and otherwise a
creditor seeking to get a negotiable receipt covering
such goods.
The prohibition is for the protection of the
warehouseman since he could be made liable to a
subsequent purchaser for value in good faith.
B. Non-negotiable receipt
The goods can be attached, provided it is done prior
to the notification of the warehouseman of the
transfer (Sec.42)
Absent such notice, both the warehouseman and the
sheriff have a right to assume that the goods are still
owned by the person whose name appears in the
receipt.

The warehousemans lien
A. Extent
The warehouseman has a lien on goods deposited or
on the proceeds thereof in his hands for:
1. All lawful charges for storage and preservation of
the goods
2. All lawful claims for money advanced, interest,
insurance, transportation, labor, weighing,
cooperating and other charges or expenses in
relation to the goods

COMMERCIAL LAW
15

2009 BAR OPERATIONS
3. All reasonable charges and expenses for notice
and advertisements of sale, and
4. Sale of goods where default has been made in
satisfying the warehousing lien.
The warehousemans lien over the goods deposited
with him is his security for the payment of the
charge, money advanced and other expenses.

B. Against what enforced
The warehousemans lien can be enforced against:
1. The goods of the depositor who is liable to the
warehouseman as debtor whenever such goods
are deposited; and
2. The goods of other persons stored by the
depositor who is liable to the warehouseman as
debtor with authority to make a valid pledge.
Purpose of the law: to give the warehouseman a lien
for charges against goods of persons who are
primarily liable for the charge incurred, and who by
their agreement create the relation of debtor and
creditor.

C. Remedies for enforcement
1. Refusing to deliver the goods until the lien is
satisfied;
2. Causing the extrajudicial sale of the property and
applying the proceeds to the value of the lien; and
3. Filing a civil action for the unpaid charges or by way
of counterclaim in an action to recover the property
from him.
- Whether a warehouseman has or has not lien upon
the goods, he is entitled to all remedies allowed by
law to a creditor against his debtor, for the collection
from the depositor of all the charges and advances
which the depositor has expressly or impliedly
contracted with the warehouseman to pay. (Sec 32)

D. Loss
The lien may be lost by:
1. Surrendering possession of goods
a warehouseman loses his lien upon the
goods by voluntary surrendering the
possession without requiring payment of the
lien, it will be presumed that the lien has
been waived or abandoned where the
warehouseman permits a depositor to
remove the goods BUT NOT where the
property is taken without warehousemans
consent or by force
2. Wrongfully refusing to deliver goods when
demand is made with which he is bound to
comply under provisions of Sec.8

E. Satisfaction by sale
1. PROCEDURE: (Sec.33)
a. The warehouseman shall give a WRITTEN
NOTICE to the person on whose account the
goods were held or to any person who has a
claim or interest in the goods. The notice shall be
given either by delivery in person or by
registered mail to the last known place of
business or abode. The notice shall contain the
following:
i. An itemized statement of the
warehousemans claim, the sum due
and the date(s) when it became due.
ii. A brief description of the goods against
which the lien exists.
iii. A demand that the amount of the claim
shall be paid on or before a day
mentioned (not less than 10 days from
the delivery of the notice if personally
delivered or from the time when the
notice should reach its destination if the
notice is sent by mail)
iv. A statement that unless the claim is paid
within the time specified, the goods will
be advertised for sale and sold by
auction at a specified time and place.
b. In accordance with the terms of the notice, a sale
of the goods by auction may be had to satisfy
any valid claim of the warehouseman for which
he has a lien over the goods.
c. After the time for payment ahs elapsed, an
advertisement of the sale, describing the goods
to be sold and stating the name of the owner or
person on whose account the goods has been
held and the time and place of the sale.
d. The ad shall be published once a week for two
consecutive weeks in a newspaper published in
the place where the sale shall be held. It can be in
the place where the lien was acquired or if such
place is manifestly unsuitable, at the nearest
suitable place.
If there is no newspaper published in such
place, the advertisement shall be posted at
least 10 days before such sale in not less
than six (6) conspicuous places therein.
e. The sale shall be held not less than 15 days from
the time of the first publication.
f. From the proceeds of the sale the
warehouseman shall satisfy his lien including the
reasonable charges of notice, advertisement and
sale.
g. The balance, if any, shall be held by the
warehouseman, and delivered on demand to the
person to whom he would have been bound to
deliver the goods.

2. EFFECT
The warehouseman shall not thereafter be liable for
failure to deliver the goods to the depositor or owner
of the goods even if such receipt be negotiable.
In cases of perishable and hazardous goods, the
warehouseman may give notice to the owner, or to
the person in whose name the goods are stored, to
satisfy the lien upon such goods and to remove them
from the warehouse. Failure to do so may entitle the
warehouseman to sell the goods at public or private
sale without advertisements. In case he was unable to
sell, he may dispose of them in any lawful manner, and
shall incur no liability by reason thereof.

COMMERCIAL LAW
16

2009 BAR OPERATIONS
Perishable and hazardous goods are goods which
by keeping will deteriorate greatly in value, or by
odor, leakage, inflammability or explosive nature
and will make warehouseman liable in case it will
injure other property.

Effect of subsequent negotiation by seller of a receipt
There is a duty upon the purchaser, mortgagee, or
pledgee of goods for which a negotiable receipt has
been issued, to require the negotiation of the receipt to
him; otherwise, his failure will have the same effect as
an express authorization on his part to the seller,
mortgagor or pledgor in possession of such receipt to
make any subsequent negotiation.

Criminal Offenses: Who are liable
1. Warehouseman, or any officer, agent or servant of
the warehouseman, who issues or aids in issuing a
receipt knowing that the goods have not actually
been received or are not under his actual control at
the time of issuing of such receipt
LIABILITY: Imprisonment not exceeding 5 yrs or
by a fine not exceeding P10, 000.00, or by both.

warehouseman, who fraudulently issues or aids in
fraudulently issuing a receipt for goods knowing that it
contains any false statements
LIABILITY: Imprisonment not exceeding 1 yr, or
by a fine not exceeding P2,000.00, or by both.

warehouseman, who issues or aids in issuing a
duplicate or additional negotiable receipt for goods
knowing that a former negotiable receipt for the
same goods is outstanding and uncancelled, without
plainly placing duplicate (except in case of loss or
destroyed receipts)
LIABILITY: Imprisonment not exceeding 5 yrs, or

4. If there are goods deposited or held by the
warehouseman as an owner, either solely or jointly
with others: that warehouseman, or any officer,
agent or his servant, knowing such ownership who,
issues or aids in issuing a negotiable receipt not stating
such ownership.

warehouseman, who delivers goods out of the
possession of such warehouseman, knowing that a
negotiable receipt is outstanding and uncancelled,
without obtaining the possession of such receipt at or
before the time of delivery
LIABILITY: Imprisonment not exceeding 1 yr, or a
fine not exceeding P2,000.00, or by both.

6. Any person who deposits goods to which he has no
title, or upon which there is a lien or mortgage, and
who takes, for such goods a negotiable receipt which
he afterwards negotiates for value without disclosing
his want of title or existence of the lien or mortgage.

COMMERCIAL LAW
GENERAL BONDED WAREHOUSE ACT
17

2009 BAR OPERATIONS

Purposes of the law
1. To protect depositors by giving then recourse in case
of the insolvency of the warehouseman against the
bond filed by him
To achieve this purpose, any person who wants
to engage in the business of receiving
commodities for storage is required by the Act to
first secure a license therefore from the
Department of Trade and Industry.
2. To regulate the business of receiving commodities for
storage
3. To encourage the establishment of more warehouse

GENERAL BONDED
WAREHOUSE ACT
WAREHOUSE RECEIPTS
LAW
Regulates and supervises
warehouses which put up a
bond
Prescribes the mutual duties
and rights of a warehouseman
who issues warehouse
receipts, and his depositor;
covers all warehouses,
whether bonded or not
A warehouseman is a person
engaged in the business of
receiving commodity for
storage.

A warehouseman is a person
lawfully engaged in the
business of storing goods for
profit

Applicability
1. Warehouseman engaged in the business of receiving
commodity for storage,
2. Including contracts or transactions wherein:
a. The warehouseman is obligated to return the
very same commodity delivered to him or to pay
its value
b. The commodity delivered is to be milled for the
owner thereof
c. The commodity delivered is commingled with
the commodity belonging to other persons, and
the warehouseman is obligated to return
commodity of the same kind or to pay its value

Commodities which may be stored in a bonded
warehouse
E Generally, these commodities could be any raw,
processed, manufactured or finished product or by-
product, goods, article, or merchandise, either
domestic or of foreign production or origin, which
may be traded or dealt in openly and legally.
Prohibited substances, the possession of which is
prohibited by law, may NOT be validly received for
storage in a bonded warehouse.

Bond required to be put by the warehouseman
1. The bond may either be cash or property bond or
bond issued by a duly authorized bonding company

2. The amount of the bond must not be less than
33 1/3% of the market value of the maximum quantity
of the commodity to be received by the
warehouseman.
3. It shall be conditioned as to respond for the market
value of the commodity actually delivered and
received at any time by the warehouseman in case
the latter is unable to return the commodity or to pay
its value.

Duties of a bonded warehouseman
1. To secure a license from the Bureau of Domestic
Trade (DTI);
2. To give the necessary bond;
3. To insure the commodity received for storage
against fire;
4. To receive for storage any commodity:
a. of the kind customarily stored by him in the
warehouse,
b. so far as his license or the capacity of the
warehouse will permit,
c. without making any discrimination between
persons desiring to avail themselves of
warehouse facilities
- A fine for double the market value of the
commodity so received is imposed in case of
excess of the authorized quantity. (Sec.12)
5. To keep complete record of all commodities
received by him, of the receipts issued therefore,
of the withdrawals, of the liquidation, and of all
receipts returned to and canceled by him;
6. To observe the rules and regulations of the
Bureau of Domestic Trade (DTI)

Right of a person injured by the breach by the
warehouseman of any of his obligation under the act:
He may sue on the bond put up by the
warehouseman to recover the damages he may have
sustained on account of such breach.
In case the bond given is not sufficient to cover the
full market value of the commodity stored, he may
sue on any property or assets of the warehouseman
not exempt by law from attachment and execution.

Offenses penalized under the act
A. Civil
- Breach of obligations secured by the bond
B. Criminal
1. Engaging in the business of receiving
commodities for storage without the proper
license
2. Receiving a quantity of commodity greater that
that specified in the license of the
warehouseman
3. Conniving or entering into a combination with an
unlicensed warehouseman for the purpose of
avoiding compliance with the requirement of
obtaining a license before engaging in the
business of receiving commodities for storage
GENERAL BONDED WAREHOUSE ACT
(ACT NO 3893 as amended by RA 247)

COMMERCIAL LAW
TRUST RECEIPTS LAW
18

2009 BAR OPERATIONS

Purposes
1. To encourage and promote the use of trust receipts
as an additional and convenient aid to commerce and
trade
2. To regulate trust receipts transactions in order to
assure the protection of the rights and the
enforcement of the obligations of the parties
involved therein
3. To declare the misuse or misappropriation of goods
or the proceeds realized from the sale of goods
released under trust receipts as an offense punishable
under A.315 of the Revised Penal Code
4. To punish the dishonesty and abuse of confidence in
the handling of money or goods to the prejudice of
another regardless of whether or not the latter is the
owner

Other purposes
1. In the case of goods or documents
a. To sell the goods or procure their sale;
b. To manufacture or process the goods with the
purpose of ultimate sale (here the entruster shall
retain its title over the goods whether in its
original or processed form until the entrustee has
complied fully with his obligation under the trust
receipt) or
c. To load, unload, ship or transship or otherwise
deal with them in a manner preliminarily or
necessary to their sale
2. In the case of instruments
a. To sell or procure their sale or exchange; or
b. To deliver them to a principal; or
c. To effect the consummation of some transaction
involving delivery to a depository or register; or
d. To effect their presentation, collection or
renewal

Constitutionality/Validity
The Court has consistently declared that it does NOT
violate the constitutional proscription against
imprisonment for non-payment of debts.
The Trust Receipts Law is a declaration by the
legislative authority that, as a matter of public policy,
the failure of a person to turn over the proceeds of
the sale of goods covered by a trust receipt or to
return said goods if not sold is a public nuisance to be
abated by the imposition of penal sanctions. (Tiomico
vs. CA, March 4, 1999)
It does NOT seek to enforce payment of a loan. The
practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place
them under the threats of criminal prosecution
should they be unable to pay it may be unjust and
inequitable, if not reprehensible.

Trust Receipt
It is a written or printed document signed by the
entrustee in favor of the entruster containing terms and
conditions substantially complying with the provision of
the decree.

Trust Receipt Transaction
It is any transaction by and between an entruster
and entrustee, whereby the entruster, who owns or holds
absolute title over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the
entruster of a trust receipt.

Parties to a trust receipt transaction:
1. ENTRUSTEE
- Borrower/buyer/importer
- person having or taking possession of goods,
documents or instruments under a trust receipt
transaction, and any successor-in-interest of
such person for the purpose(s) specified in the
trust receipt agreement
- owner of the goods purchased
2. ENTRUSTER
- Lender/financier
- person holding title over the goods, documents,
or instruments subject of a trust receipt
transaction and any successor-in-interest of such
person
- mere holder of security interest and NOT the
owner of the goods
- Security Interest a property interest in
goods, documents or instruments to secure
performance of some obligation of the
entrustee or of some third person
- Seller of the goods is a party to the contract
of sale with the buyer/importer, NOT a party
to the trust receipt transaction

Form and contents of the trust receipt
A trust receipt need not be in any particular form,
BUT every such receipt must substantially contain the
following:
1. A description of the goods, documents or
instruments subject of the trust receipt;
2. The total invoice value of the goods and the amount
of the draft to be paid by the entrustee;
3. An undertaking or a commitment of the entrustee to:
a. Hold in trust for the entrustee the goods,
documents or instruments therein described;
b. Dispose of them in the manner provided for in
the trust receipt; and
c. Turn over the proceeds of the sale to the
entruster to the extent of the amount owing to
the entruster or as appears in the trust receipt or
return the same in the event of non-sale within a
specified period.
- The trust receipt may contain other terms and
conditions agreed upon by the parties provided that
such shall not be contrary to the provisions of this
TRUST RECEIPTS LAW
(PD 115)

COMMERCIAL LAW
TRUST RECEIPTS LAW
19

2009 BAR OPERATIONS
law, any existing laws, public policy or morals, public
order or good customs.

Denominated currency of the trust receipt
The trust receipt may be in:
1. Philippine currency or
2. Any foreign currency acceptable and eligible as
part of international reserves of the Philippines.

In case of trust receipts denominated in foreign
currency, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange
rate on the date the proceeds of the sale are turned over to
the entruster.

Rights of the parties
A. Entrustee (Borrower/Buyer/Importer)
1. To receive the surplus from the public sale
2. To have possession of the goods as a condition
for his liability under this law
B. Entruster (Lender/Financier)
1. The entruster shall be entitled to the following:
a. Proceeds from the sale of the goods,
documents or instruments released under a
trust receipt to the entrustee
b. Return of the goods, documents or
instruments in case of non-sale and
c. Enforcement of all other rights conferred on
him in the trust receipt provided such are not
contrary to the provisions of this decree.
2. May cancel the trust and take possession of the
goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any
time upon default or failure of the entrustee to
comply with any of the terms and conditions of
the trust receipt; or
3. On or after default, give notice to the entrustee
of the intention to sell, and may, not less than 5
days after serving or sending of such notice, sell
the goods at a public or private sale, and the
entruster may, at a public sale, become a
purchaser.
4. The entrusters security interest in goods,
documents or instruments pursuant to the
written terms of a trust receipt shall be valid as
against all creditors of the entrustee for the
duration of the trust receipt agreement.
5. The entruster holding a security interest shall
NOT, merely by virtue of such interest or having
given the entrustee liberty of sale or other
disposition of the goods, documents or
instruments under the terms of the trust receipt
transaction, be responsible as principal or as
vendor under any sale or contract to sell made by
the entrustee.

Right of purchaser in good faith
Any purchaser of goods, documents or
instruments, who buys such for value and in good
faith from the entrustee, acquires said goods,
documents or instruments free from the entrusters
security interest.
Obligations of the parties
1. Hold the goods, documents or instruments in
trust for the entruster and shall dispose of them
strictly in accordance with the terms and
conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster
and turn over the same to the entruster to the
extent of the amount owing to the entruster or
as appears in the trust receipt;
3. Insure the goods for their total value against loss
from fire, theft, pilferage or other casualties;
4. Keep said goods or proceeds thereof whether in
money or whatever form, separate and capable
of identification as property of entruster;
5. Return the goods, documents or instruments in
the event of non-sale or upon demand of the
entruster; and
6. Observe all other terms and conditions of the
trust receipt not contrary to the provisions of this
decree.
1. Give possession of the goods to the entrustee;
and
2. Give at least 5 days notice to the entrustee of the
intention to sell the goods at an intended public
sale

Liabilities of the parties
1. CIVIL:
a. Liability for loss
- Loss pending their disposition,
irrespective of whether or not it was due
to the fault or negligence of the entrustee,
shall NOT extinguish his obligation to the
entruster for the value thereof.
b. Liability for damages under A.33 of the NCC;
because it is malum prohibitum, there is no
need of proof of intent to defraud
2. CRIMINAL: Estafa
- If there is failure on the part of the entrustee
to turn over the proceeds of the sale or to
return said goods, documents or
instruments if they were not sold or
disposed of in accordance with the terms of
the trust receipt.
- If a corporation, partnership, association or
other juridical entities commit the violation;
the penalty shall be imposed upon the
directors, officers, employees or other
officials responsible for the offense.

The breach of obligation under a trust receipt
agreement is separate and distinct from any
criminal liability for misuse and/or
misappropriation of goods or proceeds realized
from the sale of goods, documents or
instruments released under trust receipts,
punishable under Sec.13 of the Trust Receipts
Law in relation to A.315(1)(b) of the RPC. Being
based on an obligation ex contractu and not ex

COMMERCIAL LAW
TRUST RECEIPTS LAW
20

2009 BAR OPERATIONS
delicto, the civil action may proceed
independently of the criminal proceedings
instituted against petitioners regardless of the
result of the latter. (Sarmiento, Jr. vs CA, December 27,
2002)

E NO liability under any sale or contract to sell
made by the entrustee

Public sale of the goods by the entruster
1. Notice of the sale shall be deemed sufficiently given
if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the
entrustees last known address.
2. The proceeds of such sale, whether public or private,
shall be applied to the following:
a. Payment of the expenses thereof;
b. Payment of the expenses of re-taking, keeping
and storing of goods, documents or instruments;
c. Satisfaction of the entrustees indebtedness to
the entruster.
3. Excess/Deficiency
a. Excess (surplus) entrustee is entitled to it
b. Deficiency entruster is entitled to it (entrustee
to pay balance to entruster)

COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW
21

2009 BAR OPERATIONS

Negotiable Instrument
A negotiable instrument is a written contract for the
payment of money which complies with the requirements
of Sec. 1 of the Negotiable Instruments Law, which, by its
form and on its face is intended as a substitute for money
and passes from hand to hand as money, so as to give the
holder in due course the right to hold the instrument free
from defenses available to prior parties.

Functions
1. To supplement the currency of the government;
2. To substitute for money and
3. To increase the purchasing medium.
- A negotiable instrument is NOT legal tender.
Principal Features and Characteristics
1. Negotiability
- A bill, note or check may pass from hand to hand
so as to give the holder in due course the right to
hold the instrument and to collect the sum
payable for himself free from defenses
2. Accumulation of secondary contracts
- When negotiable instruments are transferred
through negotiation, secondary contracts are
accumulated because the indorsers become
secondarily liable not only to their immediate
transferees, but also to any holder

Non-negotiable documents and instruments:
These are some documents very similar to, but
not, negotiable instruments, because they lack one,
some, or all the requirements of a negotiable instrument
under Section 1 of the Negotiable Instruments Law.
Examples:
1. Treasury Warrants
2. Money Orders
3. Warehouse Receipts
4. Bills of Lading
5. Trust Receipts

Basis
NEGOTIABLE
INSTRUMENT
NON-NEGOTIABLE
INSTRUMENT
Requisites
Contains all the
requisites of Sec. 1 of
the NIL.
Does not have any,
some or all of the
requisites mentioned
in the N.I.L.
Transfer By negotiation By assignment
Rights
acquired
A holder in due
course can have
rights better than his
transferor
A transferee acquires
rights no better than
his transferor
Warranty
A prior party may
warrant payment
A prior party does
not warrant payment
but merely the
legality of his title
Law that
governs
Negotiable
Instruments Law
New Civil Code

Classes of Instrument
1. Promissory Note
- It is an unconditional promise in writing by one
person to another signed by the maker engaging
to pay on demand or at a fixed or determinable
future time, a sum certain in money, to order or
to bearer. (Sec. 184)
2. Bill of Exchange
- It is an unconditional order in writing addressed
by one person to another, signed by the person
giving it, requiring the person whom it is
addressed to pay on demand or at a fixed or
determinable future time a sum certain in money
to order or to bearer. (sec 126)
3. Check
- It is a bill of exchange drawn on a bank
payable on demand. (Sec. 185)
- It is a written order addressed to a bank or
person carrying on the business of banking,
by a party having money in their hands,
requesting them to pay on presentment, to a
person named therein or to bearer or order,
a named sum of money. (Moran v. CA, 230 SCRA
799).

BILL OF EXCHANGE CHECK
Not necessarily drawn on a
deposit. The drawee need not
be a bank.
It is necessary that a
check is drawn on a
bank deposit. The
drawee is always a bank.
Death of a drawer of a BOE,
with the knowledge of the
bank, does not revoke the
authority of the payee to pay.
Death of the drawer of a
check, with the
knowledge of the bank
revokes the authority of
the banker to pay.
May be presented for
payment within a reasonable
time after its last negotiation
because it may be further
negotiated.
Must be presented for
payment within a
reasonable time after its
issue.
May be payable on demand or
at a fixed or determinable
future time
Always payable on
demand.
PROMISSORY NOTE
BILL OF EXCHANGE
It contains an
unconditional promise
It contains an unconditional
order
There are two (2) original
parties, viz; maker and
payee
There are three (3) original
parties, viz; drawer, drawee
and payee
The original issuer
(maker) is primarily liable
The original issuer (drawer)
is secondarily liable
Only one presentment
(for payment) is needed
At least two (2)
presentments (for
acceptance and for
payment) are generally
needed.
Act No. 2031

COMMERCIAL LAW
22

2009 BAR OPERATIONS
FORM AND INTERPRETATION
OF NEGOTIABLE INSTRUMENTS

Other forms of negotiable instruments:
1. Certificate of deposit issued by banks, payable to the
depositor or his order, or to bearer (CALTEX v. CA,
212 SCRA 471)
2. Trade Acceptance;
3. Bonds, which are in the nature of a promissory notes;
4. Drafts which are bills of exchange drawn by one bank
upon another;
- All of these comply with Sec. 1 NIL.
- Letters of Credit are NOT negotiable.

Legal tender
It is that kind of money which the law compels a
creditor to accept in payment of his debt when tendered
by the debtor in the right amount.
A negotiable instrument is NOT legal tender.

Requisites of Negotiability in General (Sec. 1)
An instrument to be negotiable must conform to the
following requirements:
1. It must be in writing and signed by the maker or
drawer;
2. It must contain an unconditional promise or order to
pay a sum certain in money;
3. It must be payable on demand or at a fixed or
determinable future time;
4. It must be payable to order or to bearer;
5. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.

Requisites of a Negotiable Promissory Note:
1. It must be in writing and signed by the maker;
(Relate with Sec. 191)
2. It must contain an unconditional promise or order to
pay a sum certain in money;
3. It must be payable on demand, or at fixed or
determinable future time; and
4. It must be payable to order or to bearer.

Requisites of a Negotiable Bill of Exchange:
1. It must be in writing and signed by the drawer;
2. It must contain an unconditional order to pay a sum
certain in money;
3. It must be payable on demand or at a fixed or
determinable future time;
4. It must be payable to order or to bearer; and
5. The drawee must be named or otherwise indicated
therein with reasonable certainty.

The validity and negotiable character of a negotiable
instrument are NOT affected by the fact that:
1. It is not dated;
2. It does not specify the place where it is drawn or
where it is payable;
3. It bears a seal;
4. It designates a particular kind of current money in
which payment is to be made ; and
5. It does not specify the value given, or that any value
had been given therefore.

Unconditional promise or order
Where the promise or order is made to depend
on a contingent event, it is conditional, and makes the
instrument non-negotiable.
An instrument which contains an order or
promise to do any act in addition to the payment of
money is NOT negotiable.

The conditional nature of the promise or order is not
affected by:
a. An indication of a particular fund from which the
maker or acceptor reimburses himself after paying
the holder;
b. A statement of the transaction which gives rise to the
instrument. (Sec. 3)
c. A provision which gives the holder an election to
require something to be done in lieu of payment of
money. (Sec 5 par d)

FUND FOR
REIMBURSEMENT
PARTICULAR FUND FOR
PAYMENT
Drawee pays the payee from
his own funds; afterwards,
the drawee pays himself from
the particular fund indicated.
There is only one act- the
drawee pays directly from the
particular fund indicated.
Payment is subject to the
condition that the fund is
sufficient.
Particular fund indicated is
not the direct source of
payment but only the source
of reimbursement.
Particular fund indicated is
the direct source of
payment.
Indication in the instrument
does not affect the
unconditional character or
unconditionality of the
promise or order
Indication in the instrument
makes the promise or order
conditional.

Certainty of sum
- The sum is certain if the amount is fixed.
- The certainty is NOT affected although it is to be
paid:
1. with interests;
2. by stated installments;
3. by stated installments with acceleration clause;
4. with exchange (fixed or current rate);
5. with cost of collection or attorneys fees. (Sec. 2)

- The presence of an escalation clause or a de-
escalation clause or both in the instrument does
NOT affect the negotiable character of the
instrument.

Escalation Clause
It is an agreement pertaining to a loan or
forbearance of money, goods or credits which stipulates
that the rate of interest agreed upon may be increased in
the event that the applicable maximum rate of interest is
increased by law or by the Monetary Board.

COMMERCIAL LAW
23

2009 BAR OPERATIONS
De-escalation Clause
It is an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate
that the rate of interest agreed upon may be reduced in
the event that the applicable maximum rate of interest is
decreased by law or by the Monetary Board.

Acceleration Clause
It is a provision that upon default in payment of
any installment or of interest, the whole shall become
due.

Insecurity Clause
It is a provision in the contract which allows the
holder to accelerate payment if he deems himself
insecure.
The instrument is rendered non-negotiable
because the holders whim and caprice prevail without the
fault and control of the maker.

Extension Clause
It is a clause in the face of the instrument that
extend the maturity dates:
a. At the option of the holder; or
b. At the option of the maker or acceptor; or
c. Automatically upon or after a specified act
or event.

Payable in money
General Rule:
If some other act besides payment of money is
promised or ordered, the instrument becomes non-
negotiable.
Exceptions:
1. Authorizes the sale of collateral securities on
default;
2. Authorizes confession of judgment on default;
3. Waives the benefit of law intended to protect the
debtor/obligor;
4. Allows the holder the option to require
something to be done in lieu of money.
Payable on demand
An instrument is payable on demand:
1. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
2. In which no time for payment is expressed.

Payable on a determinable future time
Future time is determinable in the following
cases:
a. At a fixed period after date or sight;
b. On or before a specified fixed or determinable
future time;
c. On or at a fixed period after the occurrence of a
specified event, certain to happen, although the
exact date of happening is not certain.

An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect. (Sec 4)

Payable to order
- The instrument is payable to order where drawn
payable to the order of a specified person, or when
drawn payable to a specified person or to his order.
- The payee must be named or otherwise indicated
therein with reasonable certainty.
- It may be drawn payable to the order of:
a) A payee who is not maker, drawer, or drawee; or
b) The drawer or maker; or
c) The drawee; or
d) Two or more payees jointly; or
e) One or some of several payees; or
f) The holder of an office for the time being.

Payable to bearer
- The instrument is payable to bearer:
a) When it is expressed to be so payable;
b) When payable to a person named therein or
bearer;
c) When payable to the order of a fictitious or non-
existing person, and such fact was known to the
drawer or maker;
d) When the name of the payee does not purport to
be the name of any person; or
e) When the only OR last indorsement is an
indorsement in blank.
- An original bearer instrument remains to be a bearer
instrument even if indorsed specially and thus can be
further negotiated by mere delivery.
- When the payee is vaguely designated, the loss will
be borne by the party who caused it the drawer.
(Equitable Bank v. IAC, 161 SCRA 518).

Rules as to dates
a. Where the instrument is dated, such date is deemed
prima facie to be the true date of the making (of the
PN) or drawing (of the Bill of Exchange). (Sec. 11)
b. Where an acceptance of a bill is dated, such date is
deemed prima faice to be the true date of acceptance
thereof. (Sec. 11)
c. Where any indorsement of a note or bill is dated,
such date is deemed prima facie to be the true date
of the indorsement. (Sec. 11)
d. Where an instrument expressed to be payable at a
fixed period after date is issued undated, any holder
may insert therein the true date of issue and the
instrument shall be payable accordingly. (Sec. 13)
e. Where the acceptance of an instrument payable at a
fixed period after sight is undated, any holder may
insert therein the true date of acceptance and the
instrument shall be payable accordingly. (Sec. 13)
- The insertion of a wrong date in d. and e. above
does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him,
the date so inserted is to be regarded as the true
date.
f. Antedating or postdating an instrument does not
affect the validity or negotiability thereof unless done
for an illegal or fraudulent purpose.
- The person to whom an ante-dated or post-
dated instrument is delivered acquires title
thereto as of the date of delivery. (Sec. 12)

COMMERCIAL LAW
24

2009 BAR OPERATIONS
INCIDENTS IN THE LIFE
OF A NEGOTIABLE INSTRUMENT

g. Where the instrument provides for the payment of
interest, the interest runs from the date specified in
the instrument as the starting point for the running of
the interest. If the instrument does not specify the
date from which interest is to run, the interest runs
from the date of the instrument, and if the
instrument is undated, from the issue thereof.
h. When a promissory note is payable on demand, the
date of its issuance is important in relation to when it
should be presented for payment. Sec. 71 provides:
where a promissory note is payable on demand,
presentment for payment must be made within a
reasonable time after its issue.
i. When a bill of exchange is payable on demand, the
date of its last negotiation is important in relation to
when it should be presented for payment. Sec. 71
provides: In the case of a bill of exchange which is
payable on demand, presentment for payment will
be sufficient if made within a reasonable time after
the last negation thereof.

Rules on interpretation of instruments
1. Discrepancy between the amount in figures and that in
words
- The words prevail, but if the words are
ambiguous, reference will be made to the figures
to fix the amount.
2. Instrument NOT dated
- considered dated on the date of issue
3. Conflict between written and printed provisions
- written provisions prevail
4. Interest provided for, BUT no starting date was
specified
- starting date is the date of the instrument, in the
absence of said date, from date of issue
5. Instrument is ambiguous
- if the instrument is ambiguous such that there is
doubt whether it is a bill or note, the holder may
treat it either as a note or a bill at his option.
6. Signature on instrument does not indicate capacity in
which made
- Where it cannot be determined in what capacity
a person affixed his signature to a negotiable
instrument, he is deemed to have signed as an
indorser. As indorser, his liability under the
instrument is secondary, meaning that if the
party primarily liable cannot pay, the indorser
can be made to pay by the holder of the
instrument.
7. Where promissory note worded Promise to Pay is
signed by two (2) or more makers, they are jointly
and severally liable
- Under Section 17 (g) of the NIL and Article 1216
of the Civil Code, where the promissory note was
executed jointly and severally by two or more
persons, the payee of the promissory note had
the right to hold any one of the two (2) signers of
the promissory note responsible for the payment
of the whole amount of the note. (Philippine
National Bank v. Conception Milling Co., 5 SCRA 745).

1. Issue
2. Negotiation
3. Presentment for acceptance, in certain kinds of
bills of exchange
4. Acceptance
5. Dishonor by non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Discharge

ISSUE

Issue
The first delivery of the instrument, complete in
form, to a person who takes it as a holder. (Sec. 191)

Delivery
It is transfer of possession, actual or constructive,
from one person to another for the purpose of giving
effect thereto. (Sec. 191)

Kinds of Instruments which are issued:
1. complete instrument
2. incomplete instrument

Incomplete Instrument, how completed:
It must be filled up strictly in accordance with the
authority given and within a reasonable time. (Sec 14)
Where an instrument expressed to be payable at a
fixed period after date is issued undated, or where
the acceptance of an instrument payable at a fixed
period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the
instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to
be regarded as the true date.(Sec 13)
If after completion, an incomplete instrument is
negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time. (Sec 14)
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
any holder, as against any person whose signature
was placed thereon before delivery. (Sec 15)

Value
It is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time. (Sec
25)

COMMERCIAL LAW
25

2009 BAR OPERATIONS
- Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose signature
appears thereon to have become a party thereto
for value. (Sec 24)

Holder for value
Where value has at any time been given for the
instrument, the holder is deemed a holder for value in
respect to all parties who become such prior to that time.
( Sec 26)

When lien on instrument constitutes holder for value
Where the holder has a lien on the instrument
arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien. (Sec 27)

Effect of want of consideration
Absence or failure of consideration is a matter of
defense as against any person not a holder in due course;
and partial absence or consideration is a defense pro
tanto, whether the absence or failure is an ascertained
and liquidated amount or otherwise. (Sec. 28)

Accommodation
A. Definition
Accommodation is a legal arrangement under
which a person called the accommodation party
lends his name and credit to another called the
accommodated party, without consideration.
B. Effect
A person to whom the instrument thus executed
is subsequently negotiated, has a right of recourse
against the accommodation party inspite of the
formers knowledge that no consideration passed
between the accommodation and accommodated
parties.
C. Requisites
1. The accommodation party must sign as maker,
drawer, acceptor or indorser;
2. No value is received by the accommodation
party from the accommodated party; and
3. The purpose is to lend the name. (Crisologo-Jose v.
CA, 177 SCRA 594).
D. Accommodation Party
Is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to
another person.
- A corporation cannot act as an
accommodation party. Such is an ultra vires
act. (Crisologo-Jose v CA, 117SCRA594)
E. Liability of the Accommodation Party
1. The accommodation party is liable on the
instrument to a holder for value notwithstanding
that such holder at the time of taking the
instrument knew him to be only an
accommodation party. It is NOT a valid defense
that the accommodation party did not receive
any valuable consideration when he executed the
instrument. He is liable to a holder for value by
virtue of his being an accommodation party.
2. An accommodation party to a negotiable
instrument, in spite of the lack of consideration
between him and the accommodated party, is
liable to any other holder NOT to the
accommodated party. (Travel-On, Inc. v. CA, et al, 210
SCRA 351).
3. An accommodation partys liability as a solidary
party is unconditional party is unconditional and
is not affected by an extension of payment
granted by the creditor to the debtor.
HOWEVER, where the holder allowed payments
by the drawer direct to the contractor without
availing of the deed of assignment in its favor,
said holder is a bad faith holder, NOT a holder in
due course against whom an extension to pay
granted by the drawer is a defense by the
accommodation party. (Prudencio v. CA, 143 SCRA 6).
4. The liability of an accommodation party does not
extend to corporate accommodation because
the act of the corporate officers is ultra vires.
However, these officers are personally liable.
(Crisologo-Jose v. CA, 177 SCRA 594).
5. A promissory note, with an accommodation co-
maker, used to settle an estafa case, has an
illegality of cause, and does not make the
accommodation co-maker liable. (United General
Industries v. Paler, 112 SCRA 404)
6. A promissory note with an accommodation
maker, utilized to settle an estafa case, has an
illegal consideration, and does not make the co-
maker liable. (United general Industries v. Paler, 112 SCRA
404)
F. Rights of an accommodation party
1. Against the Accommodated Party
- the accommodation party, if obliged to pay to a
holder of value, can seek reimbursement from
the accommodated party.
2. Against the Co-accommodation Party
- where a solidary accommodation maker paid to
the bank the balance due on a promissory note,
he may seek contribution from the other solidary
accommodation maker, in the absence of a
contrary agreement between them. This right
springs from an implied promise between the
accommodation makers to share equally the
burdens resulting from their execution of the
note. They are joint guarantors of the principal
debtor. (Sadaya v. Sevilla)
G. A solidary accommodation maker may:
a. demand from the principal debtor
reimbursement of the amount which he paid on
the promissory note and
b. demand contribution from his co-
accommodation maker, without first directing
his action against the principal debtor,
PROVIDED that:
b.1. he made the payment by virtue of a
judicial demand, or
b.2. the principal debtor is insolvent.

COMMERCIAL LAW
26

2009 BAR OPERATIONS
NEGOTIATION

Negotiation
An instrument is negotiated when it is
transferred from one person to another in such manner as
to constitute the transferee the holder thereof. If payable
to bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder and
completed by delivery. (Sec 30)

Negotiation of the whole instrument
As a rule the whole instrument must be indorsed
EXCEPT when it was partially paid, in which case, the
remainder can be indorsed.

Rights Transferred by Negotiation
- Negotiation constitutes the transferee a holder of the
instrument. A holder is entitled to collect the instrument
from the party primarily liable, and if dishonored, from
the secondary parties. He can sue in court on the
instrument. If the holder is a holder in due course, he
takes the instrument free from the defects of title of prior
parties, free from personal defenses of prior parties
among themselves, and he can enforce the instrument for
the full amount thereof against all parties liable thereon.

Classes of Negotiation
1. By Mere Delivery of the Instrument
- Negotiation of negotiable instrument may be
effected by the delivery alone of the instrument
to the transferee in those negotiable instruments
which are:
a. originally payable to bearer, or
b. originally payable to order instruments where
the last indorsement is an indorsement in blank
or where the only indorsement is an indorsement
in blank.
2. By Indorsements Followed by Delivery
- A negotiable instrument payable to the order of
a specified person, or to him or his order, may be
negotiated by the payee by indorsement
followed by delivery of the instrument to the
indorsee. Subsequent negotiation must be made
in this manner if the holder who indorses
acquired the instrument under a special
indorsement.
- The payee of the negotiable instrument acquires
no interest with respect thereto until its delivery
to him. (Development Bank of Rizal v. Sima Wei)

INDORSEMENT

Indorsement
It is the legal transaction effected by the writing
of ones own name at the:
3. back of the instrument or
4. upon a paper (allonge) attached thereto with
or without additional words specifying the
person to whom or to whose order the
instrument is to be payable whereby one not
only transfers legal title to the paper
transferred but likewise enters into an
implied guaranty that the instrument will be
duly paid. (sec 31)
- General Rule: Indorsement must be of the
entire instrument.
- Exception: Where instrument has been paid in
part, it may be indorsed as to the residue. (Sec
32)

Kinds:
1. Special Indorsement
- specifies the person to whom, or to whose order,
the instrument is to be payable, and the
indorsement of such indorsee is necessary to the
further negotiation of the instrument. (Sec 34)
2. Indorsement in blank
- specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be
negotiated by delivery. (Sec 34)
3. Restrictive Indorsement
- an indorsement is restrictive when it
a. Prohibits the further negotiation of the
instrument; or
b. Constitutes the indorsee the agent of
the indorser; or
c. Vests the title in the indorsee in trust for
or to the use of some other persons.
- But the mere absence of words implying
power to negotiate does not make an
indorsement restrictive. (Sec 36)
Effect of restrictive indorsement; rights of
restrictive indorsee
- A restrictive indorsement confers upon the
indorsee the right:
a. to receive payment of the instrument;
b. to bring any action thereon that the
indorser could bring;
c. to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so. But all
subsequent indorsees acquire only the
title of the first indorsee under the
restrictive indorsement.(Sec 37)
4. Qualified indorsement
- constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding
to the indorser's signature the words "without
recourse" or any words of similar import. Such an
indorsement does not impair the negotiable
character of the instrument.(Sec 38)
5. Conditional Indorsement
- Where an indorsement is conditional, the party
required to pay the instrument may disregard
the condition and make payment to the indorsee
or his transferee whether the condition has been
fulfilled or not. But any person to whom an
instrument so indorsed is negotiated will hold
the same, or the proceeds thereof, subject to the
rights of the person indorsing conditionally. (Sec
39)
6. Unconditional or absolute indorsement

COMMERCIAL LAW
27

2009 BAR OPERATIONS
7. Irregular indorsement
- Where a person, not otherwise a party to an
instrument, places thereon his signature in blank
before delivery, he is liable as indorser, in
accordance with the following rules:
a. If the instrument is payable to the order
of a third person, he is liable to the
payee and to all subsequent parties.
b. If the instrument is payable to the order
of the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
c. If he signs for the accommodation of the
payee, he is liable to all parties
subsequent to the payee. (Sec 64)
8. Joint Indorsement
- Where an instrument is payable to the order of
two or more payees or indorsees who are not
partners, all must indorse unless the one
indorsing has authority to indorse for the others.
(Sec 41)

Indorsement of instrument payable to bearer
Where an instrument, payable to bearer, is
indorsed specially, it may nevertheless be further
negotiated by delivery; but the person indorsing specially
is liable as indorser to only such holders as make title
through his indorsement.(Sec 40)

Effect of instrument drawn or indorsed to a person as
cashier
Where an instrument is drawn or indorsed to a
person as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the
bank or corporation of which he is such officer, and may
be negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer. (Sec 42)

Indorsement where name is misspelled, and so forth
Where the name of a payee or indorsee is
wrongly designated or misspelled, he may indorse the
instrument as therein described adding, if he thinks fit, his
proper signature. (Sec 43)

Indorsement in representative capacity
Where any person is under obligation to indorse
in a representative capacity, he may indorse in such terms
as to negative personal liability. (Sec 44)

Requisites in indorsements made by an agent:
1. The agent must be authorized.
2. He must disclose his principal.
3. He must sign for and in behalf of his principal.

Signature per Procuration
- A signature per procuration is one made by an agent
with a limited authority to sign, and the principal is
bound only if the agent acts within the limits of the
authority.
- It is made by adding per procuration, per proc,
p.p. under the agents signature.

- Every negotiation is deemed prima facie to have
been effected before the instrument was
overdue.

- Every indorsement is presumed prima facie to
have been made at the place where the
instrument is dated.

- The indorsement or assignment of the instrument
by a corporation or by an infant passes the
property therein, notwithstanding that from
want of capacity, the corporation or infant may
incur no liability thereon.

- An instrument negotiable in its origin continues to
be negotiable until it has been restrictively
indorsed or discharged by payment or otherwise.

Effect of Indorsement on Instrument Negotiable by
DELIVERY
Where an instrument negotiable by delivery is
indorsed by the holder, he becomes liable as an
indorser.

Effect of Lack of Indorsement on an Instrument
Negotiable by INDORSEMENT Followed by Delivery
Where a holder of an instrument payable to order
transfers it for value without indorsing it, the
transferee is vested with the title, and acquires the
right to have the indorsement of the transferor. For
the purpose of determining whether the transferee
is a holder in due course or not, the negotiation
takes effect on the date the indorsement was
actually made.

Striking out of indorsements
The holder may STRIKE OUT indorsements NOT
NECESSARY TO HIS TITLE. The indorser whose
indorsement is struck out and all indorsers
subsequent to him are relieved from liability on the
instrument.
- Where an instrument is negotiated back to
a prior party, such party may, subject to
the provisions of this Act, reissue and
further negotiate the same. But he is not
entitled to enforce payment thereof
against any intervening party to whom he
was personally liable.

PRESENTMENT FOR PAYMENT
In Promissory Notes

Purpose
Not necessary to make the maker liable, but is
necessary to make the secondary parties liable.

Requisites
For a valid presentment for payment of a
promissory note, the following are necessary:
a. made within a reasonable time after issue;
b. by the holder or his agent;

COMMERCIAL LAW
28

2009 BAR OPERATIONS
c. to the party primarily liable under it;
d. at a reasonable hour on a business day; and
e. at the proper place as defined by the NIL.

- The holder must exhibit the instrument to the debtor
and should deliver it to said debtor if the latter pays.

When NOT required
Presentment is NOT required:
1. when after due diligence presentment cannot be
made;
2. when presentment is waived, and
3. when the indorser is an accommodated party.

When Instrument Considered Dishonored
The instrument is considered dishonored:
1. when after due presentment for payment,
payment is refused, and
2. when presentment being excused, the
instrument is overdue and unpaid.

PRESENTMENT FOR ACCEPTANCE

Presentment for Acceptance
It is the production of a bill of exchange to the
drawee for his acceptance or payment.

General rule:
Presentment for acceptance is NOT necessary to
render any party to the bill liable.

Exceptions:
1. Where the bill is payable after sight, or in any other
case, where presentment for acceptance is necessary
in order to fix the maturity of the instrument; or
2. Where the bill is expressly stipulates that it shall be
presented for acceptance; or
3. Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.

- In those instances found in Section 143 it is
NECESSARY, in order to charge persons secondarily
liable:
a. to make presentment for acceptance or
b. to negotiate the bill within a reasonable
time. (Sec. 144)

Purpose
- To get acceptance of the drawee for the purpose of
making him liable primarily as an acceptor.
- It is also a pre-requisite to the accrual of secondary
liability against the drawer and the indorser.

When necessary
It is necessary in the following cases:
a. to fix the maturity date;
b. where the bill expressly stipulated presentment;
c. where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee.

Requisites
Presentment for acceptance must be
1. made within a reasonable time,
2. by the holder, or his agent,
3. to the drawee or his agent
4. at a reasonable hour on a business day,
5. before the bill is overdue.

When excused
1. where the drawee is dead, hides or is a fictitious
or incapacitated person;
2. when after due diligence presentment cannot be
made;
3. when acceptance is refused on another ground
although presentment is irregular.

When Instrument Dishonored By Non-Acceptance
The instrument is considered dishonored by non-
acceptance:
1. where such acceptance is refused or cannot be
obtained, and
2. where acceptance being excused, the bill is not
accepted.

PRESENTMENT

How made
Presentment MUST be made by or on behalf of
the holder:

Requisites:
1. It must be presented at a reasonable hour;
2. It must be presented on a business day; and
3. It must be presented before the bill is overdue.

To WHOM presented
1. To the DRAWEE or some person authorized to
ACCEPT or REFUSE ACCEPTANCE on his
BEHALF; and
2. Where a bill is addressed to two or more drawees
who are not partners; presentment must be
made to them all unless one has authority to
accept or refuse acceptance for all, in which case
presentment may be made to him only;
3. Where the drawee is dead presentment may be
made to his personal representative;
4. Where the drawee has been adjudged a bankrupt
or an insolvent or has made an assignment for
the benefit of creditors, presentment may be
made to him or to his trustee or assignee.

When made:
1. A bill may be presented for acceptance on ANY
DAY on which negotiable instruments may be
presented for payment.
2. When saturday is not otherwise a holiday,
presentment for acceptance may be made
before twelve oclock noon on that day.

- The only difference between Section 72 and 85 is
that under Section 146 there is no distinction
between the instruments payable at a fixed or

COMMERCIAL LAW
29

2009 BAR OPERATIONS
determinable future time and instruments
payable on demand.

- Where the holder of a bill drawn payable
elsewhere other than the place of business or the
residence of the drawee has no time, with the
exercise of reasonable diligence to present the
bill for acceptance before presenting it for
payment on that day it falls due the delay
caused by presenting the bill for acceptance
before presenting it for payment is excused and
does NOT discharge the drawers and indorsers.

ACCEPTANCE

Acceptance
It is the signification by the drawee of his assent
to the order of the drawer.

Requisites
The acceptance must be
1. in writing;
2. signed by the drawee;
3. must NOT express that the drawee will
perform his promise by means other than
money payment; and
4. it must be communicated or delivered to the
holder.

How made
The acceptance may be on the bill, or on a
separate paper (allonge), and may even be in writing
before the bill is drawn.

a. Express acceptance
- The drawee, if he wants to accept, must do
so expressly within twenty-four (24) hours
from presentment to him, or within the
period allowed him by the holder.
b. Implied or constructive acceptance
- If he destroys the bill, or refuses to return
the bill accepted or not accepted within said
period of twenty-four hours, or other period
allowed him by the holder, he is deemed to
have accepted the bill.

- A sight draft (usually accompanying a letter of credit
in importations) is payable on demand and needs no
acceptance by the drawee. (Prudential Bank v. IAC)
- It is usually done by writing across the face of the bill
the word ACCEPTED or words of similar import,
e.g. HONORED, I WILL PAY THE BILL, SEEN
followed by the signature of the drawee.
- The drawee must sign because without his signature
he would not be bound See Section 18, NIL.
- Acceptance by telegram has been held sufficient.

Classes of Acceptance
A. General and Qualified
1. GENERAL
- assents without qualification to the order of the
drawer.
- An acceptance to pay at a particular place is a
general acceptance unless it expressly states that
the bill is to be paid there only and not
elsewhere. (Sec.140)
- The holder of the bill has the right to require
general acceptance thus he may refuse to take
qualified acceptance and if he does not obtain an
unqualified acceptance he may treat the bill as
dishonored by non-acceptance accordingly the
holder must give notice of dishonor.

2. QUALIFIED
- varies the effect of the bill as drawn
- kinds:
a. Conditional one which makes payment by
the acceptor dependent on the fulfillment of
a condition therein stated;
b. Partial an acceptance to pay part only of
the amount for which the bill is drawn;
c. Local an acceptance to pay only at a
particular place;
d. Qualified as to time
e. The acceptance of some or more drawees
but NOT of ALL.
- Effect of taking qualified acceptance:
Where a qualified acceptance is taken the
drawer and indorsers are discharged from
liability on the bill unless they have expressly or
impliedly authorized the holder to take qualified
acceptance or subsequently assents thereto.
- When the drawer or indorser receives notice of
qualified acceptance he must within a
reasonable time express his dissent to the
holder or he will be deemed to have assented
thereto.

B. Express and Constructive
1. EXPRESS
- written on the instrument by the drawee
2. CONSTRUCTIVE
- NOT in writing,
a. Where the drawee to whom the bill is
delivered for acceptance, destroys it; or
b. Where the drawee refuses, within 24 hours
after such delivery or within such time as is
given him, to return the bill accepted or not
accepted.

- If the holder should demand its return before
twenty-four hours, the drawee would be required
to comply on pain of being held as an acceptor;
but return within twenty-four hours unaccepted
would not be a dishonor.
- In all the foregoing, the drawee will be deemed
to have accepted the bill even if there is no actual
written acceptance by him.

Effect of acceptance:
- Upon acceptance, the drawee becomes liable on the
bill. The bill becomes in effect a note, the acceptor

COMMERCIAL LAW
30

2009 BAR OPERATIONS
standing in the place of the maker, and the drawer, in
the place of the first indorser.
- But should the drawee refuse to accept, the payee or
the holder has no recourse against him but only
against the drawer and indorsers, if any.
- The payment of a check does NOT include or imply
its acceptance in the sense that this word is used in
Section 62, NIL.
Where acceptance may be written:
Acceptance may be made
1. on the bill itself, or
2. on a separate paper; and if on a separate paper
a. it may be acceptance as to an existing
bill; or
b. it may be acceptance as to a future or
non-existing bill.

If the bill is non-existent, the acceptance on a separate
paper must comply with following requirements:
1. That the contemplated drawee shall describe the
bill to be drawn and promise to accept it.
2. That the bill shall be drawn within a reasonable
time after such promise is written; and
3. That the holder shall take the bill upon the credit
of the promise.

The drawee is allowed twenty-four hours after
presentment in which to decide whether or not he will
accept the bill; the acceptance if given, dates as of the
day of presentation.

NOTE: The time allowed begins from the time of delivery
and not after demand for a return of the bill and the time
for returning the bill to the holder does not begin to run
from the demand for its return but from the date of its
delivery.

Drawee bank is NOT entitled to 24 hours to decide
whether to pay or not. But, if the check is presented for
certification, this ruling will not apply, as certification is
equivalent to acceptance.

Instances when a bill may be accepted:
1. Before the bill has been signed by the drawer;
2. Even when the bill is otherwise incomplete;
3. Even when the bill is overdue;
4. Even after it has been dishonored by non-
acceptance or by non-payment.

Instances when presentment for acceptance is excused
and a bill may be treated as dishonored by non-
acceptance:
1. Where the drawee is dead, or has absconded, or
is a fictitious person or a person not having
capacity to contract by bill;
2. Where, after the exercise of reasonable
diligence, presentment cannot be made;
3. Where, although presentment has been
irregular, acceptance has been refused on some
other ground.

When a bill is dishonored by non-acceptance
1. When it is duly presented for acceptance and
such an acceptance as is prescribed by this Act is
refused or cannot be obtained; or
2. When presentment for acceptance is excused
and the bill is not accepted.

Duty of the holder where bill is not accepted
Where a bill is duly presented for acceptance and
is not accepted within the prescribed time, the person
presenting it must treat the bill as dishonored by non-
acceptance or he loses the right of recourse against the
drawer and indorsers.

How bill is treated as dishonored by non-acceptance
1. by giving NOTICE OF DISHONOR; or
2. by making a PROTEST when required

Right of holder where bill is NOT accepted:
An immediate right of recourse against the
drawer and indorsers accrues to the holder and NO
PRESENTMENT for payment is necessary.
*The immediacy is subject to the giving of notice
of dishonor to the drawer and the indorsers.

ACCEPTANCE FOR HONOR

Definition
- Acceptance of a bill made by a stranger to it before
maturity, where the drawee of the bill refused to
accept it, and the bill has been protested for non-
acceptance or where the bill has been protested for
better security

Purpose
- to save the credit of the parties to the instrument or
some party to it, as the drawer, drawee, or indorser,
or somebody else

- Where a bill is accepted for honor, consideration
is presumed, and the presumption is that
acceptor has funds/money of the party for
whose honor he accepts.

Requisites
1. The bill must have been previously protested
(a) for non-acceptance or
b) for better security;
2. The acceptor for honor must be a person not a party
already liable thereon, that is, a stranger to the bill;
3. The bill is not overdue at the time of the acceptance
for honor;
4. The acceptor for honor must be a stranger to the bill;
and
5. The holder must give his consent.

COMMERCIAL LAW
31

2009 BAR OPERATIONS
How made (Formal Requisites of Acceptance for Honor)
1. It must be in writing;
2. It must indicate that it is an acceptance for honor;
3. It must be signed by the acceptor for honor;
4. It must contain an express/implied promise to pay in
money; and
5. The accepted bill for honor must be delivered to the
holder.

NOTE:
It is necessary that the acceptor for honor MUST APPEAR
before a notary public and declare that he accepts the
protested bill in honor of the drawer or indorser, as the
case may be, and that he will pay it at the appointed time.

- Where an acceptance for honor does not
expressly state for whose honor it is made, it is
deemed to be an acceptance for the honor of the
drawer.

Liability of the acceptor for honor
- Secondary, NOT primary or absolute.
- The acceptor for honor is liable to the holder and
all parties to the bill subsequent to the party for
whose honor he had accepted.

Acceptor for honor agrees to pay if
1. presentment for payment has been made;
2. the drawee does not pay;
3. the bill is protested for non-payment; and
4. notice of dishonor is given to him.

Maturity of a bill payable after sight which has been
accepted for honor
- Maturity is calculated from the date of noting for
the non-acceptance and NOT from the date of
the acceptance for honor.

Bills which must be protested for non-payment before
it will be presented for payment
1. Where a dishonored bill has been accepted for
honor supra protest; or
2. Where a dishonored bill contains a referee in case
of need.
*Reason: In order to fix the liability of the indorsers.

LIABILITIES OF PARTIES

General rule
Only persons whose signature appear on the
negotiable instrument are liable thereon. (Sec. 18)

Exceptions
1. where a person uses an assumed name or trade name
(Sec. 18);
2. the principal is liable if an authorized agent signs in
his behalf (Sec. 19);
3. in case of forgery, the forger is liable even if his
signature does not appear on the instrument;
4. a person who negotiates by mere delivery

Instances where a persons signature appears on a
negotiable instrument and yet he is not liable thereon
1. in case of an undelivered and incomplete instrument
the person whose signature is placed thereon before
delivery (Sec. 15);
2. in case of a signature by an authorized agent (Sec.
19);
3. in case of indorsement by a minor or incapacitated
person (sec. 22);
4. in case of forgery, the person whose name appears
on the instrument but forged is not liable thereon.

A. Parties PRIMARILY Liable
1. MAKER
a. Engages to pay according to the tenor of the
instrument
b. Admits the existence of the payee and his
capacity to indorse.

- The liability of two or more co-makers using the
words I promise to pay is solidary while the
liability of two or more co-makers using the
words We promise to pay is joint and therefore
liable for their proportionate share.

2. ACCEPTOR / DRAWEE WHO ACCEPTS THE
INSTRUMENT
a. Engages to pay according to the tenor of his
acceptance.
b. Admits the existence of the drawer, the
genuineness of his signature, and his capacity
and authority to draw the instrument.
c. Admits the existence of the payee and his
capacity to indorse.

- The acceptor is precluded from asserting the
following defenses:
1. That the drawer is fictitious or non-existent;
or
2. That the drawers signature is a forgery; or
3. That he has no funds in his hands belonging
to the drawer with which to pay the bill; or
4. That the drawer has overdrawn his account;
or
5. That the drawer has no capacity to contract
or has no authority to draw the bill

B. Parties Secondarily Liable
1. THE DRAWER
a. Admits the existence of the payee and his
capacity to endorse.
b. Engages that the instrument will be
accepted or paid by the party primarily
liable.
c. Engages that if the instrument is dishonored
and proper proceedings are brought, he will
pay to the party entitled to be paid.

2. THE GENERAL INDORSER
- A person placing his signature upon an
instrument other than as maker, drawer, or
acceptor, is deemed to be indorser unless he

COMMERCIAL LAW
32

2009 BAR OPERATIONS
clearly indicates by appropriate words his
intention to be bound in some other capacity.
[Sec 63]

a. Warrants
i. the genuineness of the instrument and
in all respects what it purports to be,
ii. his good title to it,
iii. the capacity to contract of all prior
parties, and
iv. the instrument is valid and
subsisting.
b. Engages that the instrument will be paid by
the party primarily liable.
c. Engages that if the instrument is
dishonored, and proper proceedings are
taken, he will pay to the other party entitled
to be paid.

- The collecting bank or last endorser
generally suffers the loss because it has the
duty to ascertain the genuineness of all prior
indorsements considering that the act of
presenting the check for payment to the
drawee is an assertion that the party making
the presentment has done its duty to
ascertain the genuineness of the
indorsements.

- Aside from the warranties as an indorser, the
collecting bank is made liable because it is
privy to the depositor who negotiated the
check because it knows him, his address and
history for being a client thereof. Thus, it is
in a better position to detect forgery or
irregularity in the indorsement. (Associated
bank v. CA, 252 SCRA 620). aka Doctrine of
Comparative Negligence

3. THE IRREGULAR INDORSER
- An irregular indorser is one who not otherwise a
party to an instrument, affixes his signature in
blank on an instrument before delivery.
- Liability:
a. Instrument payable to order of third person
- irregular indorser liable to payee and to
subsequent parties
b. Instrument payable to order of maker or
drawer
- liable to all parties subsequent to the maker
or drawer;
c. Irregular indorser signs for accommodation
of payee
- liable to all parties subsequent to the payee.

- Liability of GUARANTOR:
- I hereby guarantee payment of this
instrument is written at the back of the
instrument
- NOT discharged from liability merely
because of the lack of due presentment or
due notice of dishonor
- liable only subsidiarily after the assets of the
principal debtor have been exhausted
- Indorses for identification only; he is a
guarantor not an indorser

- Liability of SURETY
- primarily and absolutely liable with the
debtor without benefit of exhaustion of the
properties of the latter and also without the
necessity of presentment or notice of
dishonor
C. Parties With Limited Liability
1. THE QUALIFIED INDORSER
- Warranties:
a. That the instrument is genuine and in all
respect what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to
contract;
d. That he has no knowledge of any fact which
would impair the validity of the instrument,
or render it valueless.
- A qualified indorsement constitutes the indorser
a mere assignor of the title to the instrument; it
may be made by adding to the indorsers
signature the words without recourse, sans
recourse or any other word of similar import.
- Recourse means resort to a person who is
secondarily liable after the default of the person
who is primarily liable; by indorsing the note
with recourse, does not make the indorser a
qualified indorser but a general indorser who is
secondarily liable

2. PERSON NEGOTIATING BY DELIVERY
- Warranties:
a. That the instrument is genuine and in all
respect what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to
contract;
d. That he has no knowledge of any fact which
would impair the validity of the instrument,
or render it valueless.
- Warranties extended to immediate transferee
only.

When Secondary Liability Attaches
Acts needed before secondary liability attaches
a. Presentment for payment in notes and
presentment for acceptance and/or payment in
bills of exchange;
b. Dishonor by non-payment in notes and dishonor
by non-acceptance and/or non-payment in bills
of exchange;
c. Notice of dishonor to secondary parties.

Order in which the indorsers are liable
- They are liable in the ORDER in which their
indorsements appear in the instrument; the latter
ones have a right of recourse against the prior ones

COMMERCIAL LAW
33

2009 BAR OPERATIONS

RIGHTS OF A HOLDER

Holder
- a payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof
- the holder of a negotiable instrument may sue
thereunder in his own name, and payment to him in
due course discharges the instrument

- If a promissory note is non-negotiable, subsequent
holders can never be holders in due course, but are
mere assignees against whom defenses may be
raised by prior parties. (Consolidated Plywood v. IFC Leasing,
149 SCRA 448).

Classes of holders
1. HOLDER IN DUE COURSE
- one who takes the instrument in good faith and
for value [Section 52 (c)]
- in order that one may be a holder in due course,
it is necessary that at the time the instrument
was negotiated to him he had no notice of any
xxx defect in the title of the person negotiating it
[Section 52 (d)]
- every holder is deemed prima facie to be a holder
in due course (Section 59; Vicente R. de Ocampo & Co. v.
Gatchalian, 3 SCRA 596)
- However, when it is shown that the title of
any person who has negotiated the
instrument was defective, the burden is on
the holder to prove that he or some person
under whom he claims acquired the title as
holder in due course. (Bataan Cigar and Cigarette
Factory, Inc. v. CA, 230 SCRA 647).

- What constitutes a holder in due course:
A holder in due course is a holder who has taken
the instrument under the following conditions:
1. That it is complete and regular upon its
face;
2. That he became the holder of it before it
was overdue and without notice that it
had been previously dishonored if such
was the fact;
3. That he took it for value and in good
faith;
4. That 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.

- To constitute notice of defect in the
title of the person negotiating the
same, the person to whom it is
negotiated must have actual
knowledge of such facts that his
action in taking the instrument
amount to bad faith. (Constructive
knowledge).

- Rights of a holder in due course:
a) Like any other holder, a holder in due course
may enforce the instrument and sue thereon
in his own name.
b) He also holds the instrument free any defect
of title of prior parties, free from personal
defenses of prior parties among themselves,
and he may enforce payment of the
instrument for the full amount thereof,
against all parties liable thereon.

*N.B. The fact that the postdated checks were
merely issued as security is not a ground for the
discharge of the instrument as against a holder in
due course. The only grounds are those outlined
in Section 119 of the NIL. (State Investment House, Inc.
v. CA, 217 SCRA 32)

2. HOLDER NOT IN DUE COURSE
- A holder not in due course is one who became a
holder of an instrument without any, some, or all
of the requisites under Section 52 of the NIL
- Where a holders title is defective or suspicious, it
cannot be stated that the payee acquired the
check without the knowledge of said defect in
the holders title and for this reason the
presumption that it is a holder in due course or
that it acquired the instrument in good faith does
not exist. (Vicente R. Ocampo v. Gatchalian, 3 SCRA 596)

- Rights of holder not in due course
a) A holder not in due course can enforce the
instrument and sue under it in his own name.
Prior parties, however, even through
remote, can avail against him any defense
among these prior parties and prevent the
said holder from collecting in whole or in
part the amount stated in said instrument.
b) That a holder is not a holder in due course
does not mean that he cannot recover under
the instrument.
c) A holder not in due course who derives title
through a holder in due course and who is
not himself a party to any fraud or illegality
affecting the instrument, has all the rights of
such former holder in respect of all parties
prior to the latter.

* HOLDER FOR VALUE
- one who has all the requisites for a holder in due
course EXCEPT notice of want of consideration
- he is not necessarily a holder in due course,
hence, prior parties may avail of defenses against
said holder (Prudencio v. CA, 143 SCRA 7)

- In a sale on installment, financed by a financing
company, the latter is not a holder in due course, and
the defense of failure of consideration may be
invoked against it, if the goods bought are defective
and cannot be used by the buyer for the purpose for
which he bought it. (Consolidated Plywood v. IFC Leasing, 149
SCRA 448).

COMMERCIAL LAW
34

2009 BAR OPERATIONS
- A person who became a holder of a cashiers check
indorsed by the person who stole it, is not a holder in
due course, and the issuing bank may refuse to pay
the same. (Mesina v. IAC, 145 SCRA 497)

- Where the payee acquired the check under
circumstances which should have put it to inquiry,
why the holder had the check and used it to pay his
own personal account, the duty devolved upon it to
prove that it actually acquired said check in good
faith.

- Where a note is acquired by the contract of merger or
sale between two banks, and the note is subject to a
Holdout Agreement, the holder of that note is NOT a
holder in due course. (BPI v. CA, 232 SCRA 305)

- The indorsee of a crossed check is a holder NOT in
due course, and is subject to the defenses as if the
instrument is non-negotiable.

- The only disadvantage of a holder who is not a holder
in due course is that the instrument is subject to
defenses as if it were non-negotiable. (Bataan Cigar and
Cigarette Factory, Inc. v. CA, 230 SCRA 647)

Situational Rights of a Holder:
1. Right to insert true date of issue (Sec. 13);
2. Right to insert true date of acceptance (sec. 13);
3. Right to complete an incomplete instrument (Sec.
14);
4. Right to treat an ambiguous instrument as either a
bill or a note (Sec. 17, {e});
5. Right to sign in a trade name or assumed name (Sec.
18);
6. right to strike out any indorsement not necessary to
his title (Sec. 48)
7. Right to convert a blank indorsement into a special
one (Sec. 35);
8. Right to discharge instrument by intentional
cancellation thereof (Sec. 119);
9. Right to discharge a person secondarily liable by
intentional cancellation of his signature (Sec. 120 {b});
10. Right to release the principal debtor and
consequently discharge persons secondarily liable
(Sec. 120{e});
11. Right to extend the time of payment (Sec. 120 {f});
12. Right to renounce his rights against any party to the
instrument (Sec. 122);
13. Right to enforce payment of materially altered
instrument according to its original tenor (Sec. 124);
14. Right to resort to the referee in case of need (Sec.
131);
- Referee in case of need is the person whose name
was inserted by the drawer of the bill and any
indorser to whom the holder may resort in case
of need that is in case the bill is dishonored by
non-acceptance or by non-payment.
15. Right of the holder of a bill presenting the same for
acceptance to require that the acceptance be written
of the face of the bill (Sec. 133);
16. Right of a holder of a bill to allow a period for the
drawee to accept other than 24 hours (Sec. 136 in rel.
to Sec. 137)
17. Right of a holder of a bill dishonored but
subsequently accepted to have the bill accepted as of
the date of presentment (Sec. 138);
18. Right of holder of a bill to refuse to take a qualified
acceptance and to treat the bill as dishonored by
non-acceptance if he does not obtain an unqualified
acceptance (Sec. 142);
19. Right of a holder of a bill required to be presented for
acceptance either to present it for acceptance or
negotiate it within a reasonable time (Sec. 144)
20. Right of a holder of a bill dishonored by non-
acceptance to have immediate recourse against the
drawer and indorsers (Sec. 151);
21. Right of holders to whom different parts of a bill in
set are negotiated (Sec. 179);
22. Right of a holder of a bill to allow acceptance of the
same for honor

PRESENTMENT FOR PAYMENT

Purpose
- The purpose of presentment for payment of an
accepted bill is to collect from the acceptor; and
if refused, to collect from the secondary parties.
- Other purposes of presentment for payment are:
1. to receive payment for the negotiable
instrument;
2. to afford the person under the obligation of
paying the instrument an opportunity to
ascertain the genuineness of the paper, the
amount thereon, and the authority of the
one making the presentment; and
3. to permit the surrender of the paper on
payment of the amount due it.

When excused
Presentment for payment is excused;
a) when after due diligence, it cannot be made;
b) when the drawee is a fictitious person; and
c) where there is a waiver of presentment.

When should be made
a) where the instrument is not payable on demand,
presentment must be made on the day it falls
due.
b) where it is payable on demand, presentment
must be made within a reasonable time after its
issue, except that in the case of a bill of
exchange, presentment for payment will be
sufficient if made within a reasonable time after
the last negotiation thereof. (Sec. 71)

What constitutes sufficient presentment
It must be made:
1. by the holder, or by some person authorized to
receive the payment in his behalf;
2. at a reasonable hour on a business day;
3. at a proper place as defined in the NIL;

COMMERCIAL LAW
35

2009 BAR OPERATIONS
4. to the person primarily liable on the instrument, or if
he is absent or inaccessible, to any person found at
the place where the presentment is made (Sec. 72)

Proper place for presentment
a) Where a place of payment is specified in the
instrument and it is there presented;
b) Where no place is specified, but the address of the
person to make payment is given in the instrument
and it is there presented;
c) Where no place for payment is specified and no
address is given and the instrument is presented at
the usual place of business or residence of the person
to make payment; and
d) In any other case, if presented to the person to make
payment wherever he can be found, or if presented at
his last known place of business or residence (sec. 73)
- The instrument must be exhibited to the person
from whom payment is demanded, and when it
is paid, must be delivered up to the party paying
it. (Sec. 74)

Presentment where instrument is payable to a bank
- Presentment for payment must be made during
banking hours, unless the parson to make payment
has no funds there to meet it at any time during the
day, in which case presentment at any hour before
the bank is closed on that day is sufficient. (Sec. 75)

Presentment where the principal debtor is dead
- Presentment for payment must be made to the
deceaseds personal representative, if such there be,
and if, with the exercise of reasonable diligence, he
can be found

Presentment to persons liable as partners
- Presentment for payment may be made to any one of
them, even though there be a dissolution of the firm

Presentment to joint debtors who are not partners
- Presentment must be made to all of the debtors

When presentment for payment is not required in order
to charge the drawer
- Presentment for payment is not required in order to
charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the
instrument.

When presentment for payment is not required to
charge the indorser
- Presentment for payment is not required in order to
charge an indorser where the instrument was made
or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented.

When an instrument is dishonored by non-payment
1. It is duly presented for payment and payment is
refused or cannot be obtained; or
2. Presentment is excused and the instrument is
overdue and unpaid. (Sec. 83)
- When an instrument is dishonored by
nonpayment, an immediate right of recourse
(subject to the giving of notice of dishonor) to all
parties secondarily liable thereon accrues to the
holder. (Sec. 84)

Time of maturity
- Every negotiable instrument is payable at the time
fixed therein without grace
- RULES:
1. When the day of maturity falls upon Sunday, or a
holiday, the instrument is payable on the next
succeeding business day.
2. Instrument falling due or become payable on
Saturday are to be presented for payment on the
next succeeding business day, except that
instruments payable on demand may, at the
option of the holder, be presented for payment
before 12 oclock noon on Saturday when that
entire day is not a holiday (Sec. 85)
- COMPUTATION OF TIME:
= Where the instrument is payable at a fixed period
after date, after sight, or after the happening of a
specified event, the time of payment is
determined by excluding the day from which the
time is to begin to run, and by including the date
of payment (Sec. 86)

- Where the instrument is made payable at a bank,
it is equivalent to an order to the bank to pay the
same for the account of the principal debtor
thereon (Sec. 87)

Payment in Due Course
- Payment made at or after the maturity of the
instrument to the holder thereof in good faith and
without notice that his title is defective
- Requisites of payment in due course
1. Made at or after maturity.
2. Made to the holder.
3. In good faith and without notice that the holders
title is defective. (Sec. 88)
- Good faith refers to the paying maker or
acceptor and not to the holder.

Presentment for payment to acceptor for honor, how
made
1. It must be presented in the place where the protest
for non-payment was made it must be presented
NOT LATER than the day following its maturity;

2. If it is to be presented in some other place other than
the place where it was protested, then it must be
forwarded within the time specified in Section 104.
(Sec. 168)

Delay, when excused
- Delay in making presentment is excused when the
delay was caused by events which are beyond the
control of the holder and not imputable to default,
misconduct or negligence.

COMMERCIAL LAW
36

2009 BAR OPERATIONS
- When the cause of delay ceases to operate, the bill
must be noted/ protested with reasonable diligence.

- When a bill is dishonored by the acceptor for honor
it must be protested for non-payment by him.

DISHONOR

1. In promissory notes
- In a promissory note, dishonor by non-payment
takes place when
a. it is duly presented for payment and
payment is refused or cannot be obtained; or
b. if presentment is excused, the instrument is
overdue and unpaid.

2. In bills of exchange
- In bills of exchange, there is dishonor by non-
acceptance
a. where the bill is presented for acceptance
and is returned dishonored, or
b. within twenty four hours from presentment
or any other period as the holder may allow,
is not returned accepted or unaccepted
- There is dishonor by non-payment
a. if the bill, after it has been accepted is not
paid when presented for payment, or
b. presentment being excused, is not paid on
the date of maturity.

NOTICE OF DISHONOR

Definition
- Notice of dishonor is bringing, either verbally or in
writing, to the knowledge of the drawer or the
indorser of an instrument, the fact that a specified
negotiable instrument, upon proper proceedings
taken, has not been accepted, or has not been paid,
and that the party notified is expected to pay it.

To whom given
- To the drawer and to each indorser
- any drawer or indorser to whom such notice
is not given is discharged
- Notice of dishonor is not necessary to hold parties
primarily liable

Purpose
- To inform the party notified that the paper has been
dishonored and that he is looked to for payment and
the purpose of requiring it is to enable him to protect
his rights against others who are antecedent to him
on the instrument and to afford him an opportunity
to discharge it before suit is filed to enforce payment
thereon, with consequent costs

Effect of failure to give notice of dishonor
- Any drawer or indorser to whom such notice of
dishonor is not given is discharged from liability

Who may give notice of dishonor
1. The holder;
2. Someone acting on behalf of the holder;
3. Any party to the instrument
a) who might be compelled to pay it to the holder,
and
b) who upon taking it up, would have a right to
reimbursement from the party to whom the
notice is given;
4. Someone acting on behalf of such party

- Notice of dishonor may be given by an agent
either in his own name or in the name of any
party entitled to give notice, whether that party
be his principal or not (Sec. 91)

- Where notice is given by or on behalf of the
holder, it inures to the benefit of all subsequent
holders and all prior parties who have a right of
recourse against the party to whom notice is
given.

- Where notice is given by or on behalf of a party
entitled to give notice, it inures to the benefit of
the holder and all parties subsequent to the party
whom notice is given

When agent may give notice
- When the instrument has been dishonored in the
hands of an agent,
a) he may either himself give notice to the
parties liable thereon, or
b) he may give notice to his principal.

When notice is sufficient
- A written notice need NOT be signed, and an
insufficient written notice may be supplemented and
validated by verbal communication.
- A misdescription of the instrument NOT vitiate the
notice UNLESS the party to whom the notice is given
is in fact misled thereby.

Form of notice
1. It may be in writing or merely oral
2. It may be given in any terms which sufficiently
identify the instrument and indicate that it has been
dishonored by non-acceptance or non-payment;
3. It must be delivered personally or through mail

To whom may be given
- either
a) to the party himself, or
b) to his agent in that behalf

Notice where party is dead
- When a party is dead, and his death is known to the
party giving notice, the notice must be given
a) To a personal representative if there be one, and
if with reasonable diligence he can be found.
b) If there be no personal representative, notice
may be sent to the last residence or last place of
business of the deceased

COMMERCIAL LAW
37

2009 BAR OPERATIONS
Notice to partners
- Where the parties to be notified are partners, notice
to any partner is notice to the firm even though there
has been a dissolution

Notice to persons jointly liable
- Notice to joint parties who are not partners must be
given to each of them, UNLESS one of them has
authority to receive such notice for the others

Notice to a bankrupt party
- Where a party has been adjudged bankrupt or an
insolvent, or has made an assignment for the benefit
of creditors, notice may be given either to the party
himself or to the trustee or assignee

Time within which notice must be given
- General Rule:
= Notice must be given as soon as the instrument
is dishonored and unless delay is excused as
herein provided must be given within the time
fixed by the Act

- Other Rules:
1. Where parties reside in the same place

a) If given at the place of business of the person
to receive notice, it must be given before the
close of business hours on the following day;
b) If given at his residence, it must be given
before the usual hours of rest of the day
following;
c) If sent by mail, it must be deposited in the
post-office in time to reach him in usual
course of the day following

2. Where parties reside in different places
a) if sent by mail, it must be deposited in the
post office, in time to go by mail the
following day of dishonor, or if there be no
mail at a convenient hour on that day, by the
next mail thereafter;
b) if given otherwise than through the post
office, then within the time that notice
would have been received in due course of
mail, if it had been deposited in the post
office within the time specified in the last
subdivision.

When sender is deemed to have given due notice
- Where notice of dishonor is duly addressed and
deposited in the post office, the sender is deemed to
have given due notice, notwithstanding the
miscarriage of mails

- Notice is deemed to have been deposited in the
post office when deposited in any branch post
office or in any letter box under the control of the
post office department.

Time of Notice to subsequent party
- Where a party receives notice of dishonor, he has
after the receipt of such notice, the same time for
giving notice to antecedent parties that the holder
has after the dishonor.

Where notice must be sent
1. Where a party has added an address to his signature,
notice of dishonor must be sent to that address.
2. If no address was given, notice must be sent as
follows
a) Either to the post office nearest to his place of
residence ot to the post office where he is
accustomed to receive his letters; or
b) If he lives in one place, and he has a place of
business in another, notice may be sent to either
place; or
c) If he is sojourning in another place, notice may
be sent to the place where he is sojourning.

Waiver of notice
- Notice of dishonor may be waived either before the
time of giving notice has arrived or after the omission
to give due notice and the waiver may be express or
implied.

Who are affected by waiver of notice
1. Where the waiver is embodied in the instrument
itself, it is binding upon all parties; but
2. Where it is written above the signature of an
indorser, it binds himself only.

Effect of waiver of protest
- a waiver of protest, whether in the case of a foreign
bill of exchange or other negotiable instrument, is
deemed waiver not only of a formal protest but also
of
1. presentment, and
2. notice of dishonor.

When notice is dispensed with
- When after the exercise of due diligence, notice
cannot be given to or does not reach the parties
sought to be charged.

Delay in giving notice, when excused
- When the delay is caused by circumstances beyond
the control of the holder, AND not imputable to his
default, misconduct or negligence

When notice of dishonor is not required to be given to
the drawer
1. Where the drawer and the drawee are the same
person;
2. When the drawee is a fictitious person or a person
not having capacity to contract;
3. When the drawer is the person to whom the
instrument is presented for payment;
4. Where the drawer has no right to expect or require
that the drawee or acceptor will honor the
instrument;
5. Where the drawer has countermanded payment

COMMERCIAL LAW
38

2009 BAR OPERATIONS
When notice of dishonor is not required to be given to
an indorser
1. Where the drawee is a fictitious person or a person
not having the capacity to contract, and the indorser
was aware of that fact at the time he indorsed the
instrument;
2. Where the indorser is the person to whom the
instrument is presented for payment;
3. Where the instrument was made or accepted for his
accommodation.

Notice of non-payment where acceptance is refused
- Where due notice of dishonor by non-acceptance has
been given, notice of a subsequent dishonor by non-
payment is not necessary, UNLESS in the meantime
the instrument has been accepted

Effect of omission to give notice of dishonor by non-
acceptance
- Does not prejudice the rights of a holder in due
course subsequent to the omission.

PROTEST

Definition
- It is a formal statement in writing made by a notary
public or other competent person under his seal of
office at the request of the holder of a bill or note, in
which it is declared that the same was on a certain
day presented for payment (or acceptance as the
case may be), and such payment (or acceptance) was
refused, whereupon the notary protests against all
parties to such instrument and declares that they will
be held responsible for all loss or damage arising
from its dishonor.
- It means all the steps or acts accompanying the
dishonor of a bill or note necessary to charge an
indorser.

Necessity
- Protest is required only for foreign bills, but NOT for
inland bills or notes.
- However, they may also be protested if desired.
- Omission of protest, where protest is required, will
discharge the drawer and the indorsers.

Purpose
- Protest is required:
1. for uniformity in international transactions
because most countries require it and
2. in order to furnish authentic and satisfactory
evidence of the dishonor to the drawer who,
from his residence abroad, may experience
difficulty in verifying the matter and may be
forced to rely on the representation of the
holder.
Instances when protest is required:
1. Where the foreign bill is dishonored by non-
acceptance;
2. Where the foreign bill is dishonored by non-payment,
it not having been dishonored by non-acceptance;
3. Where the bill has been accepted for honor, it must
be protested for non-payment to the acceptor for
honor; or
4. Where the bill contains a referee in case of need, it
must be protested for non-payment before it is
presented for payment to the referee in case of need.

Protest, how made:
- The protest must be annexed to the bill or must
contain a copy thereof, and must be under the hand
and seal of the notary making it and must specify:
1. The time and place of presentment;
2. The fact that presentment was made and the
manner thereof;
3. The cause or reason for protesting the bill;
4. The demand made and the answer given, it any,
or the fact that the drawee or acceptor could not
be found.

Protest may be made by
a. A notary public; Or
b. By any respectable resident of the place where the
bill is dishonored, in the presence of two or more
credible witnesses.

Protest, when made
1. Protest must be made on the day of its dishonor
unless delay is excused.
2. When a bill has been duly noted the protest may be
subsequently extended as of the date of the noting.
- Duly noted means that a notary public jots
down a note on the bill or on paper attached
thereto, or in his registry book, consisting of
his initials or signature and those matters
required to be stated in section 153.

Protest, where made:
- GR: The protest must be made at the place where the
instrument is dishonored.
- EXC: When the bill drawn payable at the place of
business or residence of some person other than the
drawee has been dishonored by non-acceptance
= It must be protested for non-payment at the
place where it is expressed to be payable, and no
further presentment for payment to, or demand
on, the drawee is necessary.

- A bill which has been protested for non-acceptance
may be subsequently protested for non-payment.

Protest for better security
- DEFINITION
= A bill protested before maturity
- REQUISITES
= A protest for better security must be made:
a. After acceptance;
b. But before the date of maturity; and
c. When the acceptor has been adjudged
bankrupt and insolvent or has made an
assignment for the benefit of creditors.

COMMERCIAL LAW
39

2009 BAR OPERATIONS
- Protest is dispensed with by any circumstances which
would dispense with notice of dishonor.

Protest may be made on a copy or written particulars
thereof when:
1. A bill is lost or destroyed ; or
2. A bill is wrongfully detained from the person entitled
to hold it

DISCHARGE

Definition
- A release of all the parties liable from obligations
arising thereunder.
- It renders the instrument without force and effect
and, consequently, it can no longer be negotiated.

How a negotiable instrument is discharged
1. By payment in due course by or on behalf of the
principal debtor;
2. By payment by accommodated party, where the
instrument is made or accepted for his
accomodation;
3. By the intentional cancellation thereof by the holder;
4. By any other act which will discharge a simple
contract for the payment of money;
= The law on Obligations and Contracts applies
(Art 1231, NCC):
a) Loss of the thing due
b) Condonation or remission
c) Confusion or merger
d) Compensation
e) Novation
f) Annulment
g) Rescission
h) Fulfillment of resolutory condition
i) Prescription
5. When the principal debtor becomes the holder of the
instrument at or after maturity in his own right. (Sec.
119)
6. By renunciation of the holders rights against the
principal debtor under the terms of Sec. 122.

PAYMENT FOR HONOR

Requisites
1. The bill has been dishonored by non-payment;
2. The bill has been protested for non-payment;
3. ANY PERSON, even a party thereto may pay supra
protest.
4. The payment must be attested by notarial act of
honor which may be appended to the protest, or
form an extension to it; and
5. The notarial act of honor must be based on the
declaration made by the payer for honor or his agent
declaring his intention to pay the bill for honor and
for whose honor he pays.

- As distinguished from acceptance for honor the
acceptor for honor must be a stranger. In payment for
honor the payor supra protest may even be a
party to the instrument.

Procedure
1. The payer or his agent goes to a notary public and
declares his intention to pay the bill and for whose
honor he pays.
2. The notary then records the declaration in the protest
or in a separate paper attached to it.
3. The payor then notifies the person for whose honor
he pays within reasonable time.

Purpose
- Instead of simple negotiation to the person desiring
to pay, payment for honor may be availed of when
the holder does not want to indorse the bill and
thereby incur the liabilities of an indorser or of one
negotiating by mere delivery.

Preference of parties offering to pay for honor
- The person whose payment will discharge most
parties to the bill is to be given the preference.

Effects on subsequent parties where bill is paid for
honor
1. All parties subsequent to the party for whose honor it
is paid are discharged.
2. The payer for honor is subrogated for and succeeds
to both the rights and duties of the holder as regards
the party for whose honor he pays and all parties
liable to the latter.

Effect if the holder refuses to receive payment supra
protest
- He loses his right of recourse against any party who
would have been discharged by such payment.

Rights of payer for honor:
1. He acquires the rights of the holder under Section
175; and
2. He has also the right to receive both the bill and the
protest.

DEFENSES OF PRIOR PARTIES
AGAINST THE HOLDER

Classes of Defenses
1. Real or Absolute Defenses
- Defenses which attach to the instrument irrespective
of the parties and are predicated on the principle
that the right sought to be enforced has never existed
or has ceased to exist.
- Available against ALL HOLDERS, whether in due
course or not.
- Real defenses: (WAD FIMMU WIFE)
a) Want of delivery of an incomplete instrument;
b) Alteration;
c) Duress amounting to forgery;
d) Fraud in factum or fraud in esse contractus;
e) Insanity where the insane person has a guardian
appointed by the court;

COMMERCIAL LAW
40

2009 BAR OPERATIONS
f) Minority;
g) Marriage in case of a wife;
h) Ultra vires acts of a corporation; where the
corporation is absolutely prohibited by its charter
or statute from issuing any commercial paper
under any circumstances;
i) Want of authority of agent, real or apparent;
j) Illegality of contract where it is the contract or
instrument itself which is expressly made illegal
by statute;
k) Forgery;
l) Execution of instrument between public enemies

2. Personal or Equitable Defenses
- a personal or equitable defense is one growing out of
an agreement or conduct of a particular person in
regard to an instrument which renders it inequitable
for him although owner of it, to enforce it against the
defendant.
- The defense is available against all holders NOT in
due course EXCEPT those who derive their rights
from holders in due course and who are not parties to
any fraud or illegality affecting the instrument.
- Personal defenses: (W
2
A
4
F
2
I
4
N
2
MU)
a) Want of delivery of complete instrument;
b) Want of authority of agent where he has
apparent authority.
c) Absence or failure of consideration, partial or
total;
d) Acquisition of the instrument by force, duress or
fear;
e) Acquisition of the instrument by unlawful means;
f) Acquisition of the instrument for an illegal
consideration;
g) Filling up of blank contrary to authority given or
not within reasonable time, where the
instrument is delivered;
h) Fraud in inducement;
i) Insertion of wrong date in an instrument, where
it is payable at a fixed period after date and it is
issued undated or where it is payable at a fixed
period after sight and the acceptance is undated;
j) Intoxication;
k) Insanity where there is no notice of insanity on
the part of the one contracting with the insane
person;
l) Illegality of contract where the form or
consideration is illegal;
m) Negotiation in breach of faith;
n) Negotiation under circumstances that amount to
fraud;
o) Mistake;
p) Ultra vires acts of corporations where the
corporation has the power to issue negotiable
paper but the issuance was not authorized for
the particular purpose for which it was issued.

Abnormal and similarly deficient negotiable instrument
A. Causes for Abnormality and Deficiency
1. Lack of Essential Requisites to a contract, which
are:
a. Lawful subject matter
b. Consideration
c. Consent
2. Lack of regularity in issue by absence of
a. The material particulars of the
questioned instrument, or in their
correctness;
b. Delivery of instrument made with the
knowledge and/or conformity of the
maker or the drawer and with intention
of making the transferee a holder of the
instrument.

Effects of defenses

A. Incomplete but delivered NI (Sec 14)
1. Holder has prima facie authority to complete the
instrument;
2. Completion must be done strictly within a
reasonable time and according to the authority
given;
3. Holder in due course of the instrument
previously completed in breach of instructions
can enforce the same as if regularly completed.

B. Incomplete and undelivered NI (Sec 15)
- If completed and delivered without authority,
not a valid contract against a person who has
signed before delivery even in the hands of HIDC
but subsequent holders are liable.

C. Complete but Undelivered Instrument (Sec 16)
- Between immediate parties and a remote party
not a holder in due course, delivery to be
effectual must be made by or under the authority
of the maker, drawer, acceptor or indorser, as
the case may be;
a. If the instrument is in the hands of a
holder in due course, all prior deliveries
are conclusively presumed valid;
b. If the instrument is out of the hands of
the person who signed it, a valid and
intentional delivery is disputably
presumed.

D. Absence or Failure of Consideration
1. Absence of consideration is the lack or want of
consideration
2. Failure of consideration is failure of agreed
consideration to materialize.
3. Both absence and failure of consideration are
defenses personal to the prejudiced party, and
available against any person not a holder in due
course.
4. Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise.

E. Forgery
1. Definition
- Forgery is the counterfeit making or fraudulent
alteration of any writing.
- It may consist of:

COMMERCIAL LAW
41

2009 BAR OPERATIONS
a) Signing of anothers name with intent to
defraud. (Sec. 23)
b) Alteration of an instrument in the name,
amount, description of payee, etc. with intent to
defraud. (Sec. 124; N.B. the name for this
defense is fraudulent alteration)

2. Governing rules
a) GR: The signature is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party to it, is acquired
through or under such signature.
b) EXC: The party against whom it is sought to
enforce such right is precluded from setting up
the defense of forgery or want of authority. (Sec.
23)
i. Those who warrant or admit the
genuineness of the signature in
question. This includes indorsers,
persons negotiating by delivery and
acceptors.
ii. Those who, by their acts, silence, or
negligence are estopped from setting
up the defense of forgery.

3. Forgery in checks:
a) Forgery in Signature of the DRAWER on a Check
- the drawer is NOT liable and his drawee bank
cannot charge the drawers account for said
check because a bank is supposed to know the
signatures of its customers, and bears the
damage in case it pays under a forged signature
of its drawer-customer.
- the drawee bank is considered as paying out of
its own funds and cannot charge the drawers
account. (PNB v. CA, 25 SCRA 693)
- Doctrine of Comparative Negligence the
party whose negligence is the proximate
cause of loss bears the loss.
- the risk of loss must perforce fall on the drawee
bank. However, if the drawee bank can prove a
failure by the customer/drawer to exercise
ordinary care that substantially contributed to
the making of the forged signature, the drawer is
precluded from asserting the forgery. If at the
same time the drawee bank was also negligent
to the point of contributing to the loss, then such
loss from the forgery can be apportioned
between the negligent drawer and the negligent
bank. (Associated Bank v. CA, 252 SCRA 620).
b) Forgery in the Signature of INDORSERS
- As a matter of practical significance, problems
arising from forged indorsements of checks may
generally be broken into two (2) types of cases:
i. where forgery was accomplished by a
person not associated with the drawer-
for example a mail robbery; and
ii. where the indorsement was forged by
an agent of the drawer. (Gempesaw v. CA,
218 SCRA 682).

- As a rule, a drawee bank who has paid a check on
which an indorsement has been forged cannot
charge the drawers account for the amount of said
check. An EXCEPTION to this rule where the drawer
is guilty of such negligence which causes the bank to
honor such a check or checks. If a check is stolen from
the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere
examination of his cancelled check.

F. Material Alteration
- Any alteration which changes the:
1. date,
2. sum payable,
3. time or place of payment,
4. number or relation of the parties,
5. medium or currency of payment,
6. adds a place of payment where none is specified,
7. which alters the effect of the instrument in any
respect.
- Effect:
1. Alteration by a party
= Material alteration avoids the instrument
EXCEPT as against the party who made,
authorized or assented to the alteration, and
subsequent indorsers
= Where the altered instrument, however, is in
the hands of a holder in due course, not a
party to the alteration, he may enforce
payment thereof according to its original
tenor regardless of whether the alteration
was innocent or fraudulent.
2. Alteration by a stranger (spoliation)
- same effect with that alteration made a
party. (Sec. 124)

BILLS OF EXCHANGE

Definition
- it is an unconditional order in writing, addressed by
one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time
a sum certain in money to order or to bearer. (Sec. 126)

Types
1. DRAFT
- a common term for all bills of exchange and they
are used synonymously.
- In bank drafts, DRAWER and DRAWEE are
liable to purchaser of draft for not complying
with his instructions.
2. TRADE ACCEPTANCE
- a bill of exchange payable to order and at a
certain maturity, drawn by a seller against the
purchaser of goods as drawee, for a fixed sum of
money, showing on its face the acceptance of
the purchaser of the goods and that it has arisen
out of a purchase of goods by the acceptor.

COMMERCIAL LAW
42

2009 BAR OPERATIONS
3. BANKERS ACCEPTANCE
- a draft or a bill of exchange of which the acceptor is a
bank or banker engaged generally in the business of
granting bankers acceptance credit. It is similar to a
trade acceptance, the fundamental difference being
that the bankers acceptance is drawn against a bank
instead of the buyer.
4. TRUST RECEIPT
- the written or printed document signed by the
entrustee in favor of the entruster containing terms
and conditions substantially complying with the
provisions of PD 115 (Trust Receipt Law, which took
effect on January 21, 1973). No further formality of
execution or authentication shall be necessary to the
validity of the trust receipt.
- It is the ENTRUSTEE NOT the ENTRUSTER who
is the real owner of the goods covered by the
trust receipt.
- The liability of the entrustee to the entruster is
EX CONTRACTU not ex delicto.
5. TREASURY WARRANTS
- a treasury warrant bearing on its face the words
payable from the appropriation for food
administration is actually an order for payment out
of a particular fund and is NOT unconditional, and
does not fulfill one of the essential requirements of a
negotiable instrument. (Abubakar v. Auditor General)
6. MONEY ORDER
- a species of draft drawn by the post-office upon
another for an amount of money deposited at the
first post office by the person purchasing the money
order and payable at the second office to a payee
named in the order.
- Money order is NOT negotiable.
7. CLEAN AND DOCUMENTARY BILLS OF EXCHANGE
a) Clean bill of exchange
- is one to which are not attached documents
of title to be delivered to the person against
whom the bill is drawn when he either
accepts or pays the bill.
b) Documentary bill of exchange
- is one to which are attached documents of
title to be delivered and surrendered to the
drawee when he accepts or pays the bill.
8. D/A AND D/P BILLS OF EXCHANGE
a) Documents Against Payment Bill or D/P Bill
- is a sight or time bill to which are attached
documents to be delivered and surrendered
to the drawee when he has paid the
corresponding bill.
b) Documents Against Acceptance Bill or D/A Bill
- is a time bill to which are attached
documents to be delivered and surrendered
to the drawee when he accepts the bill.
9. TIME OR USANCE BILLS
- are bills which are payable at a fixed future time or at
a determinable future time.
10. SIGHT BILLS
- are bills which are payable upon presentation or at
sight or on demand.

11. INLAND BILL OF EXCHANGE
- is a bill which is or on its face purports to be BOTH
drawn and payable within the Philippine Islands.
12. FOREIGN BILL OF EXCHANGE
- is a bill which is, or on its face purports to be, drawn
or payable outside the Philippine Islands.
a. to be drawn in the Philippines but payable
outside thereof; or
b. to be payable in the Philippines but drawn
outside thereof.

Importance of the distinction:
1. The distinction is important because foreign bills are
required to be protested. Failure to protest foreign
bills will discharge persons secondarily liable thereon.
2. The distinction is also important for the
determination of the law applicable.

When a bill may be treated as promissory note
1. Where the drawer and the drawee are the same
person such as, in a draft drawn by an agent on his
principal by authority of the principal.
2. Where the drawee is a fictitious person.
3. Where the drawee has no capacity to contract.

Referee in case of need
- is the person whose name was inserted by the drawer
of the bill and any indorser to whom the holder may
resort in case of need that is in case the bill is
dishonored by non-acceptance or by non-payment.
- It is the option of the holder to resort to the
referee in case of need or not as he may see fit.

BILLS IN SET

Definition
- One composed of various parts, each part being
numbered and containing a reference to the other
parts, all of which parts constitute but one bill.

Purpose
- To increase the probability of the bill reaching its
destination.

Right of holders where different parts are negotiated
- Where two or more parts are negotiated to different
holders in due course the holder whose title first
accrues as between such holders is the true owner
of the bill.

Liability of holder who indorses two or more parts of a
set to different persons
a) He is liable on every such part; and
b) Every indorser subsequent to him is liable on the part
he has himself indorsed as if such parts were
separate bills.

Acceptance of bills in set
- The acceptance may be written on any part and it
must be written on ONE PART only.

COMMERCIAL LAW
43

2009 BAR OPERATIONS
Effect if the drawee accepts more than one part
- If the drawee accepts more than one part and such
accepted parts are negotiated to different holders in
due course, he is liable on every part as if it were a
separate bill.

Payment by acceptor of bills drawn in sets
- When the acceptor of a bill drawn in a set pays it
without requiring the part bearing his acceptance to
be delivered up to him, and the part at maturity is
outstanding in the hands of a holder in due course
he is liable to the holder thereof.

Effect of discharging one of a set:
- Where one part of a bill drawn in a set is discharged
by payment or otherwise the whole bill is
discharged except as otherwise provided.

PROMISSORY NOTES AND CHECKS

Promissory Note
- An unconditional promise in writing made by one
person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or bearer.

- Where a note is drawn to the makers own order,
it is NOT complete until indorsed by him.

Special types of promissory notes
1. CERTIFICATE OF DEPOSIT
- is a written acknowledgment by a bank of the
receipt of money on deposit which the bank
promises to pay to the depositor, bearer, or to
some other person or order.
- It is NOT ipso facto negotiable it must first
comply with the requirements provided under
Section 1, NIL.
2. BONDS
- A promise, under seal, to pay money.
- The bond certifies that the issuing company is
indebted to the bondholder for the amount
specified on the face of the bond, and contains
an agreement of the company to pay the sum at
a specified time in the future, and meanwhile to
pay a specified interest on the principal amount
at regular intervals, generally six months apart.
They are negotiable if all the requisites in Section
1, NIL are complied with.
- Classes of bonds:
a) Mortgage bonds;
b) Equipment Bonds;
c) Collateral trust bonds;
d) Guaranteed bonds;
e) Debentures; and
f) Income bonds;
g) Convertible bonds;
h) Redeemable Bonds;
i) Registered Bonds; and

j) Coupon Bonds
= Those to which are attached a sheet of
dated, numbered and similarly printed
coupons which the bondholder may cut
off when due or thereafter.
= Such coupons may be served and
deposited in a bank, negotiated before
the maturity of the interest they
represent, and transferred just like any
commercial paper.
= They are negotiable if all the requisites
in Section 1, NIL are complied with.
3. BANK NOTES
- Are promissory notes of the issuing bank payable
to bearer on demand and intended to circulate as
money. They are regarded as cash and pass from
hand to hand without any evidence of title in the
holder than that which arises form possession.
However, they are not money.
4. DUE BILLS
- Is an instrument whereby one person
acknowledges his indebtedness to another.
5. MORTGAGE NOTE
6. TITLE RETAINING NOTE
7. COLLATERAL NOTE
8. JUDGMENT NOTE

Check
- A bill of exchange drawn on a bank payable on
demand.

- Acceptance is NOT required for checks for the same
are PAYABLE ON DEMAND.

- A check is a bill of exchange payable on demand is
intended for immediate use and NOT to circulate as a
promissory note.

Special types of checks
1. CASHIERS CHECK
- It is a check drawn by the cashier of a bank in the
name of the bank against the bank itself payable
to a third person or order.
2. MANAGERS CHECK
- Drawn by the manager of a bank in the name of
the bank against the bank itself payable to a
third person.
- It is similar to the cashiers check as to effect and
use.
3. MEMORANDUM CHECK
- a check on which is written the word
memorandum, memo, and mem,
signifying that the drawer engages to pay the
bona fide holder absolutely and not upon a
condition to pay upon presentment and non-
payment.
4. CERTIFIED CHECK
- a check on which the drawee bank has written an
agreement whereby it undertakes to pay the
check at any future time when presented for
payment, such as, by stamping on the check the

COMMERCIAL LAW
44

2009 BAR OPERATIONS
word certified and underneath it is written the
signature of the cashier.
5. TRAVELERS CHECK
- one in which the holders signature must appear
twice, one to be affixed by him at the time it is
issued and the second or counter-signature to
be affixed by him in the presence of the payee
before it is paid, otherwise, it is incomplete.
6. CROSSED CHECK
- How is crossing of check done:
= it is usually done by drawing two parallel
lines transversally on the face of the check. A
check may be crossed (1) specially or (2)
generally.
- Crossing specially
= a check is crossed specially when the name
of a particular banker or a company is
written between the parallel lines drawn
transversally on the face of the check.
- Crossing generally
= a check is crossed generally when only the
words and company are written between
the parallel lines, or when nothing is written
at all between the parallel lines.
- Under crossed checks, the payee has the duty to
ascertain the holders title to checks.
- The holder should not present for encashment a
crossed check but deposit the same for
collection.
- Where other than payee of crossed checks
presented it for payment, there is no proper
presentment and drawer is not liable thereon.
- Advantages of crossing check:
= it is a good precaution when it is to be
forwarded by mail or when it is entrusted to
an agent and the drawer wants to be sure
that it will be paid to the rightful owner.

Check when it should be presented for payment
- A check MUST be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the
loss caused by the delay. (Sec. 186)
- Must be presented within six (6) months otherwise
it will become stale.
- a check under BP 22 must be presented for payment
to the bank within 90 days from date so that the
holder will enjoy the benefit of the prima facie
presumption that the maker, drawer, or issuer knows
at the time of issue that he does not have sufficient
funds in or credit with the drawee bank for payment
of such check.

Effect if the check was allowed to become stale
- The drawer is discharged but only to the extent of the
loss caused by the delay.
- Hence, if no loss or injury is shown, the drawer is not
discharged.

Certification of check
- is an agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future
time when presented for payment.
- A bank is NOT obliged to the depositor to certify
checks.
- The certification of a check is equivalent to an
acceptance.
- Form of certification:
= No particular form is required but it must be in
writing.
= The letters O.K., with the initials of the cashier
of a bank do not constitute a sufficient
certification under modern banking practice.
- Effect of Certification:
1. It is equivalent to acceptance and is the operative
act that makes the drawee bank liable;
2. It operates as an assignment of the funds of the
drawer in the hands of the drawee bank;
3. If obtained by the holder, it discharges persons
secondarily liable thereon;
4. The payee or holder, for all intents and purposes,
becomes the depositor of the drawee bank, with
rights and duties of one in such a situation; and
5. The drawee may not issue a stop payment order
on the certified check.
- Effect where the holder of check procures it to be
certified:
a) Where the holder of a check procures it to be
accepted or certified, the drawer and all
indorsers are discharged from liability thereon.
b) Indorsers subsequent to the certification are not
discharged.

When check operates as an assignment
- A check of itself does not operate as assignment of
any part of the funds to the credit of the drawer with
the bank, and the bank is not liable to the holder
unless and until it accepts or certifies the check.

DEFINITION OF TERMS

1. ACCEPTANCE
- an acceptance completed by delivery or
notification.
2. ACTION
- includes counterclaim and set-off.
3. BANK
- includes any person or association of persons
carrying on the business of banking, whether
incorporated or not.
4. BEARER
- the person in possession of a bill or note which is
payable to bearer.
5. BILL
- bill of exchange; and NOTE means negotiable
promissory note.
6. DELIVERY
- transfer of possession, actual or constructive,
from one person to another.

COMMERCIAL LAW
45

2009 BAR OPERATIONS
7. HOLDER
- the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof.
8. INDORSEMENT
- an indorsement completed by delivery.
9. INSTRUMENT
- negotiable instrument.
10. ISSUE
- first delivery of the instrument, complete in
form, to a person who takes it as a holder.
11. PERSON
- includes a body of persons, whether
incorporated or not;
12. VALUE
- valuable consideration.
13. WRITTEN
- includes printed manner; and WRITING
includes print

COMMERCIAL LAW
CORPORATION LAWS
46

2009 BAR OPERATIONS

I. General Provisions
II. Incorporation and Organization of Private
Corporations
III. Board of Directors/Trustees/Officers
IV. Powers of Corporation
V. By-Laws
VI. Meetings
VII. Stocks and Stockholders
VIII. Corporate Books and Records
IX. Merger and Consolidation
X. Appraisal Right
XI. Non-Stock Corporations
a. Members
b. Trustees and Officers
c. Distribution of Assets in Non-Stock
Corporations
XII. Close Corporations
XIII. Special Corporations
a. Educational Corporations
b. Religious Corporations
XIV. Dissolution
XV. Foreign Corporations
XVI. Miscellaneous Provisions

-----------------------------------------------------------------------
I. GENERAL PROVISIONS

A. CORPORATION DEFINED

Corporation
-It is an artificial being created by operation of
law, having the right of succession and the powers,
attributes and properties expressly authorized by law or
incident to its existence (Sec. 2).

Attributes of a Corporation (CAPS)
1. Created by operation of law
2. Artificial being
3. Powers, attributes and properties expressly
authorized by law or incident to its existence
4. Right to Succession

a. Created by operation of law. No Private Corporation
could validly exist unless there is a law that creates it.
Consent of the state is needed. If not made by
operation of law, it becomes a corporation by
estoppel.
b. Artificial being. It is not a natural person. It is not
liable for the acts of its stockholders or members.
c. Powers, attributes and properties. Acquire
real/personal properties.
Powers:
(a) Those expressly authorized by law.
1. Secs. 36-44 Corporation Code;
2. Articles of Incorporation/By laws;
(b) Those incidental to its existence;
1. Those implied from its express powers;
2. Those fairly related or incidental to its
existence, direct or immediate to the furtherance
of the corporations business.
Requirements so that a private corporation could
hold real properties in the Philippines:
1. 60% shareholdings should at least belong to
Filipinos. It is the extent of shareholdings
and not the number of persons. 40%
shareholdings for aliens;
2. Place of incorporation should be in the
Philippines. If incorporated outside the
Philippines even if 60% of the shareholdings
is Filipino owned, it is a foreign corporation.
If incorporated in the Philippines but
less 60% stock is Filipino owned it is a
Philippine (domestic) corporation, but it
could not acquire real properties in the
Philippines.
Acquired properties belong to the
corporation, not to the
stockholders/members, because of its
separate and distinct personality.
d. Right to succession. The corporation is not
affected by anything that happens to its
stockholders (insolvency, death, incapacity, etc).
It continues to exist for the term stated in its
articles of incorporation except when earlier
dissolved.

Right of Stockholders in Corporate Property
a. There is no real interest in the corporate
property. It is a mere expectancy inchoate in
nature;
b. It ripens into real right only upon dissolution of
the corporation on the assumption that all debts
are already paid;

Suit
- A corporation cannot represent its stockholders in a
suit.
- Gen. Rule: A corporation is not entitled to a claim for
moral damages.
= Reason: Being an artificial person, it cannot
experience physical suffering or such sentiments
as wounded feelings, serious anxiety, mental
anguish or moral shock. Mental suffering can be
experienced only by one having a nervous
system.
- Exception: If the good reputation of a corporation is
debased or besmirched resulting in social
humiliation, this may be a ground for recovery of
moral damages and attorneys fees.

Doctrine of separate personality
- A corporation has a juridical personality separate and
distinct from that of its stockholders or members.
- Used for purposes of convenience and to subserve
the ends of justice
- Consequences:
1. Ownership of property, capacity to sue and be
sued in its own right (Art. 46, NCC);

CORPORATION CODE of the Philippines
(BP Blg. 68, effective May 01, 1980)

COMMERCIAL LAW
CORPORATION LAWS
47

2009 BAR OPERATIONS
2. Entitlement to constitutional rights; eg. Due
process, equal protection;
3. Liability for crimes or torts;
4. Cannot always claim equal rights with natural
persons; i.e. entitlement to moral damages.

Piercing the veil of corporate fiction
- This doctrine allows the State to disregard the fiction
of juridical personality of the corporation where the
entity is formed or used for non-legitimate purposes.
- Grounds:
1. Where corporate fiction is used to defeat public
convenience;
- Corporate Fiction is a personality separate
from the stockholders/members.
- Public Convenience: Instead of dealing with
all the individual stockholders, it is for public
convenience to deal with the corporation
alone.
2. Where corporate fiction is used to justify a
wrong, to protect fraud, or to defend a crime;
3. Where the corporation serves as a mere alter ego
of another person;
4. Where the corporation serves merely as an
instrument of another corporation.
5. Where the corporation is controlled by aliens, in
violation of the law as where it was organized
under Philippine laws but most of its
stockholders are Germans (normally a Filipino
corporation), the Supreme Court went beyond
the corporate fiction during the war and
considered it as an enemy corporation.

Alter Ego or Instrumentality Rule
- Requisites:
1. There must be control, not merely majority or
complete stock control, but complete
domination, not only of finances but of policy
and business practice in respect to the
transaction attacked so that the corporate entity
as to this transaction had at the time no separate
mind, will or existence of its own; (control)
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right (breach of
duty) ; and
3. Such control and breach of duty must
proximately cause the injury to the plaintiff.

- In piercing the veil, the stockholders become liable
instead of the corporation.

- Do not immediately pierce the veil just because a
ground exists. Determine first the facts and
circumstance.

= Steps:
A. Determine first the following Items:
1. Common Ownership
2. Identity of directors;
3. Manner of keeping records;
4. Manner of conducting business.

B. Is there a misuse of corporate fiction?
- The mere control by a single person of the
majority shares is not a ground to pierce the
veil [Sunio vs. NLRC, 127 SCRA 390 (1984)]
- Evidence of fraud must be proven clearly and
convincingly [Del Rosario vs. NLRC, 182 SCRA 777
(1990)]

Purpose of Piercing the Veil
1. To seek satisfaction of an obligation directed against
the stockholders;
2. Direct always the action against the stockholders: If
directed against the corporation, you cannot
anymore pierce the veil. A suit cannot be brought
against the corporation to satisfy the obligation of its
stockholders. {Umali case [182 SCRA 529 (1990)]}

Net Effect of Piercing the Veil
a) Only One Corporation: Liability attaches to its
stockholders;
b) Two or more Corporations: The court treats them as
only one.

B. CLASSES OF CORPORATIONS

1. As to existence of shares of stock
a. Stock Corporation
a corporation (1) which has capital stock
divided into shares and (2) is authorized to
distribute to the shareholders dividends or
allotments of the surplus profits on the basis of
the shares held. (Sec. 3)
b. Non-Stock Corporation
a corporation which does not issue stock and
distribute dividends to its members.

2. As to number of persons composing the corporation
a. Corporation Aggregate
a corporation consisting of more than one
member or corporator.
b. Corporation Sole
a religious corporation which consists of one
member or corporator only and his successors,
such as a bishop. (Sec. 110)

3. As to legal status
a. De Jure Corporation organized in accordance
with the requirements of law; existing both in
fact and in law.
b. De Facto Corporation organized with a
colorable compliance with the requirements of a
valid law; existing in fact but not in law. Its
existence cannot be inquired collaterally. Such
inquiry may be made by the Solicitor General in a
quo warranto proceeding. (Sec. 20)
= Why quo warranto?
1. It is the States right and authority
which are invaded and usurped;

COMMERCIAL LAW
CORPORATION LAWS
48

2009 BAR OPERATIONS
2. It would produce endless confusion and
hardship and probably destroy the
corporation if the legality of its
existence could be questioned in every
suit;
3. The rule is in the interest of the public
and is essential to the validity of
business transactions with corporations.

= How can there be a de facto status?
1. Defect in the acknowledgement;
2. Incomplete requirements;
3. Residency requirement is overlooked;
but it was still issued a certificate of
incorporation.

= Requisites of a de facto corporation:
1. Existence of a valid law under which it may
be incorporated;
2. A bona fide attempt in good faith to
incorporate under such law;
3. Actual use or exercise in good faith of
corporate powers; and
4. Issuance of a certificate of incorporation by
the SEC as a minimum requirement of good
faith.

- A de jure corporation can successfully resist
a suit by the State brought to challenge its
existence; a de facto cannot sustain its right
to exist.

c. Corporation by Estoppel
- a group of persons that assumes to act as a
corporation knowing it to be without authority to
do so, and enters into a transaction with a third
person on the strength of such appearance. It is
precluded to deny its existence in an action
under said transaction. It is neither a de jure nor
de facto corporation. (Sec. 21)
= Doctrinal Basis: It is founded on principles of
equity and is designed to prevent injustice
and unfairness. It applies when persons
assume to form a corporation and exercise
corporate functions and enter into business
relations with third persons.

d. Corporation by Prescription one which has
exercised corporate powers for an indefinite
period without interference on the part of the
sovereign power and which by fiction of law is
given the status of a corporation, e.g. Roman
Catholic Church.

4. As to relationship of management and control
a. Parent/Holding Corporation
one which controls another as a subsidiary by
the power, either directly or indirectly, to elect
management. It is one that holds stocks in other
companies for purposes of control rather than for
mere investment.

b. Subsidiary Corporation
i. Majority-owned Subsidiary its capital
stock (51% to 94%) is owned by another
corporation.
ii. Wholly-Owned Subsidiary its capital
stock (95% to 100%) is owned by another
corporation.
c. Affiliates
companies subject to the common control of
the Holding Corporation.
d. Parent and Subsidiary Corporation
separate entities with power to contract with
each other. The BOD of the Parent Company
determines its representatives to attend and
vote in the stockholders meeting of its
subsidiary. The stockholders of the Parent
company demand representation in the Board
meetings of its subsidiary.

5. As to place of incorporation
a. Domestic Corporation
a corporation formed, organized, or existing
under Philippine laws.
b. Foreign Corporation
a corporation formed, organized or existing
under any laws other than those of the
Philippines. (Sec. 123)

6. As to Functions
a. Public Corporation
one formed or organized for the government of
a portion of the State for the general good and
welfare.
b. Private Corporation
those formed for private purpose, usually for
profit-making.
= Private corporation includes:
1. Government owned or controlled
corporation one created or organized
by the government or of which the
government is the majority stockholder;
it is not for the government of a portion
of the State, e.g. GSIS, SSS, PNRC
2. Quasi-Public Corporation (a.k.a. public
utility or public service corporation) a
private corporation which have
accepted from the State the grant of
franchise or contract involving the
performance of public duties but which
are organized for profit. e.g. electric,
water, telephone and transportation
companies.
- Officers and employees of GOCCs
with original Charter (created by
special law) = under Civil Service
- Those incorporated under the
Corporation Code, governed by the
Labor Code. (Const., Art IX- B, Sec.
2 [1])

COMMERCIAL LAW
CORPORATION LAWS
49

2009 BAR OPERATIONS
Tests to determine the nationality of corporations
1. INCORPORATION TEST
determined by the state of incorporation,
regardless of the nationality of the stockholders.
2. DOMICILE TEST
determined by the State where it is domiciled.
3. CONTROL TEST or WAR-TIME TEST
determined by the nationality of the controlling
stockholders or members. It is applied in times of
war.

Domicile
the domicile of a corporation is the place fixed by law
creating or recognizing it, in the absence thereof, it shall
be understood to be the place where its legal
representation is established or where it exercises its
principal functions (Art. 51, New Civil Code)

Corporation as a Philippine national (under RA 7042,
Foreign Investment Act of 1991)
1. A corporation organized under the law of the
Philippines of which at least 60% of the outstanding
capital stock entitled to vote is owned by Filipino
citizens;
2. A foreign corporation licensed as doing business in
the Philippines of which 100% of the outstanding
capital stock entitled to vote is wholly owned by
Filipinos; and
3. Where a corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at least
60% of the capital stock outstanding and entitled to
vote of both corporations and at least 60 % of the
members of the Board of Directors of both
corporations must be Filipino citizens (Double 60%
Rule)
- The law applies the Control Test both with
respect to the ownership of shares entitled
to vote and the membership in the BOD.

Grandfather rule
- The method by which the percentage of Filipino
equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities,
provided for under the constitution and other
nationalization laws, is computed, where there are
corporate shareholders.
- Shares belonging to corporations or partnerships at
least 60 % of the capital of which is owned by Filipino
citizens shall be considered as of Philippine
nationality.
- But if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage
shall be counted as of Philippine nationality.

Nationalized corporations:
1. 100% Filipino owned:
a. Mass media (radio, TV, and printed)
b. Rural Banks 100% of its capital stock
c. Rice and corn industry
d. Security, watchman, and detective agency
2. 70% Filipino owned
a. Advertising Industry
b. Banks other than rural banks and new banks
established by consolidation of branches or
agencies of foreign banks in the Philippines
c. Private development Banks
d. Savings and Loan associations
3. 60% Filipino owned
a. Financing companies - 60 % of its capital stock
b. Fishing and business activity relating to fishing
Industry 60% of its capital stock
c. Exploration, Development, and Utilization of
Natural Resources
d. Owners of lands
e. Operation of Public Utility
f. Educational institutions other than those
established by religious groups
g. Any business reserved by Congress
4. Majority Owned by Filipinos
a. Investment House

Advantages of a corporation over an unregistered
association
1. Enjoys perpetual succession under corporate name
and in an artificial form;
2. Can take and grant property;
3. Can contract obligations;
4. Can sue and be sued in its corporate name as a
juridical person;
5. Capacity to receive and enjoy common grants and
privileges and immunities;
6. No personal liability beyond value of their shares.

C. CLASSIFICATION OF SHARES

1. Common Shares
the basic class of stock ordinarily and usually issued
without extraordinary rights and privileges, and the
owners thereof are entitled to a pro rata share in the
profits of the corporation and in its assets upon
dissolution and, likewise, in the management of its
affairs without preference or advantage whatsoever.

2. Preferred Shares
those issued wit par value, and preferences either
with respect to (a) payment of dividends (b)
distribution of assets after dissolution, or (c) such
other preferences as may be stated in the Articles of
Incorporation which are not violative of the
Corporation Code.
Kinds of Preferred Shares:
a) Preferred share as to assets
b) Preferred share as to Dividends
- Cumulative Preferred Share
a share which entitles the holder thereof not
only to the payment of current dividends but
also to dividends in arrears. If the stipulated
dividend is not paid in a given year, it shall be
added to the dividend which shall be due the
following year and the accumulated dividends
must be paid to the shareholder before any

COMMERCIAL LAW
CORPORATION LAWS
50

2009 BAR OPERATIONS
dividend may be paid to common
stockholders.
- Non-Cumulative Preferred Share
It is a share which entitles the holder thereof
to the payment of current dividends only in
preference to common stockholders.
- Participating Preferred share
A share which gives the holder thereof not
only the right to receive the stipulated
dividends but also to participate with the
holders of common shares in the remaining
profits pro rata after the common shares have
been paid the amount of the stipulated
dividend at the same preferred rate.
- Non-Participating Preferred Share
It is a share which entitles the holder thereof
to receive the stipulated preferred dividends
and no more. The balance, if any, is given
entirely to the common stocks.
- Cumulative Participating Preferred Share
The holder is entitled not only to dividends in
arrears but also, after receiving his preferred
share of dividends, to participation with the
holders of common stocks in the remaining
profits.

3. Deferred Shares
Those shares in which the payment of dividends
upon them is expressly postponed until the preferred
and common shares are paid.

4. Redeemable Shares
those which permit the issuing corporation to
redeem or purchase its own shares.
= Limitations:
a. Redeemable shares may be issued only
when expressly provided for in the Articles
of Incorporation;
b. The terms and conditions affecting such
shares must be stated both in the articles of
Incorporation and in the certificates of stock
representing such shares;
c. Redeemable shares may be deprived of
voting rights in the Articles of Incorporation,
unless otherwise provided in the
Corporation Code.
- Redeemable shares may be redeemed regardless
of the existence of unrestricted retained earnings
provided that the corporation has, after such
redemption, sufficient assets in its books to
cover debts and liabilities inclusive of capital
stock.
- Redemption may not be made where the
corporation is:
a. insolvent; or
b. if such redemption would cause insolvency
or inability of the corporation to meet its
debts as they mature.

5. Treasury Shares
Shares which have been lawfully issued by the
corporation and fully paid for and later reacquired it
either by purchase, redemption, donation, forfeiture
or other lawful means.
- If purchased from stockholders: The transaction in
effect is a return to the stockholders of the value
of their investment in the company and a
reversion of the shares to the corporation. The
corporation must have surplus profits with which
to buy the shares so that the transaction will not
cause impairment of the capital.
- If acquired by donation from the stockholders: The
act would amount to surrender of their stock
without getting back their investments that are,
instead voluntary given to the corporation.
- Treasury shares need not be sold at par or issued
value but may be sold at the best price
obtainable, provided it is reasonable. When
treasury shares are sold below their par or issued
value, there can be no watering of stock because
such watering contemplates an original issuance
of shares.

6. Founders Shares
shares issued to organizers and promoters of a
corporation in consideration of some supposed right
or property. Shares classified as such in the AI which
may be given special preference in voting rights and
dividend payments. But if an exclusive right to vote
and be voted for as director is granted, it needs the
approval of the SEC, and cannot exceed 5 years from
the date of approval.

7. Par Value Shares
Shares with a value fixed in the certificates of stock
and in the Articles of Incorporation.

8. No Par Value Shares
Shares having no par value but have issued value
stated in the certificate or AI.
= Limitations:
a. No par value shares cannot have an issued
price less than P5.00;
b. The entire consideration for its issuance
constitutes capital so that no part of it
should be distributed as dividends;
c. They cannot be issued as preferred stocks;
d. They cannot be issued by banks, trust
companies, insurance companies, public
utilities and building and loan associations;
e. The AI must state the fact that it issued no
par value shares as well as the number of
shares;
f. Once issued, they are deemed fully paid and
non-assessable. (Sec. 6)

9. Voting Shares
shares with a right to vote.

10. Non-Voting Shares
shares without right to vote.
- The law only authorizes the denial of voting
rights in the case of redeemable shares and
preferred shares, provided there shall always

COMMERCIAL LAW
CORPORATION LAWS
51

2009 BAR OPERATIONS
be a class or series of shares which have
complete voting rights.
- These redeemable or preferred shares, when
such voting rights are denied, are still
entitled to vote on the following:
a. Amendment of Articles of
Incorporation;
b. Adoption and amendment of by-laws;
c. Sale or disposition of all or substantially
all of corporate property;
d. Incurring, creating or increasing bonded
indebtedness;
e. Increase or decrease of capital stock;
f. Merger or consolidation or corporations;
g. Investments of corporate funds in
another corporation;
h. Dissolution of corporation. (Sec. 6)

11. Watered Stock
a stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or
services.
- Water in stock represents the difference
between the fair market value at the time of the
issuance of the stock and the par or issued value
of said stock. Both par and no par stocks can thus
be watered stocks.

12. Escrow stock
deposited with a third person to be delivered to a
stockholder or his assign after complying with certain
conditions, usually payment of subscription price.

13. Convertible Shares
shares that are changeable by the stockholder from
one class to another at certain price and within a
certain period.
= Convertibility of Shares
a. Preferred to Common in the absence of an
express provision in the AI as to that
convertibility, preferred shares cannot be
converted to common.
b. No Par Value to Par Value allowed by SEC
provided there would be no change in the
stockholders percentage interest in the
total assets of the corporation.

14. Street Certificate
a stock certificate endorsed by the registered
holder in blank and the transferee can command its
transfer to his name from the issuing corporation.

15. Over-issued/Spurious Stock
stock issued in excess of the authorized capital
stock. Its issuance is null and void.

16. Fractional Share
a share with a value less than one full share.

Doctrine of equality of shares
- Where the Articles of Incorporation do not provide
for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are also
subject to the same liabilities (Sec. 6).

-----------------------------------------------------------------------

II. INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS

A. Theories on the Formation of a Corporation
1. Concession Theory
espouses that a corporation is an artificial
creature without any existence until it has
received the imprimatur of the State acting
according to law, through the SEC.
2. Theory of corporate enterprise or economic unit
espouses that the corporation is not merely an
artificial being, but more of an aggregation of
persons doing business, or an underlying
business unit.

B. Steps in the Creation of a Corporation (Sec. 10)
1. Promotion
- is a number of business operations peculiar to
the business world by which the company is
brought into existence.
- Procuring necessary legislation;
- Getting incorporations together;
- Procuring necessary subscribers to the articles of
incorporation.
- This can, however, be dispensed with if the
persons promoting have sufficient capital or
funds; hence, there is no need to attract
prospective investors to come in.

2. Incorporation Proper (Sec. 10):
- Drafting and execution of the Articles of
Incorporation
- Filing with the SEC of the Articles of
Incorporation accompanied by an affidavit
showing that at least 25% of the entire
authorized shares has been subscribed and at
least 25% of the entire subscription has been
paid in cash.
- If governed by a special law, a favorable
recommendation of the appropriate government
agency is needed in filing the Articles of
Incorporation.
- Payment of filing and publication fees.
- Issuance of Certificate of Incorporation by the
SEC (within a period of two years).

3. Formal Organization and Commencement of Business
Operations (Sec.22):
- Election of Board of Directors/Trustees, its
corporate officers (President, Vice President,
Secretary, Treasurer) within 2 years from date of
incorporation.
- If it fails, then:
a. corporate powers cease;
b. corporation can be deemed dissolved.

COMMERCIAL LAW
CORPORATION LAWS
52

2009 BAR OPERATIONS
- If it commenced transaction of business but
subsequently becomes inoperative for a period
of at least 5 years, the same shall be a ground for
the suspension of its corporate franchise
(Certificate of Incorporation).

Promoter
a person who, acting alone or with others,
takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor.
Incorporators
They are those mentioned in the article of
Incorporation as originally forming and
composing the corporation, having signed the AI
and acknowledged the same before a notary
public. They have no powers beyond those
vested in them by the statute.
Stockholders/Shareholders
owners of shares in a corporation which has a
capital stock.
Members
corporators of a corporation which has no
capital stock.
Corporators
those whose comprise the corporation whether
as stockholders or members.

C. Franchises of a Corporation
1. Primary Franchise
- Right or privilege granted by the State to
individuals to exist and act as a corporation after
its incorporation. It is inalienable. It is a part of
the corporation and cannot be sold or assigned;
otherwise, a corporation would be created
without the consent of the legislature.
2. Secondary Franchise
- The special right or privilege conferred upon an
existing corporation to the business for which it
was created. May ordinarily be
conveyed/mortgaged under the general power
granted to a corporation to dispose of its
property, except such franchises charged with a
public use (e.g., to operate a messenger and
express delivery service, to use the streets of a
city to lay pipes or tracks).

Primary Franchise vs. Secondary Franchise

D. Number & Qualifications of Incorporators
1. Not less than 5 but not more than 15 incorporators
who must be natural persons
- Reason: Artificial persons, without brain or body
and existing only on paper through legislative
command, cannot create other artificial persons.
- Exception: Rural Banks Act of 1992 (Sec. 4, RA
No. 7353). Duly established cooperatives and
corporations primarily organized to hold equities
in rural banks and/or subscribe shares of stocks
of a rural bank can be incorporators of rural
banks.
- Exception to the number requirement: a
corporation sole which is incorporated by only
one person, e.g., bishop, priest, rabbi
- A corporation may become a stock holder in
another corporation by subscribing or purchasing
the latters stocks for the power of one
corporation to own a stock in another
corporation is entirely different from its power to
create or itself become one of the incorporators
of another corporation.
- A cooperative cannot be a corporation because a
corporation must be formed under the
Corporation Code, but it has a separate legal
existence from its members.

2. Incorporators must have the capacity to enter into
a valid contract.
- Reason: an act of forming a corporation is
contractual in nature.
- It must be acknowledged before a notary public
(its articles of incorporation).
- It is also to secure the State and all concerned
individuals against the possibility of any fictitious
name being subscribed to the articles and to
furnish proof of the genuineness of the
signatures.

3. Majority of the incorporators must be residents of
the Philippines.
- A corporation composed of entirely aliens may
be incorporated as long as a majority of the
incorporators are residents of the Philippines,
except in cases of nationalized corporations.
- Reasons for Residence Requirement:
a. Because they transact business in the
Philippines.
b. So that they could be easily notified (as
when there are special or regular meetings).

4. Citizenship Requirement
- It is a necessary qualification for incorporators in
corporations in which a certain percentage of the
capital stock is required to be owned by Filipino
Citizens. This rule applies to directors and
trustees.
- Reason: Certain nationalized activities are
exclusively reserved to Filipino Citizens like
quasi-public corporations.

Primary Franchise Secondary Franchise
1. refers to the franchise of
being or existing as a
corporation
1. refers to the exercise of
rights. Example: eminent
domain
2. vested in the individuals
who compose the
corporation
2. deemed vested in the
corporation
3. It cannot be sold or
transferred because it is
inseparable from the
corporation itself.
3. It may be sold or
transferred, subject to sale
on execution or levy

COMMERCIAL LAW
CORPORATION LAWS
53

2009 BAR OPERATIONS
5. Each of the incorporators of a Stock Corporation
must own or be a subscriber to at least one (1)
share of the capital stock of the corporation.
- Reason: The presumption is that where an
incorporator has a pecuniary interest in the
corporation, he will be concerned with the
management of its affairs.

E. Corporate term (limitations [sec. 11])
1. Shall not exceed 50 years at any given time.
2. Extension may be made by amendment of the
Articles of Incorporation.
- When:
a. Within the period of 5 years before the
expiry date.
b. Earlier than 5 years could be made if there is
a justifiable reason as determined by the
SEC.
- Procedure for Extension (Sec. 37)
a. Amendment of the Articles of Incorporation
to be approved by a majority vote of the
Board of Directors/Trustees (board
resolution) and ratified at a meeting of
stockholders representing at least 2/3 of the
capital stock (or 2/3 of the members).
b. Written notice of the proposed action, time,
place of the meeting must be addressed to
each stockholder as shown in the corporate
books;
c. Delivery of the notice to the stockholder by
depositing the same to the addressee in the
post office with postage prepaid, or served
personally
d. Amendments (with appropriate markings)
will be submitted to the SEC attached to the
original copy.
e. Amendment is effected before the corporate
term of existence, for after dissolution by
expiration of the corporate term, no more
corporate life to extend:

- Doctrine of Relation: Where the delay in
effecting the amendment is due to the neglect of
the officer with whom the application is required
to be filed or to a wrongful refusal on his part to
receive it, the same will be treated as having
been filed before the expiry date. But the
occurrence of a fortuitous event or force majeure
may justify the doctrine. The doctrine does not
apply if the delay is attributable to the
corporation.
- Appraisal Right of Dissenting Stockholder:
He can demand payment for the full value of his
share if he does not wish to join.

F. Corporate Structure of a Stock Corporation
Definition of Terms:
1. CAPITAL The value of the actual property or estate of
the corporation whether in money or property. Its net
worth or stockholders equity is its assets less liabilities.
2. CAPITAL STOCK The amount fixed in the articles of
incorporation, to be subscribed and paid in or agreed to
be paid in by the stockholders of a corporation, in money,
property, services, or other means at the organization of
the corporation or afterwards and upon which it is to
conduct its business, such contribution being made either
through directly through stock subscription or indirect
through the declaration of stock dividends.
3. AUTHORIZED CAPITAL STOCK The capita stock
divided into shares with par values. Par value stocks are
required in the case of corporations issuing preferred
shares, as well as in the case of banks, trust companies,
insurance companies, building and loan associations, and
public utilities. It is the total amount in the charter which
may be raised by the corporation for its operations.
4. SUBSCRIBED CAPITAL STOCK The total amount of
the capital stock subscribed whether fully paid or not.
5. PAID-UP CAPITAL STOCK The amount paid by the
stockholders on subscriptions from unissued shares of the
corporation.
6. OUTSTANDING CAPITAL STOCK The total amount
of the capital stock issued to subscribers except treasury
shares.
7. UNISSUED CAPITAL STOCK That portion of the
capital stock that is not issued or subscribed. It does not
vote and draws no dividends.
8. LEGAL CAPITAL The amount equal to the aggregate
par value and/or issued value of the outstanding capital
stock.

(1) Minimum Capital Stock
a. General Rule: No minimum capital stock is
required for stock corporations incorporated
under the Corporation Code as long as the paid-
up capital is not less than P5,000.00
Exception: Filipino percentage ownership
requirement regarding corporate capital in
nationalized corporations.

(2) Minimum Subscription and Paid-Up Capital for
Incorporation
a. Minimum Subscribed Capital At least 25% of
the authorized capital stock as stated in the
Articles of Incorporation must be subscribed at
the time of incorporation;
Computation of the 25% subscription requirement:
1. Where capital stock consists of par value
shares:
The minimum subscription should be 25% of
the amount of the authorized capital stock
or 25% of the aggregate value of all the
shares of stock the corporation is authorized
to issue.
In par value stock corporations, the
percentage subscription requirement shall
always be based on the amount of the
authorized capital stock irrespective of the
class, number, and par value of the shares.
2. Where the capital stock consist of no par
value shares:
The 25% requirement shall be computed on
the basis of the entire number of authorized
shares. Corporations whose shares have no
par value have no authorized capital stock

COMMERCIAL LAW
CORPORATION LAWS
54

2009 BAR OPERATIONS
the issued price of no par value shares need
to be fixed in the articles of incorporation.
3. Where the capital stock is divided into par
value shares and no par value shares:
The requirement as to par value shares is as
indicated above and for the no par value
shares, the 25% is based on the number of
the said no par value shares.

b. Minimum Paid-Up Capital At least 25% of the
total subscription must be paid upon
subscription but must not be less than P5,
000.00.
- Reason: To give assurance to the investing public
dealing with the new corporation that it is
financially and actually able to operate and
undertake to do business as they arise from the
start of its operations.
- Exception: when special laws require higher
minimum capitalization such as:
1. Insurance Corporations P5 million
2. Pawnshop established as a corporation
P100,000.00
3. Financial Intermediary applying for
authority to perform quasi-banking
functions P50 million

Ways of increasing capital stock:
1. By increasing the number of shares and retaining the
par value;
2. By retaining the number of shares and increasing the
par value;
3. By increasing the number of shares and increasing
the par value;
4. By reinvesting retained earnings to the capital and
issuing stock dividends.

Tools available to the stockholders to replenish capital
1. Additional subscription to shares of stock of the
corporation by the stockholders or by investors;
2. Advances by the stockholders to the corporation;
3. Payment of unpaid subscription by the stockholders.

G. Articles of incorporation (AI)

Articles of Incorporation
- The document prepared by the persons establishing a
corporation and filed with the SEC containing the
matters required by the Corporation Code.

Significance
- Its issuance signals the birth of the corporations
juridical personality.

Language Used
- Any of the official languages duly signed and
acknowledged by all of the incorporators.

Contents:
- Generally
1. Name of the corporation;
2. Specific purpose for which the corp. is being
incorporated;
3. Location of principal office which must be within
the Philippines;
4. Corporate term;
5. Incorporators names, nationalities and
residences;
6. Number of Directors or trustees, which shall not
be less than 5 nor more than 15;
7. Names, nationalities and residences of persons
acting as directors/trustees until the first regular
directors/trustees are duly elected and qualified;
- If stock corp:
1. Amount of its authorized capital stock in lawful
money of the Philippines;
2. Number of shares into which it is divided;
3. If par value shares, the par value of each, names,
nationalities and residences of the original
subscriber, the amount subscribed and paid;
4. If some or all of the shares are without par value.
- If non-stock corp:
1. The amount of its capital;
2. Names, nationalities, and residences of the
contributors; and
3. The amount contributed by each.
4. The articles of incorporation must state the
amount of its capital or money contributed or
donated by specified persons.
5. Sworn statement of the treasurer elected by the
subscribers showing
a. A copy of the articles filed which is returned
with the certificate of incorporation issued
by the SEC under its official seal becomes its
corporate charter.
b. Corporation created by special law has no
articles of incorporation. It draws its life not
from a general law, but from a direct act of
Congress.
c. If that corporation is regulated by a
government agency, submit also a favorable
recommendation of that agency.

Corporate name
- Necessity of putting the corporate name:
1. The corporation acquires juridical personality
under the name stated in the articles of
Incorporation;
2. The corporation has the power to succession thru
that name;
3. It identifies and distinguishes it from other
corporations;
4. By its name it is authorized to transact business;
5. Corporate/trade name is a property right, a right
in which it may assert and protect against the
whole world.
- Guidelines for Corporate Name (Sec. 18)
1. Not identical or deceptively or confusingly
similar to that of another existing corporation or
to any other name already protected by law.

COMMERCIAL LAW
CORPORATION LAWS
55

2009 BAR OPERATIONS
2. Not patiently deceptive or contrary to existing
law;
3. The name of the corporation must end with word
Incorporated or Inc. unless it includes the
word corporation.
4. Prohibited Use of Certain Words:
a. Emblem, official seal, and the name of the
United Nations both in its full or abbreviated
form for commercial purposes (RA No. 226);
b. Unlawful to use the word Bonded, in part
or in whole as business name of those
maintaining any warehouse not licensed
under the General Bonded Warehouse Act
(Act No. 3893).
c. Using the word bank, banking, banker,
building and loan association, trust
corporation, trust company, or words of
similar import, when not conducting the
business of commercial banking
corporation, trust corporation, savings and
mortgage bank, or building and loan
association;
d. Using the words Rural Bank, when not
authorized under the Rural Banks Act (RA
No. 7353);
e. Using the term savings and loan
association when not organized under the
Savings and Loan Association Act (RA No.
3779), or the term development bank
unless organized under the Private
Development Banks Act (RA No. 4093);
f. Using the word National as portion of their
name or title, except the Philippines
National Bank (PD 694), due to its
connotation of being a government agency
or a government-owned or controlled
corporation;
g. UN, Olympic, and Bureau in full or
abbreviated form or business purposes;
h. Financing Company, Finance Investment
Company, unless organized as a financing
company (RA No. 5980);
i. Engineer, or Architect unless used by
persons properly registered and licensed as
civil engineers or architects (RA Nos. 544,
545);
j. Geodetic Engineers is prohibited except
when majority of the members of the
partnership or corporation are properly
registered and licensed as geodetic
engineers (RA No. 4374);
k. subsidiary corporation of a foreign firm may
carry the name of the principal company
with the word Phil. Or Philippines affixed
to the firm name, with the written consent
of the mother company.
l. The name of an internationally known
foreign corporation or one similar to it may
not be used by a domestic corporation
without the prior consent of the former;
m. If the full name of a person forms part of the
corporate name, the consent of such person
or his heir must be obtained; and
n. The word State, National, Maharlika
and the Barangay cannot be used as part
of the corporate name since these are
reserved for the exclusive use of the
government.

Doctrine of secondary meaning
- A word or phrase originally incapable of exclusive
appropriation with reference to an article on the
market, because geographically, or otherwise
descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference
to his article, that in that trade or to that branch of
the purchasing public, the word or phrase has come
to mean that the article was his product. Ex. Ang
Tibay, merely descriptive, but its products are
already associated with it.
- Test of infringement: Whether the similarity is such as
to mislead a person using ordinary care and
discrimination. The right to the exclusive use of a
corporate name with freedom from infringement is
determined by priority of adoption.
- Remedy in case of infringement: Injunction.

Corporate purpose:
- It must be specified with sufficient clarity to define
with certainty the scope of its business. If more than
one purposes, state the primary and the secondary
purpose.
- The law allows a corporation to have secondary
purposes because the primary purpose may not turn
out to be profitable, and in such case, all it has to do
is to invest its funds in any such purposes instead of
organizing a new corporation.
= Reasons:
a. A person who intends to invest his money in
the business corporation will know where
and in what kind of business or activity his
money will be invested;
b. The directors and officers of the corporation
will know within what scope of business are
they authorized to act; and
c. A third person who has dealings with the
corporation will know by perusal of the
articles whether the transaction or dealing
he has with the corporation is within the
authority of the corporation or not.

Principal place
- The articles of incorporation must state the principal
place where the principal office of the corporation is
to be established or located, in which place, must be
within the Philippines. The place to be designated is
the city or municipality where the principal office is to
be located.
- Purpose of the requirement for definite place: For
effective regulation and supervision of the
corporation.

COMMERCIAL LAW
CORPORATION LAWS
56

2009 BAR OPERATIONS
AMENDMENTS OF THE ARTICLES OF
INCORPORATION (PROCEDURE): (Sec. 16)
1. Board of Directors convene to a meeting and make a
proposal for amendments to be converted into a
board resolution;
2. The resolution stating such amendments must be
approved by a majority vote of the Board of
Directors/Trustees;
3. The approved resolution must be submitted to the
stockholders for ratification;
4. The required vote for ratification is the approval of
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members (for
non-stock); a meeting to that effect may not be
necessary since they can just submit their written
assent representing at least 2/3 of the outstanding
capital stock.
Note: Written assent is not allowed in (a) extending
or shortening the corporate term (Sec. 37); (b)
decreasing or increasing the capital stock and (c) in
close corporations (Sec. 103), a meeting of the
stockholders is always necessary.
5. The articles, as amended, must be indicated by
underscoring the change or changes made, a copy
thereof must be certified under oath by the corporate
secretary and the fact that it has been duly approved
by the required vote of the stockholders/members.
6. Submission to the SEC; and
7. It takes effect upon approval by the SEC or from the
date of filing if not acted upon within 6 months if the
delay is not attributable to the corporation.
- This rule does NOT apply if the amendment is
intended to dissolve the corporation. You have
to wait for the approval of the SEC. There can be
no presumption that when 6 months have
already lapsed, it is deemed approved. The
reason being that dissolution must be made at
the consent of the State.

Non-amendable Facts in the Articles of Incorporation
- Those matters referring to facts existing as of the
date of the incorporations such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock
and their subscribed and paid-up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of
a non-stock corporation;
5. Date and place of execution of the AI;
6. Witnesses to the signing and acknowledgment of
the AI.

Grounds for the Disapproval of the Articles of
Incorporation
1. Not substantially in compliance with the form
prescribed by the Code;
2. Purpose/purposes are patently unconstitutional,
illegal, immoral or contrary to government rules
and regulations;
3. Treasurers affidavit concerning the amount of
capital stock subscribed and/or paid is false;
4. Required percentage of ownership of the capital
stock to be owned by citizens of the Philippines
has not been complied with as required by
existing laws or the Constitution. Ex. Monetary
Board of the Central Bank for banking
institutions.
- However, if the corporation is involved in a public
utility the SEC may give such corporation a
reasonable time to modify the objectionable
portion.

Grounds for Suspension/Revocation of Certificate
1. Fraud in procuring the certificate of
incorporation (ex. Paid-up capital);
2. Serious misrepresentation causing great damage
and prejudice to the public;
3. Refusal to comply with a lawful order of the SEC;
4. Continuous inoperation for a period of at least 5
years;
5. Failure to file by-laws within the required period;
and
6. Failure to file required reports in appropriate
forms as determined by the SEC within the
prescribed period.

ARTICLES OF INCORPORATION vs. BY-LAWS

ARTICLES OF
INCORPORATION
BY-LAWS
1. It constitutes the charter or
fundamental law of the
corporation; a contract
between:
a. the corporation and the
stockholders/members;
b. between and among the
stockholders/ members; and
c. the corporation and the
State
1. It is merely for the
internal government of the
corporation but has the
force and effect of a
contract between:
a. the corporation and the
stockholders /members;
and
b. between and among the
stockholders/ members
2. It is executed before
incorporation
2. It may be executed after
incorporation; it may be
filed simultaneously with
the AI

3. It is a condition precedent in
the acquisition of corporate
existence
3. It is a condition
subsequent; its absence
merely furnishes a ground
for the revocation of the
franchise.
4. It is amended by a majority
vote of the BOD/BOT, and
stockholders representing at
least 2/3 of the outstanding
capital, or 2/3 of the members
in case of non-stock
corporations
4. It may be amended by a
majority vote of the
BOD/BOT, and majority
vote of the outstanding
capital stock, or a majority
of members in case of non-
stock corporations
5. The power to amend/repeal
the AI cannot be delegated by
the stockholders/ members to
the BOD/BOT
5. The power to
amend/repeal the by-laws
or adopt new by-laws may
be delegated by the 2/3 of
the outstanding capital
stock or 2/3 of the members
incase of non-stock
corporations.

COMMERCIAL LAW
CORPORATION LAWS
57

2009 BAR OPERATIONS
Rules on conversion (SEC Opinion)
1. Stock to non-stock corporation
- May be made by mere amendment of the articles
of Incorporation.
2. Non-stock to stock corporation
- The corporation must first be dissolved; mere
amendment of the AI would not suffice because
the conversion would change the corporate
nature from non-profit to monetary gain.

- The conversion without dissolving it first would be
tantamount to distribution of its assets or income to
its members inasmuch as after its conversion, the
asset of the non-stock corporation would now be
treated as payment to the subscriptions of the
members who will now become stockholders of the
corporation.

Formal organization and commencement of the
transaction of the business (sec. 22)
- These are conditions subsequent which may be
satisfied by substantial compliance in order that a
corporation may legally continue as such.
- Acts of Constituting Formal Organization
1. Adoption of by-laws and filing of the same with
the SEC;
2. Election of the Board of Directors and officers by
the board pursuant to the by-laws;
3. Establishment of principal office;
4. Subscription and payment of the capital stock,
etc

Effects of Subsequent Continuous Inoperation
1. If the corporation does not formally organize and
commence transaction within a period of 2 years,
corporate powers cease and corporation is
deemed dissolved;
2. If it commenced transaction but subsequently
becomes continuously inoperative for a period of
5 years, it serves as a ground for the suspension or
revocation of its corporate franchise (certificate
of incorporation).

- The rule that a corporation must formally organize
and commence the transaction of its business or the
construction of its works within 2 years from the date
of its incorporation (the exercise of its secondary
franchise) does not apply to:
1. Special Corporations, because the law creating
them provides for the commencement of their
juridical personality;
2. Corporation Sole, the person incorporating is not
required to wait for the certificate of
incorporation. Mere filing of the Articles of
Incorporation makes it incorporated already.

-----------------------------------------------------------------------

III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

Subject structure: components of a corporation
1. Promoter
2. Incorporators
3. Corporators
a. Stockholders
b. Members
4. Governing Body (absolute control and direction)
a. Board of Directors
b. Board of Trustees
5. Managing and Administrative Body
a. Executive committee
b. Contracted Mangers
6. Corporate Officers

A. Qualifications of Directors/Trustees
1. Every director (including incorporating director) must
own at least one share of the capital stock, and if
ceases to own at least one share in his own name, he
automatically ceases to be a director (Sec 23). For
non-stock corporation, only members of the
corporation can be elected to seat in the Board of
Trustees.
- Person in whose name it has been issued is the
one to be elected
- Q. When is it necessary that he is the owner?
A: At the time of assumption of office
- Note: Both husband and wife own share either
can be elected at any given time.
2. A majority of the directors/trustees must be residents
of the Philippines
3. He must not have been convicted by final judgment
of an offense punishable by imprisonment for a
period exceeding 6 years or a violation of the
Corporation Code committed within 5 years from the
date of his election (Sec. 27).
4. Only natural persons can be elected
directors/trustees.
5. Other qualifications as may be prescribed in the by-
laws of the corporation (e.g. must not be engaged in
business in competition with the corporation)
(Gokongwei case, 89 SCRA 336)

B. BOD/BOT as repository of corporate powers
- Gen. Rule:
= The corporate powers of the corporation, all
business conducted and all property of such
corporation controlled and held by the BOD/BOT
(Sec. 23)
- Exceptions:
1. In case of an Executive Committee duly
authorized in the by-laws;
2. In case of a contracted manager which may be an
individual, a partnership, or another corporation.
(Note: In case the contracted manager is another
corporation special rule: Sec. 44 applies)
3. In case of close corporations, the stockholders
may manage the business of the corporation
instead by a board of directors, if the Articles of
Incorporation provide.

COMMERCIAL LAW
CORPORATION LAWS
58

2009 BAR OPERATIONS
C. Nature of Powers of the Board
1. They are original and undelegated
- Theory of Original Power: the powers of the board
are original and undelegated. The stockholders
or members do not confer, nor can they revoke,
those powers.
2. They are derivative only in the sense of being
received from the State in the act of incorporation
3. They are directly conferred by statute;
4. Can bind the corporation only by action taken at a
board meeting.
= Reasons:
a. A meeting is necessary in order that any
action may be deliberately adopted, after
opportunity for discussion and an
interchange of views, and
b. As agents of the corporation managing its
affairs, directors/trustees have no power to
act other than as a board.

Business judgment rule
The BOD/BOT is the body entrusted with the general
control and management of the business of the
corporation having plenary power and authority to
transact the ordinary business of the corporation within
the scope of its charter power. The SEC, court, and
stockholders cannot overrule a pure business judgment.

Three-Fold Duties of Directors
1. Duty of Obedience
- To direct the affairs of the corporation only in
accordance with the purposes for which it was
organized
2. Duty of Diligence
3. Duty of Loyalty

Obligation and liabilities of the board of directors,
trustees and officers (sec. 31)
1. Liability for Damages (director/trustee)
- Solidary liability
a. Willfully and knowingly votes or assents to
patently unlawful acts of the corporation,
b. Gross negligence or bad faith in directing the
affairs of the corporation;
c. Acquiring any personal or pecuniary interest in
conflict with his duty as such director or trustee.
d. Agreeing or stipulating in a contract to hold
himself liable with the corporation
e. Consenting to the issuance of a watered stocks,
or, having knowledge thereof, failing to file
objections with the corporate secretary (Sec.65)
(Personal Liability)
f. By virtue of specific provision of law.

2. Liability for Bad Faith or Gross Negligence
(BOD/trustees/officers)
- Personal Liability
a. Any wrongful disposition of corporate assets and
for any loss or injury to the corporation arising
from their gross negligence or unauthorized acts
of violation of their duties;
b. Termination of employees which are done with
malice or in bad faith.

3. Liability for secret profit (BOD/ Trustees/officers)
a. Profits which otherwise would have accrued to
the corporation;
b. Profits derived from ultra vires transaction.

Remedies in case of mismanagement:
1. Derivative suit or complaint
2. Injunction, if the act has not yet been done
3. Receivership
4. Dissolution if the abuse amounts to a ground for quo
warranto but the Solicitor general refuses to act

Special fact doctrine
- Director takes advantage of an information by virtues
of his office to the disadvantage of the corporation.

Inherent power of amotion
- It is the power to remove directors, trustees or
officers prior to the expiration of their term

D. Election of directors or trustees (sec. 24)
a. Stock Corporation
- directors elected among the holders of stocks
b. Non-stock corporation
- trustees elected from among the members of the
corp.

Requirements
1. Presence of majority stockholders/members in
person or by proxy (written/authorized)
2. By balloting if requested by any voting
stockholders/members, otherwise by viva voice

Methods of Voting
1. Straight Voting
- Every stockholder may vote such number of
shares for as many persons as there are directors
to be elected.
- Illustration:
X owns 100 shares in ABC Corporation.
If there are 5 directors to be chosen, X is entitled
to 500 votes obtained by multiplying 100 by 5. He
may give to the 5 candidates he wants to be
elected 100 votes each.
Under this method, the votes are
distributed equally among the 5 candidates
without preference.

2. Cumulative Voting
a. Cumulative Voting for one candidate
- A stockholder gives to one candidate as
many votes as the number of directors to be
elected multiplied by the number of his
shares shall equal.
- In the above example, X gives 500 votes to
one candidate.
b. Cumulative Voting by Distribution
- A stockholder cumulates his shares by
multiplying also the number of his shares by

COMMERCIAL LAW
CORPORATION LAWS
59

2009 BAR OPERATIONS
the number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
- Also in the illustration above, with 100
shares, X is entitled to 500 votes if there are
5 directors to be elected. X may distribute
his votes to candidates D= 100; E=100;
F=100; G = 150; H = 250. Any combination is
allowed provided the total of votes cast by
him does not exceed 500 votes.
- Rationale: To enable minority stockholders
to have adequate representation in the
board.

Non stock corporation
- As many votes as there are trustees to be elected but
can give only 1 vote per trustee
- If shares are delinquent-cant vote
- Q. Can a holder of preferred shares vote?
A. No, not allowed to vote in the election of BOD
- Q. Can one vote by zones:
A. No, implied from Sec. 24-election requires the
majority of the capital stock or majority of the
members entitled to vote.
- TERM: shall hold office for 1 year until their
successors are elected and qualified.

Hold-over principle
Upon failure of a quorum at any meeting of the
stockholders or members called for an election, the
directorate naturally holds over and continuous to
function until another directorate is chosen and qualified.
The failure to elect does not terminate the terms of
incumbent officers nor dissolve the corporation.

- Corporate Elections - only means by which
stockholders can control the composition and the
action of the Board.

Number
a. Stock Corporation not less than 5 but not more than
15 (Sec. 14[6])
b. Non-Stock Corporation not less than 5 (or 3?) but
may be more than 15 with the term of office of 1/3 of
their number expiring every year (Sec. 92 [1])
c. Close Corporation no board (no limit) or can have if
pass a resolution
d. Corporation Sole =1

Corporate officers (Sec. 25)
- Those whose offices are created by the
Corporation Code or the corporations by-laws.
They do not enjoy security of tenure, and their
incumbency is within the business judgment
discretion of the BOD/BOT. Their removal is
considered an intra-corporate controversy and
beyond the reach of labor tribunals.
- Immediately after their election, the directors
must formally organize by the election of:
1. President must be a director
2. Treasurer may or may not be a director; as
a matter of sound corporate practice, must
be a resident of the Philippines
3. Secretary must be a resident and citizen of
the Phils.; need not be a director unless
required by the by-laws
4. Other officers provided for in the by-laws

- Two or more position maybe held concurrently
by the same person
= President and Treasurer at the same time
but NOT President and Secretary.

- Officers are elected by the Board in a valid
meeting.

Quorum
- Such number of the membership of a collective body
as is competent to transact its business or do any
other corp. act.
- Gen. Rule: Simple majority can act on any matter.
- Exception: in the election of corporate officers which
shall require the vote of a majority of all the members
of the Board (all of them are present)

Requisites for a valid board meeting
1. Meeting of the directors or trustees duly assembled
as a board;
2. Presence of the required quorum;
3. Decision of the majority of quorum or, in other cases,
a majority of the entire board; and
4. Meeting at the place, time and manner provided in
the by-laws.

No proxy in a board meeting
- directors or trustees cannot validly act by proxy
on account of
a. their responsibility to the corporation and
b. their being voted into office presumably
because of their personal qualifications.

- For spouses who own the same share jointly, only
one of them can be elected on the board.

Valid corporate acts
- Gen. Rule: All corporate acts to be valid must be
from a board meeting.
- Exceptions: (Board meeting not required for validity)
1. Directors are the only stockholders
2. When a corporate act is undertaken by a person
already authorized by the Board
3. If the necessity of a Board meeting is waived.
4. Act done or authorized by the BOD without a
valid board meeting is ratified unanimously by
the stockholders.
5. Management contract
6. Executive Committee acts within the power
delegated to it.

Report of election of BOD/BOT and Officers (Sec. 26)
- Secretary or other officer of the corporation to
submit with SEC the names, nationalities, and

COMMERCIAL LAW
CORPORATION LAWS
60

2009 BAR OPERATIONS
residences of the directors, trustees and officers
elected within 30 days after the election.
- Director/trustee/officer dies, resigns or in any
manner ceases to hold office his heir, the secretary
or any other officer of corporation or the director,
trustee or officer himself, to immediately report such
fact to the SEC. (as the case may be)

Removal of directors or trustees (Sec. 28)
1. Hold a meeting regular or special
Regular meeting as provided in the by-laws/AI
2. Prior notice to stockholders of the intention to
remove a director
-by the SEC upon orders of the President or majority
of members
3. Notice must contain the particular purpose-removal
specified
4. Vote stockholders representing 2/3 of outstanding
capital stock, or in non-stock corporations, by 2/3 of
the members entitled to vote

- A special meeting called for the removal of a
director/trustee must be called
1. By the SECRETARY on order of the President, or
2. On the written demand of stockholders holding
or representing at least a MAJORITY of the
outstanding capital stock (or on the written
demand of at least MAJORITY members entitled
to vote)

= If the Secretary fails or refuses to call a special
meeting upon such demand or refuses to give
the notice, or if there is no Secretary, the call for
the meeting may be addressed directly to the
stockholders or members by ANY stockholder or
member signing the demand.

- The vacancy resulting from the removal may be filled:
a. by election at the same meeting without further
notice, or
b. at any regular or special meeting called for the
purpose, after giving notice

- Removal may be with or without cause; BUT a
minority director can only be removed with cause.

Vacancies in the office of director/trustee (Sec. 29)
- Vacancy other than removal by the SH/member
(Death, Resignation, Abandonment, Disqualification,
or Expiration of term) is filled by at least majority of
the remaining directors/trustees, if still constituting a
quorum.

Vacancies to be filled by a vote of stockholders or
members:
1. In case of removal of a director or trustee;
2. If the remaining directors or trustees do not
constitute a quorum and therefore could not fill the
vacancies created by death, resignation,
disqualification, abandonment or expiration of the
term of a director or trustee;
3. If the vacancy is created because of increase in the
number of directors/trustees at any time of the year.

Compensation of directors (Sec. 30)
- Gen. Rule: BOD/BOT are not entitled to
compensation except for reasonable per diems.
- Exceptions (that they can receive compensation):
1. If provided for in the by-laws; or
2. By a vote of stockholders representing at least a
majority of the outstanding capital stock.
- Limitation (in case they are compensated):
The yearly compensation of directors shall in no case
exceed 10% of the NET income before income tax of
the corporation during the preceding year.
- But a corporate officer who is not a director may be
compensated as an employee of the corporation.
- A corporate officer who is also a director may
likewise be compensated, in addition to his per
diems, the amount to be fixed by a board resolution
in the absence of provision to the contrary in the by
laws and subject to the limitation.

Liability of directors/trustees (Sec. 31)
- Nature of Directors/Trustees Position
= They are agents of the corporation; they also
occupy a fiduciary relation to the corporation.

Instances when directors/trustees maybe held liable for
damages
1. He willfully and knowingly votes or assents to patent
unlawful acts of the corporation
2. He is guilty of gross negligence or bad faith in
directing the affairs of the corporation-refuse to
make a decision/withholds the vote required.
3. He acquires any personal or pecuniary interest in
conflict with his duty as such director/trustee.
(investment in another corporation competing
directly with the corporation.)

- The erring board members shall be held jointly and
severally liable for all the damages resulting
therefrom suffered by the corporation, its
SH/members or other persons.

Liability of a director/trustee, or officer as a trustee for
the corporation
1. When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation
2. In respect to any matter which has been reposed in
him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf.
= he must account for the profits which otherwise
would have accrued to the corporation.

- The effects under Sec. 31 and 34 applies even if
he uses his own money; if violated, no
ratification
SEC 31: Violated is a specific trust reposed upon
a director
SEC 34: Violated is general trust reposed on all
directors

COMMERCIAL LAW
CORPORATION LAWS
61

2009 BAR OPERATIONS
- Applies also if no specific instructions given (no
decision made by Board)
- Doctrine of Corporate opportunity will not apply if
the director acted in good faith
- Acquisition is not vested to any activity of the
corporation
- If corporation is unable to acquire opportunity no
prohibition imposed upon him

Special rules on contracts entered into by
directors/trustees or officers:

1. Contracts of Self-Dealing Directors (Sec. 32)
- Contracts which are entered into by the
corporation with one or more of its own
directors/trustees, or officers are voidable,
UNLESS:
a) The presence of such director/trustee in the
board meeting approving the contract was
not necessary to constitute a quorum for
such meeting;
b) The vote of such director/trustee in the
board meeting approving the contract was
not necessary for the approval of the
contract;
c) The contract is fair and reasonable under the
circumstances;
d) In case of an officer, there was previous
authorization by the BOD/BOT.
- If any of the first 2 conditions is absent, in the
case of a contract with a director/trustee, the
contract may be ratified by the vote of the
stockholders representing at least 2/3 of the OCS
or of 2/3 of the members in a meeting called for
the purpose, PROVIDED:
a) That full disclosure of the adverse interest of
the dir/trustee involved is made at such
meeting.
b) That the contract is fair and reasonable
under the circumstances
- Although not all the said conditions are present,
the corporation may elect NOT to attack or
question the validity of the contract, without
prejudice, however , to the liability of the
director/trustee for damages under Sec. 31.

2. Contracts of Interlocking Directors (Sec. 33)
- Contracts entered into between corporations
with interlocking directors (interest of said
directors is substantial exceeding 20% of the
outstanding capital stock) are VALID provided
that:
a) The contract is not fraudulent; and
b) The contract is fair and reasonable under the
circumstances.
- If interest in both corporation are nominal (less
than 20% of OCS), the contract is valid
- If both substantial, the contract is valid
- If one is nominal and the other is substantial , the
contract is valid if all the conditions set in Sec 32
are present with respect to the corporation in
which he has nominal interest

3. Doctrine of Corporate Opportunity (Sec. 34)
- Disloyalty of a Director
- Unless his act is ratified, a director shall refund to
the corporation all the profits he realizes on a
business opportunity which:
a) The corporation is financially able to
undertake;
b) from its nature, is in line with the
corporations business and is of practical
advantage to it; and
c) the corporation has an interest or a
reasonable expectancy.
- The rule shall apply notwithstanding the fact that
the director risked his own funds in the venture.
- When doctrine is NOT applicable:
a. If the director acted in good faith
b. Acquisition is not related to any activity
of the corporation
c. If the corporation is unable to acquire
the opportunity
d. If no prohibition is imposed upon him
e. If the prohibition imposed upon him is
related but there is ratification

Rationale of applying sec. 32
- As if the corporation is dealing with its own directors

Section 35: Executive Committee
- Body given corporate powers which is composed of
not less than 3 as provided for in the by-laws to
assume
- Provided for in the by-laws
- Not less than 3 members of the board to be
appointed by the board.
- Gen. Rule: An act by majority vote, all other matters
delegated by the by-laws or on a majority vote of the
board.
- Exceptions:
1. approval of any action for which shareholders
approval is also required
2. the filling of vacancies in the board
3. the amendment or repeal of by-laws in the
adoption of new by laws
4. the amendment or repeal of any resolution of the
board or by its express terms is not so amendable
or repealable
5. a distribution of cash dividends to the
shareholders.

Purpose of creating executive committee
- To assure prompt and speedy action and solution to
important matters with the need for a board meeting
especially where such meeting cannot readily be held

----------------------------------------------------------------------

COMMERCIAL LAW
CORPORATION LAWS
62

2009 BAR OPERATIONS
IV. POWERS OF CORPORATION

- EXPRESS POWERS
- granted by law, Corporation Code, and its
Articles of Incorporation
- INHERENT/INCIDENTAL POWERS
- not expressly stated but are deemed to be within
the capacity of corporate entities.
- IMPLIED/NECESSARY POWERS
- exist as a necessary consequence of the exercise
of the express powers of the corporation or the
pursuit of its purposes as provided for in the

Theory of general capacity
- A corporation is said to hold such powers as are not
prohibited or withheld from it by general law
(everything is allowed except when prohibited)

General Powers and Capacity (Sec 36)
Express powers:
1. To sue and be sued
2. Of succession
3. To adopt and use of corporate seal
4. To amend its Articles of Incorporation
5. To adopt its by-laws
6. For stock corporation to issue and sell stocks to
subscribers and treasury stock, for non-stock
corporations to admit members;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds;
8. To enter into merger or consolidation;
9. To make reasonable donations to
a. public welfare
b. hospital
c. charitable
d. cultural
e. scientific
f. civic
g. similar purposes
Provided NO donation is given to any:
a. Political party
b. Candidates
c. Partisan political activity
10. To establish pension, retirement, and other
plans for the benefit of directors, trustees,
officers and employees
11. To exercise other powers essential or necessary
to carry out its purposes.

Two sources of express powers of a corporation:
1. Those enumerated in Sec. 36
2. Purpose clause of the AI

Theory of special capacity
- A corporation cannot exercise powers except those
expressly or impliedly given (everything is prohibited
except when allowed)

Special powers (Secs. 37 44)
1. To extend or shorten corporate term
Requirements:
a. Amendment of articles of incorporation
b. Approval of the amendment by majority
vote of the BOD/BOT
c. Written notice of the proposed action and of
the time and place of the meeting to each
stockholder or member.
d. Ratification in the meeting by stockholders
representing at least 2/3 of OCS or at least
2/3 of members
2. To increase or decrease capital stock;
3. To incur, create or increase bonded indebtedness
4. To deny pre-emptive right
5. To sell, dispose, lease, encumber all or substantially
all of corporate assets;
6. To purchase or acquire own shares provided:
a. there is an unrestricted retained earnings
b. it is for a legitimate purpose
7. To invest corporate funds in another corporation or
business for other purpose other than primary
purpose;
8. To declare dividends out of unrestricted earnings
9. Enter into management contract with another
corporation (not with an individual or a partnership
within general powers) whereby one corporation
undertakes to manage all or substantially all of the
business of the other corporation for a period not
longer than 5 years for any one term. (Sec. 37)

- Right of appraisal is available in case of
extension (Sec. 37) and also available in
shortening the corporate term (Sec. 81[1]).

Sec. 38 Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness
- Requires:
1. Proposed action approved by a majority vote of the
BOD
2. Written notice of the proposed action and of the time
and place of the stockholders meeting to be
addressed to each stockholder
3. Approved by stockholders representing 2/3 of OCS
4. A certificate in duplicate of said corporate act shall be
signed by majority of the BOD and and
countersigned by the Chairman and the Secretary of
the stockholders meeting
5. A certificate of increase must be accompanied by the
Treasurers affidavit showing that at least 25% of
such increased capital stock has been subscribed and
that at least 25% of the amount subscribed has been
paid.

- Corporate act to take effect from and after the
approval of the SEC.
- No decrease in capital stock shall be approved by SEC
if it will prejudice corporate creditors
- Bonds issued by the corporation shall be registered
with the SEC which is given the power to determine
the sufficiency of the terms of such bonds

COMMERCIAL LAW
CORPORATION LAWS
63

2009 BAR OPERATIONS
- Where a corporation increase capital stock. SH are
entitled to a pre-emptive right to subscribe to a
sufficient number of shares in order to maintain their
previous relative voting power. The corporation must
give the SH a reasonable period which to exercise
such right.
- Right of appraisal NOT available in this Sec. 38.

- Non-stock corporation may incur or create bonded
indebtedness, or increase the same with the approval
of:
1. majority vote of the BOT and
2. at least 2/3 vote of the members in a meeting
duly called for the purpose.

Power to deny pre-emptive right (Sec. 39)
- All SH of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares
on any class, in proportion to their respective
shareholdings.

Pre-emptive right shall not extend to:
1. Shares to be issued in compliance with laws requiring
stock offering or minimum stock ownership by the
public;
2. Shares issued in good faith with the approval of the
SH representing 2/3 of the OCS, in exchange for
property needed for corporate purposes
3. Shares issued in payment of a previously contracted
debt.
4. In case the right is denied in the AI.

*Pre-emptive right includes re-issuance of treasury shares.

Pre-emptive right or right of pre-emption
- The stockholders right to subscribe to all issues or
disposition of shares of any class in proportion to his
stockholdings, the purpose being to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus.
- Pre-emptive right granted in favor of the corporation
only is null and void, because it unduly inhibits the
SHs right to dispose of their shares in the manner
they desire. However, if in the subscription
agreement, the SH waives his pre-emptive right, this
is valid because this has been individually and freely
bargained for. Waiver of a right is valid and is not
prohibited. What is prohibited is the blanket
restriction in the by-laws.
- A contract entered into between the two majority SH
of the corporation providing for suspension of the
right to dispose shareholding during the limited
period provided for in the agreement and imposes a
penalty if any of the parties should dispose of their
shareholdings within the limited period, is a valid
agreement and not violative of the policy against
restraint of trade since it is reasonable in purpose (to
ensure the stability of the corporation during the
critical period of development) and is reasonable in
period.
- By-laws of a corporation cannot be the source of limit
to restrict the right of the SH to transfer shares of
stocks which are personal property. Restrictions on
transfer of shares can be provided only in the law or
the charter of the corporation, and would be invalid if
provided for in the by-laws.
- Pre-emptive right is not available in case of shares
issued to obtain loans or to obtain the services of
technical men.

Sale or other disposition of assets (Sec. 40)
- Requisites:
1. The sale or other disposition must be approved
by a majority vote of the BOD/BOT;
2. The action of the board must be authorized by
the vote of stockholders representing at least
2/3 of OCS including holders of non-voting
shares or 2/3 of the members; and
3. The authorization must be done at a
stockholders or members meeting duly called
for the purpose after written notice.

- Appraisal right can be exercised
- Despite approval by the SH or members, it is not
mandatory for the board to continue with the
disposition.
- Substantially all where the sale or other disposition
would render the corporation incapable of continuing
the business or accomplishing the purpose for which
it as incorporated.
- This section covers not only sale but also lease,
exchange, mortgage or pledge. But disposition of
properties in the course of business does not need
approval by or authority of SH members.

Stock Certificate
- Written acknowledgement by the corporation of the
stockholders interest in the corporation.
- It is personal property and be mortgaged or pledged.

Power to acquire own shares (Sec. 41)
- When may a corporation reacquire its own stocks?
1. To eliminate fractional shares arising out of stock
dividends
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing SH entitled to
payment for their shares under the provisions of
this Code.
- Other instances when the corporation may acquire its
own shares:
1. Reacquisition of treasury shares (Sec. 9);
2. Purchase of redeemable shares by the
corporation regardless of the existence of
unrestricted retained earnings (URE) in its books
(Sec. 8);
3. To effect a decrease in the capital stock of the
corporation (Sec. 38);
4. In a close corporation, where there is deadlock
respecting the management of its business, the
SEC may order the purchase at their fair value of
shares of any stockholder by the corporation

COMMERCIAL LAW
CORPORATION LAWS
64

2009 BAR OPERATIONS
regardless of the availability of URE in its books
(Sec. 104, par. 1[4]).

Trust fund doctrine
- The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to look
up to satisfy their credits, and which the corporation
may not dissipate. The creditors may sue the
stockholders directly for the latters unpaid
subscription.
- The capital stock, property and other assets of a
corporation are regarded as equity in trust for the
payment of corporate creditors.
- Hence, dividends are declared only if there is an
unrestricted retained earnings, and that no
distribution of corporate property except upon
dissolution and after payment of all its debts and
liabilities.

Application of the Trust Fund Doctrine:
1. Where the corporation has distributed its capital
among the stockholders without providing for
the payment of creditors;
2. Where the corporation has transferred its
property in fraud of its creditors;
3. Where the corporation had released the
subscribers to the capital stock from their
subscriptions; and
4. Where the corporation is insolvent.

Coverage of the Trust Fund Doctrine:
1. If the corporation is solvent, the TFD extends to
the capital stock represented by the
corporations legal capital.
2. If the corporation is insolvent, the TFD extends
to the capital stock of the corporation and to all
of its property and assets.

Exceptions to the Trust Fund Doctrine:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there is a deadlock
and the SEC orders the payment of the appraised
value of the stockholders share (Sec. 104).

Power to invest corporate funds in another corporation
or business for any other purpose (Sec. 42)
- Requires majority vote of BOD, ratified by 2/3
OCS/members, to invest for purposes other than
primary purpose. But where the investment (even in
another corporation) is reasonably necessary to
accomplish the primary purpose, a board resolution is
sufficient.
- Example: A sugar company invests in another
company engaged in the manufacture of sacks for
sugar, this was done pursuant to its primary purpose
so a Board resolution will do.
- BUT where the purchase of another corporations
shares is done solely for investment and not to
accomplish the purpose of its incorporation, the 2/3
vote of SH is required.

Power to declare dividends (Sec. 43)
- The BOD of a stock corporation may declare
dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock
to all SH on the basis of outstanding stock held by
them:
a) Provided, that any cash dividends due on
delinquent stock shall first be applied to the
unpaid balance, while stock dividends shall be
withheld from the delinquent stockholder until
his unpaid subscription is fully paid:
b) Provided further, that no stock dividend shall be
issued without the approval of SH representing
not less than 2/3 of the OCS at a regular or
special meeting duly called for the purpose.

- Stock corporations are prohibited from retaining
surplus profit in excess of 100% of their paid-in
capital stock, EXCEPT:
1. When justified by definite corporate
expansion program or programs approved
by the BOD
2. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not yet
been secured.
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.

- It is mandatory to declare dividends:
a) Cash dividends declared by the BOD only
b) Stock dividends BOD, approved by 2/3
OCS

Dividends
- That part of the profits or unrestricted returned
earnings of a corporation set aside, declared and
ordered by the directors to be paid ratably to the
stockholders on demand or at a fixed time, in the
form of cash, property or stocks.

Kinds of Dividends:
1. Cash Dividend payable in cash.
2. Property Dividend distributed to stockholders in
the form of property, real or personal, such as
warehouse receipts, or shares of stock of another
corporation.
3. Stock dividend payable in unissued or increased or
additional shares of the corporation.
4. Optional Dividend gives the stockholder an option
to receive cash or stock dividend.
5. Composite Dividend partly in cash and partly in
stocks. Here, there is no option involved.
6. Preferred or Preferential Dividend payable, by
virtue of contract, to one class of stockholders in
priority to that to be paid to another class.

COMMERCIAL LAW
CORPORATION LAWS
65

2009 BAR OPERATIONS
7. Cumulative Dividend contracted to be paid at a
certain rate at stated times and, if net earnings at any
dividend period are insufficient to pay the contract
dividend, it is to be made out of subsequent net
earnings.
8. Scrip Dividend one in the form of a writing or
certificate issued to a stockholder entitling him to the
payment of money, stock or other benefit at some
future time inasmuch as the corporation at the time
such dividends are declared has profits not in cash or
has no sufficient cash, or has the cash but wishes to
reserve it for some corporate purposes. It is in the form
of a promissory note or a promise to pay and may be
issued to bear interest.
9. Bond Dividend A dividend distributed in bonds of
the corporation to the stockholders. The bondholder
becomes a creditor of the corporation to the extent of
the amount of the bond.
10. Liquidating Dividends These are actually
distributions of assets of the corporation upon
dissolution or winding of the same. They are not paid
on account of earnings or profits, but as a return of
capital invested.

- The right to dividends is based on duly recorded
stockholdings; accordingly, the corporation is
prohibited from entitling thereto to anyone else.

Sources of Dividends:
- Gen. Rule: Dividends can only be declared and paid
out of actual and bona fid unrestricted retained
earnings.
- Special Rules:
1. Where a corporation sold its real property, which
is not being used for business, at a gain, the
income derived therefrom may be availed of for
dividend distribution.
2. Increase in the value of a fixed asset as a result of
its revaluation is NOT retained earning.
However, increase in the value of fixed assets as
a result of revaluation (revaluation surplus)
may be declared as cash or stock dividends
provided that the company:
a) has sufficient income from operations
from which the depreciation on the
appraisal increase was charged;
b) has no deficit at the time the
depreciation on the appraisal increase
was charged to operations; and
c) such depreciation on appraisal increase
previously charged to operations has
not been impaired by losses.
3. Dividends can be declared out of the amount
received in excess of the par value of shares
(paid-in surplus) when:
a) They are declared only as stock
dividends and not cash;
b) No creditors are prejudiced; and
c) There is no impairment of capital.

- Note that unlike par value shares, when no par
shares are sold at a premium, the entire
consideration paid is considered capital, hence
the same cannot be declared as dividends.
4. Reduction surplus can be a source of dividends.
Rule on paid-in surplus is applicable.
5. Money cannot be borrowed for the payment of
dividends because an indebtedness is not a
retained earning o f the corporation.
6. Corporate earnings which have not yet been
received even though they consist in money
which is due, cannot be included in the profits
out of which dividends may be paid.
7. Profits realized from sale of Treasury Shares are
part of capital and cannot be declared as cash or
stock dividend as purchase and sale of such
shares are regarded as contractions and
expansions of paid-in capital.
8. No dividends can be declared out of capital
except only in two instances:
a) liquidating dividends; and
b) dividends from investments in wasting
asset corporation.

- Retained earnings = Assets liabilities and legal
capital

Wasting assets doctrine
- A wasting assets corporation, such as a mining or
timbercutting company, the capital of which is
necessarily exhausted in the carrying on of its
operations, may rightfully declare and pay dividends
out of net income without making up for the loss of
its capital which is thus being constantly diminished.
- A mining company, for example, is not formed for the
purpose of permanently using the property in which
its capital is invested, but for the purpose of investing
in property which, in the nature of things, will be
gradually consumed in making profits, and in
estimating the profits of such company for the
purpose of determining whether it may lawfully
declare a dividend, no deduction is to be made for
depreciation in the value of its mine by reason of its
use and consumption in taking out the ore or other
minerals. Dividends may be lawfully declared out of
the net proceeds of its operations after deducting
expenses and debts and a reasonable fund for
contingencies.

Power to enter into management contract (Sec. 44)
- Requires:
1. Resolution of the BOD/Trustees, and
2. Majority vote of the OCS/members
Except: (2/3 vote shall be necessary if:)
a) The SH represents the interest of both
corporations owns 1/3 of the OCS of the
managing corporation.
b) Majority of the members of he board of the
managing corporation compose also
majority of the members of the board of the
managed corporation.

- Management contract is a device for tax avoidance,
resulting in splitting of income. But when the

COMMERCIAL LAW
CORPORATION LAWS
66

2009 BAR OPERATIONS
conditions set herein are complied with, then there is
no legal basis to pierce the veil of corporate entity.

Ultra vires acts of corporations (Sec. 45 )
- No corporation under this Code shall possess or
exercise any corporate power except those conferred
by this Code or by its AOI and except such as are
necessary or incidental to the exercise of the powers
so conferred.

Ultra vires act
- beyond powers
- An act which although not prohibited by law, the
corporation cannot perform because it is not within
its express, incidental or implied powers. It is not
necessarily illegal although an illegal act is always
ultra vires.
- An ultra vires act may be that of:
1. The corporation;
2. The Board of Directors; and
3. The corporate officers.

Types of Ultra Vires Cases
1. Acts done beyond the powers of the corporation
as provided in the law or its AI;
2. Acts or contracts entered into in behalf of a
corporation by persons who have nor corporate
authority (This is technically ultra vires acts of
officers and not of the corporation);
3. Acts and contracts which are per se illegal as
being contrary to law.

Test whether a corporation may perform an act:
- Consider the logical and necessary relation between
the act questioned and the corporate purpose
expressed by law or in the charter. If the act is lawful
in itself and not prohibited, and is done for the
purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense
(Montelibano Doctrine)

Effects of Ultra Vires Act on:
1. Wholly executed contract
- shall not be interfered with as between the
parties or persons whose rights are derived
therefrom, but the State can always question
said contract or act.
2. Wholly executory contracts
- cannot be enforced, even at the suit of either
party (void and unenforceable) nor can damages
be recovered for its breach.
3. Part executed and part executory
- principle of no unjust enrichment at the expense
of another shall apply, and recovery can be had
by one or whose part it was executed.
4. Executory contracts apparently authorized but ultra
vires
- the principle of estoppel shall apply and the title
of a corporation to property cannot be
questioned on the ground that it was acquired
through an ultra vires contract of transfer.
Ratification of ultra vires acts
1. If act or contract is illegal per se, it is null and void
and cannot be ratified.
2. If act or contract is bot illegal per se but merely
beyond the power of a corporation, the same is
merely VOIDABLE

Requirements for the ratification of an ultra vires act:
1. The act must be consummated, not executory
2. The creditors are not prejudiced, or all of the
creditors have given their consent
3. The rights of the public or the State are not
involved
4. All the SH must give their consent

- Corporations cannot validly enter into a partnership
because in a partnership, all the other partners can
bind the partnership and the other partners, which
would be violative of the principle in Corporation Law
that only the BOD can bind the corporation.

Case:
- X company agreed to post a bond for a postmaster
in case of malversation for the opening of a post
office within X Companys compound to facilitate
mail of the employees living therein, after
conferring with the Postmaster General. The
postmaster malversed public funds, so the
Postmaster General sued on the bond posed by X
Co. but X Co. raised the defense of ultra vires act,
that it was not authorized to file a bond for a
public officer such as the postmaster and,
therefore, such act did not bind the corporation.
- Held: The filing of the surety bond is ultra vires,
but not illegal per se, and which was ratified by
the acceptance by X company of the benefits
attendant to the opening of a post office in its
compound, is binding on the corporation.

Case:
- Y cannot pay her loan from the GSIS with her
house as mortgage so she proposed a scheme to
the GSIS Board by which she can liquidate her
claim. It was rejected by the Board, but the
secretary erroneously sent a message to Y that the
proposal was accepted. Subsequently, Y received a
summons for foreclosure. Y sued GSIS for
damages.
- Held: The corporate secretary is the custodian of
corporate records and if she certifies that a
certain action had been taken by the board, such
certification is binding upon the corporation
although the same may have been erroneously
made. The reason for this is that the corporate
secretary is clothed with apparent authority.

Derivative suit
- the principal defense of the minority SH against the
abuses of the majority. It is a remedy designed by
equity for those situations where the management,
through fraud, neglect of duty, or other cause,

COMMERCIAL LAW
CORPORATION LAWS
67

2009 BAR OPERATIONS
declines to take the proper and necessary step to
assert the corporations rights.

Requisites for the proper filing of a derivative suit:
1. The party bringing suit should be a SH as of the time
of the act or transaction complained of
2. He has exhausted intra-corporate remedies (i.e., has
made a demand on the BOD for the appropriate relief
but the latter has failed or refused to heed his plead.)
3. The cause of action actually devolves on the
corporation, the wrongdoing or harm having been
caused to the corporation and not the particular SH
bringing the suit.

-------------------------------------------------------------------

V. BY-LAWS

By laws
These are rules of action adopted by a corporation for its
internal government and for the government of its
stockholders or members and those having the direction,
management and control of its affairs in their relation to
the corporation and as among themselves.

Binding Effect of by-laws:
1. As to members and corporation
- They have the force of contract between the
members themselves.
- They are binding only upon the corporation and
on its members and those having direction,
management and control of its affairs.
2. As to third persons
- Third persons are not bound to know the by-laws
which are merely provisions for the government
of a corporation and notice to them will not be
presumed.
-Why? By-laws have no extra-corporate force
and are not in the nature of legislative
enactments so far as third persons are
concerned.

When by-laws are adopted
- It may be before or after incorporation.
- Generally every corporation formed under this Code
must, within one (1) month after receipt of official
notice of the issuance of its Certificate of
Incorporation by the SEC adopt a code of by-laws for
its government not inconsistent with this Code.
- However, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and
submitted to the SEC, together with the Articles of
Incorporation.

When by-laws are effective
- In all cases, by-laws shall be effective only upon the
issuance by the SEC of a certification that the by-laws
are not inconsistent with this Code.

How by-laws are adopted
a) Affirmative vote of majority of the OCS/members
b) Signed by stockholders/members voting for them
and shall be kept in the principal office of the
corporation, subject to inspection of the stockholders
or members during office hours
c) Duly certified to by a majority of the directors or
trustees and countersigned by the secretary of the
corporation.
d) Filed with the SEC, which shall be attached to the
original articles of incorporation.

Special Corporations
- SEC not to accept for filing the by- laws of any special
corporation governed by special laws unless
accompanied by a certificate of the appropriate
government agency to the effect that such are in
accordance with law.

Validity of By-Laws
1. They must not be contrary to law and not
inconsistent with the Corporation Code;
= Not contrary to law although allowed in the by-
laws, a BOD must always be a natural person. He
cannot be a representative of a juridical person
(Grace Nat. High vs. CA 281 SCRA 133).
2. Must not be contrary to morals and public policy;
3. Must not impair obligations of contracts;
4. Must be general and uniform in their operation and
not directed against particular individuals;
5. Must be consistent with the charter or articles of
incorporation;
6. Must be reasonable (capable of compliance).

Amendments to by-laws (Sec. 48)
- By a vote of the majority of the BOD/BOT and the
owners of at least a majority of the OCS/members, at
a regular or special meeting DULY called for the
purpose.

May the voting right of the SH be delegated?
- Yes. The owners of 2/3 of the OCS or members may
delegate to the BOD or trustees the power to amend
or repeal any by-laws PROVIDED, the power
delegated is deemed revoked whenever the
stockholders owning or representing a majority of
the OCS or a majority of the members in non-stock
corporations, shall so vote at a regular or special
meeting.

- The power to revoke may happen at any time even if
not among the agenda in a regular or special
meeting. Notice that the rule did not specifically
provide that the regular or special meeting must be
duly called for the purpose.

Effectivity of amended by-laws
- The amended or new by-laws shall only be effective
upon the issuance by the SEC of a Certification that
the same are not inconsistent with the Code.

---------------------------------------------------------------------

COMMERCIAL LAW
CORPORATION LAWS
68

2009 BAR OPERATIONS
VI. MEETINGS

- Notice of any meeting, either SH/Members or BODs
meeting, may be waived, expressly or impliedly by
the SH/Member or BOD/trustee.

Who presides at meetings
- The President
- Exceptions:
a) When the by -laws provide otherwise;
b) the petitioning stockholder/member When
there is no person authorized to call a meeting, a
SH/member may petition the SEC upon showing
of good cause therefor. SEC to issue an order to
the petitioning stockholder or member directing
him to call a meeting of the corporation by giving
proper notice required by the Corporation Code
or the by-laws. The petitioning stockholder or
member shall preside thereat until at least a
majority of the SH/members present have
chosen one of their number as presiding officer
(Sec. 50(4)).

Proper Person to Call the Meeting
1. Person designated in the by-laws normally it is
the Corporate Secretary
2. In the absence of the secretary, a director/trustee
or by an officer with interest in the management
of the corporation unless there is a prohibition in
the by-laws.
3. A SH or member on order of the SEC whenever
for any cause, no person authorized to call a
meeting.
4. Special meeting for the removal of
director/trustee may be called by the Secretary
or by the SH/member as provided by Sec. 28.

Place and Time of Meetings/Quorum

Requisites of Notice of Meeting
1. Issued by one who has authority to issue it;
2. Must be in writing;
3. Must state the time, date and place of the meeting,
unless otherwise provided in the by-laws;
4. Must state the business to be transacted thereat;
5. Must be sent at a certain time before the scheduled
meeting as fixed by law, unless a different period is
required by the by-laws.
6. The notice must comply with any other requirements
prescribed by the law or by the by-laws of the
Corporation.

May the BOD change or postpone the date of meetings
fixed in the by-law?
- Yes, but not the annual meeting.
- Exception: Annual meetings may be postponed if
there are justifiable reasons for its postponement as
when the annual meetings cannot be held in the date
fixed by the by -laws for some valid or justifiable
reasons. However, no postponement is allowed if the
effect is to prolong the term of the directors.

- Meetings held in the absence of some of the directors
and without any notice to them is illegal and the
action at such meeting is invalid, unless subsequently
ratified or waived.

Requisites for a valid meeting of Stockholders or
members:
1. It must be held at the proper place;
2. It must be held on stated date and at the appointed
time or at a reasonable time thereafter;
3. It must be called by the proper person;
4. There must be a previous notice of meeting;
5. There must be a quorum.
MEETING SH/MEMBERS BOD
Regular
Held annually on a
date fixed in the by-
laws; if not so fixed,
on any date in April
of every year as
determined by the
Board
Held monthly or
as provided in the
by laws.
Special
Held at any time
deemed necessary
or as provided in the
by- laws.
Held at anytime
upon the call of
the President or
as provided in the
by- laws.
NOTICE SH/MEMBERS BOD
Regular
2 weeks prior to the
meeting unless a
different period is
required by the by-
laws.
1 day notice prior
to the scheduled
meeting unless
otherwise
provided in the
by-laws.
Special
1 week written
notice, unless
otherwise provided
in the by-laws.
1 day notice prior
to the scheduled
meeting unless
otherwise
provided in the
by-laws. (the
same as in
regular meeting)
SH/MEMBER BOD/BOT
PLACE
(Regular or special) -
city or municipality
where the principal
office of the
corporation is located,
and if practicable in
the principal office of
the corporation (Sec.
51)
May be held
anywhere in or
outside of the
Philippines,
unless the by-
laws provide
otherwise
(Sec. 53)
QUORUM
Majority of the OCS or
members in case of
non-stock unless
otherwise provided for
in the Corporation
Code or in the by-laws.
Majority of all
members of
the Board of
directors or
trustees.

COMMERCIAL LAW
CORPORATION LAWS
69

2009 BAR OPERATIONS

When a meeting is not required
1. Amendment of the AI (sec. 16)
2. Sec. 101 action by the directors of a close
corporation without a meeting but ratified
3. When there is agreement.

Right to vote
- An inherent right of the stockholders or members in
the management of the corporation.

May a stockholder be compensated for his time in coming to
the corporation to vote?
- No, because voting is a right hence one is not paid for
exercising such right.

Who are entitled to vote
- The SH/Members (record date).
- Except the ff.
1. Delinquent
2. Treasury shares
3. Non -voting shares, except under those 8
instances enumerated under sec. 6 A
2
MI
3
DS

- The following persons are not stockholders or
members but may vote.
1. Pledgor or mortgagor under sec. 55
- A pledgor or mortgagor of shares remain
entitled to vote on shares given as security
unless an express written authority to vote is
given to pledgee or mortgagee this authority
being required by law to be registered in
corporate books at the instance of the pledgor
or mortgagor.
2. Executors, administrators, receivers, and the
other legal representatives duly appointed by
the court (sec. 55)
- Legal representatives (like executors,
receivers, etc.) vote by legal mandate
(without need of proxy) on shares subject to
their administration.

2 Ways of Voting By the Stockholder or member
1. In person
2. By proxy

Proxy
- Is the formal authority given by the holder of the
stock, who has a right to vote it, or by a member, to
another person to exercise the voting rights of the
former.

Requisites/limitations of a valid Proxy
1. It shall be in writing and signed by the SH or member;
2. It must be filed before the scheduled meeting with
the corporate secretary;
3. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended or
valid only for the specified meeting;
4. A continuing proxy may be for a period not exceeding
five (5) years at any one time, otherwise it shall not
be a valid and effective after such period.
- Directors or trustees cannot attend or vote by
proxy at Board meetings. (Sec. 25, last
paragraph)

Kinds of Proxy
1. General Proxy
- Confers a general discretionary power of attorney
to attend and vote at an annual meeting with all
the powers the undersigned would possess if
personally present, to vote for directors and all
ordinary matters that may properly come before a
regular meeting.
2. Limited Proxy
- The power has a limited.

Rules on Proxy
1. 1 proxy is given to 2 or more persons:
- Gen. Rule:
= All must agree upon the vote.
= If they cannot agree, rule of the majority
applies.
- Exception:
= if the proxies discriminate
= This means that the proxies determined the
manner on how they should vote.
- The stockholders instruction, if any, prevails.
2. When several proxies are submitted:
a. Where proxies are dated
= Latest proxy revokes the earlier proxy.
b. Where proxies are undated
= If proxy is mailed to the corporation the
one having the latest time of day of
postmark
- If submitted in person one presented latest.
- Dated proxies prevail over undated proxies

Right to appoint a proxy
- The right to appoint a proxy cannot be denied in a
stock corporation but maybe denied in a non-stock
corporation.
- Reason for the distinction:
= In a stock corporation, the stockholder has an
investment that he is protecting; the same is not
true in a non-stock corporation.

Revocation of proxies
- Gen. Rule:
= Revocation takes place at any time.
- Exception:
= When the proxy is coupled with an interest
(Proxy has parted with value or incurred liability
at the SHs request, looking to the exercise or the
proxy as the means of reimbursement or
indemnity. E.g. Where D borrows money from C
and D pledges his certificates of stock to C for
the debt, giving C a written continuing proxy to
attend and vote the shares at meetings of
stockholders until the debt is paid. It is clear that
D cannot revoke the proxy unless he first pays C.)

COMMERCIAL LAW
CORPORATION LAWS
70

2009 BAR OPERATIONS
How to revoke a proxy agreement
- In any manner either expressly or impliedly, hence
notice is not actually required as when it was orally
revoked
1. Formal notice/expressly;
2. Orally/impliedly;
3. By conduct, as when during the meeting
the SH appears, in this case the proxy is
deemed revoked;
4. Issuance of a subsequent proxy; OR
5. Sale of shares of stockholder.

VOTING TRUST AGREEMENT (VTA)
- It is an agreement in writing whereby one or more
stockholders of a stock corporation transfer his or
their shares to any person or persons or to a
corporation having authority to act as a trustee for
the purpose of vesting or conferring upon a trustee or
trustees the right to vote and other rights pertaining
to the shares for a period not exceeding 5 years at
any one time.

Rationale of VTA
a) Such an agreement makes possible a unified control
of the affairs of the corporation and consistent policy
by binding the SH to vote as a unit.
b) It also makes it possible for a majority group of
shareholders to dispose of the beneficial interest in a
large proportion of their shares and still retains
control of the corporation through the voting trustee.

Limitations of a VTA
1. It shall be good for a period not exceeding five (5)
years at any one time BUT if required by a loan
agreement, the period may go beyond five (5) years
but the trust shall automatically cease upon full
payment of the loan;
2. It must be in writing and duly notarized;
3. It shall not be entered to circumvent laws against
monopolies and illegal combinations in restraint of
trade nor shall it be used for purposes of fraud;
4. A certified copy of such agreement shall be filed with
the corporation and with the SEC, otherwise said
agreement is ineffective and unenforceable;
5. It shall be subject to examination by any stockholder
of the corporation in the same manner as any other
corporate book or record: Provided that both the
transferor and the trustee or trustees may exercise
the right of inspection of all corporate books and
records in accordance with the provision of the code;
6. Unless expressly renewed, all rights granted in a VTA
shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the
certificates of stock in the name of the trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the transferors.

How VTA works
1. Certificate of stock covered by the VTA shall be
cancelled and new ones shall be issued in the
name of the trustee or trustees stating that they
are issued pursuant to said agreement.
= NOTE: In the books of the corporation, it shall be
noted that the transfer in the name of the trustee
or trustees is made pursuant to said VTA.
= EFFECT: The trustor becomes the beneficial
owner. A stockholder of a stock corporation
parts with the voting power only but retains the
beneficial ownership of the stock. A voting
trustee therefore is only a share owner vested
with apparent legal title for the sole purpose of
voting upon stocks that he does not own.
= HOWEVER, the transferring stockholder,
although he has ceased to be the stockholder of
record, retains the right of inspection of
corporate books, which he can exercise
concurrently with the voting trustee.
2. Trustee(s) shall execute and deliver to the transferor
a voting trust certificates (VTC), which shall be
transferable in the same manner and with the same
effect as certificates of stock.
= EXPLANATION: In return for the certificates of
stock, the voting trustee executes and delivers to
the stockholders voting trust certificates to show
that the latter are in reality the owners of the
shares held by the voting trustee. The owners are
thus enabled to claim the dividends when they
are collected by the trustee and to recover their
stocks at the expiration of the trust.

Effects of the executing and delivering VTA to the
Stockholder (transferor)
1. To show that the SH is in reality the owner of the
shares held by the voting trustee
2. To enable him to claim the right to the dividend when
they are collected by the trustee.
3. To inspect corporate books
4. To recover his shares of stock at the expiration of the
trust.

Rights of voting trustee(s)
1. The trustee(s) shall possess the right to vote and
other rights pertaining to the shares so transferred
and registered in his or their names subject to the
terms and conditions of and for the period specified
in the agreement.
2. When he votes, he may vote in person or by proxy
unless the agreement provides otherwise.
3. They may exercise, like the transferor, the rights of
inspection of all corporate booked and records.
4. He is the legal title holder or owner of the shares so
transferred under the agreement. Hence he can be
voted. If so then he is also qualified to be a director
(Sec. 23)

Cancellation of the VTA
- Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stocks shall
be reissued in the name of the transferors.

COMMERCIAL LAW
CORPORATION LAWS
71

2009 BAR OPERATIONS
VOTING TRUST vs. PROXY

VOTING TRUST PROXY
1. Trustee acquires legal title
to the shares of the
transferring stockholder
1. Proxy has no legal title
to the shares of the
principal
2. Generally, the agreement
is irrevocable for a definite
and limited period of time.
2. Generally revocable
except when coupled with
interest.
3. Trustee can act in all
meetings during the lifetime
of the VTA.
3. Proxy can only act at a
specified meeting unless
otherwise provided
(continuing)
4. Trustee can vote and
exercise all the rights of the
transferring stockholder
even when the latter is
present.
4. Proxy can only vote if in
the absence of the owner
of the stock.
Reason: Presence of SH in
a meeting is an implied
revocation of the proxy.
5. A VTA must not exceed 5
years at any one time
except when the same is
made a condition of a loan.
5. A proxy is usually
shorter in duration
although it cannot exceed
5 years at any one time
(Sec. 58)
6. There is transfer of share 6. No transfer of share
7. Filed with the SEC
otherwise it is ineffective
and unenforceable.
7. Filed only with the
Corporate secretary. Filing
with the SEC not needed.
8. The agreement must be
notarized
8. The proxy need not be
notarized
9. The voting right is
divorced from the
ownership of stocks
9. The right to vote is
inherent and inseparable
from the right to stock
ownership.
10. The trustee votes as
owner rather than as mere
agent
10. The proxy holder votes
as agent

- The maximum duration of both cannot exceed
five (5) years at any one time.

----------------------------------------------------------------------

VII. STOCKS AND STOCKHOLDERS

Ways by which a person becomes a Stockholder
1. By Subscription
2. By Purchase/transfer

Subscription contract
- It is any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be
formed.
- Subscription pertains only to unissued stocks.

Kinds of Subscription
1. Pre-incorporation subscription contract (Sec. 61)
- One entered into before incorporation. It
constitutes a binding contract among the
subscribers. (Sec. 61) This is mandatory. (Sec. 13)
[25%/25% requirement]
- Gen. Rule:
= A subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least 6 months
from the date of subscription.
= Rationale of the GR: To ensure that the
corporation shall have the capital to
undertake the business of which it is
established.
- Exceptions:
a. When all of the other subscribers consent to
the revocation; or
b. The incorporation of the corporation fails to
materialize within said period or within a
longer period as may be stipulated in the
contract of subscription.
- Notice that the 6 months period as provided in
the Gen. Rule applies only if no stipulation is
made in the subscription contract. The 6 months
may also be shortened if so stipulated in the
subscription contract.
- When is the Pre-incorporation Subscription
Contract absolutely irrevocable?
= After the submission of the AI to the SEC.
= In Ong Yong vs. CA (02/01/02), the SC
allowed the rescission of a pre-incorporation
subscription contract on the ground of
substantial breach of obligations as provided
in Art. 1191 of the NCC.
= The SC recognized the nature of a pre-
incorporation subscription contract as a
reciprocal obligation by the original
subscribers with the corporation intended to
be formed as a beneficiary of pour autri
stipulation in such agreement.

2. Post-incorporation subscription contract
- One entered into after the incorporation for
the acquisition of unissued stock.

Stock option
- Is a privilege granted to a party to subscribe to a
certain portion of the unissued capital stock of a
corporation within a certain period and under the
terms and conditions of the grant exercisable by the
grantee at any time within the period granted. It is a
contract to buy or purchase whereas in
SUBSCRIPTION, the contract is already executed.

Purchase or transfer
- Buying issued shares from a stockholder or from the
corporation itself.
- Pertains to issued shares in contradistinction with
subscription.

Sources of Corporate Capital
1. Funds furnished by shareholders
2. Borrowings
3. Profits and stock dividends

COMMERCIAL LAW
CORPORATION LAWS
72

2009 BAR OPERATIONS
Warrant
- A type of security which entitles the holder the right
to subscribe to the unissued capital stock of a
corporation OR to purchase issued shares in the
future, evidenced by a Warrant Certificate, whether
detachable or not, which may be soled or offered for
sale to the public.

Shares of stock
- Interest or right which the owner has in the
management of the corporation, and its surplus,
profits, and, on dissolution, in all of its assets
remaining after the payment of its debt.

Consideration for stocks (sec. 62)
- Rule:
= Stocks shall not be issued for a consideration less
than the par or issued price thereof.
= If less than its par or issued price watered stock
- Consideration for the issuance of stock may be any
or a combination of any two or more of the following:
1. Actual cash;
2. Property, tangible or intangible,
a. actually received by the corporation
b. and necessary or convenient for its use and
lawful purposes
c. at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for, or services actually
rendered to, the corporation;
4. Previously incurred indebtedness by the
corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; (increase of capital by
declared stock dividends)
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion, e.g.
common shares of stock.

- Promissory notes or future services cannot be made
as payment for shares of stock.

May postdated checks be accepted as payment?
- No. As a rule the corporation must actually receive
the cash or property.

Who determines the valuation if the consideration is other
than cash?
- Where the consideration is other than cash or
consists of intangible property such as patents or
copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to approval by the SEC.
- Hence, there must be a valuation fixed by the Board,
approved by the SEC before the property is accepted
as consideration. If accepted as consideration and no
valuation, the stock is considered as watered. (sec.
65)

What about no par value shares, how are their issued price
determined?
- The issued price of no-par value shares may be:
a. fixed in the Articles of Incorporation; or
b. by the BOD pursuant to authority
conferred upon it by the AI or the by-
laws or in the absence thereof,
c. by the stockholders representing at
least a majority of the OCS at a meeting
duly called for the purpose

Bonds
- The same consideration as provided for in this section
(Sec. 62) insofar as they may be applicable, may be
used for the issuance of bonds by the corporation.

When one is supposed to pay?
- At the date fixed in the subscription contract or, if no
date is fixed, upon CALL (demand to pay) by the
board.

What happens if there was failure to pay on the date fixed
or upon call?
- Failure to pay on such date shall render the entire
balance due and payable and shall make the
stockholder liable for interest at the legal rate of
interest as provided in the by-laws, computed from
such date until full payment.
- Within 30 days after the call or after the date fixed in
the by-laws, there was still failure to pay, the shares
shall become delinquent shares.

Purpose of a call
- To fix the date of payment

Requisites of a valid call
1. It must be made by the board through a resolution
2. It must operate uniformly either to all or a particular
class or species of share.

Is a call absolutely necessary?
- No, call is not necessary in the following instances:
a. If corporation is already insolvent;
b. Subscriber is insolvent;
c. If there is a date fixed in the subscription
contract.

What one is supposed to pay
a. Amount of unpaid subscription
b. The interest on all unpaid subscriptions from the
date of subscription, if so required by, and at the
rate of interest fixed in, the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.

- Now that one has paid, he is now entitled to shares of
stocks and the corresponding certificate of stocks.

Stock certificate
- This is a written instrument signed by the proper
officer (president or the vice president) of a
corporation stating or acknowledging that the person
named thereon is the owner of a designated number
of shares of its stock.

COMMERCIAL LAW
CORPORATION LAWS
73

2009 BAR OPERATIONS
- Stockholder has the right to a certificate of stock
= Upon full payment of the amount of the
subscription together with the interest and
expenses (in case of delinquent shares) if any.

Formal requisites of a certificate of stock
1. Signed by the President or VP.
2. Countersigned by the Secretary or asst. secretary.
3. Issued in accordance with the by-laws.
4. It contains the corporate seal.

- Where the stock certificate reflects a greater volume
of shares than the actual number of shares issued or
to be issued, the following rules may be considered:
1. To the extent that there was an over-issue, the
excess issuance (over the authorized capital
stock or stated capital) shall be void as being
ultra vires.
2. If there is no over-issue, but no payment has
been made to cover the par or stated value of the
excess shares, the latter would constitute
watered stocks.
3. If there is no over-issue and watering of stocks,
the corporation may be bound to honor the
certificate (if duly signed and released by its
authorized officers) in the hands of a holder in
good faith, reserving a right of recourse that an
aggrieved party may pursue against the culpable
or unjustly enriched party.

How partial payments are treated
- Partial payment must be applied on the number of
shares covered by it BUT in the case of Baltazar (14
SCRA 522); Partial payment must be pro-rated
among all the shares
- Eg. If A subscribed 500 shares at 100 peso per share
and he paid only 25,000 pesos. He is deemed to have
paid only 50 pesos of the 100 peso per share
subscription price. This doctrine was however
decided under the old laws but there may still be
corporations existing that are governed by the old
law.

- Once the stocks are issued in the name of the
stockholder, the shares of stocks so issued become his
personal property.

= Effect: It being his personal property, he may
transfer the same if he wants to (remember that
transfer or purchase is one of the modes by
which one becomes a stockholder)

Requisite of a valid transfer
- It should be recorded in the books of the corporation.
- Exception: Sole Corporation

Who should do the recording?
- The corporate secretary. Other than him the
recording is ineffective.
- However, another person may do it provided it is
done under his supervision. (278 SCRA 792)

When may the corporate secretary refuse the recording?
- Corporate secretary may refuse or the corporation
may oppose recording or transfer when the
corporation holds an unpaid claim against the shares
of stocks. (sec. 63)
- In the Chinabank case (270 SCRA 503) the shares of
stock against which the corporation holds an unpaid
claim is defined as a delinquency.

Is it not that under section 64 stock certificate shall be
issued only when they are fully paid?
- Yes, but the unpaid claims as hereto referred arises
from instances where by honest mistake the
corporation issued a stock certificate to a subscriber
unknowingly that he has not yet fully paid his
subscription.

How transfer is made
- Transfer is made by endorsement and delivery of the
certificate.

Reasons for Requiring Registration of Stock transfer
1. To enable the corporation to know at all times who
are its stockholders because mutual rights and
obligations exist between the corporation and its
stockholders.
2. To afford the corporation an opportunity to object or
refuse to the transfer in case it has a claim against the
stock sought to be transferred, or for any valid
reason.
3. To avoid fictitious or fraudulent transfers.

Can a subscription be transferred?
- Yes, but with consent of the corporation. This is in
effect a novation.

Effects of Unregistered Transfer
1. Valid only between transferor and transferee
2. Invalid as against the corporation until notice is given.
3. Invalid as against the corporate creditors.
- Under the doctrine of Piercing the Veil of
Corporate Entity. Remember that the purpose of
the same is to make the stockholders liable.
4. Invalid as against creditors of transferor
5. Transferor continues the right to vote and be voted
until he is challenged.
6. Transferor continues to enjoy the right to receive the
dividends until there is recording.

Subscriber vs. Stockholder
a) A subscriber is one who has not yet fully paid his
subscription, whereas a stockholder is one who has
paid his subscription.
b) Holders of subscribed shares not fully paid which are
not delinquent (CF) shall have all the rights of a
stockholder (Sec. 72)

- In the case of First Phil. Holding, 253 SCRA, a stock
certificate is not necessary to establish the
relationship of a Stockholder with the corporation.
The evidence is now the receipt of payment.

COMMERCIAL LAW
CORPORATION LAWS
74

2009 BAR OPERATIONS
If the stocks are fully paid but the certificate of stocks is not
yet issued is one already considered a stockholder?
- Yes, because if section 72 considers one to be a
stockholder even if he has not yet fully paid then with
more reason that a person who has fully paid his
subscription be considered a stockholder.

Rights of stockholders
1. Managerial Rights
a. Voting rights; and
b. Right to remove directors
2. Appraisal Rights
3. Proprietary Rights
a. Right to dividends;
b. Right to issuance of certificate of stock for fully
paid shares;
c. Proportionate participation in the distribution of
assets in liquidation;
d. Right to transfer of stocks in corporate books;
e. Pre-emptive right;
f. Right to recover stocks unlawfully sold for
delinquent payment of subscription;
g. Right to be furnished of the most recent financial
statement/ financial report.
4. Inspection Right right to inspect books and records
5. Remedial rights
a. Individual suit a suit instituted by a shareholder
for his own behalf against the corporation;
b. Representative suit a suit filed by a shareholder
in his behalf and in behalf of other stockholders
similarly situated and with a common cause
against the corporation; and
c. Derivative suit a suit filed in behalf of the
corporation by its stockholders (not creditors
whose remedies are merely subsidiary such as
accion subrogatoria and accion pauliana) upon a
cause of action belonging to the corporation, but
not duly pursued by it, against any person,
director, officer and/or controlling shareholders
of the corporation.

What is the presumption if one is issued his certificate of
stock?
- The presumption is that he has fully paid his
subscription.

Watered stocks
- These are stocks issued not in exchange for its
equivalent.
- Includes:
1. Stock issued without consideration
2. Issued as fully paid when the corporation has
received a less sum of money than its par or
issued value
3. Other than cash but valuation less than the par
or issued value
4. Issued as stock dividend when there are no
sufficient retained earnings or surplus (as if not
paid the full amount of subscription)

Who are primarily liable?
- The holder of the watered stock shall be liable to the
corporation and its creditors for the difference
between the fair values received at the time of
issuance of the stock and the par or issued value of
the same.

Instances when not only the SH is liable
1. When a director or officer of a corporation consented
to the issuance of stocks for a consideration less than
its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair
value, or
2. Who having knowledge thereof, does not forthwith
express his objection in writing and file the same with
the corporate secretary (This is the remedy of a
director or officer if he wants to avoid liability arising
from the issuance of a watered stock of which he has
knowledge.)

= Extent of liability in these instances
- The director or officer shall be solidarily liable
with the stockholder concerned to the
corporation and its creditors for the difference
between the fair value received at the time of
issuance of the stock and the par or issued value
of the same.
- Section 64 does not apply.
- Section 65 does not also distinguish whether the
issuance of a watered stock is deliberate or not.

Coverage of watered stocks
- Only originally issued shares may be watered. Hence,
it arises only in a transaction between the
corporation and a subscriber.
- Any subsequent appreciation in value of the shares
will not cure the defect.
= Reason: The liability for watered stocks arises
from the time the stocks are issued.

DELINQUENT SHARES

Effects of Declaration of Delinquency (Sec. 71)
1. Delinquent stocks cannot be voted for
2. Cannot vote in any election
3. No representation at any stockholders meeting
4. Not entitled to any of the right of the stockholder
except the right to receive dividends but subject to
the rules under sec. 43.

Procedure for delinquency sale: (Sec 68)
1. There must be a board resolution ordering the sale
stating the amount due on each subscription plus all
accrued interest and the date, time and place of the
sale which shall not be less than 30 days nor more
than 60 days from the date the stocks became
delinquent.
2. Notice of sale, with a copy of the resolution given to
the delinquent SH personally or by registered mail.
This must also be published once a week for 2

COMMERCIAL LAW
CORPORATION LAWS
75

2009 BAR OPERATIONS
consecutive weeks in the province or city where the
principal office of the corporation is located.
3. Auction sale whereby the stocks are sold to the
highest bidder.
- HIGHEST BIDDER
= He is the person offering at the sale to pay
the full amount of the balance on the
subscription together with the accrued
interest if any, cost of advertising and
expenses of the sale, for the smallest
number of shares or fraction of a share (Why
smallest number of share to give possibility
for the subscriber to have something left for
him).
= Illustration: At public auction sale, M offers
to pay P800 for 1,000 shares, L, P800 for 900
shares and T, P800 for 800 shares. T is the
highest bidder and the remaining 200 shares
shall go to X, the original subscriber.

- The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor.
- The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise
be entitled to the issuance of a certificate of stock
covering such shares.

When auction may be cancelled
1. If the delinquent SH pays to the corporation, on or
before the date specified for the sale, the balance due
on his subscription plus accrued interest, cost of
advertisement plus expenses of the sale.
2. If the Board otherwise orders.

What happens if there are no bidders?
- The corporation may purchase the delinquent stocks.
The purchase must be made out of its net earnings in
view of the trust fund doctrine (Sec. 41[2]).
- Advertisements for bidders are simply invitations to
make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the
contrary appears (Art. 1326,NCC)

When may the auction sale be questioned?
- When there is irregularity or defect in the notice of
sale, or in the sale itself of the delinquent stock.
- Remedy: Recovery of the stocks

Requisites before one may file an action to recover
a. The party seeking to maintain such action must first
pay or tender to the party holding the stocks the sum
for which the same was sold with interest from the
date of sale at the legal rate.
b. The action must be filed within 6 months from the
date of sale.

Can the corporation dispense with the auction sale as a
remedy?
- Yes, by first filing a judicial action to collect the
amount due in any unpaid subscription with accrued
interest, costs and expenses. Call is still necessary.
Rights of Unpaid Shares (Sec. 72)
- Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder.

Lost, stolen or destroyed certificate of stock (sec. 73)
Procedure:
1. The registered owner of the certificate or his legal
representative shall file with the corporation an
affidavit in triplicate, setting forth if possible, the
circumstances as to:
a) how the certificates were lost, stolen or
destroyed,
b) the number of shares represented by each
certificate,
c) the name of the corporation which issued the
same, and
d) Such other information and evidence which he
may deem necessary.
2. The corporation shall publish a notice in a newspaper
of general circulation once a week for 3 consecutive
weeks at the expense of the registered owner.

When a corporation may issue a new certificate of
stock
- After the expiration of 1 year from the date of last
publication.
- If no contest has been presented to said corp. after
the expiration of 1 year the right to make the
contest shall be barred.
- If contest has been presented to the corp. or an
action is pending in court regarding the ownership,
the issuance of a new certificate shall be suspended
until final determination by the court regarding the
ownership of the lost, stolen or destroyed certificate.

- Gen. Rule: No action may be brought against any
corp. for the issuance of a new certificate
- Exceptions: in case of fraud, bad faith or negligence
on the part of the corp. and officers.

May the requirement of publication be dispensed with?
- Yes, if bond or surety is filed by shareholder running
for a period of 1 year, in which case a new certificate
may be issued even before the expiration of 1 year

------------------------------------------------------------------

VIII. CORPORATE BOOKS AND RECORDS

Books and Records to be Kept by the Corporation (Sec.
74):
1. A record of all business transactions;
2. Minutes of all meetings contents
- set forth in details the time and place of meeting
whether regular or special
- those present and absent
- every act ordered at the meeting
- upon demand, time when
director/shareholder/members entered or left,
yes or no vote or protest

COMMERCIAL LAW
CORPORATION LAWS
76

2009 BAR OPERATIONS
3. Stock and transfer books, in case of stock corporation
- records of all stocks and names of shareholder
- installments paid and unpaid in all stock for
which subscription has been made
- Kept in principal office of the corp. or office of
the stock or transfer agent

- Non-stock corp. do not have stock and transfer
books.
- Sole corp. may not have all these books

Inspection rights of a stockholder
Limitations:
a. The right must be exercised during reasonable hours
on business days;
b. The person demanding the right has not improperly
used any information obtained through any previous
examination of the books and records of the
corporation; and
c. The demand is made in good faith or for a legitimate
purpose.

- OFFICER/AGENT of corp. who refuses to allow
examination and copying of excerpts liable for
damages and guilty of violation of the Corporation
Code; if acting based on a board resolution or order
of directors, liability attaches to the directors who
voted for the refusal.
- Mandamus available remedy of the stockholder or
member if wrongfully refused to exercise the right.

Stocks and transfer agent
- One engaged principally in the business of registering
transfer of stocks in behalf of a stock corp.
- Allowed to operate in the Philippines if he secures a
license from the SEC and pays a fee which shall be
renewed annually.

- Stock corp is not precluded from making transfer of
its own stocks

A Corp. B Corp.: X shareholder of A Corp.; A Corp. is a
shareholder of B Corp
- Gen Rule: No right of inspection by X to the books of
B Corp.
- Except: If it is wholly owned subsidiary
- Conditions: (89 SCRA 336)
1. If owned entirely by the corp. of which he is a
shareholder
2. Both corporations use the same office
3. Both corporations have identical directors

Rights to financial statements (Sec. 75)
When is a corp. mandated to furnish its recent financial
statement?
- Within 10 days from receipt of a written request of
any shareholder or member

What are included in the written statement
1. Balance sheet as of the end of the last taxable
year
2. Profit or loss statement for said taxable year
showing in reasonable details its assets and
liabilities and result of its operation

- OBLIGATION OF THE BOARD
- Financial report of the operations of the corp. for
the preceding year, which shall include financial
statement, duly signed and certified by an
independent CPA

- PAID- UP CAPITAL OF CORP.
- Less than 50T, financial statements may be
certified under oath by the treasurer or any
responsible officer of the corporation.

--------------------------------------------------------------------

IX. MERGER AND CONSOLIDATION

Merger
- A union whereby one or more existing corporations
are absorbed by another corporation which survives
and continues the combined business.

Consolidation
- The union of two or more existing corporations to
form a new corporation called the consolidated
corporation.
- Reasons:
1. expansion,
2. profitability,
3. effective loss management,
4. lesser cost

Procedure (Sec. 76-79)
1. Board of each constituent corp. execute a plan of
merger or consolidation contents of plan
a. Names of the corporations proposing to
merge/consolidate
b. The terms of the merger or consolidation and
the mode of carrying the same into effect
c. A statement in the changes of AI of the
surviving corp. in case of merger and with
respect to the consolidated corp., in case of
consolidation, all the statements required to be
set forth in the AI
d. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable
2. Approval by majority of each of the board of the
constituent corporations
3. Submitted for approval to shareholders/members of
each of such corporations at separate meetings
- notice given at least 2 weeks prior to the date of
the meeting / include a summary of the plan
- Q: May the right of Appraisal be taken away?
A: Yes when the board decided to abandon the
plan after approval by the shareholder of such
plan
- Amendment to the plan of merger or
consolidation

COMMERCIAL LAW
CORPORATION LAWS
77

2009 BAR OPERATIONS
a) approval of majority vote of the boards of all
constituent corps.
b) ratified by the shareholder representing 2/3 of
the OCS
4. Execution of articles of merger or consolidation by
each of the constituent corp.
- signed by the President or VP and certified by
the Secretary or Asst. Secretary by each corp.
setting forth:
a) the plan of merger or consolidation
b) as to stock corp., the number of shares
outstanding, in case of non-stock the number of
members
c) as to each corp. the number of shares or
members voting for or against such plan
5. Approval by the SEC (in quadruplicate)
- if banks or banking institutions, building and loan
associations, trust co., insurance co,. public
utilities, educational institutions and other
special corps. governed by special laws,
FAVORABLE recommendation of the
appropriate government agency be obtained
first.
6. Issuance of the certificate of merger / consolidation
- upon such time merger or consolidation shall be
effective

- If SEC has reason to believe that the proposed
merger or consolidation is contrary law:
- set a hearing for the corp. to be heard
- notice be given at least 2 weeks prior to the
hearing

Effects of Merger or Consolidation (Sec. 80)
1. The constituent corporations shall become a single
corporation which, in case of merger shall be the
surviving corporation, and in case of consolidation,
shall be the consolidated corporation;
2. Separate existence of the constituent corporations
shall cease, except that of the surviving or
consolidated corporation;
3. The surviving or consolidated corporation shall
possess all the rights, privileges, immunities and
powers and shall be subjected to all the duties and
liabilities of a corporation;
4. The surviving or consolidated corporation shall
possess all the rights, privileges, immunities and
franchise of each of the constituent corporations;
5. All property, real or personal, and all receivables due
to, and all other interest of, each constituent
corporation shall be deemed transferred to and
vested in such surviving or consolidated corporation
without further act or deed (transfer is automatic);
6. The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of
each of the constituent corporations.
7. Any claim, action or proceeding pending by or
against any of such constituent corporations may be
prosecuted by or against the surviving or
consolidated corporation;
8. The rights of creditors or lien upon the property of
any of each of the constituent corporations shall NOT
be impaired by such merger or consolidation

SALE
- Gen. Rule: When one corporation buys all the shares
of another corporation, this will not operate to
dissolve the other corporation and as the two
corporations still maintaining their separate
corporate entities, one will not answer for the debts
of the other.
- Exceptions as to non-assumption of liabilities:
1. If there is an express assumption of liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser is merely a continuation of the
seller.

MERGER/CONSOLIDATION vs. SALE OF ASSETS

Merger/Consolidation Sale of Assets
1. Sale of assets is not always
involved
1. Sale of assets is
always involved
2. There is automatic
assumption by the surviving/
consolidated corp of the
liabilities of the constituent
corp.
2. The purchasing corp
is not generally liable
for the duties and
liabilities of the selling
corp
3.There is a continuance of the
enterprise and of the
shareholders thereon though in
an altered form
3. The selling corp.
ordinarily
contemplates a
liquidation of the
enterprise
4.The title to the assets of the
corp. is by operation of law
transferred to the new corp.
4.Transfer of title is by
virtue of contract
5. Constituent corps. are
automatically dissolved
5. The selling corp is
not dissolved by the
mere transfer of its
property

-----------------------------------------------------------------------

IX. APPRAISAL RIGHT

Appraisal right (Sec. 81)
- right of shareholder to demand payment of the fair
value of his shares after dissenting from a proposed
corporate action involving a fundamental change in
the corporation in the cases provided by law.

Instances when the appraisal right may be exercised
1. In case of any amendment to the AI which has the
effect of changing or restricting the rights of any
shareholder or class of shares, or authorizing
preferences in any respect superior to those of
outstanding shares of any class;
2. Amendment which has the effect of extending or
shortening the term of corporate existence;

COMMERCIAL LAW
CORPORATION LAWS
78

2009 BAR OPERATIONS
3. In case of sale, lease, exchange, transfer, mortgage,
pledge, or other disposition of all or substantially all
of corporate property and assets;
4. In case of merger or consolidation;
5. Investment of corporate funds to another
corporation or business for any purpose other than its
primary purpose;
6. Shareholder of any close corporation may compel the
corporation to allow him to exercise the right when
the corporation has sufficient assets in the books to
cover its debts and liabilities exclusive of capital
stock. (Sec. 85)

How to exercise appraisal right (Sec. 82)
1. By voting against the proposed action
2. By making a written demand within 30 days after the
vote was taken.
3. By surrendering the Certificate of Stock within 10
days from demand
= for notation only that such is dissenting share,
once noted, return to shareholder
= importance of surrender Sec. 86: so that
shareholder rights will not be terminated
4. All rights accruing to the shares from demand for
payment until either abandonment of the corporate
action involved or the purchase of said shares by the
corp. shall be suspended (30 days)
= including voting and dividend rights EXCEPT the
right to receive the payment of fair value.
= Note: Failure to make a written demand within
30 days shall be deemed a waiver of appraisal
right
= If the withdrawing shareholder and corp. cannot
agree on the fair value of the shares within 60
days appraised by 3 disinterested persons (1 by
shareholder, 1 by corp, 1 chosen by the 2)
findings of the majority of the appraisers shall be
final and the award be paid by the corp within 30
days after award is made.
5. Corp. pays the shareholder the fair market value of
the share
= fair value as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate
action
6. Upon payment, shareholder shall transfer his shares
to the corp.
= effect if dissenting shareholder Is not paid the
value of his shares within 30 days after the award
= His voting and dividend rights shall immediately
be received (back as shareholder)

Extinguishment of right of payment
- Gen Rule: No demand of payment of the FV of shares
may be withdrawn
- Exceptions:
1. Such shareholder withdraws his demand for
payment and the corporation consents thereto;
2. Proposed corporate action is abandoned or
rescinded by the corporation;
3. The proposed corporate action is disapproved by
SEC, where its approval is necessary;
4. The SEC determines that such shareholder is not
entitled to appraisal right.

Effects when right of payment has ceased
1. Restored as shareholder
2. All dividends which would have accrued in his
shares shall be paid to him

Who bears the cost of appraisal (Sec. 85)
1. the corporation
a. Where the price offered by the
stockholder is approximately the same
as the FV ascertained by the appraisers;
or
b. In case of an action to recover such FV is
filed by the dissenting shareholder and
his refusal to accept payment is found
by the court to be justified.
2. the Stockholder
a. Where the price offered by the
corporation is approximately the same
as the FV ascertained by the appraisers;
or
b. In case of an action to recover such FV is
filed by the dissenting shareholder and
his refusal to accept payment is found
by the court to be unjustified.

Effects of Transfer of Shares/COS
1. The rights of transferor as dissenting shareholder
shall cease and transferee shall have all the rights
of a regular shareholder.
2. All dividends which or would have accrued to
such shares shall be paid to transferee.
- purchasing the dissenting shares is an
indication on the part of the transferee
to become a shareholder which is in
contrast to the right of appraisal.

----------------------------------------------------------------------

XI. NON-STOCK CORPORATIONS

Non-stock corporation (Sec. 87)
- one where no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of the Corporation Code on
dissolution
- Any profit obtained as an incident to its operations
shall be used for the furtherance of the purpose(s) for
which it was organized.
- Purposes (Sec. 88): charitable, religious, educational,
professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like
trade, industry, agricultural and like chambers or
combination thereof.

- NSCs are governed by the same rules established for
stock corporations, whenever pertinent, subject,
however, to a number of special features.

COMMERCIAL LAW
CORPORATION LAWS
79

2009 BAR OPERATIONS
STOCK CORPORATION vs. NON-STOCK
CORPORATION

SC NSC
1. Has capital stock divided
into shares and with
authority to distribute to its
stockholders
1. Does not have shares
and may not distribute
profits to its members
2. Stockholders may
transfer their shares
2. Members cannot
transfer their membership
unless allowed by the AI or
by-laws
3. Cumulative voting is
available in the election of
directors
3. cumulative voting not
available unless otherwise
provided in the AI or by-
laws
4. Directors cannot exceed
15 in number
4. Trustees may exceed 15
in number
5. The term of a director is 1
year
5. The term of a trustee is 3
years; 1/3 of the Board shall
be elected annually
6. Stockholders may vote
by proxy
6. Members may be
deprived of the right to
vote by proxy in the AI or
by-laws
7. Officers are elected by
the Board of Directors
7. Officers may be directly
elected by the members
unless otherwise provided
in the AI or by-laws
8. Stockholders and
directors must act in a
meeting, except where a
mere written assent is
sufficient or a formal
meeting unnecessary
8. Members may be
allowed by the by-laws to
vote by mail or other
similar means.
9. Stockholders meeting to
be held at the place where
the principal office is
located
9. Members meeting in or
out of the place where the
principal office is located.

Right to vote (Sec. 89)
- Gen Rule: Each member regardless of class, shall be
entitled to 1 vote
- Except: If limited, broadened or denied by the AI or
by-laws
- Power of Courts: Courts have no power to strip a
member of his membership therein without cause.

Who can be trustees?
- Any member of the NSC
- Vacancy filled by election only for unexpired term

Place of meetings (Sec. 93:)
- Members meeting
= In or out of the place where the principal office of
the corporation is located, so long as it is within
the Philippines
- Notice
= sent to all members indicating the date, time and
place of meeting.
Distribution of assets (Sec. 93)
- Dissolution execute a plan of distribution of assets
- Procedure:
1. Adoption of a resolution recommending a plan of
distribution by or majority vote of the BOT.
2. Submission for voting at a regular or special
meeting.
3. Written notice to each member entitled to vote,
set forth the proposed plan or summary thereof;
date, time and place of meeting.
4. Adoption of the plan upon approval of at least
2/3 of the members having voting rights present
or by proxy.

Conversion of NSC to SC
- Dissolution of NSC before organizing a stock
corporation.

Conversion of SC to NSC
- Mere amendment of AI

Rules on distribution (Sec. 94)
1. All liabilities shall be paid or satisfied for adequate
provisions.
2. Assets held subject to return upon dissolution shall be
delivered back to their respective transferors;
3. Assets held for charitable, religious, etc, without a
condition for their return on dissolution shall be
conveyed to one or more organizations engaged in
similar activities as the dissolved corporation;
4. Other assets shall be distributed to members as
provided for in the AI or by-laws;
5. In any other case, assets may be distributed as
provided in the plan of distribution.

-----------------------------------------------------------------------

XII. CLOSE CORPORATIONS

Close corporation (Sec. 96)
- A special kind of stock corporation:
1. whose Articles of Incorporation provide that:
a) all shares except treasury shares are
held on record by persons not exceeding
20;
b) issued stock s are subject to one or more
restrictions, with a right of preemption
in favor of the stockholders or the
corporation; and
c) the corporation shall not be listed in the
stock exchange or its stocks should not
be publicly offered; AND
2. whose 2/3 of the voting stocks or voting rights is
NOT owned or controlled by another corporation
which is not a close corporation.

What kind of restrictions can the corporation put?
- Any restriction provided it does not violate Sec. 98:
1. Restrictions on the right to transfer shares must
appear in the AI or By-Laws and in the Certificate
of Stock, otherwise not binding upon a purchaser
in good faith.

COMMERCIAL LAW
CORPORATION LAWS
80

2009 BAR OPERATIONS
2. Restrictions shall not be more onerous than
granting the existing shareholder or the
corporation the option to purchase the shares of
the transferring shareholder with such
reasonable terms, conditions or period stated
thereon.
e.g.
a) FMV of shares = 100 if sold less 10% (
cant because it is more burdensome)
b) Transferring without prior consent of
the board
If corp. fails to exercise the option Shareholder
may now transfer to third person who wishes to
buy.
3. Close Corp. may not list in a stock exchange or
make any public offering of its shares.
- Corp. must be listed in the Phil Stock Exchange
(reason: shares may be held by anybody who is
unknown/not denied)

- Public Offering offering ones share for the
unknown public

Can a corp. be part of a close corp.?
- Yes, provided it does not own or control 2/3 of OCS of
a close corporation or control 2/3 of stocks having
voting rights.

Right of First Refusal
- The shareholder who wants to sell his shares must
first offer it either to the corporation or to the other
existing shareholders. If the corporation or existing
shareholders fail to exercise the option to purchase
within the period stated (1 month) the transferring
shareholder may sell his shares to any third person.
- Gen Rule: Any corporation may be incorporated as a
close corporation
- Exceptions:
1. mining companies;
2. oil companies;
3. stock exchanges;
4. banks;
5. insurance companies;
6. public utilities;
7. education institutions;
8. other corporations declared to be vested
with public interest

Characteristics of close corporations:
1. Stockholders may act as directors without need of
election and therefore are liable as directors;
2. Stockholder who are involved in the management of
the corporation are liable in the same manner as
directors are;
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase
the number of stockholders to more than the
maximum, are invalid;
5. Corporate actuations may be binding even without a
formal board meeting, if the stockholder had
knowledge or ratified the informal action of the
others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on the
written petition by any stockholder; and
8. A stockholder may withdraw and avail of his right of
appraisal.

Articles of Incorporation (Sec. 97):
- Aside from the general matters of Art. 14, the AI of a
close corporation may provide:
1. For a
a) classification of shares or rights
b) prescribe qualification for owning/holding
shares
c) restrictions on their transfer
2. For a classification of directors into one or more
classes, each of which may be voted for and
elected solely by a particular class of stocks;
3. For a greater quorum or voting requirements in
meetings of stockholders or directors
4. That the business of the corporation shall be
managed by the stockholders rather than the
BOD so long as this provision continues in effect:
a) No meeting of stockholders need be called
to elect directors;
b) Unless the context clearly requires
otherwise, the stockholders shall be deemed
to be directors for all intents
c) The stockholders and the corporation shall
be subject to all liabilities of directors.
5. That all officers or employees or that specified
officers or employees shall be elected or
appointed by the stockholders instead of the
BOD.

Terms of directors
- 1 year

Issuance or Transfer of Stock of a Close Corporation in
Breach of Qualifying Conditions (Sec. 99):
1. A person holding stocks
- if the qualification for ownership is conspicuously
stated in the certificate of stock, the person
holding such certificate is conclusively presumed
to have knowledge of such qualification.
- Effect: Corp at its option may refuse the transfer
in its favor
2. If the AI states the number of persons not in excess
of 20 to be entitled to be holders on record of its
stock and the certificate conspicuously states such
numbers, the person to whom such stock is issued in
excess of the nos. required is conclusively presumed
to have knowledge of the fact.
- Effect: Corp. may refuse to record the transfer to
its books
3. If a stock certificate conspicuously shows a restriction
on transfer of stocks, transferee is conclusively
presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such
acquisition violates the restriction.
- If transfer actually violates the restriction
without prejudice to the right of transferee to
proceed against transferor

COMMERCIAL LAW
CORPORATION LAWS
81

2009 BAR OPERATIONS

Effect of Violation of the Presumption
- Gen. Rule:
= The corporation may at its option, refuse to
register the transfer of the stock in the name of
the transferee
- Except:
1. if the transfer of the stock has been consented to
by all shareholders of the close corporation; or
2. if the corporation has amended its AI.

- Transfer not limited to a transfer for value

- Note: It is better to dissolve the corp. and incorporate
again if it wants to convert it into another kind

- Amendment that may terminate the status of a close
corporation
= 2 kinds:
1. To delete/remove any of the provisions
under the title;
2. To reduce the quorum or voting requirement
- reduction of what is required by law to
ordinary shareholder 2/3 to effect
amendment
- include all shareholder with or without
voting rights

Rights of transferee not impaired by the provisions of
this section
1. Right to rescind the transaction; or
2. Right to recover under any applicable warranty,
express or implied.

Rules on Agreements By Stockholders (Sec. 100)
1. Agreements by and among shareholders before the
formation and organization of a close corporation
signed by all stockholders:
- survive the incorporation of such corporation and
- valid and binding, if not inconsistent with the AI,
irrespective if embodied in AI or not, except
those required by the Corporation Code to be
embodied in the AI.
- Prior to incorp. Shareholder can enter into any
agreement as long as it is legal.
- After incorp. agreement continues to subsist/
valid and binding
2. Shareholders agreement, in writing and signed by
the parties thereto, may provide that in exercising
any voting rights, the shares held by them shall be
voted:
a) as therein provided;
b) as they may agree; or
c) as determined in accordance with a
procedure agreed upon by them
= How shares will be voted?
- Agree at the time of voting how to vote
- Procedure to determine how they will vote
- Voting trust / voting by proxy as equivalent
in ordinary situation

3. No provision in any written agreement signed by
stockholders, relating to any phase of the corporate
affairs, shall be invalidated between the parties on
the ground that its effect is to make them partners
among themselves.
= must be consistent with the AI
4. Shareholders agreement restricting or interfering
with the discretion and powers of the BOD it will
not be invalidated but the stockholders who are
parties thereto shall be liable for managerial acts
imposed by the Corporation Code on directors
5. Stockholders who actively engage in the
management or operation of the business and affairs
of the corporation shall be held to strict fiduciary
duties to each other and among themselves
= Corporate torts shareholders are
personally liable UNLESS the corporation
has obtained reasonably adequate liability
insurance

When Board Meeting Is Unnecessary Or Improperly
Held (Sec. 101)

- Gen Rule: Any action by the director without a
meeting shall be valid if the following conditions are
present:
1. Before or after such action is taken, written
consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiescence
of all stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing.
- Exception: If by- laws provide otherwise

- Ordinary corp. without / improper meeting question
of impropriety
- If a directors meeting is held without a proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend UNLESS he promptly files his written
objection with the Secretary of the corporation after
having knowledge thereof.

Preemptive Right In Close Corporation (Sec. 102)
- Extend to all kinds of stock, including reissuance of
treasury shares, unless the AI provide otherwise
(ordinary corp. extend only to new issuances)

Deadlocks (Sec. 104)
- If the directors or stockholders are so divided
respecting the management of the corporations
business and affairs that the votes required for any
corporate action cannot be obtained with the
consequence that the business and affairs of the
corporation can no longer be conducted to the
advantage of the shareholders generally. The SEC,
with the power to arbitrate, upon written petition of

COMMERCIAL LAW
CORPORATION LAWS
82

2009 BAR OPERATIONS
any shareholder shall have authority to make such
orders as it deems appropriate, including an order:
1. Canceling or altering any provision contained in
AI or By-Laws or any stockholders agreement;
2. Canceling, altering, or enjoining any resolution,
or other act of the corporation or its BOD,
officers or stockholders;
3. Directing or prohibiting any act of the
corporation or its BOD, stockholders, officers or
other persons party to the action;
4. Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or by
other stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; OR
7. Granting such other relief as the circumstances
may warrant.

Provisional director (Sec. 104)
- An impartial person who is neither a stockholder nor
a creditor of the corporation, and whose further
qualifications, if any, may be determined by the SEC.
- He is NOT a receiver of the corporation and does not
have the title and powers of a custodian or receiver.
- He shall have all the rights and powers of a duly
elected director, including the right to notice of and
to vote at meetings of directors, until such time as he
shall be removed by order of the SEC or by all the
stockholders.

Remedies in case of deadlocks
1. Written petition with SEC for it to arbitrate
2. Withdrawal Shareholder may for any reason
compel the corporation to purchase his shares at the
FMV provided the close corp. has sufficient assets in
its books to cover its debts and liabilities exclusive of
capital stocks (Sec 105)
3. Written petition with SEC to compel dissolution on
grounds of the acts of the directors, officers or those
in control of the corporation is :
a) Illegal,
b) fraudulent,
c) dishonest,
d) oppressive or unfairly prejudicial to the
corporation or any stockholder, or
e) whenever corporate assets are being
misappropriated or wasted.

ORDINARY STOCK CORPORATION VS. CLOSE
CORPORATION

ORDINARY STOCK
CORPORATION
CLOSE CORPORATION
1. Its AI need only contain
the general matters
enumerated in Sec. 14 of
the Corporation Code
1. Aside from the general
matters in Sec. 14, its AI
must contain the special
matters prescribed by Sec.
97. Failure to do so
precludes a de jure close
corporation status
2. Its status as an ordinary
stock corporation is not
affected by the ownership
of its voting stock or voting
rights
2. The 2/3 of its voting
stock or voting rights must
not be owned or controlled
by another corporation
which is not a close
corporation
3. Its AI cannot classify its
directors
3. Its AI may classify its
directors
4. Business of the
corporation is managed by
the BOD
4. Business of the
corporation may be
managed by the
stockholders if the AI so
provide, but they are liable
as directors
5. The corporate officers
and employees are elected
by a majority vote of all the
directors
5. Its AI may provide that
any or all of the corporate
officers or employees may
be elected or appointed by
the stockholders
6. The pre-emptive right is
subject to the exceptions
found in Sec. 39
6. The pre-emptive right is
subject to no exceptions
unless denied in the AI
7. The appraisal right may
be exercised by a
stockholder only in the
case provided in Secs. 81
and 42 of the Corporation
Code
7. The appraisal right may
be exercised and
compelled against the
corporation by a
stockholder for any reason
8. Except as regards
redeemable shares, the
purchase of the
corporation of its own
stock must always be made
from the unrestricted
retained earnings
8. In case of an arbitration
of an intra-corporate
deadlock by the SEC, the
corporation may be
ordered to purchase its
own shares from the
stockholders regardless of
the availability of
unrestricted retained
earnings
9. Arbitration of intra-
corporate deadlock by the
SEC is not a remedy in case
the directors or
stockholders are so divided
respecting management of
the corporation
9. Arbitration of intra-
corporate deadlock by the
SEC is an available remedy
in case the directors or
stockholders are so divided
respecting the
management of the
corporation

-----------------------------------------------------------------------

XIII. SPECIAL CORPORATIONS

1. EDUCATIONAL CORPORATION (Sec. 106)
- A stock or non-stock corporation organized to
provide facilities for teaching or instructions
- must obtain favorable recommendation from DECS
for the approval of its AI and By-Laws by SEC. [DepEd
= Elementary and High School; CHED = Tertiary]
- it is primarily governed by special laws and,
suppletorily, by the provisions of the Corporation
Code
- Board of Trustees (NSEC) not less than 5 members
and not more than 15 the term of office is 5 years

COMMERCIAL LAW
CORPORATION LAWS
83

2009 BAR OPERATIONS
- It is different from an ordinary non-stock corporation
organized for educational purposes.

2.RELIGIOUS CORPORATION (Sec. 109)
- A corporation composed entirely of spiritual persons
which is organized for the furtherance of a religion or
for perpetuating the rights of the church or for the
administration of church or religious work or property
- It is different from an ordinary non-stock corporation
organized for religious purposes, like the Knights of
Columbus, Opus Dei etc.
- Kinds:
a. Corporation Sole
- incorporated by one person and consist of
one member or corporator only and his
successors, such as a bishop
a) can sell, acquire, encumber property
b) to dissolve, file a declaration to that
effect
b. Religious Society
- a non-stock corporation governed by a
board but with religious purposes. It is
incorporated by an aggregate of persons,
e.g. religious order, diocese, synod, sect,
etc.
- Articles of incorporation - submit to SEC with
affidavit of affirmations

-----------------------------------------------------------------------

XIV. DISSOLUTION

Dissolution
- refers to the extinguishment of its franchise to be a
corp. and the termination of its corporate existence
- Corp ceases its operation altogether, BUT it
continues to exist for 3 years for purposes of winding
up of its affairs
- Steps:
1. Termination
2. Winding up
3. Liquidation

Kinds of dissolution
1. Voluntary dissolution
2. Involuntary dissolution

Voluntary dissolution
- by the act of the corporation

a. If there are no creditors who are prejudiced, dissolution
may be effected:
i. by the majority vote of BOD/BOT, and
ii. by a resolution duly adopted by the affirmative
vote of the stockholders owning at least 2/3 of
the OCS or of at least 2/3 members at a meeting
duly called for the purpose after notice of the
meeting was published in a newspaper of general
circulation.

= Procedure
i. File with the SEC the resolution duly
certified by the Board and countersigned by
the Secretary
ii. Issuance by the SEC of a certificate of
dissolution dissolution takes effect

b. If there are creditors affected, by judgment of the SEC
after hearing of the petition for voluntary dissolution.
(Sec. 119)
= Procedure:
1. Petition filed with SEC
2. If petition is sufficient in form and substance,
the SEC, by an order reciting the purpose of
the petition, shall fix a date on or before
which objections thereto may be filed, but
which shall not be less than 30 days nor
more than 60 days after the entry of the
order;
3. Publication of the SEC order at least once a
week in 3 consecutive weeks in a newspaper
of general circulation, and a similar copy
shall be posted for 3 consecutive weeks in 3
public places, in the municipality or city
where the principal office of the corporation
is situated;
4. Five days after the expiration of the date set
for filing objections, the SEC shall hear the
petition and try any issue made by
objections filed;
5. Dissolution takes effect upon judgment by
SEC ordering distribution of assets of corp.

c. by amending the AI to shorten the corporate term (Sec.
120)
= Procedure:
1. Amendment of the AI approved by the
Board and ratified by stockholders owning at
least 2/3 of OCS or 2/3 of the members
2. Submit the amended AI to the SEC
- The Rule that when the SEC does not
take action in 6 months from the date of
filing for a cause not attributable to the
corporation the amendment is deemed
effective, is not applicable in this case.
- Submit also an affidavit of publication
setting forth that the corporation has
amended its articles to shorten the term
to effect dissolution upon arrival of date
stated
3. Dissolution takes effect upon approval of the
amendment or expiration of the shortened
term.

If there are creditors what is the proper way of dissolving?
- Any of the 3 ways so long as creditors are not
prejudiced.
- In case of corporation sole, dissolution is effected by
submitting to the SEC a verified declaration of
dissolution for approval.

COMMERCIAL LAW
CORPORATION LAWS
84

2009 BAR OPERATIONS
Involuntary dissolution
- Brought about by filing of a verified complaint with
SEC and after proper notice and hearing on the
grounds provided for by existing laws, rules and
regulations.
- Grounds:
1. Violation of the corporation code
2. When there is a deadlock in a close corp.
3. When a close corp. is mismanaged
4. When the certificate of registration is suspended
or revoked in ff. instances:
a) when there is fraud in processing its
certificate of registration
b) when there is serious misrepresentation as
to what the corp. can do or is doing to the
great prejudice of or damage to the general
public
c) refusal to comply or defiance of any lawful
order of the commission restraining the
commission of an act which would amount
to a grave violation of its franchise
d) continuous inoperation for 5 years
e) failure to file BL within the required period
f) failure to file reports in appropriate form
within the presented period

Kinds of Involuntary Dissolution
1. Expiration of the corporate term corp. continues
to operate for a period of 3 years for purposes of
winding up its affairs
2. Legislative enactment except: it must not impair
any right or remedy
3. Failure to organize and commence transaction
within 2 years from incorporation (However, the
SEC has opined that the dissolution in this case is not
automatic. The corporation continues to exist as
such, notwithstanding its non-operational status until
the SEC orders its dissolution after notice and
hearing)
4. Dissolution by judicial decree forfeiture of its
privilege or franchise as non user
5. Quo warranto suit against a de facto corporation
6. Minority stockholders suit for dissolution on
justifiable grounds
7. SEC dissolution, upon complaint and after notice
and hearing, on the following grounds:
a) The corporation was illegally organized;
b) Continuous inactivity (subsequent to
incorporation, organization and commencement
of business) for at least 5 years;
c) Serious dissension in the corporation; or
d) Commission by the corporation of illegal or ultra
vires acts or violations of the Corporation Code.

Effects of dissolution
1. Legal title to corporate assets is vested in the
shareholder, who become co-owners thereof
2. The corporation ceases as a body politic or to
continue the business for which it was established
3. Can no longer be revived (but may reincorporated by
filing a new AI and BL)
4. The dissolution does not by itself imply the
extinction of rights demandable against the
corporation
5. Ceases to have any personality whatsoever after
the expiration of the 3-year winding period and
as a general rule it can no longer sue or be sued
as such

LIQUIDATION
- The winding up of the affairs of the corporation by
reducing its assets in money, settling with creditors
and debtors, and apportioning the amount of profit
and loss.

Methods of Liquidation
1. Liquidation by the corporation itself
- converts assets with cash, settle with creditors,
apportion profit and loss
2. Liquidation by a duly appointed trustee
- transfer assets in the name of the trustee, has
responsibility to liquidate the corporation.
3. Liquidation by a management committee or
rehabilitation receiver appointed by the SEC.

- The 3-year period of liquidation does not apply to
Methods 2 and 3 as long as the trustee or receiver is
appointed within the said period.

If corp. cannot wind up its affairs within 3 years
a. It is best to appoint a trustee or receiver because he
can act as such even beyond 3 years, (the corp. can
only act for 3 years)
b. If the property liquidation is transmitted to a trustee
or a receiver, the corporation ceases, legal interest
vests in the trustee and beneficial interest in the
stockholders, members, or creditors.

- The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of the
rights and liabilities of such entity nor those of its
owners and creditors alike (Sec. 145).
- Where, in the case of a corporation, the 3-year
extended life has expired without a trustee or
receiver having been expressly designated within the
said period, those who have been charged to wind up
its affairs or, in their absence, the BOD/BOT should
be permitted to continue as trustees by legal
implication to complete the corporate liquidation.

How to Distribute Assets
In the following order:
1. Creditors
2. Shareholders/members who are likewise creditors
3. Shareholders in proportion to their shareholding
preference

Amount shareholder is entitled to
- Fair Market Value of the shares of stock.
- If there is a loss below FMV.
- If there are profits in proportion to their
shareholdings

COMMERCIAL LAW
CORPORATION LAWS
85

2009 BAR OPERATIONS
- Upon winding up of the corporate affairs, any asset
distributable to any creditor of shareholder or
member who is unknown or cannot be found shall be
escheated to the city or municipality where such
asset is located.

General Rule:
= Dissolution authority given to the corporation
to distribute assets to shareholders or members
Except: (even if no dissolution, the corp. can
distribute assets)
= Exceptions to the Trust Fund Doctrine
1. Decrease of capital stock (Sec. 38)
2. When corp. is redeemed by redeemable shares
3. When corporation is purchasing treasury shares
(Sec. 42)
4. When the corporation is acquiring its own shares,
converting it into treasury shares (Sec. 42)
5. When declared as dividends (Sec 43)
6. When there is withdrawal from a close corp (Sec
105)

-----------------------------------------------------------------------

XV. FOREIGN CORPORATION

Foreign corporation
- One formed, organized or existing under any laws
other than those of the Philippines, and whose laws
allow Filipino citizens and corporations to do business
in its own country or State. (Sec. 123)
- This definition espouses the incorporation test and
the reciprocity rule and is significant for licensing
purposes. It does not say that it is required that the
laws under which foreign corporations are formed
give Philippine national reciprocal rights.
- A foreign corporation shall have the right to transact
business in the Phil. after obtaining a license to
transact business in this country and a certificate of
authority from the appropriate government agency
concerned. (Sec. 123)
- Test: Incorporation Test (Place of incorporation),
regardless of the nationality of the shareholders
- During wartime, the control test will apply, that is, a
domestic corp. controlled by enemy aliens shall be
deemed a foreign corporation with a nationality
identical with that of its controlling shareholder
- becomes a Philippine resident the moment it is
granted a license to transact business in the
Philippines. Corporate residence is where its business
is transacted

Objectives of regulation of foreign corporation
1. To place them in equal footing with domestic
corporation;
2. To subject them to inspection so that their condition
may be known;
3. To protect the residents of the State doing business
with them by subjecting them to the courts of the
State.

FOREIGN INVESTMENT ACT OF 1991 (RA 7092)
- A foreign corporation may now acquire and own
100% Filipino corporation.
- Except when limited by Constitution (owning land)

- Problem: Corporation A with Shareholder = 31%
Filipino and 69% owned by Corporation B ( 47% Fil
and 53% Alien), engaged in partially nationalized
industry
Q: Is the 60% requirement met?
A: Yes, requirement met

- Because a FC cannot extend its jurisdiction beyond its
limits, it exist only in contemplation of law and by the
consent of such state or country

APPLICATION FOR A LICENSE (Sec. 125)

Procedure for the Issuance of License
I. Submit application with SEC which shall be under oath
and specifically set forth the following unless stated in its
AI:
1. The date and term of incorporation;
2. The address including the street number of
the principal office of the corporation in the
country or state of incorporation;
3. Name and address of its resident agent
authorized to accept summons and process
in all legal proceedings and, pending the
establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purposes of the corporation
which it intends to pursue in the transactions
of its business in the Philippines. Provided
that said purpose are those specifically
stated in the certificate of authority issued
by the appropriate government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which
the corporation has authority to issue;
8. A statement of its OCS and the aggregate
number of shares which the corp. has issued;
9. A statement of the amount actually paid in;
and
10. Such additional information as may be
necessary in order to enable the SEC to
determine whether such corp. is entitled to
a license to transact business in the
Philippines and to determine and assess the
fees payable.

II. Submit Articles of Incorporation and By-laws, duly
certified and their translation to an official language in the
Phil.

III. Submit and attach a certificate under oath by an
authorized official of the jurisdiction of its incorporation
attesting to the fact that the laws of the country or state

COMMERCIAL LAW
CORPORATION LAWS
86

2009 BAR OPERATIONS
of the applicant allow Filipino citizens and corporation to
do business therein and the applicant is an existing corp.
of good standing with a translation of the certificate in
English under oath of the translator if it is in foreign
language

IV. A statement under oath of the President or any
authorized officer of the corp. showing to the satisfaction
of the SEC and other government agency in proper cases
that the applicant is solvent and in sound financial
condition and setting forth its assets and liabilities for the
previous year

V. Other requirement provided by law a certificate of
Authority from the appropriate government agency
whenever required by law

VI. Power (written) of Attorney designating a resident
agent on whom summons and other legal processes
against the corp. may be served and a written agreement
and stipulation consenting that such services may be
made upon the SEC, if anytime, it shall cease to transact
business in the Phils. or shall be without resident agent
(Rule XIV, Sec 13).

Resident agent
- An individual, who must be of good moral character
and of sound financial standing, residing in the
Philippines, or a domestic corporation lawfully
transacting business in the Philippines, designated by
a written power of attorney by a foreign corporation
authorized to do business in the Philippines, on
whom any summons and other legal processes may
be served in all actions or other legal proceedings
against the foreign corporation. (Secs. 127 -128)

- When a corporation has designated a person to
receive service of summons pursuant to the
Corporation Code, that designation is exclusive and
service of summons on any other person is
inefficacious.

Service of summons to a corp. with license (In the ff.
order)
1. Resident agent exclusive
2. SEC ( If no resident agent and the corp ceases
to transact business SEC transmit within 10
days from receipt a copy of such summons to
the corp. at its home or principal office (act of
mailing within 10 days complete the service
expenses born by the party on whose instance
the service is made)
3. Officers or agent in the Philippines.

- Note: the above order of examination is to be
followed only if a foreign corp. is transacting
business in the Phils. with a license (Wang
Labora vs. Mendoza)

- If without license service be made upon any
agent of the corp.
- If domestic corp. Rules of Court will apply

Conditions imposed subsequent to the issuance of
license:
1. The FC shall transact business and for the
purpose/s for which it is authorized under its
license;
2. Within 60 days after the issuance of its license,
it shall deposit with SEC satisfactorily securities
in the actual market value of at least P100k
consists of:
a. bonds or other evidence of
indebtedness of the government of the
Phils, its political subdivisions and
instrumentalities or of government
owned or controlled corporation;
b. shares of stock in Registered
Enterprises (registered under
Omnibus Investment Code)
c. Shares of stock in domestic corporation
registered in the stock exchange
d. Shares of stock in domestic insurance
co. and banks
e. Any combination of these kinds of
securities EXCEPT foreign banking or
insurance corp.
3. Within 6 months after the end of each fiscal year
of the license
a. additional deposit of securities
equivalent in actual market value of 2%
of the amount by which the licenses
gross income for that fiscal year
exceeds 5M if less than 5M no
additional
b. If the market value of the deposit
decreased by at least 10% of such
value at the time they were deposited ,
the deposit shall be increased; if the
deposit increased by 10% - allowed to
withdraw
Can you exchange the deposits with
another one? Yes, substitution can be
allowed provided the corp. is solvent.
c. If there are dividends/interest due on
the deposited securities, the license
shall be entitled to collect
d. Deposits be returned when the license
ceases to do business in the Phils.
provided it is able to show the absence
of any liability to Phil residents
including the Government of the Pgils.
4. It must comply with the provisions of existing
laws, rules and regulations otherwise its license
may be revoked, suspended or annulled by SEC

Effect of issuance of license:
- FC may now commence to transact its business in the
Philippines for as long the corporation continues to
exist as a corporation under the laws of its State of
incorporation EXCEPT when the license is
surrendered, revoked, suspended, or annulled.

COMMERCIAL LAW
CORPORATION LAWS
87

2009 BAR OPERATIONS
TESTS OF DOING OR TRANSACTING BUSINESS IN
THE PHILIPPINES:

A. JURSIPRUDENTIAL TESTS:
1. Twin Characterization Test
a) Whether the foreign corporation is
maintaining or continuing in the Philippines the body or
substance of the business for which it was organized or
whether it has substantially retired from it and turned it
over to another (Substance Test); and
b) Whether there is continuity of commercial
dealings and arrangements, contemplating to some
extent the performance of acts or works or the exercise of
some functions normally incident to and in progressive
prosecution of the purpose and object of its organization
(Continuity Test).

2. Contract Test
- Whether the contracts entered into by the
foreign corporation, or by an agent acting under the
control and direction of the foreign corporation, are
consummated in the Philippines.

B. STATUTORY TESTS
1. Foreign Investment Act of 1991 (RA 7042)
Acts constituting doing business:
a) Soliciting orders, service contracts, opening
offices, whether called liaison offices or
branches;
b) Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period or
periods totaling to 180 days or more;
c) Participating in the management, supervision
or control of any domestic business, firm or
entity or corporation in the Philippines;
d) Any other act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial gain or
of the purposes of the business organization.

2. Implementing Rules of RA 7042
- Acts NOT constituting doing business:
a) Mere investment as a shareholder in a
domestic corporation and/or the exercise of the
rights of such investor;
b) Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account;
c) Publication of a general advertisement
through any print or broadcast media;
d) Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
processed by another entity in the Philippines;
e) Consignment by the foreign corporation of
equipment with a local company to be used in
the processing of products for export;
f) Collecting information in the Philippines; and
g) Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis.

Law Applicable (Sec 129)
- Gen. Rule:
= Any FC lawfully doing business in the Phils. shall
be bound by all laws, rules and regulations
applicable to domestic corporation.
- Except: (Governed by the state of Incorp.)
1. Matters relative to formation, creation,
organization or dissolution of corporation
2. The relations, liabilities, responsibilities or duties
of shareholders, members or officers of corp. to
each other or to the corp. (Citibank vs. Chilia)
- By laws of a FC can be given application
without approval by the SEC since the
SEC grants a license only when the FC
has complied with all the requirements
of law, it follows that when it decides to
issue such license, it is deemed to have
approved its foreign enacted by laws

Amendments to articles of incorporation or by-laws of
foreign corporations (Sec. 130)
- Note: The law that governs the amendment of AI of
the FC is the law of State of its incorporation
- Limitation in the amendments of AI/BL of FC: it shall
not of itself enlarge or alter the purpose/s for which
such corporation is authorized to transact business in
the Philippines.

Amended license (Sec 131)
Q: When is it required?
A: 1. The FC changes its corporate name
2. The FC desires to pursue in the Phils. other or
additional purposes
How by submitting an application thereof to
the SEC favorably endorsed by the appropriate
government agency in the proper cases
Merger/Consolidation involving a FC licensed in
the Phils.
- FC merged/consolidated with a
domestic corp laws of the Phils will be
followed as to requirements or merger
or consolidation
- If FC with another FC such FC licensed
to do business in the Phil. within 60
days after such merger/consolidation
becomes effective, file with the SEC
and in appropriate cases, with the
proper government agency, a copy of
the articles of merger or consolidation
duly authenticated by the proper
official of the State under the laws of
which such merger or consolidation
was effected.
- If FC with another FC if the one
absorbed is the corp. licensed to do
business in the Phils. it shall file a
petition for the withdrawal of its
license.

COMMERCIAL LAW
CORPORATION LAWS
88

2009 BAR OPERATIONS
REVOCATION OF LICENSE (Sec. 135)
Grounds
1. Failure to file annual report or pay any fees required
by this Code.
2. Failure to appoint and maintain a resident agent in
the Philippines;
3. Failure after change of its resident agent or of his
address to submit to the SEC a statement of such
change;
4. Failure to submit to the SEC an authenticated copy of
any amendments to its AIC or BL or any articles of
merger or consolidation;
5. A misrepresentation of any material matter in any
application, report, affidavit or other documents
submitted by such corporation pursuant to this title;
6. Failure to pay any and all taxes imposed, penalties
and assessments, if any, lawfully due to the
Philippine government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of the
purpose/s for which such corp. is authorized under its
license;
8. Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corp. or entity
not duly licensed to do business in the Philippines;
9. Any other ground as would render it unfit to transact
business in the Philippines.

What happens when there is revocation of license?
- The SEC will issue a certificate of revocation,
furnishing a copy thereof to the appropriate
government agency in the proper cases. SEC shall
mail to the corp. at its registered office in the Phils. a
notice of such revocation accompanied by a copy of
the certificate of revocation

EFFECTS OF LACK OF LICENSE
A. On suits
1. Foreign corporation doing business in the Philippines:
a) may not sue in any action in any court or
administrative agency of the Philippines; and
b) may be sued on any valid cause of action
recognized in the Philippines (under the doctrine of quasi-
estoppel by acceptance of benefits). (Sec. 133)

2. Foreign corporation NOT doing business in the
Philippines:
a) Generally, it may not sue and be sued in any
court or administrative agency of the Philippines;
b) However, it may sue and be sued on isolated
transactions, as well as for those which are casual or
incidental thereto.

Doctrine of Isolated Transactions
-Foreign corporations, even unlicensed ones, can sue or
be sued on a transaction or series of transactions set apart
from their common business in the sense that there is no
intention to engage in a progressive pursuit of the
purpose and object of business transaction.
- However, it is not the lack of the prescribed license to do
business in the Philippines but the doing of business
without license which bars a foreign corporation from
access to Philippine courts. An unlicensed foreign
corporation is not ipso facto barred from bringing an
action. The legal prohibition is confined to cases relating
to its business activity in the country.

Instances when a foreign corporation may sue in the
Philippines whether or not licensed to do business
thereat:
1. To seek redress for isolated business transaction;
2. To protect its corporate name, reputation or
goodwill;
3. To enforce a right not arising out of a business
transaction in the Philippines;
4. When the parties have contractually stipulated
that the Philippines is the venue of actions; and
5. When the party sued is barred by the principle of
estoppel and/or principle of unjust enrichment
from questioning the capacity of the foreign
corporation.

B. On contracts
- The contracts contemplated are those that satisfy the
contract test or those that make a foreign corporation
as one doing business in the Philippines.

General Rule: The contracts are unenforceable. They are
enforceable only upon securing a license.
Exception: However, the contracts are null and void if they
are contrary to law, morals, good customs, public policy
and public order.

WITHDRAWAL OF FOREIGN CORPORATIONS (Sec.
136)
- How to effect surrender/ withdrawal: by filing a
petition for withdrawal of license

Essential Requirements for Withdrawal
1. All claims which have accrued in the Philippines have
been paid, compromised or settled;
2. All taxes, imposts, assessments and penalties, if any,
lawfully due the Phil. government or any of its
agencies or political subdivisions have been paid;
3. The petition for withdrawal of license has been
published once a week for 3 consecutive weeks in a
newspaper of general circulation in the Phil.

Formal Requirements to Legally Effect the Withdrawal
of Foreign Corporations License
The following must be submitted to the SEC:
1. The letter petition of the Resident Agent
requesting the withdrawal of the license to do
business
2. Filing fee of P10.00
3. A copy of the resolution of the BOD authorizing
the closing of the Phil. branch and empowering
the RA to effectuate the withdrawal thereof, duly
authenticated in accordance with law to be
submitted in triplicate
4. Latest balance sheet and sworn statement that
no creditors will be prejudiced by the withdrawal
also to be submitted in triplicate

COMMERCIAL LAW
CORPORATION LAWS
89

2009 BAR OPERATIONS
5. Proof of publication of the Notice of withdrawal
once a week for 3 consecutive weeks in a
newspaper of general circulation in the Phil.
6. The license issued by the commission to the
corp. which shall be surrendered

2 Things to Consider to Determine Whether a FOREIGN
CORPORATION has Access to Phil Courts
1. Does it have license
2. Is it transacting business in the Phil.
- How to determine no hard and fast rule but
there are guidelines provided
a. If the FC is continuing the business for which
it was created in the Phil. then it is
transacting business (Menthrelatura case)
b. If acts of the corp. indicates a purpose by the
corp. to engage in some parts of its regular
business, then doing business (Microwe____
case)
c. When a single act is not merely incidental or
casual but such but of such character as to
distinctly indicate its intention to perform
other business in the Phils (Way lab)
d. The volume of the business does not matter,
it is the performance of acts for which the
corp. was created that determines whether
it was transacting business (Granger)
e. The continuity of conduct of which an
intention can be inferred of establishing a
business in the Phils (JAL)

4 Exceptions when FC Without license can sue
I. Isolated business transaction single transaction
- solicited by domestic corp., entity or
person
- Note: If FC who solicits the transaction
then it is already transacting business in
the Phils.
Rationale for the exceptions: not the
intention of law to favor domestic corp.
3 Requisites (to file an action based on this)
1. FC must disclose that it is not doing
business in the Phils. And it is suing
under the isolated business transaction
disclose in complaint
2. Suing entity must be a FC
3. Name its duly authorized representative
or RA for purposes of action, it must
appoint a resident agent to whom
notice upon the FC must be served for
the purpose of pre trial

II. To protect corporate name, reputation and
goodwill ( Puma vs. IAC)
- Rule NOW, foreign trademarks/ trade names
1. owner of the same is domiciled in the country
of which it is a member of the treaty
agreement on trademarks
2. widely known in the Phils.

2 Requirements BEFORE ( no longer applied)
1. Trade name/trademark registered in the Phils.
2. Country of the FC allows or gives Filipino
Corp/citizen reciprocal rights

III. To enforce a right not arising out of Business
Transaction
- Bulakhidas and Universal Shopping
transaction between 2 foreign entities
IV. Intends to hold person/entity for actionable acts or
omission
- Rule on equity allows Filipino to sue FC
- Lack of license is not an excuse for its
non-suability (FBA)

RULES
1. Burden of proof that it is FC transacting
business without a license suing under the 4
exceptions is on the FC
2. The defendant must specifically deny the
allegation of FC capacity to sue
3. Proof of doing business is not necessary to
confer jurisdiction on th FC (Marubers case
and Signetics vs, CA)

-----------------------------------------------------------------------

XVI. MISCELLANEOUS PROVISIONS

Sec 137
- OCS all shares of stock issued to subscribers or
shareholders of a stock corp. whether or nor fully
paid or partially as long as there is a bonding
subscription agreement, except treasury shares.
- All OCS are issued because not outstanding if not
issued but not all issued shares of stocks are
outstanding (e.g. treasury shares issued but not OCS)

OCS
Not all OCS are
considered subscribed
Subscribed
All subscribed capital
stocks are considered
outstanding

- Reason: Because it is possible that shares of
stock are fully paid. If fully paid, no longer
considered as subscribed.

Sec. 138
- Q: Is it possible for a corp. to have its affairs managed
by Board of Governors?
A: Yes, but only limited to non-stock and special corp.
who may designate another name for its BOT

Sec 142
- Gen Rule: Examination results of the operation,
books and records of any corp are strictly confidential
- Except: When a law requires disclosure

COMMERCIAL LAW
CORPORATION LAWS
90

2009 BAR OPERATIONS

SEC
- agency entrusted with the enforcement of all laws
affecting corps., partnership and association
- Composition:
= 5 Commissioners 1 chair (7 years)
= 4 Associate Com
o 2 (3 years)
o 2 (5 years)

Quorum
- The presence of 3 Comm is sufficient to constitute
quorum. In the absence of the chairman presiding
officer will the most Senior Officer

Q: Can the SEC form a committee to hear a dispute?
A: Yes, because in the exercise of its authority, it shall
have the power to unlist the aid and support of and to
deputize any and all enforcement agencies of the
govt, civil or military as well as any private
institution, corp., form, association or person
If there is dispute = heard by SEC/SEC division
within 30 days appealable with the commission en
banc within 20 days to the CA on Petition for
Review (BP 129 does not apply)
Can the RTC issue an injunction directed to the SEC?
No, because they are of co-equal rank.

Original and exclusive jurisdiction of the regional trial
courts (Sec. 5 of PD 902-A in relation to Sec. 5.2 of RA
8799):
1. Fraudulent devices and schemes employed by
directors detrimental to the public interest and to
other firms;
2. Intra-corporate controversies and with the state in
relation to their franchise and right to exist as such;
= 4 Kinds of Relationship that will constitute an
intra-corporate relationship (Union Cola vs. SEC):
a. between the corp. and the public;
b. between the corp. and shareholders,
members and officers;
c. between the corp. and the state in so far as
its permits, franchise, or license to operate is
concerned right to exist
d. between and among shareholders
3. Controversies in election or appointment of
directors, trustees, officers and managers
4. Petitions declaring corp. in a state of suspension of
payments
= 2 Situations that will allow the filing of petition for
suspension of payments:
a. Corp. has sufficient assets to cover liabilities
but foresees the impossibility, when they fall
due simple suspension
b. No asset or insufficient asset but under the
management of a rehabilitation receiver or
management committee
= When may a receiver be appointed for a corporation?
-Whenever necessary in order to preserve the
rights of party litigants and/or protect the interest
of the investing public and creditor.
= If the corp. is regulated by another government
agency, a receiver can still be appointed but a
request coming from an appropriate government
agency if necessary
= When can there be a management committee?
Two instances:
1. When there is imminent danger of
dissipation, loss or wastage or destruction
of assets or other properties;
2. When there is paralyzation of business
operation which may be prejudicial to the
interest of minority shareholders, any of
the party litigants or the general public.

Gen. Rule: Petition is necessary before SEC can
appoint management committee
Except: If in SECs opinion there is imminent danger
of dissipation, loss or wastage or destruction of
assets, or other properties or paralyzation of business
corp.

Powers of rehabilitation committee or rehabilitation
receiver (Sec. 6[d]):
1. To take custody of, and control over, all existing
assets and properties of such entities under
management;
2. To evaluate the existing assets and liabilities,
earnings and operations of such corporations,
partnerships or other associations;
3. To determine the best way to salvage and protect
the interest of the investors and creditors;
4. To study, review and evaluate the feasibility of
continuing operation and restructure and
rehabilitate such entities if determined to be feasible
by the RTC;
5. To report and be responsible to the RTC until
dissolved; and
6. May overrule or revoke the actions of the previous
management and board of directors of the entity
under management, notwithstanding any provision
of law, articles of incorporation or by-laws to the
contrary.

Rehabilitation receiver/ management committee
- Not subject to any action, claim or demand for or in
connection with any act done or omitted to be done
by it in good faith in the exercise of its function.

Securities and Exchange Commission Reorganization Decree
Revised Securities Act
PD 902-A

COMMERCIAL LAW
CORPORATION LAWS
91

2009 BAR OPERATIONS

Definition of Terms:

1. SECURITIES these are shares, participation or
interests in a corporation or in a commercial enterprise or
profit making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
character. It includes:
(i) shares of stock, bonds, debentures, notes,
evidences, of indebtedness, asst-backed
securities;
(ii) investments contracts, certificates of interest
or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
(iii) fractional undivided interests in oil, gas or
other mineral rights;
(iv) derivates like options or warrants;
(v) certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
(vi) proprietary or nonproprietary membership
certificates in corporation; and
(vii) Other instruments as may in be future be
determined by the Commission. (Sec. 3.1)

2. ISSUER it is the originator, maker, obligor, or creator
of the security. Securities statures have been enacted
principally to protect the investing public from
unscrupulous issuers. (Sec. 3.2)

3. BROKER any person engaged in the business of
buying and selling securities for the account of others.
(Sec. 3.3)

4. DEALER any person who buys and sells securities for
his own account in then ordinary course of business.
Compare with a broker. (Sec. 3.4)

5. CLEARING AGENCY any person who acts as
intermediary in making deliveries upon payment to effect
settlement in securities transactions. Just like an
exchange, it is the desire of the SEC that a clearing
agency could develop into a self-regulatory organization.
(Sec. 3.6)

6. EXCHANGE an organized market place or facility that
brings together buyers and sellers and executes trades of
securities and/ or commodities. Unlike the usual over-the-
counter market, an exchange has a physical facility. (Sec.
3.7)

7. INSIDER an insider may be:
(i) The issuer;
(ii) A director or office (or a person performing
similar functions) of, or a person controlling
the issuer;
(iii) a person whose relationship or former
relationship to the issuer gives or gave him
access to material information about the
issuer or the security that is not generally
available to the public;
(iv) a government employee, or director, or
office of an exchange, clearing agency and/
or self-regulatory organization who has
access to a material information about an
issuer or a security that is not generally
available to the public; or
(v) A person who learn such information by a
communication from any of the foregoing
insiders. (Sec. 3.8)
One is not prohibited form being an insider.
It is not a crime. It is a status. An insider starts to
get into trouble when he acts upon the material
nonpublic information he has and busy or sells
shares or, under Section 27.3, communicates
such information to another knowing or having
reason to believe that such person will likely buy
or sell a security.

8. PRE-NEED PLANS these are contracts which provide
for the information of future services or the payment of
future monetary considerations at the time of actual
need, for which plan holders pay in cash or installment at
stated prices, with or without interest or insurance
coverage and includes life, pension, education,
interments and other plans which the commission may
from time to time approve. (Sec. 3.9)

9. PROMOTER a person who, acting alone or with
others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration thereof. (Sec. 3.10)

10. PROSPECTUS it is the document made by or on
behalf of an issuer, underwriter or dealer to sell or offer
securities for sale to the public through a registration
statement filed with the SEC. it is a selling document that
contains most of the information set out in the
registration statement. If a potential investor wants
information about a new issue, his broker will hand him a
prospectus of the issue, not the registration statement of
the particular security. (Sec. 3.11)

11. REGISTRATION STATEMENT it is the application for
the registration of securities required or be filed with the
SEC. the protection of the investing public starts with an
examination and review by the SEC of an issuers
registration statement. (Sec. 3.12)

12. UNCERTIFICATED SECURITY it is a security
evidenced by electronic or similar records. The increased
difficulty in the issuance and cancellation of shares after
every transaction in the exchange, brought about by
increase in the volume of transactions, has led to the
development and adoption of the concept of
uncertificated securities. (Sec. 3.13)

13. UNDERWRITER a person who guarantees on a firm
commitment and/ or declared beat efforts basis the
distribution and sale of securities of any kind by another

SECURITIES REGULATION CODE
RA 8799

COMMERCIAL LAW
CORPORATION LAWS
92

2009 BAR OPERATIONS
company. The firm underwriter takes to buy the unsold
portion of the issue it handles and gets paid a higher- fee
for its effort than the best efforts underwriter who does
no make the same commitment. (Sec. 3.14)

REGISTRATION OF SECURITIES
- Gen rule:
A registration statement duly filed and approved by
the Sec is necessary before securities may be sold
and offered for sale or distribution within the
Philippines. Prior to any sale, information on the
securities, in such form and substance prescribed by
the SEC, shall be made available to each prospective
purchaser. (Sec. 8)
- Exceptions:
1. Exempt securities; and
2. Exempt transactions.

EXEMPT SECURITIES (Sec. 9)
1. Any security issued or guaranteed by the government
of the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or
supervised by, and acting as instrumentality of said
government;
2. Any security issued or guaranteed by the government
of any country of which the Philippines maintains
diplomatic relations, or by any state, province or
political subdivision thereof on the basis of
reciprocity; provided, that the commission may
require compliance with the form and content of
disclosures the Commission may prescribed;
3. Certificates issued by the receiver or by the trustee in
bankruptcy duly approved by the proper adjudicatory
body;
4. Any security or its derivates the sale or transfer of
which, by law, is under the supervision and regulation
of the office of the Insurance Commission, Housing
and Land Used Regulatory Board, or the Bureau of
Internal Revenue;
5. Any security issued by the bank except its own shares
of stock.

EXEMPT TRANSACTIONS (Sec. 10)
1. Judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy;
2. Sale of pledged or foreclosed property to liquidate
debts;
3. Sale on isolated transactions by owner or by his
representative for the owners account;
4. Distribution by a corporation, actively engaged in the
business authorized by its articles of incorporation, of
securities to its stockholders or other security holders
as a stock dividend or other distribution out of
surplus;
5. Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or
other remuneration is paid or given directly or
indirectly in connection with the sale of such capital
stock ( e.g. the additional issuance of shares by a
corporation out of its authorized but unissued capital
stock);
6. Issuance of bonds or notes secured by mortgage
upon real state or tangible personal property, where
the entire mortgage together with all the bonds or
notes secured thereby are sold to a single purchaser
at a single sale;
7. Issuance and delivery of any security in exchange for
any other security of the same issuer pursuant to a
right of conversion (Provided, that the security so
surrendered has been registered under the SRC or
was, when sold, exempt from the provisions of the
SRC, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the
time of such conversion fall within the class of
securities entitled to registration under the SRC.
Upon such conversion, the par value of the security
surrendered in such and delivered in such exchanged
and sold);
8. Brokers transactions, executed upon consumers
orders, on any registered exchange or other trading
market;
9. Pre-incorporation subscriptions and subscription to
an increase in its authorized capital stock under the
Corporation Code;
10. Exchange of securities by the issuer with its existing
security holders exclusively;
11. Sale of securities by an issuer to fewer than 20
persons in the Philippines during any 12 month
period;
12. Sale of securities to any number of the following
qualified buyers:
(i) bank
(ii) registered investment house;
(iii) insurance company;
(iv) pension fund or retirement plan
maintained by the government of the
Philippines or any political subdivision
thereof or manage by a bank or other
persons authorized by the
BankoSentral to engage in trust
functions;
(v) investment company; or
(vi) such other person as the commission
may by rule determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, or amount of assets under
management.

Initial procedure for the registration of securities (Sec.
12)
- All securities required to be registered under section
8.1 of the SRC shall be registered through the filing
by the issuer in the main office of the SEC of the
sworn registration statement with respect to such
securities. Unlike the Revised Securities Act, the SRC
does not specify in great detail the information which
must be provided and the documents which must be
submitted by the applicant issuer, leaving such
matters, including the form of the application, for the
SEC to prescribe.

COMMERCIAL LAW
CORPORATION LAWS
93

2009 BAR OPERATIONS
Who are required to sign the registration statement? (Sec.
12.4)
- The registration statement shall be signed by the
issuers principal executive officer, its principal
operating officer, its principal financial officer, its
comptroller, its principal accounting officer, its
corporate secretary or persons performing similar
functions accompanied by a duly verified resolution
of the board of directors of the issuer corporation.

What action may the SEC take on a registration statement?
(Sec. 12.6)
- Within 45 days after the date of filing of the
registration statement, or by such later date to which
the issuer has consented, the SEC shall declare the
registration statement effective or rejected, unless
the applicant is allowed to amend the registration
statement as provided in Section 14 of the SRC. The
SEC shall enter an order declaring the registration
statement to be effective if it finds that the
registration statement together with all the other
papers and documents attached thereto is on its face
complete and that the requirements have been
complied with. The SEC may impose such terms and
conditions as may be necessary or appropriate for the
protection of the investors. Note that the SEC does
not approve the registration statement (although
Secs. 8.1 and 8.2 refer to the registration statement
being approved by the SEC) but simply declares it
effective. The non-use of he word approve is more
probably designed to avoid any suggestion that the
SEC is endorsing the particular issue.

Grounds for Rejecting a Registration Statement (Sec.
13.1)
- The SEC may reject a registration statement and
refuse registration of the security thereunder, or
revoke the affectivity of a registration statement and
the registration of the security thereunder, after due
notice and hearing, by issuing an order to such effect,
setting forth its findings in respect thereto, if it finds
that:

(a) the issuer-
(i) has been judicially declared insolvent;
(ii) has violated any of the provisions of this
code; the rules promulgated pursuant
thereto, or any order of the commission of
which the issuer has notice in connection
with the offering for which the registration
statement has been filed;
(iii) has been or is engaged or is about to engage
in fraudulent transactions;
(iv) has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
(v) has failed to comply with any requirement
that the commission may impose as a
condition for the registration of the security
for which the registration has been filed.

(b) the registration statement is on its face
incomplete or inaccurate in any material respect
or includes any untrue statement of a material
fact or omits to state a material fact required to
be stated therein or necessary to make the
statements therein not misleading or,
(c) the issuer, any officer, director or controlling
person of the issuer, or person performing similar
functions, or any underwriter has been
convicted, by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the commission or other
competent judicial or administrative body for
violations of securities, commodities, and other
related laws.

TENDER OFFER
- A tender offer is a publicly announced intention by a
person acting alone or in concert with other persons
to acquire equity securities of a public company (Sec.
19). It has also been described as an imprecise term
widely used in securities law, generally referring to a
quick, enticing proposal to the shareholders of a
corporation that they tender their shares for
purchase by the offeror at a specified price. Tender
offer is an upside-down term; I make the offer, you
make the tender. It is usually, not always, part of an
attempt by the offeror to buy enough stock to control
the corporation, i.e., a takeover (also spelled take-
over and take over). Accordingly, tender offer is
sometimes called takeover offer or takeover bid.
(Mellinkoffs Dictionary of American Legal Usage, p.
64)
- Tender offers are regulated to prevent he
stockholders of the target company from being
misled by the offeror or the targets management.
Thus, a principal requirement of the SEC rules on
tender offer is the disclosure by the offeror of certain
information about the offer, with a copy of such
information being given or sent to the stockholders
(Rule 19.1, par. 7).

Circumstances where tender offer is mandatory (Sec.
19.1 (a); SRC Rule 19.1, par. 2)
- Except when relief from the mandatory tender offer
requirement is granted under SRC Rule 19.1,
paragraph 3, a person is required under the following
circumstances to make a tender offer for equity
shares of a public company in an amount equal to the
number of shares that the person intends to acquire:
(a) where the person intends to acquire 15% or
more of the equity shares of a public company
pursuant to an agreement made between or
among the person or one or more sellers;
(b) where the person intends to acquire 30% or
more of the equity shares of a public company
within a period of 12 months; and,
(c) where the person intends to acquire shares
that would result in the ownership of more

COMMERCIAL LAW
CORPORATION LAWS
94

2009 BAR OPERATIONS
than 50% of the equity shares of a public
company.

When would a person be presumed to be making a
voluntary tender offer? (SRC Rule 19.1, par. 4)
- A person may make a voluntary tender offer. He will
be presumed to be doing so when some or all of the
following factors are present:
(a) there is active and widespread solicitation of
public shareholders fort he shares of a public
company;
(b) the solicitation is made for a substantial
percentage of the issuers stock;
(c) the offer to purchase is made at a premium over
the prevailing market price, at firm rather than
negotiable terms;
(d) the offer is contingent on the tender of a fixed
number of shares; and
(e) the offer is only open for a limited period of time.

- The foregoing list of factors reflects the so-called
weight-factor Wellman Vs. Dickinson Test enunciated
in an American Case of the same name (475F. Supp.
783, 823-824 [S>D>N>Y>, 1979] involving the
coordinated private solicitations of 30 institutions
and 9 individuals, with a premium price offered and
no individualized negotiations (Fundamentals of
Securities Regulation by Louis Loss and Joel Seligman,
Little Brown and Company, 3
rd
edition, 1995).

What is a proxy and why is its solicitation regulated? (Sec.
20; SRC Rule 20)
- A proxy is a formal authorization from a stockholder
that empowers someone to vote in his or her behalf;
the term also refers to the person who is sop
authorized to vote on behalf of a stockholder
- The SRC regulates the issuance and solicitation of
proxies. Indeed, it expressly requires that proxies
must be issued and proxy solicitation must be made
in accordance with SEC rules (Sec. 20.1). thus, proxies
must be in writing, signed by the stockholder or his
duly authorized representative and filed with the
corporate secretary before the scheduled meeting
(Sec. 20.2); unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended; no proxy shall be valid and effective for a
period longer than 5 years at one time (Sec. 20.3);
and a broker or dealer can not give a proxy in respect
of any security it carries fort he account of a
customer without the express written authorization
of such customer(Sec. 20.4).
- The issuance and solicitation of proxies are regulated
to minimize, if not avoid, the abuse and misuse of the
proxy device that may lead to the self-perpetuation
and irresponsibility of management. Management
has innate advantages in the solicitation of proxies; it
has the stockholders list; it benefits from the usual
inertia of stockholders; and it has access to corporate
funds for the normally substantial costs of
solicitation.

The terms solicit and solicitation means
(a) any request for a proxy whether or not
accompanied by or included in a form of proxy;
(b) any request to execute or not to execute, or to
revoke a, a proxy; or
(c) the furnishing of a form of proxy or other
communication to security holders under
circumstance reasonably calculated to result in the
procurement, withholding or revocation of a proxy.

- The approach of the SEC Rules on proxy solicitation
follows the traditional three-way approach which
(i) calls for a brief description of the
matters to be considered, together with
the action proposed to be taken by the
holder of the proxy (SRC Rule 20, pars. 3
and 4);
(ii) requires the registrant (i.e. the insurer of
the securities in respect of which proxies
are to be solicited), as a condition of its
own solicitation, to mail to record
owners the proxy material of any
stockholder upon his or her request at
his or her expense (SRC Rule 2o, par. 6);
and
(iii) adopts a general fraud rule prohibiting
the making of any materially false or
misleading statements (SRC Rule 20,
par. 7).

- No solicitation of proxy shall be made unless each
person solicited is furnished, concurrently or earlier,
with a written proxy statement containing the
information required by the SEC (SRC Rule 20, par. 3).
The form of proxy, shall be made unless each person
solicited or given to stockholders at least 15 business
days prior to the meeting date (SRC Rule 20, par. 4.f).

RECOVERY OF PROFITS

When could the profits made by a stockholder, director
or officer in a purchase and sale, or a sale and purchase,
of any equity security be recovered? (Sec. 23.2)
- For the purpose of preventing the unfair use of
information which may have been obtained by a
beneficial owner of equity securities, director or
officer, or officer of the issuer by reason of his
relationship top the issuer, any profit realized by him
from any purchase and sale, o any sale and purchase,
of any equity security of such issuer with in any
period of less than 6 months, unless such security was
acquired in good faith in connection with a debt
previously contracted, shall inure to and be
recoverable by the issuer, irrespective of any
intention of holding the security purchased or of not
purchasing the security sold for a period exceeding 6
months. A suit to recover such profit may be
instituted before the regional trial court by the issuer,
or by the owner of any security of the issuer in the
name and I behalf of the issuer if the issuer shall fail
or refuse to bring such suit within 60 days after

COMMERCIAL LAW
CORPORATION LAWS
95

2009 BAR OPERATIONS
request or shall be brought more than 2 years after
the date such profit was realized.

MANIPULATION OF SECURITY PRICES

What are the various ways by which security prices may
be manipulated? (Sec. 24; SRC Rule 24.1(b)-1, par. 5)
- The following are some examples of the ways by
which security prices may be manipulated:
(a) Painting the tape- engaging in a series of
transactions in securities that are reported
publicly to give the impression of activity or price
movement in a security;
(b) Marking the close- buying and selling securities
at the close of the market in an effort to alter the
closing price of the security;
(c) Improper matched orders- engaging in the
transaction where both the buy and sell orders
are entered at the same time with the same price
and quantity by different but colluding parties;
(d) Hype and dump- engaging in buying activity at
increasingly higher prices and then selling
securities in the market at higher prices;
(e) Wash sales- engaging in transactions in which
there is no genuine change in actual ownership
of a security;
(f) Squeezing the float- taking advantage of a
shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
way as to create artificial prices ;
(g) Boiler room sales- the use of high-pressure sales
tactics to promote purchases and sales of
securities;
(h) Daisy chain- a series of purchases and sales of
the same at successively higher (or lower) prices,
by the same group of people with the purpose of
manipulating prices and drawing unsuspecting
investors into the market, leaving them
defrauded of their money or securities.

THE INSIDER

Prohibited acts of an insider: (Secs. 3.8 and 27)
- While to be an insider in not prohibited, it shall,
however, be unlawful for an insider to sell or buy a
security of the issuer while in possession of material
nonpublic information with respect to the issuer or the
security unless-
(a) the insider is able to prove that the information
was not gained from such relationship, or
(b) if the other party selling to or buying from the
insider (or his agent) is identified, the insider is able
to prove (i) the he disclosed the nonpublic
information to the other party, or (ii) that he had
reason to believe that the other party otherwise is
also in possession of the nonpublic information.

- The duty of the insider when trading is to disclose the
material nonpublic information to the other party.

Could an insider be liable even if he does not trade?
(Sec. 27. 3)
Yes. It shall be unlawful for any insider to
communicate material nonpublic information about the
issuer or security to any person who, by virtue of the
communication, becomes an insider as defined in Section
3.8 of the SRC, where the insider communicating the
information knows or has reason to believe that such
person will likely buy or sell a security of the issuer while
in possession of such information.

Is there a presumption of insider trading? (Sec. 27.1)
Yes. A purchase or sale of a security of the issuer
made by an insider or such insiders spouse or relatives by
affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to have
been effected while in possession of material nonpublic
information if transacted after such information came
into existence but prior to dissemination of such
information to the public and the lapse of a reasonable
time fort he market to absorb such information; provided,
however, that this presumption shall be rebutted upon a
showing by the purchaser or seller that he was no aware
of the material nonpublic information at the time of the
purchase or sale.

MATERIAL NONPUBLIC INFORMATION (Sec. 27. 2)
Material nonpublic information is information that
1. has not being generally disclosed to the public and
would likely affect the market price of the security
after being disseminated to the public and the lapse
of a reasonable time for the market to absorb the
information, or
2. would be considered by a reasonable person
important under the circumstances in determining
his course of action whether to buy, sell or hold a
security.

REGISTRATION OF MARKET PROFESSIONALS AND
ENTITIES

Who are the market professionals and entities required
to register with SEC?
(a) Brokers, dealers, salesman and associated
person (Sec. 28.1) no person shall engage in
the business of buying or selling securities in the
Philippines as a broker or dealer, or act as a
salesman, or an associated person of any broker
or dealer unless registered as such with the SEC.
(b) Exchanges (Secs. 3.7 and 33.2) the applicant
fort he registration must be organized as a stock
corporation and engaged solely in the business
of operating an exchange. No person may
beneficially own or control, directly or indirectly,
more than 5% of the voting rights of the
exchange. Industry and business group are
similarly limited to not more than 29% of the
voting rights of the exchange. Brokers shall
constitute no more than 49% of the Board of
Directors of the exchange, while the remaining
51% shall be composed of three independent

COMMERCIAL LAW
CORPORATION LAWS
96

2009 BAR OPERATIONS
directors and person who represent the interests
of issuers, investors and other market
participants who are not associated with any
broker or dealer or member of the exchange for
period of 2 years prior to his appointment.
(c) Other securities trading markets the SEC is
authorized to determine the number, size and
location of stock exchanges, other trading
markets and commodity exchanges, and other
similar organizations in the light of national or
regional requirements for such activities with the
view to promote, enhance, protect, conserve or
rationalize investment (Sec. 36.3). The Sec is
also authorized to register and license innovative
and other trading markets or exchanges covering
the issuance of innovative securities, securities of
small, medium, growth and venture enterprises,
and technology-based ventures.
(d) Self-regulatory organizations (Sec. 39) a self-
regulatory organization is any securities
exchange, clearing or depository agency or other
securities-related organization or association
which is organized and has the capacity to be
able to carry out he purposes of the SRC and to
comply with, and to enforce compliance by its
members, with the provisions of the SRC, the
rules and regulations thereunder, and the rules of
the association (Sec. 39.3[a]). Those entities
which the SEC may register as self=regulatory
organizations include associations of brokers and
dealers, transfer agents, custodians, fiscal and
paying agents, computer services, news
disseminating services, proxy solicitors,
statistical agencies, security rating agencies, and
securities information processors.
(e) Clearing agencies (Secs. 3.6 and 42)

- In Nicolas vs. CA, G.R. 122857, March 27, 1998
The Supreme Court ruled that the suit of Nicolas
must fail because the traded securities fort he account of
others without securing the necessary license therefore
from the SEC. the failure to obtain such a license is a
violation of Section 19 of the Revised Securities Act which
provides that no brokers shall sell any securities unless he
is registered with the SEC. stock market trading, a
technical and highly specialized institution in the
Philippines, must be entrusted to individuals with proven
integrity, competence and knowledge and who has due
regard fort he requirements of the law.

INDEPENDENT DIRECTOR
- An independent director is a person other than an
officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere in the exercise of independent judgment in
carrying out the responsibilities of a director (Sec.
38).
- More expansively, SRC rule 38.1 defines an
independent director as a person who, apart from his
fees and shareholdings, is independent of
management and free from any business or other
relationship which could, or could reasonably be
perceived to, materially interfere with his exercise of
independent judgment in carrying out his
responsibilities as a director in the corporation. For
example, a person may not qualify as an independent
director under SRC rule 38.1 if
(a) he is a substantial shareholder (i.e. a beneficial
owner, directly or indirectly, of more than 10%
of any class of equity security) of the
corporation or of its related companies (i.e., its
holding company, its subsidiary, or subsidiary
of its holding company) or any of its
substantial shareholders; or
(b) he is a relative (i.e., the spouse, parent, child,
brother and sister of such person, and the
spouse of such child, brother or sister) of any
director, officer or substantial shareholder of
the corporation, any of its related companies
or any of its substantial shareholders; or
(c) he has been employed in any executive
capacity by the public company, any of its
related companies or by any of its substantial
shareholders within the last 5 years; or
(d) he is retained as professional adviser by the
public company, any of its related companies
or by any of its substantial shareholders, either
personally or through his firm.

Who are required to have independent directors? (Sec.
38)
Apart from exchange, any corporation with a
class of equity securities listed for trading in an exchange,
or with assets in excess of P50 million and having 200 or
more holders, at least 200 of which are holding at least
100 shares of a class of its equity securities or which has
sold a class of equity securities to the public pursuant to
an effective registration statement in compliance with
Section 12 of the SRC, shall have at least 2 independent
directors or such independent directors shall constitute at
least 20% of the members of such board, whichever is the
lesser.

PROHIBITED TRANSACTIONS OF BROKERS AND
DEALERS (Sec. 30.1)
- No broker or dealer shall deal in or otherwise buy or
sell, for its own account or for the account of
customers, securities listed on an exchange issued by
any corporation where any stockholder, director,
associated person or salesman, or authorized clerk of
said broker or dealer and all the relatives of the
foregoing within the fourth civil degree of
consanguinity or affinity, is at the time holding office
in said issuer corporation as a director, president, vice
president, manager, treasurer, comptroller, secretary
or any office of trust and responsibility, or is
controlling person oft eh issuer.

SUITABILITY RULE (SRC Rule 30.2-4)
- The suitability rule states that, in recommending to a
customer the purchase, sale or exchange of any
security, a broker, dealer or an associated person or
salesman of a broker or dealer shall have reasonable

COMMERCIAL LAW
CORPORATION LAWS
97

2009 BAR OPERATIONS
grounds for believing that the recommendation is
suitable for such customer upon the basis of the facts
disclosed by such customer as to his security holdings
and as to his financial situation and needs.

SUSPENSION OF TRADINGS
Can the SEC suspend trading in a security or all trading
on any securities exchange? (Sec. 36.1)
Yes. The SEC is authorize, if in its opinion such
action is necessary or appropriate for the protection of
investors and the public interest so requires, summarily to
suspend trading in any listed security on any exchange or
other trading market for a period not exceeding 30 days
or, with the approval of the President of the Philippines,
summarily to suspend all trading on any securities
exchange or other trading market for a period of more
than 30 but not exceeding 90 days; provided, however,
that the SEC, promptly following the issuance of the
order of suspension, shall notify the affected issuer of the
reasons for such suspension and provides such issuer with
an opportunity for hearing to determine whether the
suspension should be lifted.

MARGIN TRADING (Secs. 48, et seq.)
Margin trading refers to the purchase of
securities by an investor using the credit of the broker to
pay for part of the said securities. It is regulated for the
purpose of the excessive use of credit or carrying of
securities. The margin is the amount of money or
securities that an investor must deposit with a broker to
secure a loan with from the broker. When a broker makes
a demand on the investor to deposit money or securities
with a broker when the purchase is made or when the
investors equity in a margin account declines below a
minimum standard set by the exchange or broker, the
broker is said to have made a margin call.

VIOLATONS OF THE SRC, PENALTIES AND
SANCTIONS
What administrative sanctions may the SEC impose?
(Sec. 4)
If there is violation of the SRC, the SCR rules or
the orders of the SEC, the SEC shall, in its discretion and
after due notice and hearing, impose any or all the
following sanctions as may be appropriate in light of the
facts and circumstances:
(a) suspension, or revocation of any registration for
the offering of securities;
(b) a fine of no less than P10,000 nor more than
P1,000,000 plus not more than P2,000
for each day of continuing violation;
(c) in the case of violations of Sections 19.2(the
making of untrue statement, etc. in connection
with a tender offer), 20 (proxy solicitations), 24
(manipulation of security prices, etc.), 26
(fraudulent transactions) and 27 (insider trading),
disqualification from being an officer, member of
the board of directors, or person performing
similar functions, of an issuer required to file
reports under Section 17 of the SRC or any other
act, rule or regulation administered by the SEC;
(d) in the case of f\violation of Section 34 (re
segregation and limitation of functions of
members, brokers, dealers), a fine of no more
than 3 times the profit gained or loss avoided as
a result of the purchase, sale or communication
proscribed by such section; and
(e) other penalties within the power of the SEC to
impose.

SETTLEMENT OFFER (Sec. 55)
A settlement offer is a written proposal made to
the SEC by a party being investigated or charged, during
an investigation or proceeding under the SRC, in order
that such investigation or proceeding against the said
party could be terminated or dismissed. Upon receipt of
such offer of settlement, the SEC may consider the offer
based on timing, the nature of the investigation or
proceeding, and the public interest. The SEC may only
agree to settlement offer based on its findings that such
settlement is in the public interest. Any agreement to
settle shall have no legal effect until publicly disclosed.
Such decision may be made with out a determination of
guilt on the part of the person making the offer.

FALSE REGISTRATION STATEMENT
Who may sue on account of a false registration
statement? (Sec. 56.1)
Any person (i) acquiring a security, the
registration statement of which or any part thereof
contains on its effectivity an untrue statement of a
material fact or omits to state a material fact required to
be stated therein or necessary to make such statement
not misleading, (ii) who suffers damage, and (iii) who did
not know of such untrue statement or omission at the
time of such acquisition, may sue and recover damages.

Who may be sued on account of a false registration
statement? ( Sec. 56.1)
(a) the issuer and every person who signed the
registration statement;
(b) every person who was a director of, or any other
person performing similar functions, or a partner
in, the issuer at the time of the filing of the
registration statement or any part, supplement
or amendment thereof with respect to which his
liability is asserted;
(c) every person who is named in the registration
statement as being or about to become a
director of, or person performing similar
functions, or a partner in, the issuer and whose
written consent thereto is filed with the
registration statement.
(d) Every auditor or auditing firm named as having
certified any financial statements used in
connection with the registration statement or
prospectus;
(e) Every person who, with his written consent,
which shall be filed with the registration
statement, or as having prepared or certified any
report or valuation which is used in connection
with the registration statement, with respect to
the statement, report or evaluation, which

COMMERCIAL LAW
CORPORATION LAWS
98

2009 BAR OPERATIONS
purports to have been prepared or certified, by
him;
(f) Every selling shareholder who contributed to and
certified as to the accuracy of the portion of the
registration statement, with respect to that
portion of the registration statement which
purports to have been contributed by him; and
(g) Every underwriter with respect to such security.

What is the prescriptive period for the enforcement of
actions under Sections 56 (re civil liabilities on account
of false registration statement) and 57 (Re civil
liabilities arising in connection with prospectus,
communications and reports)? Sec. 62)
No action shall be maintained to enforce any
liability created under Sections 56 or 57 of the SRC unless
brought within 2 years after the discovery of the untrue
statement or the omission, or, if the action is to enforce a
liability created under Section 57.1(a) (re offering to sell or
selling an unregistered security), unless brought within 2
years after the violation upon which it is based. In no
event shall any such action be brought to enforce liability
crated under Section 56 or 57.1(a) more than 5 years after
the security was bona fide offered to the public, or under
Section 57.1 (b) ( re offering to sell or selling a security by
means of a prospectus, etc. containing an untrue
statement, etc.) more than 5 years after the sale.

What are the damages that may be awarded in suits to
recover damages under Sections 56-60? (Sec. 63)
(a) actual damages;
(b) treble damages, i.e., damages in an amount not
exceeding triple the amount of the transaction;
(c) exemplary damages in cases of bad faith, fraud,
malevolence or wantonness in the violation of
the SRC or the SRC rules;
(d) Attorneys fees not exceeding 30% of the award.

May compliance with any provision of the SRC be
waived and would such waiver be valid? (Sec. 71.1)
Any condition, stipulation, or provision binding
any person to waive compliance with any provision of the
SRC or of any rule or regulation thereunder, or of any rule
of an Exchange required thereby, as well as the waiver
itself, shall be void.

COMMERCIAL LAW
CORPORATION LAWS
99

2009 BAR OPERATIONS

A.M. No. 00-8-10-SC

R E S O L U T I O N

Acting on the recommendation of the Subcommittee on
Special Rules for Special Commercial Courts, submitting
for the consideration and approval of the Court the
Resolved to APPROVED the same.

The Rule shall take effect on January 16, 2009 following
its publication in two (2) newspapers of general
circulation.

December 2, 2008

RULES OF PROCEDURE ON CORPORATE
REHABILITATION (2008)

RULE 1
COVERAGE

Section 1. Scope - These Rules shall apply to petitions for
rehabilitation of corporations, partnerships and
associations pursuant to Presidential Decree No. 902-A,
as amended.

Section 2. Applicability to Rehabilitation Cases Transferred
from the Securities and Exchange Commission. - Cases for
rehabilitation transferred from Securities Exchange
Commission to the Regional Trial Court pursuant to
Republic Act No. 8799, otherwise known as The Securities
Regulation Code, shall likewise be governed by these
Rules.

RULE 2
DEFINITION OF TERMS AND CONSTRUCTION

Section 1. Definition of Terms. - For purpose of these
Rules:

"Administrative Expenses" shall refer to (a) reasonable and
necessary expenses that are incurred in connection with
the filing of the petition; (b) expenses incurred in the
ordinary course of business after the issuance of the stay
order, excluding interest payable to the creditors for loans
and credit accommodations existing at the time of the
issuance of the stay order, and (c) other expenses that are
authorized under this Rules.

"Affidavit of General Financial Condition" shall refer to a
verified statement on the general financial condition of
the debtor requiredin Section 2, Rule 4 of these Rules.

"Affiliate" is a corporation that directly or indirectly,
through one or more intermediaries, is controlled by, or is
under the common control of another corporation, which
thereby becomes its parent corporation.
"Asset" is anything of value that can be in the form of
money, such as cash at the bank or amounts owed; fixed
assets such as property or equipment; or intangibles
including intellectual property, the book value of which is
shown in the last three audited financial statement
immediately preceding the filing of the petition, In case
the debtor is less than three years in operation, it is
sufficient that the book value is based on the audited
financial statement\s for the years or year immediately
preceding the filing of petition, as the case may be.

"Board of Directors" shall include the executive committee
or the management of partnership or association

"Claim" shall include all claims or demands of whatever
nature or charter against a debtor or its property, whether
for money or otherwise

"Control" is the power of a parent corporation to direct or
govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.
Control is presumed to exit when the parent owns,
directly or indirectly though subsidiaries, more than one -
half (?) of the voting power of the voting power of an
enterprise unless, unless, in exception circumstances, it
can clearly be demonstrated that such own ship does not
constitute control. Control also exits even when the
parent own one-half (1/2) or less of the voting power of an
enterprise when there is power:

(A) Over more than one-half (?) of agreement with
investors;
(B) To direct or govern the financial and operating policies
of the enterprise under a statute or agreement;
(C) To appoint or remove the majority of the member of
the board of directors or equivalent governing body;
or
(D) To cast the majority votes at meeting of the board of
directors or equivalent governing body.

"Creditor" shall mean any holder of a claim

"Court" shall refer to the proper Regional Trial Court
designated to hear and decide the cases contemplated
contemplated under these Rules.

"Days" shall refer to calendar days unless otherwise
provided in these Rules.

"Debtor" shall mean any corporation, partnership or
association or a group of companies, whether supervised
or regulated by the Securities and Exchange Commission
or other government agencies, on whose behalf a petition
for rehabilitation has been filed under these rules.

"Foreign court" means a judicial or other authority
competent to control or supervise a foreign proceeding.

"Foreign proceeding" means a collective judicial or
administrative proceeding in a foreign State, interim
proceeding, pursuant to a law re solvency in which
proceeding the assets and affairs of the debtor are subject

RULES OF PROCEDURE ON CORPORATE
REHABILITATION

COMMERCIAL LAW
CORPORATION LAWS
100

2009 BAR OPERATIONS
to control or supervision by a foreign count, for the
purpose of rehabilitation or re-organization

"Foreign Representative" means person or entity, including
one appointed on an interim basis, authorized in a foreign
proceeding to administer the reorganization or
rehabilitation of the debtor or act as a representative of
the foreign proceeding.
"Group of companies" refers to, and can cover only,
corporation that are financially refers to, and can cover
only, corporations that are financially rated to one
another as parent corporation, subsidiaries and affiliates.
When the petition covers a group of companies,
all reference under these Rules to "debtor" shall include
and apply include and apply to the group of companies.

"Liabilities" shall refer to monetary claims against the
debtor, including stockholders advances that have been
recoded in the debtor's audited financial statements as
advances for subscription.

"Parent" is a corporation directly or indirectly though one
or more intermediaries.

"Rehabilitation" shall mean the restoration of the debtor
to a position of successful operation and solvency, if it is
shown that its continuance of operation is economically
feasible and its creditors can recover by way of the
present value of payments projected in the plan more if
the corporation continues as a going concern than if it
immediately liquidated.

"Secured claim" shall refer to any claim whose payment or
fulfillment is secured by contract or by law, including any
claim or credit enumerated under Articles 2241 and 2242
of the civil Code and Article 110, as amended, of the Labor
code of the Philippines.

"Subsidiary" means a corporation more than fifty percent
(50%) of the voting stock of which is owned or controlled
directly or indirectly though one or more intermediaries
by another corporation

"Unsecured claim" shall mean any claim other than a
secured claim.

Section 2. Construction - These Rules shall be liberally
construed to carry out the objectives of Section 5(d), 6(d)
and 6(d) of Presidential Decree No. 902-A, as amended,
and to assist the parties in obtaining a jut, expeditious and
inexpensive determination of case. Where applicable, the
Rules of Court shall apply supplementary to proceedings
under these Rules.

RULES 3
GENERAL PROVISONS

Section 1. Nature of Proceeding - Any proceeding initiated
under these Rules shall be considered in rem. Jurisdiction
over all persons affected by the proceeding shall be
considered as acquired upon publication of the notice of
the commencement of the proceedings in any newspaper
or general circulation in the Philippines in the manner
prescribed by these rules.

The proceedings shall also be summary and non-
adversarial in nature. The following pleading are
prohibited:
(a) Motion to dismiss;
(b) Motion for a bill of particulars:
(c) Petition for relief;
(d) Motion for extension;
(e) Motion for postponement
(f) Third-party complaint;
(g) Intervention;
(h) Motion to hear affirmative defenses; and
(I) Any pleading or motion which is similar to or
of like effect as any of the foregoing.

Any pleading, motion, opposition, defense or claim filed
by any interested party shall be supported by verified
statements that the affiant has read same and that the
factual allegations therein are true and correct of his
personal knowledge or based on authentic records, and
correct of his personal knowledge or based on authentic
records, and shall contain as annexes such documents as
may be deemed by the party court may be decide matters
on the basis of affidavits and other documentary
evidence. Where necessary, the court shall conduct
clarificatory hearings before resolving any matter
submitted to it for resolution.

Section 2. Venue. - Petitions for rehabilitation pursuant to
these Rules shall be filed in the regional trial court which
has jurisdiction over the principal office of the debtor as
specified in its articles of incorporation or partnership.
Where the principal office of the corporation, partnership
or association is registered in the Securities and Exchange
Commission as Metro Manila, the action must be filed in
the regional trial court of the city or municipality where
the head office is located.

A joint petition by a group of companies shall be filed in
the Regional Trial Court which has jurisdiction over the
principal office of the parent company, as specified in its

Section 3. Service of Pleadings and Documents. - When so
authorized by the court, any pleading and/or document
required by these Rules may be filed with the court and/or
served upon the other parties by facsimile transmission
(fax) or electronic mail (e-mail). In such cases, the date of
transmission shall be deemed to be the dtae of service.
Where the pleading or document is voluminous, the court
may, upon motion, waive the requirement of service;
provided that a copy thereof together with all its
attachments is duly filed with the court and is made
available for examination and reproduction by any party,
and provided, further, that a notice of such filing and
availability is duly served on the parties.

Section 4. Trade Secrets and Other Confidential
Information. - Upon motion, the court may issue an order
to protect trade secrets or other confidential research,

COMMERCIAL LAW
CORPORATION LAWS
101

2009 BAR OPERATIONS
development or commercial information belonging to the
debtor.

Section 5. Executory Nature of Orders. - Any order issued
by the court under these Rules is immediately executory.
A petition to review the order shall not stay the execution
of the order unless restrained or enjoined by the appellate
court. Unless otherwise provided in these Rules, the
review of any order or decision of the court or an appeal
therefrom shall be in accordance with the Rules of Court;
provided, however, that the reliefs ordered by the trial or
appellate courts shall take into account the need for
resolution of proceedings in a just, equitable and speedy
manner.

Section 6. Nullification of Illegal Transfers and
Preferences. - Upon motion the court may nullify any
transfer of property or any other conveyance, sale,
payment or agreement made in violation of its stay order
or in violation of these Rules.

Section 7. Stay Order. - If the court finds the petition to
be sufficient in form and substance, it shall; not later than
five (5) working days from the filing of the petition, issue
an order:

(a) appointing a rehabilitation receiver and fixing his
bond;
(b) staying enforcement of all claims, whether for money
or otherwise and whether such enforcement is by
court action or otherwise, against the debtor, its
guarantors and persons not solidarily liable with the
debtor; provided, that the stay order shall not cover
claims against letters of credit and similar security
arrangements issued by a third party to secure the
payment of the debtor's obligations; provided,
further, that the stay order shall not cover foreclosure
by a creditor of property not belonging to a debtor
under corporate rehabilitation; provided, however,
that where the owner of such property sought to be
foreclosed is also a guarantor or one who is not
solidarily liable, said owner shall be entitled to the
benefit of excussion as such guarantor;
(c) prohibiting the debtor from selling, encumbering,
transferring, or disposing in any manner any of its
properties except in the ordinary course of business;
(d) prohibiting the debtor from making any payment of its
liabilities except as provided in items (e), (f) and (g) of
this Section or when ordered by the court pursuant to
Section 10 of Rule 3;
(e) prohibiting the debtor's suppliers of goods or services
from withholding supply of goods and services in the
ordinary course of business for as long as the debtor
makes payments for the services and goods supplied
after the issuance of the stay order;
(f) directing the payment in full of all administrative
expenses incurred after the issuance of the stay
order; (g) directing the payment of new loans or
other forms of credit accommodations obtained for
the rehabilitation of the debtor with prior court
approval;
(h) fixing the dates of the initial hearing on the petition
not earlier than forty-five (45) days but not later than
sixty (60) days from the filing thereof;
(i) directing the petitioner to publish the Order in a
newspaper of general circulation in the Philippines
once a week for two (2) consecutive weeks;
(j) directing the petitioner to furnish a copy of the petition
and its annexes, as well as the stay order, to the
creditors named in the petition and the appropriate
regulatory agencies such as, but not limited to, the
Securities and Exchange Commission, the Bangko
Sentral ng Pilipinas, the Insurance Commission, the
National Telecommunications Commission, the
Housing and Land Use Regulatory Board and the
Energy Regulatory Commission;
(k) directing the petitioner that foreign creditors with no
known addresses in the Philippines be individually
given a copy of the stay order at their foreign
addresses;
(l) directing all creditors and all interested parties
(including the regulatory agencies concerned) to file
and serve on the debtor a verified comment on or
opposition to the petition, with supporting affidavits
and documents, not later than fifteen (15) days
before the date of the first initial hearing and putting
them on notice that their failure to do so will bar
them from participating in the proceedings; and,
(m) directing the creditors and interested parties to
secure from the court copies of the petition and its
annexes within such time as to enable themselves to
file their comment on or opposition to the petition
and to prepare for the initial hearing of the petition.

The issuance of a stay order does not affect the right to
commence actions or proceedings insofar as it is
necessary to preserve a claim against the debtor.

Section 8. Service of Stay Order on Rehabilitation Receiver.
- The petitioner shall immediately serve a copy of the stay
order on the rehabilitation receiver appointed by the
court, who shall manifest his acceptance or non-
acceptance of his appointment not later than ten (10)
days from receipt of the order.

Section 9. Period of Stay Order. - The stay order shall be
effective from the date of its issuance until the approval
of the rehabilitation plan or the dismissal of the petition.

Section 10. Relief from, Modification, or Termination of
Stay Order. -
(a) The court may, upon motion, terminate, modify, or set
conditions for the continuance of the stay order, or relieve
a claim from the coverage thereof upon showing that (1)
any of the allegations in the petition, or any of the
contents of any attachment, or the verification thereof
has ceased to be true; (2) a creditor does not have
adequate protection over property securing its claims; (3)
the debtor's secured obligation is more than the fair
market value of the property subject of the stay and such
property is not necessary for the rehabilitation of the
debtor; or (4) the property covered by the stay order is
not essential or necessary to the rehabilitation and the

COMMERCIAL LAW
CORPORATION LAWS
102

2009 BAR OPERATIONS
creditor's failure to enforce its claim will cause more
damage to the creditor than to the debtor.

(b) For purposes of this Section, the creditor lacks
adequate protection if it can be shown that:
(1) The debtor fails or refuses to honor a pre-existing
agreement with the to keep the property insured;
(2) The debtor fails or refuses to take commercially
reasonable steps to maintain the property; or
(3) The property has depreciated to an extent that the
creditor is undersecured

(c) Upon showing the creditor's lack of adequate
protection, the court shall order the rehabilitation
receiver to (1) make arrangements to provide for the
insurance or maintenance of the property, or (2) to make
payments or otherwise provide additional or replacement
security such as that the obligation is fully secured. If such
arrangements are not feasible, the court shall modify the
stay order to allow the secured creditor lacking adequate
protection to enforce its claim against the debtor;
provided, however, that the court may deny the creditor
the remedies in this paragraph if such remedies would
prevent the continuation of the debtor as a going concern
or otherwise prevent the approval and implementation of
a rehabilitation plan.

Section 11. Qualifications of Rehabilitation Receiver. -

(a) In the appointment of the rehabilitation receiver, the
following qualifications shall be taken into consideration
by the court:
(1) Expertise and acumen to manage and operate a
business similar in size and complexity to that of the
debtor;
(2) Knowledge in management, finance and rehabilitation
of distressed companies;
(3) General familiarity with the rights of creditors in
suspension of payments or rehabilitation and general
understanding of the duties and obligations of a
rehabilitation receiver;
(4) Good moral character, independence and integrity;
(5) Lack of conflict of interest as defined in this Section;
and
(6) Willingness and ability to file a bond in such amount as
may be determined by the court.

(b) Without limiting the generality of the following, a
rehabilitation receiver may be deemed to have a conflict
of interest if:
(1) He is creditor or stockholder of the debtor;
(2) He is engaged in a line of business which competes
with the debtor;
(3) He is, or was within two (2) years from the filing of the
petition, a director, officer, or employee or the auditor or
accountant of the debtor;
(4) He is or was within two (2) years from the filing of the
petition, an underwriter of the outstanding securities of
the debtor;
(5) He is related by consanguinity or affinity within the
fourth civil degree to any creditor, stockholder, director,
officer, employee, or underwriter of the debtor; or
(6) He has any other direct or indirect material interest in
the debtor or any creditor.

Section 12. Powers and Functions of Rehabilitation
Receiver. - The rehabilitation receiver shall not take over
the management and control of the debtor but shall
closely oversee and monitor the operations of the debtor
during the pendency of the proceedings. For this purpose,
the rehabilitation receiver shall have the powers, duties
and functions of a receiver under Presidential Decree No.
902-A, as amended, and the Rules of Court.

The rehabilitation receiver shall be considered as an
officer of the court. He shall be primarily tasked to study
the best way to rehabilitate the debtor and to ensure that
the value of the debtor's property is reasonably
maintained pending the determination of whether or not
the debtor should be rehabilitated, as well as implement
the rehabilitation plan after its approval. Accordingly, he
shall have the following powers and functions:

(a) To verify the accuracy of the petition, including its
annexes such as the Schedule of Debts and Liabilities
and the Inventory of Assets submitted in support to
the petition;
(b) To accept and incorporate, when justified,
amendments to the Schedule of Debts and Liabilities;
(c) To recommend to the court the disallowance of claims
and rejection of amendments t the Schedule of Debts
and Liabilities that lack sufficient proof and
justification;
(d) To submit to the court and make available for review
by the creditors, a revised Schedule of Debts and
Liabilities;
(e) To investigate the acts, conduct, properties, liabilities
and financial condition of the debtor, the operation
of its business and the desirability of the continuance
thereof; and, any other matter relevant to the
proceeding or to the formulation of a rehabilitation
plan;
(f) To examine under oath the directors and officers of the
debtor and any other witnesses that he may deem
appropriate;
(g) To make available to the creditors documents and
notices necessary for them to follow and participate
in the proceedings;
(h) To report to the court any fact ascertained by him
pertaining to the causes of the debtor's problems,
fraud, preferences, dispositions, encumbrances,
misconduct, mismanagement and irregularities
committed by the stockholders, directors,
management,, or any other person against the
debtor;
(i) To employ such person or persons such as lawyers,
accountants, appraisers and staff are necessary in
performing his functions and duties as rehabilitation
receiver;
(j) To monitor the operations of the debtor and to
immediately report to the court any material adverse
change in the debtor's business;
(k) To evaluate the existing assets and liabilities, earnings
and operations of the debtor;

COMMERCIAL LAW
CORPORATION LAWS
103

2009 BAR OPERATIONS
(l) To determine and recommend to the court the best
way to salvage and protect the interests of the
creditors, stockholders and the general public;
(m) To study the rehabilitation plan proposed by the
debtor or any rehabilitation plan submitted during
the proceedings, together with any comments made
thereon;
(n) To prohibit and report to the court any encumbrance,
transfer or disposition of the debtor's property
outside of the ordinary course of business or what is
allowed by the court;
(o) To prohibit and report to the court any payments
outside of the ordinary course of business;
(p) To have unlimited access to the debtor's employees,
premises, books, records and financial documents
during business hours;
(q) To inspect, copy, photocopy or photograph any
document, paper, book, account or letter, whether in
the possession of the debtor or other persons;
(r) To gain entry into any property for the purpose of
inspecting, measuring, surveying or photographing it
or any designated relevant object or operation
thereon;
(s) To take possession, control and custody of the debtor's
assets;
(t) To notify counterparties and the court as to contracts
that the debtor has decided to continue to perform
the breach;
(u) To be notified of and to attend all meetings of the
board of directors and stockholder of the debtor;
(v) To recommend any modification of an approved
rehabilitation plan as he may deem appropriate;
(w) To bring to the attention of the court any material
change affecting the debtor's ability to meet the
obligations under the rehabilitation plan;
(x) To recommend the appointment of a management
committee in the cases provided for under
Presidential Decree No. 902-A, as amended;
(y) To recommend the termination of the proceedings
and the dissolution of the debtor if he determines
that the continuance in business of such entity is no
longer feasible or profitable or no longer works to the
best interest of the stockholders, parties-litigants,
creditors or the general public;
(z) To apply to the court for any order or directive that he
may deem necessary or desirable to aid him in the
exercise of his powers and performance of his duties
and functions; and
(aa) To exercise such other powers as may from time to
time be conferred upon him by the court.

Section 13. Oath and Bond. - Before entering upon his
powers, duties and functions, the rehabilitation receiver
must be sworn in to perform them faithfully, and must
post a bond executed in favor of the debtor in such sum as
the court may direct, to guarantee that he will faithfully
discharge his duties and obey the orders of the court. If
necessary, he shall also declare under oath that he will
perform the duties of a trustee of the assets of the debtor,
will act honestly and in good faith, and deal with the
assets of the debtor on a commercially reasonable
manner.

Section 14. Fees and Expenses. - The rehabilitation
receiver and the persons hired by him shall be entitled to
reasonable professional fees and reimbursement of
expenses which shall be considered as administrative
expenses.

Section 15. Immunity from Suit. - The rehabilitation
receiver shall not be subject to any action, claim or
demand in connection with any act done or omitted by
him in good faith in the exercise of his functions and
powers herein conferred.

Section 16. Reports. - The rehabilitation receiver shall file
a written report every three (3) months to the court or as
often as the court may require on the general condition of
the debtor. The report shall include, at the minimum,
interim financial statements of the debtor.

Section 17. Dismissal of Rehabilitation Receiver. - A
rehabilitation receiver may, upon motion, be dismissed by
the court on the following grounds: (a) if he fails, without
just cause, to perform any of his powers and functions
under these Rules; or (b) on any of the grounds for
removing a trustee under the general principles of trusts.

Section 18. Rehabilitation Plan. - The rehabilitation plan
shall include:
(a) the desired business targets or goals and the duration
and coverage of the rehabilitation;
(b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation,
giving due regard to the interests of secured creditors
such as, but not limited, to the non-impairment of
their security liens or interests;
(c) the material financial commitments to support the
rehabilitation plan;
(d) the means for the execution of the rehabilitation plan,
which may include debt to equity conversion,
restructuring of the debts, dacion en pago or sale
exchange or any disposition of assets or of the
interest of shareholders, partners or members;
(e) a liquidation analysis setting out for each creditor that
the present value of payments it would receive under
the plan is more than that which it would receive if
the assets of the debtor were sold by a liquidator
within a six-month period from the estimated date of
filing of the petition; and,
(f) such other relevant information to enable a reasonable
investor to make an informed decision on the
feasibility of the rehabilitation plan.

Section 19. Repayment Period. - If the rehabilitation plan
extends the period for the debtor to pay its contractual
obligations, the new period should not extend beyond
fifteen (15) years from the expiration of the stipulated
term existing at the time of filing of the petition.

Section 20. Effects of Rehabilitation Plan. - The approval
of the rehabilitation plan by the court shall result in the
following:

COMMERCIAL LAW
CORPORATION LAWS
104

2009 BAR OPERATIONS
(a) The plan and its provisions shall be binding upon the
debtor and all persons who may be affected thereby,
including the creditors, whether or not such persons
have participated in the proceedings or opposed the
plan or whether or not their claims have been
scheduled;
(b) The debtor shall comply with the provisions of the plan
and shall take all actions necessary to carry out the
plan;
(c) Payments shall be made to the creditors in accordance
with the provisions of the plan;
(d) Contracts and other arrangements between the
debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do not
conflict with the provisions of the plan; and
(e) Any compromises on amounts or rescheduling of
timing of payments by the debtor shall be binding on
creditors regardless of whether or not the plan is
successfully implemented.

Section 21. Revocation of Rehabilitation Plan on Grounds
of Fraud. - Upon motion, within ninety (90) days from the
approval of the rehabilitation plan, and after notice and
hearing, the court may revoke the approval thereof on the
ground that the same was secured through fraud.

Section 22. Alteration or Modification of Rehabilitation
Plan. - An approved rehabilitation plan may, upon
motion, be altered or modified if, in the judgement of the
court, such alteration or modification is necessary to
achieve the desired targets or goals set forth therein.

Section 23. Termination of Proceedings. - The court shall,
upon motion or upon recommendation of the
rehabilitation receiver, terminate the proceeding in any of
the following cases:
(a) Dismissal of the petition;
(b) Failure of the debtor to submit the rehabilitation plan;
(c) Disapproval of the rehabilitation plan by the court;
(d) Failure to achieve the desired targets or goals as set
forth in the rehabilitation plan;
(e) Failure of the debtor to perform its obligations under
the plan;
(f) Determination that the rehabilitation plan may no
longer be implemented in accordance with its terms,
conditions, restrictions or assumptions; or
(g) Successful implementation of the rehabilitation plan.

Section 24. Discharge of Rehabilitation Receiver. - Upon
termination of the rehabilitation proceedings, the
rehabilitation receiver shall submit his final report and
accounting with such period of time as the court will allow
him. Upon approval of his report and accounting, the
court shall order his discharge.

RULE 4
DEBTOR-INITIATED REHABILITATION

Section 1. Who May Petition. - Any debtor who foresees
the impossibility of meeting its debts when they
respectively fall due, may petition the proper regional trial
court for rehabilitation.

A group of companies may jointly file a petition for
rehabilitation under these Rules when one or more of its
constituent corporations foresee the impossibility of
meeting debts when they respectively fall due, and the
financial distress would likely adversely affect the
financial condition and/or operations of the other
member companies of the group is essential under the
terms and conditions of the proposed rehabilitation plan.

Section 2. Contents of Petition. -
(a) The petition filed by the debtor must be verified and
must set forth with sufficient particularity all the
following material facts: (1) the name and business of
the debtor; (2) the nature of the business of the
debtor; (3) the history of the debtor; (4) the cause of
its inability to pay its debts; (5) all the pending actions
or proceedings known to the debtor and the courts or
tribunals where they are pending; (6) threats or
demands to enforce claims or liens against the
debtor; and (7) the manner by which the debtor may
be rehabilitated and how such rehabilitation may
benefit the general body of creditors, employees and
stockholders.

(b) The petition shall be accompanied by the following
documents:
(1) An audited financial statement of the debtor at the
end of its last fiscal year;
(2) Interim financial statements as of the end of the
month prior to the filing of the petition;
(3) A Schedule of Debts and Liabilities which lists all the
creditors of the debtor, indicating the name and last
address of record of each creditor; the amount of
each claim as to principal, interest, or penalties due
as of the date of filing; the nature of the claim; and
any pledge, lien, mortgage judgement or other
security given for the payment thereof;
(4) An Inventory of Assets which must list with reasonable
specificity all the assets of the debtor, stating the
nature of each asset, the location and condition
thereof, the book value or market value of the asset,
and attaching the corresponding certificate of title
thereof in case of real property, or the evidence of
title or ownership in case of movable property, the
encumbrances, liens or claims thereon, if any, and
the identities and addresses of the lienholders and
claimants. The Inventory shall include a Schedule of
Accounts Receivable which must indicate the amount
of each, the persons from who due, the date of
maturity and the degree of collectibility categorizing
them as highly collectible to remotely collectible;
(5) A rehabilitation plan which conforms with the minimal
requirements set out in Section 18 of Rule 3;
(6) A Schedule of Payments and Disposition of Assets
which the debtor may have effected within three (3)
months immediately preceding the filing of the
petition;
(7) A Schedule of Cash Flow of the debtor for three (3)
months immediately preceding the filing of the
petition, and a detailed schedule of the projected
cash flow for the succeeding three (3) months;

COMMERCIAL LAW
CORPORATION LAWS
105

2009 BAR OPERATIONS
(8) A Statement of Possible Claims by or against the
debtor which must contain a brief statement of the
facts which might give rise to the claim and an
estimate of the probable amount thereof;
(9) An Affidavit of General Financial Condition which shall
contain answers to the questions or matters
prescribed in Annex "A" hereof;
(10) At least three (3) nominees for the position of
rehabilitation receiver as well as their qualifications
and addresses, including but not limited to their
telephone numbers, fax numbers and e-mail address;
and
(11) A certificate attesting under oath that (i) the filing of
the petition has been duly authorized; and (ii) the
directors and stockholders of the debtor have
irrevocably approved and/or consented to, in
accordance with existing laws, all actions or matters
necessary and desirable to rehabilitate the debtor
including, but not limited to, amendments to the
articles of incorporation and by-laws or articles of
partnership; increase or decrease in the authorized
capital stock; issuance of bonded indebtedness;
alienation, transfer, or encumbrance of assets of the
debtor; and modification of shareholders' rights.

(c) Five (5) copies of the petition shall be filed with the
court.

Section 3. Verification by Debtor. - The petition filed by
the debtor must be verified by an affidavit of a
responsible officer of the debtor and shall be in a form
substantially as follows:

"I, ___________________, (position) of (name of
petitioner), do solemnly swear that the petitioner has
been duly authorized to file the petition and that the
stockholders and board of directors (or governing body)
have approved and/or consented to, accordance with law,
all actions or matters necessary or desirable to
rehabilitate the debtor. The petition is being filed to
protect the interests of the debtor, the stockholders, the
inventors and the creditors of the debtor, which warrant
the appointment of a rehabilitation receiver. There is no
petition for insolvency filed with any other body, court of
tribunal affecting the petitioner. The Inventory of Assets
and the Schedule of Debts and Liabilities contains a full,
correct and true description of all debts and liabilities and
of all goods, effects, estate and property of whatever kind
of class belonging to petitioner. The Inventory also
contains a full, correct and true statement of all debts
owing or due to petitioner, or to any person or persons in
trust for petitioner and of all securities and contracts
whereby any money may hereafter become due or
payable to petitioner or by or through which any benefit
or advantage may accrue to petitioner. The petition
contains a concise statement of the facts giving rise, or
which might give rise, to any cause of action in favor of
petitioner. Petitioner has no land, money, stock,
expectancy, or property of any kind, except those set
forth in the Inventory of Assets. Petitioner has, in no
instance, created or acknowledged a debt for a greater
sum than the true and correct amount. Petitioner, its
officers, directors and stockholders have not, directly or
indirectly, concealed, fraudulently sold or otherwise
fraudulently disposed of, any part of petitioner's real or
personal property, estate, effects or rights of action, and
petitioner, its officers, directors and stockholders have
not in any way compounded with any of its creditors in
order to give preference to such creditors, or to receive or
to accept any profit or advantage therefrom, or to
defraud or deceive in any manner any creditor to whom
petitioner is indebted. Petitioner, its officers, directors,
and stockholders have been acting in good faith and with
due diligence.
Section 4. Opposition to or Comment on Petition. - Every
creditor of the debtor or any interested party shall file his
verified opposition to or comment on the petition not
later than fifteen (15) days before the date of the initial
hearing fixed in the stay order. After such time, no
creditor or interested party shall be allowed to file any
comment thereon or opposition thereto without leave of
court.
If the Schedule of Debts and Liabilities omits a claim or
liability, the creditor concerned shall attach to its
comment or opposition a verified statement of the
obligations allegedly due it.

Section 5. Initial Hearing. -
(a) On or before the initial hearing set in the order
mentioned in Section 7 of Rule 3, the petitioner shall
file a publisher's affidavit showing that the
publication requirements and a petitioner's affidavit
showing that the notification requirement for foreign
creditors had been complied with, as required in the
stay order.

(b) Before proceeding with the initial hearing, the court
shall determine whether the jurisdictional
requirements set forth above had been complied
with. After finding that such requirements are met,
the court shall ensure that the parties consider in
detail all of the following:
(1) Amendments to the rehabilitation plan proposed by
the debtor;
(2) Simplification of the issues;
(3) The possibility of obtaining stipulations and admission
of facts and documents, including resort to request
for admission under Rule 26 of the Rule of Court;
(4) The possibility of amicably agreeing on any issue
brought up in the comments on, or opposition to, the
petition;
(5) Referral of any accounting, financial and other
technical issues to an expert;
(6) The possibility of submitting the petition for decision
on the basis of the comments, opposition, affidavit
and other documents on record;
(7) The possibility of a new rehabilitation plan voluntarily
agreed upon by the debtor and its creditors; and
(8) Such other matters as may aid in the speedy and
summary disposition of the case.

Section 6. Additional Hearings. - The court may hold
additional hearings as part of the initial hearing
contemplated in these Rules but the initial hearing must

COMMERCIAL LAW
CORPORATION LAWS
106

2009 BAR OPERATIONS
be concluded not later than ninety (90) days from the
initial date of the initial hearing fixed in the stay order.

Section 7. Order After Initial Hearing. -
(a) Within twenty (20) days after the last hearing, the
court shall issue an order which shall:
(1) Give due course to the petition and immediately refer
the petition and its annexes to the rehabilitation
receiver who shall evaluate the rehabilitation plan
and submit his recommendations to the court not
later than ninety (90) days from the date of the last
initial hearing, if the court is satisfied that there is
merit to the petition, otherwise the court shall
immediately dismiss the petition; and
(2) Recite in detail the matters taken up in the initial
hearing and the action taken thereon, including a
substitute rehabilitation plan contemplated in
Sections 5 (b)(7) and (8) of this Rule;
(b) If the debtor and creditors agree on a new
rehabilitation plan pursuant to Section 5 (b)(7) of this
Rule, the order shall so state the fact and require the
rehabilitation receiver to supply the details of the
plan and submit it for the approval of the court not
later than sixty (6) days from the date of the last
initial hearing. The court shall approve the new
rehabilitation plan not later than ninety (90) days
from the date of the last initial hearing upon
concurrence of the following:
(1) Approval or endorsement of creditors holding at least
two-thirds (2/3) of the total liabilities of the debtor
including secured creditors holding more than fifty
percent (50%) of the total secured claims of the
debtor and unsecured creditors holding more than
fifty percent (50%) of the total unsecured claims of
the debtor;
(2) The rehabilitation plan complies with the
requirements specified in Section 18 of Rule 3;
(3) The rehabilitation plan would provide the objecting
class of creditors with payments whose present value
projected in the plan would be greater than that
which they would have received if the assets of the
debtor were sold by a liquidator within a six (6)
month period from the date of filing of the petition;
and
(4) The rehabilitation receiver has recommended approval
of the plan.

The approval by the court of the new rehabilitation plan
shall have the same effect as approval of a rehabilitation
plan under Section 20 of Rule 3.

Section 8. Creditors' Meetings. - If no new rehabilitation
plan is agreed upon by the debtor and the creditors, the
rehabilitation receiver, at any time before he submits his
evaluation on the debtor-proposed rehabilitation plan to
the court as prescribed in Section 7(a)(1) of this Rule,
shall, either alone or with the debtor, meet with the
creditors or any interested party t discuss the plan with a
view to clarifying or resolving any matter connected
therewith.

Section 9. Comments on or Opposition to Rehabilitation
Plan. - Any creditor or interested party of record may file
comments on or opposition to the proposed
rehabilitation plan, with a copy given to the rehabilitation
receiver, not later than sixty (60) days from the date of
the last initial hearing. The court shall conduct summary
and non-adversarial proceedings to receive evidence, if
necessary, in hearing the comments on and opposition to
the plan.

Section 10. Modification of Proposed Rehabilitation Plan. -
The debtor may modify its rehabilitation plan in the light
of the comments of the rehabilitation receiver and
creditors or any interested party and submit a revised or
substitute rehabilitation plan for the final approval of the
court. Such rehabilitation plan must be submitted to the
court not later than ten (10) moths from the date of filing
of the petition.

Section 11. Approval of Rehabilitation Plan. - The court
may approve a rehabilitation plan even over the
opposition of creditors of the debtor if, in its judgement,
the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable if
the following are present:

(a) The rehabilitation plan complies with the
requirements specified in Section 18 of Rule 3;
(b) The rehabilitation plan would provide the objecting
class of creditors with payments whose present value
projected in the plan would be greater than that
debtor were sold by a liquidator within a six (6)-
month period from the date of filing of the petition;
and
(c) The rehabilitation receiver has recommended approval
of the plan.

In approving the rehabilitation plan, the court shall ensure
that the rights of the secured creditors are not impaired.
The court shall also issue the necessary orders or
processes for its immediate and successful
implementation. it may impose such terms, conditions, or
restrictions as the effective implementation and
monitoring thereof may reasonably require, or for the
protection and preservation of the interests of the
creditors should the plan fall.

Section 12. Period to Decide Petition. - The court shall
decide the petition within one (1) year from the date of
filing of the petition, unless the court, for good cause
shown, is able to secure an extension of the period from
the Supreme Court.

RULE 5
CREDITOR-INITIATED REHABILITATION

Section 1. Who May Petition. - Any creditor or creditors
holding at least twenty percent (20%) of the debtor's total
liabilities may file a petition with the proper regional trial
court for rehabilitation of a debtor that cannot meet its
debts as they respectively fall due.

COMMERCIAL LAW
CORPORATION LAWS
107

2009 BAR OPERATIONS

Section 2. Requirements for Creditor-Initiated Petitions. -
Where the petition is filed by a creditor or creditors under
this Rule, it is sufficient that the petition is accompanied
by a rehabilitation plan and a list of at least three (3)
nominees to the position of rehabilitation receiver and
verified by a sworn statement that the affiant has read
the petition and that its contents are true and correct of
his personal knowledge or based on authentic records and
that the petition is being filed to protect the interests of
the debtor, the stockholders, the investors and the
creditors of the debtor.

Section 3. Applicability of Provisions Relating to Debtor-
Initiated Rehabilitation. - The provisions of Sections 5 to
12 of Rule 4 shall apply to rehabilitation under this Rule.

RULE 6
PRE-NEGOTIATED REHABILITATION

Section 1. Pre-negotiated Rehabilitation Plan. - A debtor
that foresees the impossibility of meeting its debts as
they fall due may, by itself or jointly with any of its
creditors, file a verified petition for the approval of a pre-
negotiated rehabilitation plan. The petition shall comply
with Section 2 of Rule 4 and be supported by an affidavit
showing the written approval or endorsement of creditors
holding at least two-thirds (2/3) of the total liabilities of
the debtor, including secured creditors holding more than
fifty percent (50%) of the total secured claims of the
debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor.

Section 2. Issuance of Order. - If the court finds the
petition sufficient in form and substance, it shall, not later
than five (5) working days from the filing of the petition,
issue an order which shall:

(a) Identify the debtor, its principal business or activity/ies
and its principal place of business;
(b) Direct the publication of the order in a newspaper of
general circulation once a week for at least two (2)
consecutive weeks, with the first publication to be
made within seven (7) days from the time of its
issuance;
(c) Direct the service by personal delivery of a copy of the
petition on each creditor who is not a petitioner
holding at least five percent (5%) of the total
liabilities of the debtor, as determined in the
schedule attached to the petition, within three (3)
days;
(d) Direct the petitioner to furnish a copy of the petition
and its annexes, as well as the stay order, to the
relevant regulatory agency;
(e) State that copies of the petition and the rehabilitation
plan are available for examination and copying by any
interested party;
(f) Direct creditors and other parties interested (including
the Securities and Exchange Commission and the
relevant regulatory agencies such as, but not limited
to, the Bangko Sentral ng Pilipinas, the Insurance
Commission, the National Telecommunications
Commission, the Housing and Land Use Regulatory
Board and the Energy Regulatory Commission) in
opposing the petition or rehabilitation plan to file
their verified objections thereto or comments
thereon within a period of not later than twenty (20)
days from the second publication of the order, with a
warning that failure to do so will bar them from
participating in the proceedings;
(g) Appoint the rehabilitation receiver named in the plan,
unless the court finds that he is not qualified under
these Rules in which case it may appoint a qualified
rehabilitation receiver of its choice;
(h) Stay enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its
guarantors and persons not solidarily liable with the
debtor; provided, that the stay order shall not cover
claims against letters of credit and similar security
arrangements issued by a third party to secure the
payment of the debtor's obligations; provided
further, that the stay order shall not cover foreclosure
by a creditor of property not belonging to a debtor
under corporate rehabilitation; provided, however,
that where the owner of such property sought to be
foreclosed is also a guarantor or one who is not
solidarily liable, said owner shall be entitled to be
benefit of excussion as such guarantor;
(i) Prohibit the debtor from selling, encumbering,
transferring, or disposing in any manner any of its
(j) Prohibit the debtor from making any payment of its
liabilities outstanding as of the date of filing of the
petition;
(k) Prohibit the debtor's suppliers of goods or services
from withholding supply of goods and services in the
ordinary course of business for as long as the debtor
makes payments for the services and goods supplied
after the issuance of the stay order;
(l) Direct the payment in full of all administrative
expenses incurred after the issuance of the stay
order; and
(m) Direct the payment of new loans or other forms of
credit accommodations obtained for the
rehabilitation of the debtor with prior court approval.

Section 3. Approval of Plan. - Within ten (10) days from
the date of the second publication of the order referred to
in Section 2 of this Rule, the court shall approve the
rehabilitation plan unless a creditor or other interested
party submits a verified objection to it in accordance with
the next succeeding section.

Section 4. Objection to Petition or Rehabilitation Plan. -
Any creditor or other interested party may submit to the
court a verified objection to the petition or the
rehabilitation plan. The objection shall be limited to the
following:
(a) The petition or the rehabilitation plan or their
attachments contain material omissions or are
materially false or misleading;
(b) The terms of rehabilitation are unattainable; or

COMMERCIAL LAW
CORPORATION LAWS
108

2009 BAR OPERATIONS
(c) The approval or endorsement of creditors required
under Section 1 of this Rule has not been obtained

Copies of any objection to the petition or the
rehabilitation plan shall be served on the petitioning
debtor and/or creditors.

Section 5. Hearing on Objections. - The court shall set the
case for hearing not earlier than ten (10) days and no
longer than twenty (20) days from the date of the second
publication of the order mentioned in Section 2 of this
Rule on the objections is in accordance with the
immediately preceding section, it shall direct the
petitioner to cure the defect within a period fifteen (15)

Section 6. Period for Approval of Rehabilitation Plan. - The
court shall decide the petition not later than one hundred
twenty (120) days from the date of the filing of the
petition. If the court fails to do so within said period, the
rehabilitation plan shall be deemed approved.

Section 7. Effects of Approval of Rehabilitation Plan. -
Approval of the rehabilitation plan under this Rule shall
have the same legal effect as approval of a rehabilitation
plan under Section 20 of Rule 3.

Section 8. Revocation of Approved Rehabilitation Plan. -
Not later than thirty (30) days from the approval of a
rehabilitation plan under this Rule, the plan may, upon
motion and after notice and hearing, be revoked on the
ground that the approval was secured by fraud or that the
petitioner has failed to cure the defect ordered by the
court pursuant to Section 5 of this Rule.

Section 9. Effect of Rule on Pending Petitions. - Any
pending petition for rehabilitation that has not undergone
the initial hearing prescribed under the Interim Rules of
Procedure for Corporate Rehabilitation at the time of the
effectivity of these Rules may be converted into a
rehabilitation proceeding under this Rule.

RULE 7
RECOGNITION OF FOREIGN PROCEEDINGS

Section 1. Scope of Application. - This Rule applies where
(a) assistance is sought in a Philippine court by a foreign
court or a foreign representative in connection with a
foreign proceeding; (b) assistance is sought in a foreign
State in connection with a domestic proceeding governed
by these Rules; or (c) a foreign proceeding and a domestic
proceeding are concurrently taking place.

The sole fact that a petition is filed pursuant to this Rule
does not subject the foreign representative or the foreign
assets and affairs of the debtor to the jurisdiction of the
local courts for any purpose other than the petition.

Section 2. Non-Recognition of Foreign Proceeding. -
Nothing in this Rule prevents the court from refusing to
take an action governed by this Rule if (a) the action
would be manifestly contrary to the public policy of the
Philippines; and (b) if the court finds that the country of
which the petitioner is a national does not grant
recognition to a Philippine rehabilitation proceeding in a
manner substantially in accordance with this Rule.

Section 3. Petition for Recognition of Foreign Proceeding. -
A foreign representative may apply with the Regional
Trial Court where the debtor resides for recognition of the
foreign proceeding in which the foreign representative
has been appointed.
A petition for recognition shall be accompanied by:

(a) A certified copy of the decision commencing the
foreign proceeding and appointing the foreign
representative; or
(b) A certificate from the foreign court affirming the
existence of the foreign proceeding and of the
appointment of the foreign representative; or
(c) In the absence of evidence referred to in subparagraph
(a) and (b), any other evidence acceptable to the
court of the existence of the foreign proceeding and
of the appointment of the foreign representative.

Section 4. Recognition of Foreign Proceeding. - A foreign
proceeding shall be recognized if:
(a) The proceeding is a foreign proceeding as defined
herein;
(b) The person or body applying for recognition is a
foreign representative as defined herein; and
(c) The petition meets the requirements of Section 3 of
this Rule;

Section 5. Period to Recognize Foreign Proceeding. - A
petition for recognition of a foreign proceeding shall be
decided within thirty (30) days from the filing thereof.

Section 6. Notification to Court. - From the time of filing
the petition for recognition f the foreign proceeding, the
foreign representative shall inform the court promptly of:
(a) Any substantial change in the status of the foreign
proceeding or the status of the foreign
representative's appointment; and
(b) Any other foreign proceeding regarding the same
debtor that becomes known to the foreign
representative.

Section 7. Provisional Relief that May be Granted upon
Application for Recognition of Foreign Proceeding. - From
the time of filing a petition for recognition until the same
is decided upon, the court may, upon motion of the
foreign representative where relief is urgently needed to
protect the assets of the debtor or the interests of the
creditors, grant relief of a provisional nature, including:
(a) Staying execution against the debtor's assets;
(b) Entrusting the administration or realization of all or
part of the debtor's assets located in the Philippines
to the foreign representative or another person
designated by the court in order to protect and
preserve the value of assets that, by their nature or
because of other circumstances, are perishable,
susceptible to devaluation or otherwise in jeopardy;

COMMERCIAL LAW
CORPORATION LAWS
109

2009 BAR OPERATIONS
(c) Any relief mentioned in Section 9(a)(1), (2) and (7) of
this Rule.

Section 8. Effects of Recognition of Foreign Proceeding. -
Upon recognition of a foreign proceeding:
(a) Commencement or continuation of individual actions
or individual proceedings concerning the debtor's
assets, rights, obligations or liabilities is stayed;
provided, that such stay does not affect the right to
commence individual actions or proceedings to the
extent necessary to preserve a claim against the
debtor.
(b) Execution against the debtor's assets is stayed; and
(c) The right to transfer, encumber or otherwise dispose
of any assets of the debtor is suspended.

Section 9. Relief That May be Granted After Recognition of
Foreign Proceeding. -
(a) Upon recognition of a foreign proceeding, where
necessary to protect the assets of the debtor or the
interests of the creditors, the court may, upon
motion of the foreign representative, grant any
appropriate relief including:
(1) Staying the commencement or continuation of
individual actions or individual proceedings
concerning the debtor's assets, rights, obligations or
liabilities to the extent they have not been stayed
under Section 8(a) of this Rule;
(2) Staying execution against the debtor's assets to the
extent it has not been stayed under Section 8(b) of
this Rule;
(3) Suspending the right to transfer, encumber or
otherwise dispose of any assets of the debtor to the
extent this right has not been suspended under
Section 8(c) of this Rule;
(4) Providing for the examination of witnesses, the taking
of evidence or the delivery of information concerning
the debtor's assets, affairs, rights, obligations or
liabilities;
(5) Entrusting the administration or realization of all or
part of the debtor's assets located in the Philippines
to the foreign representative or another person
designated by the court;
(6) Extending the relief granted under Section 7 of this
Rule;
(7) Granting any additional relief that may be available to
the rehabilitation receiver under these laws.

(b) Upon recognition of a foreign proceeding, the court
may, at the request of the foreign representative,
entrust the distribution of all or part of the debtor's
assets located in the Philippines to the foreign
representative or another person designated by the
court; provided that the court is satisfied that the
interests of local creditors are adequately protected.

Section 10. Protection of Creditors and Other Interested
Persons. -
(a) In granting or denying relief under this Rule or in
modifying or terminating the relief under paragraph
(c) of this Section, the court must be satisfied that the
interests of the creditors and other interested
persons, including the debtor, are adequately
protected.
(b) The court may subject the relief granted under Section
7 or Section 9. Of this Rule to conditions it considers
appropriate.
(c) The court may, upon motion of the foreign
representative or a person affected by the relief
granted under Section 7 or Section 9 of this Rule, or
on its own motion, modify or terminate such relief.

Section 11. Actions to Avoid Acts Detrimental to Creditors.
- Upon recognition of a foreign proceeding, the foreign
representative acquires the standing to initiate actions to
avoid or otherwise render ineffective acts detrimental to
creditors that are available under these Rules.

Section 12. Intervention by Foreign Representative in
Philippine Proceedings. - Upon recognition of a foreign
proceeding, the foreign representative may intervene in
any action or proceeding in the Philippines in which the
debtor is a party.

Section 13. Cooperation and Direct Communication with
Foreign Courts and Foreign Representatives. - In matters
covered by this Rule, the court shall cooperate to the
maximum extent possible with foreign courts or foreign
representatives.
The court is entitled to communicate directly with, or
request information or assistance directly from, foreign
courts or foreign representatives.
Section 14. Forms of Cooperation. - Cooperation may be
implemented by any appropriate means, including but
not limited to the following:
(a) Appointment of a person or body to act at the
discretion of the court;
(b) Communication of information by any means
considered appropriate by the court;
(c) Coordination of the administration and supervision of
the debtor's assets and affairs;
(d) Approval or implementation by courts of agreements
concerning the coordination of proceedings;
(e) Coordination of concurrent proceedings regarding the
same debtor;
(f) Suspension of proceedings against the debtor;
(g) Limiting the relief of assets that should be
administered in a foreign proceeding pending in a
jurisdiction other than the place where the debtor has
its principal place of business (foreign non-main
proceeding) or information required in that
proceeding; and
(h) Implementation of rehabilitation or re-organization
plan for the debtor.

Nothing in this Rule limits the power of the court to
provide additional assistance to the foreign
representative under other applicable laws.

Section 15. Commencement of Local Proceeding after
Recognition of Foreign Proceeding. - After the recognition
of a foreign proceeding, a local proceeding under these
Rules may be commenced only if the debtor is doing
business in the Philippines, the effects of the proceedings

COMMERCIAL LAW
CORPORATION LAWS
110

2009 BAR OPERATIONS
shall be restricted to the assets of the debtor located in
the country and, to the extent necessary to implement
cooperation and coordination under Sections 13 and 14 of
this Rule, to the other assets of the debtor that, under
local laws, must be administered in that proceeding.

Section 16. Local and Foreign Proceedings. - Where a
foreign proceeding and a local proceeding are taking
place concurrently regarding the same debtor, the court
shall seek cooperation and coordination under Section 13
and 14 of this Rule. Any relief granted to the foreign
proceeding must be made consistent with the relief
granted in the local proceeding.

RULE 8
PROCEDURAL REMEDIES

Section 1. Motion for Reconsideration. - A party may file a
motion for reconsideration of any order issued by the
court prior to the approval of the rehabilitation plan. No
relief can be extended to the party aggrieved by the
court's order on the motion through a special civil action
for certiorari under Rule 65 of the rules of Court. Such
order can only be elevated to the Court of Appeals as an
assigned error in the petition for review of the decision or
order approving or disapproving the rehabilitation plan.
An order issued after the approval of the rehabilitation
plan can de reviewed only through a special civil action for
certiorari under Rule 65 of the Rules of Court.

Section 2. Review of Decision or Order on Rehabilitation
Plan. - an order approving or disapproving a rehabilitation
plan can only be reviewed through a petition for review to
the Court of Appeals under Rule 43 of the Rules of Court
within fifteen (15) days from notice of the decision or
order.

RULE 9
FINAL PROVISIONS

Section 1. Severability. - If any provision or section of
these Rules is held invalid, the other provisions or sections
shall not be affected thereby.
Section 2. Transitory Provision. - Unless the court orders
otherwise to prevent manifest injustice, any pending
petition for rehabilitation that has not undergone the
initial hearing prescribed under the Interim Rules of
Procedure for Corporate Rehabilitation at the time of the
effectivity of these Rules shall be governed by these rules.

Section 3. Effectivity. - These Rules shall take affect on 16
January 2009 following its publication in two (2)
newspapers of general circulation in the Philippines.

ANNEX "A"
AFFIDAVIT OF GENERAL FINANCIAL CONDITION

(1) Are you an officer of the debtor referred to in these
proceedings?
(2) What is your full name and what position do you hold
in the debtor?
(3) What is the full name of the debtor and what is the
address of its head office?
(4) When was it formed or incorporated?
(5) When did the debtor commence business?
(6) What is the nature of its business? What is the market
share of the debtor in the industry in which it is
engaged?
(7) Who are the parties, members, or stockholders? How
many employees?
(8) What is the capital of the debtor?
(9) What is the capital contribution and what is the
amount of the capital, paid and unpaid, of each of the
partners or shareholders?
(10) Do any of these people hold the shares in trust for
others?
(11) Who are the directors and officers of the debtors?
(12) Has the debtor any subsidiary corporation? If so, give
particulars?
(13) Has the debtor properly maintained its books and are
they updated?
(14) Were the books audited annually?
(15) If so, what is the name of the auditor and when was
the last audited statement drawn up?
(16) Have all proper returns been made to the various
government agencies requiring same?
(17) When did the debtor first become aware of its
problems?
(18) Has the debtor within the twelve months preceding
the filing of the petition:
(a) made any payments, returned any goods or
delivered any property to any of its creditors,
except in the normal course of business?
(b) executed any mortgage, pledge, or security
over any of its properties in favor of any creditor?
(c) transferred or disposed of any of its properties
in payment of any debt?
(d) sold, disposed of, or removed any of its
property except in the ordinary course of
business?
(e) sold any merchandise at less than fair market
value or purchased merchandise or services at
more than fair market value?
(f) made or been a party to any settlement of
property in favor of any person?
If, so, give particulars.
(19) Has the debtor recorded all sales or dispositions of
assets?
(20) What were the sales for the last three years and what
percentage of the sales represented the profit or
markup?
(21) What were the profits or losses for the debtor for the
last three years?
(22) What are the causes of the problems of the debtor?
Please provide particulars?
(23) When did you first notice these problems and what
actions did the debtor take to rectify them?
(24) How much do you estimate is needed to rehabilitate
the debtor?
(25) Has any person expressed interest in investing new
money into the debtor?
(26) Are there any pending and threatened legal actions
against the debtor? If so, please provide particulars.

COMMERCIAL LAW
CORPORATION LAWS
111

2009 BAR OPERATIONS
(27) Has the debtor discussed any restructuring or
repayment plan with any of the creditors? Please
provide status and details.
(28) Has any creditor expressed interest in restructuring
the debts of the debtor? If so, please give particulars.
(29) Have employees' wages and salaries been kept
current? If not, how much are in arrears and what
time period do the arrears represent?
(30) Have obligation to the government and its agencies
been kept current? If not, how much are in arrears
and what time period do the arrears represent?

COMMERCIAL LAW
CORPORATION LAWS
112

2009 BAR OPERATIONS

(Effective December 15, 2000)

Rule 1 Coverage
Rule 2 Definition Of Terms And Construction
Rule 3 General Provisions
Rule 4 Rehabilitation
Rule 5 Final Provisions
Annex A Affidavit of General Financial Condition
Appendix A A.M. No. 00-11-03-SC

Rule 1
COVERAGE

SECTION 1. Scope These Rules shall apply to petitions
for rehabilitation filed by corporations, partnerships, and
associations pursuant to Presidential Decree No. 902-A,
as amended.

SEC. 2. Applicability to Rehabilitation Cases Transferred
from the Securities and Exchange Commission. Cases
for rehabilitation transferred from the Securities and
Exchange Commission to the Regional Trial Courts
pursuant to Republic Act No. 8799, otherwise known as
The Securities Regulation Code, shall likewise be
governed by these Rules.

Rule 2
DEFINITION OF TERMS AND CONSTRUCTION

SECTION 1. Definition of Terms. For purposes of these
Rules:
Administrative Expenses shall refer to
those expenses incurred in the ordinary
course of business of the debtor after the
issuance of the stay order, excluding interest
payable to creditors.
Affidavit of General Financial Condition
shall refer to a verified statement on the
general financial condition of the debtor
required in section 2, Rule 4 of these Rules.
Board of Directors shall include the
executive committee or the management of a
partnership or association.
Claim shall include all claims or demands of
whatever nature or character against a debtor
or its property, whether for money or
otherwise.
Creditor shall mean any holder of a Claim.
Court shall refer to the proper Regional
Trial Court designated to hear and decide the
cases contemplated under these Rules.
Debtor shall mean any corporation,
partnership, or association, whether
supervised or regulated by the Securities and
Exchange Commission or other government
agencies, on whose behalf a petition for
rehabilitation has been filed under these
Rules.
Stockholder shall include a member of a
non-stock corporation or association, or a
partner in a partnership.

SEC. 2. Construction. These Rules shall be liberally
construed to carry out the objectives of sections 5(d), 6(c)
and 6(d) of Presidential Decree No. 902-A, as amended,
and to assist the parties in obtaining a just, expeditious,
and inexpensive determination of cases. Where
applicable, the Rules of Court shall apply suppletorily to
proceedings under these Rules.

Rule 3
GENERAL PROVISIONS

SECTION 1. Nature of Proceedings. Any proceeding
initiated under these Rules shall be considered in rem.
Jurisdiction over all those affected by the proceedings
shall be considered as acquired upon publication of the
notice of the commencement of the proceedings in any
newspaper of general circulation in the Philippines in the
manner prescribed by these Rules.
adversarial in nature. The following pleadings are
prohibited:
a. Motion to dismiss;
b. Motion for a bill of particulars;
c. Motion for new trial or for reconsideration;
d. Petition for relief;
e. Motion for extension;
f. Memorandum;
g. Motion for postponement;
h. Reply or Rejoinder;
i. Third party complaint; and
j. Intervention.

Any pleading, motion, opposition, defense, or claim
filed by any interested party shall be supported by verified
statements that the affiant has read the same and that
the factual allegations therein are true and correct of his
personal knowledge or based on authentic records and
shall contain as annexes such documents as may be
deemed by the party submitting the same as supportive
of the allegations in the affidavits. The court may decide
matters on the basis of affidavits and other documentary
evidence. Where necessary, the court shall conduct
clarificatory hearings before resolving any matter
submitted to it for resolution.

SEC. 2. Venue. Petitions for rehabilitation pursuant
to these Rules shall be filed in the Regional Trial Court
having jurisdiction over the territory where the debtors
principal office is located.
INTERIM RULES OF PROCEDURE ON
CORPORATE REHABILITATION
(2000)

COMMERCIAL LAW
CORPORATION LAWS
113

2009 BAR OPERATIONS

SEC. 3. Service of Pleadings and Documents. When so
authorized by the court, any pleading and/or document
required by these Rules may be filed with the court and/or
served upon the other parties by facsimile transmission
(fax) or electronic mail (e-mail). In such cases, the date of
transmission shall be deemed to be the date of service. In
case of a voluminous pleading or document, the court
may, motu proprio or upon motion, waive the requirement
of service, provided, a copy thereof together with all its
attachments is duly filed with the court and is made
available for examination and reproduction by any party,
and provided, further, that a notice of such filing and
availability is duly served on the parties.

SEC. 4. Trade Secrets and Other Confidential
Information. On motion or on its own initiative, the
court may issue an order to protect trade secrets or other
confidential research, development, or commercial
information belonging to the debtor.

SEC. 5. Executory Nature of Orders. Any order issued
by the court under these Rules is immediately executory.
A petition for review or an appeal therefrom shall not stay
the execution of the order unless restrained or enjoined
by the appellate court. The review of any order or
decision of the court or an appeal therefrom shall be in
accordance with the Rules of Court; Provided, however,
that the reliefs ordered by the trial or appellate courts
shall take into account the need for resolution of
proceedings in a just, equitable, and speedy manner.

Rule 4
REHABILITATION

SECTION 1. Who May Petition. Any debtor who
foresees the impossibility of meeting its debts when they
respectively fall due, or any creditor or creditors holding
at least twenty-five percent (25%) of the debtors total
liabilities, may petition the proper Regional Trial Court to
have the debtor placed under rehabilitation.

SEC. 2. Contents of the Petition. The petition filed by
the debtor must be verified and must set forth with
sufficient particularity all the following material facts: (a)
the name and business of the debtor; (b) the nature of the
business of the debtor; (c) the history of the debtor; (d)
the cause of its inability to pay its debts; (e) all the
pending actions or proceedings known to the debtor and
the courts or tribunals where they are pending; (f) threats
or demands to enforce claims or liens against the debtor;
and (g) the manner by which the debtor may be
rehabilitated and how such rehabilitation may benefit the
general body of creditors, employees, and stockholders.
The petition shall be accompanied by the following
documents:
a. An audited financial statement of the debtor
at the end of its last fiscal year;
b. Interim financial statements as of the end of
the month prior to the filing of the petition;
c. Schedule of Debts and Liabilities which lists all
the creditors of the debtor indicating the
name and address of each creditor, the
amount of each claim as to principal, interest,
or penalties due as of the date of filing, the
nature of the claim, and any pledge, lien,
mortgage judgment, or other security given
for the payment thereof;
d. An Inventory of Assets which must list with
reasonable specificity all the assets of the
debtor, stating the nature of each asset, the
location and condition thereof, the book value
or market value of the asset, and attaching
the corresponding certificate of title therefor
in case of real property, or the evidence of
title or ownership in case of movable
property, the encumbrances, liens or claims
thereon, if any, and the identities and
addresses of the lienholders and claimants.
The Inventory shall include a Schedule of
Accounts Receivable which must indicate the
amount of each, the persons from whom due,
the date of maturity, and the degree of
collectibility categorizing them as highly
collectible to remotely collectible;
e. A rehabilitation plan which conforms to the
minimal requirements set out in section 5,
Rule 4 of these Rules;
f. A Schedule of Payments and disposition of
assets which the debtor may have effected
within three (3) months immediately
preceding the filing of the petition;
g. A Schedule of the Cash Flow of the debtor for
three (3) months immediately preceding the
filing of the petition, and a detailed schedule
of the projected cash flow for the succeeding
three (3) months;
h. A Statement of Possible Claims by or against
the debtor which must contain a brief
statement of the facts which might give rise
to the claim and an estimate of the probable
amount thereof;
i. An Affidavit of General Financial Condition
which shall contain answers to the questions
or matters prescribed in Annex A hereof;
j. At least three (3) nominees for the position of
Rehabilitation Receiver as well as their
qualifications and addresses, including but not
limited to their telephone numbers, fax
number and e-mail address; and
k. A Certificate attesting, under oath, that (a)
the filing of the petition has been duly
authorized; and (b) the directors and
stockholders have irrevocably approved
and/or consented to, in accordance with
existing laws, all actions or matters necessary
and desirable to rehabilitate the debtor
including, but not limited to, amendments to
the articles of incorporation and by-laws or
articles of partnership; increase or decrease in
the authorized capital stock; issuance of
bonded indebtedness; alienation, transfer, or
encumbrance of assets of the debtor; and

COMMERCIAL LAW
CORPORATION LAWS
114

2009 BAR OPERATIONS
modification of shareholders rights.
Five (5) copies of its petition shall be filed with the
court.

SEC. 3. Verification by Debtor. The petition filed by the
debtor must be verified by an affidavit of a responsible
officer of the debtor and shall be in a form substantially as
follows:

I, _____________________, (position) of
(name of petitioner), do solemnly swear that
the petitioner has been duly authorized to file
the petition and that the stockholders and
board of directors (or governing body) have
approved and/or consented to, in accordance
with law, all actions or matters necessary or
desirable to rehabilitate the debtor. There is
no petition for insolvency filed with any other
body, court, or tribunal affecting the
petitioner. The Inventory of Assets and the
Schedule of Debts and Liabilities contains a
full, correct, and true description of all debts
and liabilities and of all goods, effects, estate,
and property of whatever kind or class
belonging to petitioner. The Inventory also
contains a full, correct, and true statement of
all debts owing or due to petitioner, or to any
person or persons in trust for petitioner and of
all securities and contracts whereby any
money may hereafter become due or payable
to petitioner or by or through which any
benefit or advantage may accrue to
petitioner. The petition contains a concise
statement of the facts giving rise, or which
might give rise, to any cause of action in favor
of petitioner. Petitioner has no land, money,
stock, expectancy, or property of any kind,
except those set forth in the Inventory of
Assets. Petitioner has, in no instance, created
or acknowledged a debt for a greater sum
than the true and correct amount. Petitioner,
its officers, directors, and stockholders have
not, directly or indirectly, concealed,
fraudulently sold, or otherwise fraudulently
disposed of, any part of petitioners real or
personal property, estate, effects, or rights of
action, and petitioner, its officers, directors,
and stockholders have not in any way
compounded with any of its creditors in order
to give preference to such creditors, or to
receive or to accept any profit or advantage
therefrom, or to defraud or deceive in any
manner any creditor to whom petitioner is
indebted. Petitioner, its officers, directors,
and stockholders have been acting in good
faith and with due diligence.

SEC. 4. Creditor-initiated Petitions. Where the petition
is filed by a creditor or creditors, it is sufficient that the
petition is accompanied by a rehabilitation plan and a list
of nominees to the position of Rehabilitation Receiver
and verified by a sworn statement that the affiant has
read the petition and that its contents are true and
correct of his personal knowledge or based on authentic
records obtained from the debtor.

SEC. 5. Rehabilitation Plan. The rehabilitation plan
shall include (a) the desired business targets or goals and
the duration and coverage of the rehabilitation; (b) the
terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due
regard to the interests of secured creditors; (c) the
material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include conversion of the
debts or any portion thereof to equity, restructuring of
the debts, dacion en pago, or sale of assets or of the
controlling interest; (e) a liquidation analysis that
estimates the proportion of the claims that the creditors
and shareholders would receive if the debtors properties
were liquidated; and (f) such other relevant information to
enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.

SEC. 6. Stay Order. If the court finds the petition to be
sufficient in form and substance, it shall, not later than
five (5) days from the filing of the petition, issue an Order
(a) appointing a Rehabilitation Receiver and fixing his
bond; (b) staying enforcement of all claims, whether for
money or otherwise and whether such enforcement is by
court action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with the
debtor; (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner
any of its properties except in the ordinary course of
business; (d) prohibiting the debtor from making any
payment of its liabilities outstanding as at the date of
filing of the petition; (e) prohibiting the debtors suppliers
of goods or services from withholding supply of goods
and services in the ordinary course of business for as long
as the debtor makes payments for the services and goods
supplied after the issuance of the stay order; (f) directing
the payment in full of all administrative expenses incurred
after the issuance of the stay order; (g) fixing the initial
hearing on the petition not earlier than forty five (45) days
but not later than sixty (60) days from the filing thereof;
(h) directing the petitioner to publish the Order in a
newspaper of general circulation in the Philippines once a
week for two (2) consecutive weeks; (i) directing all
creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on
the debtor a verified comment on or opposition to the
petition, with supporting affidavits and documents, not
later than ten (10) days before the date of the initial
hearing and putting them on notice that their failure to
do so will bar them from participating in the proceedings;
and (j) directing the creditors and interested parties to
secure from the court copies of the petition and its
annexes within such time as to enable themselves to file
their comment on or opposition to the petition and to
prepare for the initial hearing of the petition.

COMMERCIAL LAW
CORPORATION LAWS
115

2009 BAR OPERATIONS
SEC. 7. Service of Stay Order on Rehabilitation
Receiver. The petitioner shall immediately serve a copy
of the stay order on the Rehabilitation Receiver appointed
by the court, who shall manifest his acceptance or non-
acceptance of his appointment not later than ten (10)

SEC. 8. Voidability of Illegal Transfers and
Preferences. Upon motion or motu proprio, the court
may declare void any transfer of property or any other
conveyance, sale, payment, or agreement made in
violation of its stay order or in violation of these Rules.

SEC. 9. Initial Hearing. On or before the initial hearing,
the petitioner shall file the publishers affidavit showing
that the publication requirements specified above had
been complied with. If the court is satisfied that said
jurisdictional requirement had been complied with, it shall
summarily hear the parties on any matter relating to the
petition as well as any comment and/or opposition filed in
connection therewith. The court may hold additional
clarificatory hearings where there is need to further clarify
matters but in no event shall such additional hearings be
held beyond one hundred eighty (180) days from the date
of the initial hearing.
If, after the initial hearing, the court is satisfied that
there is merit in the petition, it shall give due course to
the petition and immediately refer the petition and its
annexes to the Rehabilitation Receiver who shall evaluate
the rehabilitation plan and submit his recommendations
to the court not later than one hundred twenty (120) days
from the date of the initial hearing.

SEC. 10. Opposition to or Comment on the Petition.
Every creditor of the debtor or any interested party shall
file his verified opposition to or comment on the petition
not later than ten (10) days before the date of the initial
hearing. After such time, no creditor or interested party
shall be allowed to file any comment or opposition
thereto without leave of court.
If the Schedule of Debts and Liabilities omits a claim
or liability, the creditor concerned shall attach a verified
statement of the obligations allegedly due it to its
comment or opposition.
The court shall likewise require the Securities and
Exchange Commission to comment on the petition. The
Commission shall coordinate with the government
agency concerned in appropriate cases for purposes of
filing its comment.

SEC. 11. Period of the Stay Order. The stay order
shall be effective from the date of its issuance until the
dismissal of the petition or the termination of the
rehabilitation proceedings.
The petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of one
hundred eighty (180) days from the date of the initial
hearing. The court may grant an extension beyond this
period only if it appears by convincing and compelling
evidence that the debtor may successfully be
rehabilitated. In no instance, however, shall the period
for approving or disapproving a rehabilitation plan exceed
eighteen (18) months from the date of filing of the
petition.

SEC. 12. Relief from, Modification, or Termination of
Stay Order. The court may, on motion or motu proprio,
terminate, modify, or set conditions for the continuance
of the stay order, or relieve a claim from the coverage
thereof upon showing that (a) any of the allegations in the
petition, or any of the contents of any attachment, or the
verification thereof has ceased to be true; (b) a creditor
does not have adequate protection over property
securing its claim; or (c) the debtors secured obligation is
more than the fair market value of the property subject of
the stay and such property is not necessary for the
rehabilitation of the debtor.
For purposes of this section, the creditor shall lack
adequate protection if it can be shown that:
a. the debtor fails or refuses to honor a pre-
existing agreement with the creditor to keep
the property insured;
b. the debtor fails or refuses to take
commercially reasonable steps to maintain
the property; or
c. the property has depreciated to an extent that
the creditor is undersecured.
Upon showing of a lack of adequate protection, the
court shall order the rehabilitation receiver to (a) make
arrangements to provide for the insurance or
maintenance of the property, or (b) to make payments or
otherwise provide additional or replacement security such
that the obligation is fully secured. If such arrangements
are not feasible, the court shall modify the stay order to
allow the secured creditor lacking adequate protection to
enforce its claim against the debtor; Provided, however,
that the court may deny the creditor the remedies in this
paragraph if such remedies would prevent the
continuation of the debtor as a going concern or
otherwise prevent the approval and implementation of a
rehabilitation plan.

SEC. 13. Qualifications of the Rehabilitation Receiver.
In the appointment of the Rehabilitation Receiver, the
following qualifications shall be taken into consideration
by the court:
a. Expertise and acumen to manage and operate
a business similar in size and complexity to
that of the debtor;
b. Knowledge in management, finance, and
rehabilitation of distressed companies;
c. General familiarity with the rights of creditors
in suspension of payments or rehabilitation
and general understanding of the duties and
obligations of a Rehabilitation Receiver;
d. Good moral character, independence, and
integrity;
e. Lack of a conflict of interest as defined in
these Rules; and
f. Willingness and ability to file a bond in such
amount as may be determined by the court.
Without limiting the generality of the following, a

COMMERCIAL LAW
CORPORATION LAWS
116

2009 BAR OPERATIONS
Rehabilitation Receiver may be deemed to have a conflict
of interest if:
a. He is a creditor or stockholder of the debtor;
b. He is engaged in a line of business which
competes with the debtor;
c. He is, or was within two (2) years from the
filing of the petition, a director, officer, or
employee of the debtor or any of its present
creditors, or the auditor or accountant of the
debtor;
d. He is, or was within two (2) years from the
filing of the petition, an underwriter of the
outstanding securities of the debtor;
e. He is related by consanguinity or affinity
within the fourth civil degree to any creditor,
stockholder, director, officer, employee, or
underwriter of the debtor; or
f. He has any other direct or indirect material
interest in the debtor or any creditor.

SEC. 14. Powers and Functions of the Rehabilitation
Receiver.The Rehabilitation Receiver shall not take over
the management and control of the debtor but shall
closely oversee and monitor the operations of the debtor
during the pendency of the proceedings, and for this
purpose shall have the powers, duties and functions of a
receiver under Presidential Decree No. 902-A, as
amended, and the Rules of Court.
The Rehabilitation Receiver shall be considered as
an officer of the court. He shall be primarily tasked to
study the best way to rehabilitate the debtor and to
ensure that the value of the debtors property is
reasonably maintained pending the determination of
whether or not the debtor should be rehabilitated, as well
as implement the rehabilitation plan after its approval.
Accordingly, he shall have the following powers and
functions:

a) To verify the accuracy of the petition,
including its annexes such as the Schedule of
Debts and Liabilities and the Inventory of
Assets submitted in support of the petition;
b) To accept and incorporate, when justified,
amendments to the Schedule of Debts and
Liabilities;
c) To recommend to the court the disallowance
of claims and rejection of amendments to the
Schedule of Debts and Liabilities that lack
sufficient proof and justification;
d) To submit to the court and make available for
review by the creditors, a revised Schedule of
Debts and Liabilities;
e) To investigate the acts, conduct, properties,
liabilities, and financial condition of the
debtor, the operation of its business and the
desirability of the continuance thereof; and,
any other matter relevant to the proceeding
or to the formulation of a rehabilitation plan;
f) To examine under oath the directors and
officers of the debtor and any other witnesses
that he may deem appropriate;
g) To make available to the creditors documents
and notices necessary for them to follow and
participate in the proceedings;
h) To report to the court any fact ascertained by
him pertaining to the causes of the debtors
problems, fraud, preferences, dispositions,
encumbrances, misconduct,
mismanagement, and irregularities
management, or any other person against the
debtor;
i) To employ such person or persons such as
lawyers, accountants, appraisers, and staff as
are necessary in performing his functions and
duties as Rehabilitation Receiver;
j) To monitor the operations of the debtor and
to immediately report to the court any
material adverse change in the debtors
business;
k) To evaluate the existing assets and liabilities,
earnings and operations of the debtor;
l) To determine and recommend to the court
the best way to salvage and protect the
interests of the creditors, stockholders, and
the general public;
m) To study the rehabilitation plan proposed by
the debtor or any rehabilitation plan
submitted during the proceedings, together
with any comments made thereon;
n) To prohibit and report to the court any
encumbrance, transfer, or disposition of the
debtors property outside of the ordinary
course of business or what is allowed by the
court;
o) To prohibit and report to the court any
payments outside of the ordinary course of
business;
p) To have unlimited access to the debtors
employees, premises, books, records, and
financial documents during business hours;
q) To inspect, copy, photocopy, or photograph
any document, paper, book, account, or
letter, whether in the possession of the debtor
or other persons;
r) To gain entry into any property for the
purpose of inspecting, measuring, surveying,
or photographing it or any designated
relevant object or operation thereon;
s) To take possession, control, and custody of
the debtors assets;
t) To notify counterparties and the court as to
contracts that the debtor has decided to
continue to perform or breach;
u) To be notified of, and to attend all meetings
of the board of directors and stockholders of
the debtor;
v) To recommend any modification of an
approved rehabilitation plan as he may deem
appropriate;
w) To bring to the attention of the court any
material change affecting the debtors ability
to meet the obligations under the

COMMERCIAL LAW
CORPORATION LAWS
117

2009 BAR OPERATIONS
x) To recommend the appointment of a
management committee in the cases
provided for under Presidential Decree No.
902-A, as amended;
y) To recommend the termination of the
proceedings and the dissolution of the debtor
if he determines that the continuance in
business of such entity is no longer feasible or
profitable or no longer works to the best
interest of the stockholders, parties-litigants,
creditors, or the general public;
z) To apply to the court for any order or directive
that he may deem necessary or desirable to
aid him in the exercise of his powers and
performance of his duties and functions; and
aa) To exercise such other powers as may from
time to time be conferred upon him by the
court.

SEC. 15. Oath and Bond. Before entering upon his
powers, duties, and functions, the Rehabilitation Receiver
must be sworn to perform them faithfully, and must post
a bond executed in favor of the debtor in such sum as the
court may direct, to guarantee that he will faithfully
discharge his duties and obey the orders of the court. If
necessary, he shall also declare under oath that he will
perform the duties of a trustee of the assets of the debtor,
will act honestly and in good faith, and deal with the
assets of the debtor in a commercially reasonable
manner.

SEC. 16. Fees and Expenses. The Rehabilitation
Receiver and the persons hired by him shall be entitled to
reasonable professional fees and reimbursement of
expenses which shall be considered as administrative
expenses.

SEC. 17. Immunity from Suit. The Rehabilitation
Receiver shall not be subject to any action, claim, or
demand in connection with any act done or omitted by
him in good faith in the exercise of his functions and
powers herein conferred.

SEC. 18. Reports. The Rehabilitation Receiver shall
report every three months to the court or as often as the
court may require on the general condition of the debtor.

SEC. 19. Dismissal of Rehabilitation Receiver. A
Rehabilitation Receiver may be dismissed by the court,
upon motion or motu proprio, on account of conflict of
interest, or on any of the grounds for removing a trustee
under the general principles of trusts.

SEC. 20. Comments on or Opposition to the
Rehabilitation Plan. Any creditor or interested party of
record may file comments on or opposition to the
proposed rehabilitation plan, with a copy given to the
Rehabilitation Receiver, not later than one hundred
twenty (120) days from the date of the initial hearing.
The court shall conduct summary and non-adversarial
proceedings to receive evidence, if necessary, in hearing
the comments and opposition to the plan.

SEC. 21. Creditors Meetings. At any time before he
submits his evaluation on the rehabilitation plan to the
court as prescribed in section 9, Rule 4 of this Rule, the
Rehabilitation Receiver may, either alone or with the
debtor, meet with the creditors or any interested party to
discuss the plan with a view to clarifying or resolving any
matter connected therewith.

SEC. 22. Modification of the Proposed Rehabilitation
Plan. The debtor may modify its rehabilitation plan in
the light of the comments of the Rehabilitation Receiver
and creditors or any interested party and submit a revised
or substitute rehabilitation plan for the final approval of
the court. Such rehabilitation plan must be submitted to
the court not later than one (1) year from the date of the
initial hearing.

SEC. 23. Approval of the Rehabilitation Plan. The
court may approve a rehabilitation plan even over the
opposition of creditors holding a majority of the total
liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition
of the creditors is manifestly unreasonable.
In determining whether or not the opposition of the
creditors is manifestly unreasonable, the court shall
consider the following:
a. That the plan would likely provide the
objecting class of creditors with
compensation greater than that which they
would have received if the assets of the
debtor were sold by a liquidator within a
three-month period;
b. That the shareholders or owners of the debtor
lose at least their controlling interest as a
result of the plan; and
c. The Rehabilitation Receiver has
recommended approval of the plan.
In approving the rehabilitation plan, the court shall
issue the necessary orders or processes for its immediate
and successful implementation. It may impose such
terms, conditions, or restrictions as the effective
implementation and monitoring thereof may reasonably
require, or for the protection and preservation of the
interests of the creditors should the plan fail.

SEC. 24. Effects of the Rehabilitation Plan. The
approval of the rehabilitation plan by the court shall result
in the following:
a. The plan and its provisions shall be binding
upon the debtor and all persons who may be
affected by it, including the creditors, whether
or not such persons have participated in the
proceedings or opposed the plan or whether
or not their claims have been scheduled;
b. The debtor shall comply with the provisions of
the plan and shall take all actions necessary to
carry out the plan;
c. Payments shall be made to the creditors in

COMMERCIAL LAW
CORPORATION LAWS
118

2009 BAR OPERATIONS
accordance with the provisions of the plan;
d. Contracts and other arrangements between
the debtor and its creditors shall be
interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the plan; and
e. Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors regardless
of whether or not the plan is successfully
implemented.

SEC. 25. Revocation of the Rehabilitation Plan on
Grounds of Fraud. On motion or motu proprio, within
ninety (90) days from the approval of the rehabilitation
plan, and after notice and hearing, the court may revoke
the approval thereof on the ground that the same was
secured through fraud.

SEC. 26. Alteration or Modification of the Rehabilitation
Plan. An approved rehabilitation plan may, on motion,
be altered or modified if, in the judgment of the court,
such alteration or modification is necessary to achieve the
desired targets or goals set forth therein.

SEC. 27. Termination of Proceedings. In case of the
failure of the debtor to submit the rehabilitation plan, or
the disapproval thereof by the court, or the failure of the
rehabilitation of the debtor because of failure to achieve
the desired targets or goals as set forth therein, or the
failure of the said debtor to perform its obligations under
the said plan, or a determination that the rehabilitation
plan may no longer be implemented in accordance with
its terms, conditions, restrictions, or assumptions, the
court shall upon motion, motu proprio, or upon the
recommendation of the Rehabilitation Receiver,
terminate the proceedings. The proceedings shall also
terminate upon the successful implementation of the
rehabilitation plan.

SEC. 28. Discharge of the Rehabilitation Receiver.
Upon termination of the rehabilitation proceedings, the
Rehabilitation Receiver shall submit his final report and
accounting within such period of time as the court will
allow him. Upon approval of his report and accounting,
the court shall order his discharge.

Rule 5
FINAL PROVISIONS

SECTION 1. Severability. If any provision or section of
these Rules is held invalid, the other provisions or sections
shall not be affected thereby.

SEC. 2. Effectivity. These Rules shall take effect on
December 15, 2000 following its publication in two (2)
newspapers of general circulation in the Philippines.

ANNEX A

AFFIDAVIT OF GENERAL FINANCIAL CONDITION

1) Are you an officer of the debtor referred to in these
proceedings?
2) What is your full name and what position do you
hold in the debtor?
3) What is the full name of the debtor and what is the
address of its head office?
4) When was it formed or incorporated?
5) When did the debtor commence business?
6) What is the nature of its business? What is the
market share of the debtor in the industry in which
it is engaged?
7) Who are the partners, members, or stockholders?
How many employees?
8) What is the capital of the debtor?
9) What is the capital contribution and what is the
amount of the capital, paid and unpaid, of each of
the partners or shareholders?
10) Do any of these people hold the shares in trust for
others?
11) Who are the directors and officers of the debtor?
12) Has the debtor any subsidiary corporation? If so,
give particulars.
13) Has the debtor properly maintained its books and
are they updated?
14) Were the books audited annually?
15) If so, what is the name of the auditor and when was
the last audited statement drawn up?
16) Have all proper returns been made to the various
government agencies requiring the same?
17) When did the debtor first become aware of its
problems?
18) Has the debtor within the twelve months preceding
the filing of the petition:
a) made any payments, returned any goods or
delivered any property to any of its creditors,
except in the normal course of business?
b) executed any mortgage, pledge, or security
over any of its properties in favor of any
creditor?
c) transferred or disposed of any of its properties
in payment of any debt?
d) sold, disposed of, or removed any of its
property except in the ordinary course of
business?
e) sold any merchandise at less than fair market
value or purchased merchandise or services at
more than fair market value?
f) made or been a party to any settlement of

COMMERCIAL LAW
CORPORATION LAWS
119

2009 BAR OPERATIONS
property in favor of any person?
If so, give particulars.
19) Has the debtor recorded all sales or dispositions of
assets?
20) What were the sales for the last three years and
what percentage of the sales represented the profit
or mark-up?
21) What were the profits or losses for the debtor for
the last three years?
22) What are the causes of the problems of the debtor?
Please provide particulars.
23) When did you first notice these problems and what
actions did the debtor take to rectify them?
24) How much do you estimate is needed to rehabilitate
the debtor?
25) Has any person expressed interest in investing new
money into the debtor?
26) Are there any pending and threatened legal actions
against the debtor? If so, please provide particulars.
27) Has the debtor discussed any restructuring or
repayment plan with any of the creditors? Please
provide status and details.
28) Has any creditor expressed interest in restructuring
the debts of the debtor? If so, please give
particulars.
29) Have employees wages and salaries been kept
current? If not, how much are in arrears and what
time period do the arrears represent?
30) Have obligations to the government and its
agencies been kept current? If not, how much are in
arrears and what time period do the arrears
represent?

A.M. NO. 00-11-03-SC

RESOLUTION DESIGNATING CERTAIN
BRANCHES OF REGIONAL TRIAL COURTS
TO TRY AND DECIDE CASES FORMERLY
COGNIZABLE BY THE SECURITIES AND
EXCHANGE COMMISSION

To implement the provisions of Sec. 5.2 of Republic
Act No. 8799 (The Securities Regulation Code), and in the
interest of a speedy and efficient administration of justice
and subject to the guidelines hereinafter set forth, the
following branches of the Regional Trial Courts (RTC) are
hereby designated to try and decide Securities and
Exchange Commission (SEC) cases enumerated in Sec. 5
of P.D. No. 902-A (Reorganization of the Securities and
Exchange Commission), arising within their respective
territorial jurisdictions with respect to the National
Capital Judicial Region and within the respective
provinces in the First to the Twelfth Judicial Regions:

NATIONAL CAPITAL
JUDICIAL REGION
Manila
(1) Br. 46, Judge Artemio S. Tipon
Quezon City
(2) Br. 90, Judge Reynaldo B. Daway
(3) Br. 93, Judge Apolinario D. Bruselas, Jr.
Makati City
(4) Br. 138, Judge Sixto C. Marella
(5) Br. 139, Judge Florentino A. Tuazon, Jr.
Pasig City
(6) Br. 158, Judge Jose R. Hernandez
Kalookan City
(7) Br. 123, Judge Edmundo T. Acua
Las Pias City
(8) Br. 253, Judge Jose F. Caoibes, Jr.
Mandaluyong City
(9) Br. 214, Judge Edwin D. Sorongon
Marikina City
(10) Br. 273, Judge Olga P. Enriquez
Muntinlupa City
(11) Br. 256, Judge Alberto L. Lerma
Paraaque City
(12) Br. 258, Judge Raul E. De Leon
Pasay City
(13) Br. 231, Judge Cesar Z. Ylagan
Valenzuela City
(14) Br. 75, Judge Jaime F. Bautista
FIRST JUDICIAL REGION
Abra (Bangued)
(15) Br. 1, Judge Charito B. Gonzales
Benguet (Baguio City)
(16) Br. 59, Judge Abraham B. Borreta
Ilocos Norte (Laoag City)
(17) Br. 15, Judge Benjamin D. Turgano
La Union (San Fernando City)

COMMERCIAL LAW
CORPORATION LAWS
120

2009 BAR OPERATIONS
(18) Br. 29, Judge Robert T. Cawed
Pangasinan (Urdaneta City)
(19) Br. 48, Judge Alicia G. Decano
SECOND JUDICIAL REGION
Isabela (Ilagan)
(20) Br. 16, Judge Isaac R. De Alban
Nueva Vizcaya (Bayombong)
(21) Br. 29, Judge Gil L. Valdez
Quirino (Cabarroguis)
(22) Br. 31, Judge Moises M. Pardo
THIRD JUDICIAL REGION
Bataan (Balanga)
(23) Br. 2, Judge Manuel M. Tan
Bulacan (Malolos)
(24) Br. 7, Judge Danilo A. Manalastas
Nueva Ecija (Cabanatuan City)
(25) Br. 28, Judge Tomas B. Talavera
Pampanga (San Fernando)
(26) Br. 42, Judge Pedro M. Sunga, Jr.
Zambales (Olongapo City)
(27) Br. 72, Judge Eliodoro G. Ubiadas
Tarlac (Tarlac City)
(28) Br. 63, Judge Arsenio P. Adriano
FOURTH JUDICIAL REGION
Laguna (Calamba)
(29) Br. 92, Judge Antonio S. Pozas
Rizal (Binangonan)
(30) Br. 70, Judge Augusto T. Gutierrez
Cavite (Imus)
(31) Br. 21, Judge Norbeto J. Quisumbing, Jr.
Batangas (Batangas City)
(32) Br. 2, Judge Mario V. Lopez
Quezon (Lucena City)
(33) Br. 57, Judge Rafael R. Lagos
Mindoro Oriental (Calapan City)
(34) Br. 39, Judge Manuel D. Luna, Jr.
FIFTH JUDICIAL REGION
Camarines Sur (Naga City)
(35) Br. 23, Judge Pablo M. Paqueco, Jr.
Albay (Legaspi City)
(36) Br. 4, Judge Gregorio A. Consulta
Sorsogon (Sorsogon)
(37) Br. 52, Judge Honesto A. Villamor
SIXTH JUDICIAL REGION
Negros Occidental (Bacolod City)
(38) Br. 53, Judge Pepito B. Gellada
Iloilo City
(39) Br. 39, Judge Jose G. Abdallah
Aklan (Kalibo)
(40) Br. 8, Judge Eustaquio G. Terencio
Capiz (Roxas City)
(41) Br. 19, Judge Sergio L. Pestao
Antique (San Jose)
(42) Br. 10, Judge Sylvia G. Jurao
SEVENTH JUDICIAL REGION
Cebu (Cebu City)
(43) Br. 11, Judge Isaias P. Dicdican
Negros Oriental (Dumaguete City)
(44) Br. 40, Judge Godofredo S. Sison
Bohol (Tagbilaran City)
(45) Br. 48, Judge Fernando G. Fuentes, III
EIGHT JUDICIAL REGION
Leyte (Tacloban City)
(46) Br. 8, Judge Salvador Y. Apurillo
Southern Leyte (Maasin)
(47) Br. 24, Judge Bethany G. Kapili
Northern Samar (Catarman)
(48) Br. 19, Judge Cesar R. Cinco
NINTH JUDICIAL REGION
Zamboanga del Norte (Dipolog City)
(49) Br. 6, Judge Primitivo S. Abarquez, Jr.
Zamboanga del Sur (Zamboanga City)
(50) Br. 12, Judge Hakim S. Abdulwahid
Agusan del Norte (Butuan City)
(51) Br. 33, Judge Victor A. Tomaneng
TENTH JUDICIAL REGION
Misamis Oriental (Cagayan de Oro City)
(52) Br. 40, Judge Epifanio T. Nacaya, Jr.
Misamis Occidental (Oroquieta City)
(53) Br. 14, Judge Henry B. Damasing
Surigao del Norte (Surigao City)
(54) Br. 30, Judge Floripinas C. Buyser
ELEVENTH JUDICIAL REGION
Davao del Norte (Panabo)
(55) Br. 34, Judge Gregorio A. Palabrica
Davao del Sur (Davao City)
(56) Br. 10, Judge Augusto V. Breva
South Cotabato (General Santos City)
(57) Br. 23, Judge Jose S. Majaducon
Surigao del Sur (Tandag)
(58) Br. 27, Judge Ermelindo G. Andal
TWELFTH JUDICIAL REGION
Lanao de Norte (Iligan City)
(59) Br. 5, Judge Maximino M. Libre
Lanao del Sur (Marawi City)
(60) Br. 8, Judge Santos B. Adiong
The following guidelines shall be observed:
1. In multiple sala courts where one (1) or more
branches of the RTC are herein designated as special
courts, there will be no unloading of cases already
pending in the branches designated. They shall continue
to try and decide the said cases in addition to the SEC
cases. In the meantime, in view of the temporary
imbalance of caseload as a result of the transfer of SEC
cases, the Executive Judge concerned shall exclude them
in the raffle of newly filed cases in their station until their
workload equals to that of the other branches, in which
event they shall be included in the raffle of other civil and

COMMERCIAL LAW
CORPORATION LAWS
121

2009 BAR OPERATIONS
criminal cases.
2. The trial and disposition of SEC cases shall be in
accordance with the procedure to be promulgated by the
Supreme Court.
3. In case of temporary incapacity, absence,
disability or inhibition of the judge of the designated
special court in multiple sala courts where one (1) or more
branches of the RTC have been designated, the pairing
system for multiple sala stations subject of Circular No. 7
dated 23 September 1974, as amended, shall apply.
4. The branches herein designated shall continue to
perform the functions of special courts even after they
shall have become vacant due to retirement, death,
incapacity, dismissal, resignation, transfer, detail or
promotion of the incumbent judges herein named. Their
successors, whether permanent or temporary, shall act as
Presiding Judges of these special courts unless the Court
directs otherwise.
5. In provinces (for the First to the Twelfth Judicial
Regions) where there are no designated special courts,
the Executive Judge of the station where new SEC cases
will be filed shall consult the Supreme Court thru the
Office of the Office Administrator.
6. This Resolution shall take effect on the fifteenth
day of December, 2000 and shall be published in a
newspaper of general circulation not later than the 28th
day of November 2000.
Promulgated this 21st day of November 2000.

Davide, C.J., Bellosillo, Melo, Puno, Vitug, Kapunan,
Mendoza, Panganiban, Quisumbing, Pardo, Buena,
Gonzaga-Reyes, Ynares-Santiago, and De Leon, JJ.

COMMERCIAL LAW
CORPORATION LAWS
122

2009 BAR OPERATIONS
INTERIM RULES OF PROCEDURE ON CORPORATE
REHABILITATION
(Effective December 15, 2000)

Steps:
1. Filing of a verified petition with the appropriate RTC
by:
a) corporate debtor who foresees the impossibility
of meeting its debts when they respectively fall
due, or
b) creditors holding at least 25% of the debtors
total liabilities;
2. The following shall be annexed to the petition:
a) audited financial statement at the end of its last
fiscal year;
b) interim financial statement;
c) schedule of debts and liabilities;
d) inventory of assets;
e) rehabilitation plan;
f) schedule of payments and disposition of assets
effected within 3 months preceding the filing of
the petition;
g) schedule of cash flow for the last 3 months;
h) statement of possible claims;
i) affidavit of general financial condition;
j) at least 3 nominations for rehabilitation receiver;
k) certificate under oath that directors and
stockholders have irrevocably
approved/consented to all actions/matters
necessary under the rehabilitation plan.
3. The court shall issue the stay order not later than 5
days from the filing of the petition, which among
others, shall:
4. Publication of the stay order in a newspaper of a
general circulation once a week for 2 consecutive
weeks;
5. Referral of rehabilitation plan to rehabilitation
receiver;
6. Meetings between corporate debtor with creditors
and discussions on the rehabilitation plan;
7. Submission of final rehabilitation plan to the RTC for
approval;
8. The petition shall be dismissed (which results into the
automatic lifting of the stay order unless RTC ordered
otherwise) if no rehabilitation plan is approved after
180 days from initial hearing;
9. Approval or disapproval of the rehabilitation plan by
the RTC.

What is the scope of the rules? (Rule 1, Sec. 2)
The rules apply to petitions for rehabilitation
filed by corporations, partnerships and associations
pursuant to PD 902-A, as amended.

How should the rules be construed? (Rule 2, Sec. 2)
The rules are to be liberally construed in order to
carry out the objectives of Sections 5(d) and 6(c) and (d)
of PD 902-A, and to assist the parties in obtaining a just,
expeditious and inexpensive determination of cases.

What is the nature of the proceedings under the rules?
(Rule 3)
The proceedings under the rules shall be in rem.
Jurisdiction over all those affected by the proceedings
shall be considered as acquired upon publication of the
notice of the commencement of the proceedings in a
newspaper of a general circulation in the Philippines.
adversarial in nature. For example-
(a) motions to dismiss, for bills of particulars, for new
trail or for reconsideration, among others, are
prohibited (Rule 3,Sec. 1);
(b) the court may decide matters on the basis of
affidavits and other documentary evidence ( Rule 3,
Sec. 1);
(c) pleadings and documents may be filed with the court
or served on the other parties, when so authorized by
the court, by facsimile transmission (fax) or
electronic mail (email) (Rule 3, Sec. 3);
(d) incase of voluminous pleading or document, the
court may, motu proprio or upon motion, waive the
requirement of service, provided that a copy thereof,
together with all its attachments, is duly filed with
the court and made available for examination and
reproduction by any party, and provided, further that
a notice of such filing and availability is duly served
on the parties (Rule 3, Sec. 5); and
(e) any order issued by the court under the rules is
immediately executory, and a petition for review or
appeal therefrom shall not stay the execution of the
order unless restrained or enjoined by the appellate
court (Rule 3, Sec. 5).

Who may petition for rehabilitation? (Rule 4, Sec. 1)
(a) any debtor who foresees the impossibility of meeting
its debts when they respectively fall due; or
(b) any creditor or creditors holding at least 25% of the
debtors total liabilities.

Where should a petition for rehabilitation be filed?
(Rule 3 Sec. 2)
Petitions for rehabilitation shall be filed in the
appropriate Regional Trial Court having jurisdiction over
the territory where the debtors principal office is located.

Are the Rules of Court applicable to the proceedings?
(Rule 2, Sec. 2)
Yes, the Rules of Court, where appropriate, shall
apply suppletorily to proceedings under the rules.

What are the contents of the petition filed by the
debtor? (Rule 4, Sec. 2)
(a) name and business of the debtor;
(b) nature of debtors business;
(c) history of the debtor;
(d) cause of the debtors inability to pay its debts;
(e) all the pending actions or proceedings known to the
debtor and the courts or tribunals where they are
pending;
(f) threats or demands to enforce claims or liens against
the debtor;

COMMERCIAL LAW
CORPORATION LAWS
123

2009 BAR OPERATIONS
(g) the manner by which the debtor may be rehabilitated
and how such rehabilitation may benefit the general
body of creditors, employees and stockholders.

What should be attached to the petition filed by the
debtor?(Rule 4, Sec.4)
(a) audited financial statements as of the end of the
debtors last fiscal year;
(b) interim financial statements as of the end of the
month prior to the filing of the petition;
(c) schedule of debts and liabilities;
(d) inventory of assets;
(e) rehabilitation plan;
(f) schedule of the debtors cash flow;
(g) affidavit of general financial condition;
(h) names of at least three nominees for the position of
rehabilitation receiver, including their qualifications
and contact information;
(i) certificate under oath attesting to the fact that (i) the
filing has been duly authorized, and (ii) the directors
and stockholders have irrevocably approved and/or
consented to all actions or matters necessary and
desirable to rehabilitate the debtor including, but not
limited to, amendments to the articles of
incorporation and by-laws (or articles of partnership);
increase or decrease in the authorized capital stock;
issuance of bonded indebtedness; alienation, transfer
or encumbrance of assets of the debtor, and
modification of shareholders rights.

What are the attachments to the petition filed by
creditor(s)? (Rule 4 Sec. 4)
(a) rehabilitation plan;
(b) list of nominees to the position of rehabilitation
receiver;

Under what circumstance could the petition be
dismissed? (Rule 4, Sec. 11)
The petition shall be dismissed if no
rehabilitation plan is approved by the court upon the
lapse of 180 days from the date of initial hearing. The
court may grant an extension beyond this period if it
appears by convincing and compelling evidence that the
debtor may be rehabilitated. In no instance, however,
shall the period for approving or disapproving a
rehabilitation plan exceed 18 months from the date of
filing of the petition.

What are the contents of the order that the court shall
issue if it finds the petition for rehabilitation to be
sufficient in form and substance? (Rule 4, Sec. 6 and 11)
If the court finds the petition to be sufficient in
form and substance, it shall, not later than 5 days from
the filing of the petition issue an order which shall, among
others:
(a) appoint a rehabilitation receiver and fix his bond;
(b) stay enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with the
debtor;
(c) prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its
(d) prohibit the debtor from making any payment of its
outstanding liabilities as of the date of filing of the
petition;
(e) prohibit the debtors suppliers of goods or services
from withholding supply of goods or services in the
ordinary course or business for as long as the debtor
makes payments from the services and goods
supplied after the issuance of the stay order;
(f) fix the initial hearing on the petition not earlier than
45 days but not later than 60 days from the filing
thereof;
(g) direct the petitioner to publish the order in a
newspaper of general circulation in the Philippines
once a week for two consecutive weeks;
(h) direct all creditors and interested parties (including
the SEC) to file and serve on the debtor a verified
comment or opposition to the petition, with
supporting affidavits and documents, not later than
10 days before the date of the initial hearing and
putting them on notice that their failure to do so will
bar them from participating in the proceedings.

For how long the stay holder to be effective?(Rule 4,
Sec. 11)
The stay order shall be effective from the date of
its issuance until the dismissal of the petition or
termination of the rehabilitation proceedings.

Could the stay order be modified or terminated? Could
conditions be set for its continuance? Could a claim be
relieved from the coverage of the order?(Rule 4, Sec 12)
Yes, to all the questions. The court may, on
motion or motu proprio, terminate, modify, or set
conditions for the continuance of the stay order, or relieve
a claim from the coverage thereof, upon showing that-
(a) any of the allegations of the petition, or any of
the contents of any attachment, or the verification
thereof, has ceased to be true;
(b) a creditor does not have adequate protection
over property securing its claim; or
(c) the debtors secured obligation is more than the
fair market value of the property subject of the stay and
such property is not necessary for the rehabilitation of the
debtor.

What is the concept of adequate protection over
property?(Rule 4, Sec 12)
A creditor does not have adequate protection
over property securing its claim if it can be shown that-
(a) the debtor fails or refuses to honor a pre-existing
agreement with the creditor to keep the property insured;
(b) the debtor fails or refuses to take commercially
reasonable steps to maintain the property; or
(c) the property has depreciated to the extent that the
creditor is undersecured.

What are the contents of the rehabilitation plan? (Rule
4, Sec 5)

COMMERCIAL LAW
CORPORATION LAWS
124

2009 BAR OPERATIONS
(a) the desired business targets or goal, and the duration
and coverage of the rehabilitation;
(b) the terms and conditions of such rehabilitation;
(c) the material financial commitments to support the
(d) the means for the execution of the rehabilitation
plan, e.g. conversion of debts into equity,
restructuring the debts, dacion en pago, sale of
assets or controlling interest;
(e) liquidation analysis, i.e. an estimate of the proportion
of the claims that the creditors and stockholders
would receive if the debtors properties were
liquidated;
(f) other relevant information to enable a reasonable
investor to make an informed decision on the
feasibility of the rehabilitation plan.

What is the power of the court to cram down a
rehabilitation plan?(Rule 4, Sec. 23)
The power of the court to cram down a
rehabilitation plan refers to its authority to approve a
rehabilitation plan even over the opposition of the
creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor
is feasible and the opposition of the creditors is
manifestly unreasonable. In determining whether or not
the opposition of the creditor is manifestly unreasonable,
the court shall consider the following:
(a) the plan would likely provide the objecting class of
the creditors with compensation greater than that
debtor were sold by the liquidator within a three-
month period;
(b) that the shareholders or owners of the debtor lost at
least their controlling interest as a result of the plan;
and
(c) that the rehabilitation receiver has recommended
approval of the plan.

What is the effect of the approval of the court of the
rehabilitation plan on the debtor and creditors?(Rule 4,
Sec. 24)
The approval of the rehabilitation plan by the
court shall result, among other effects, in the said plan
and its provisions being binding upon the debtor and all
the persons who may be affected by it, including the
creditors, whether or not such persons have participated
in the proceedings or opposed the plan or whether or not
their claims have been scheduled.

What is the primary task of the rehabilitation receiver?
Does he take over the management and control of the
debtor? (Rule 4, Sec 14)
The rehabilitation receiver implements the
rehabilitation plan after its approval by the court. His
primary task is to study the best way to rehabilitate the
debtor and to ensure that the value of the debtors
property is reasonably maintained pending the
determination of whether or not the debtor should be
rehabilitated.
He does not take over the management and
control of the debtor but simply oversees and monitors
closely the operations of the debtor during the pendency
of the proceedings. This reflects the concept of debtor-in-
place. For this purpose, he has been granted the powers,
duties and functions of a receiver under PD 1402-A, as
amended, and the Rules of Court.

COMMERCIAL LAW
CORPORATION LAWS
125

2009 BAR OPERATIONS

RULE I
GENERAL PROVISIONS

SECTION 1. (a) Cases covered. - These Rules shall
govern the procedure to be observed in civil cases
involving the following:
(1) Devices or schemes employed by, or any act of,
the board of directors, business associates,
officers or partners, amounting to fraud or
misrepresentation which may be detrimental to
the interest of the public and/or of the
stockholders, partners, or members of any
corporation, partnership, or association;
(2) Controversies arising out of intra-corporate,
partnership, or association relations, between
and among stockholders, members, or
associates; and between, any or all of them and
the corporation, partnership, or association of
which they are stockholders, members, or
associates, respectively;
(3) Controversies in the election or appointment of
directors, trustees, officers, or managers of
corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
(b) Prohibition against nuisance and harassment suits.
- Nuisance and harassment suits are prohibited. In
determining whether a suit is a nuisance or harassment
suit, the court shall consider, among others, the
following:
(1) The extent of the shareholding or interest of the
initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts
complained of; and
(5) Prejudice or damage to the corporation,
partnership, or association in relation to the relief
sought.
In case of nuisance or harassment suits, the court
may, motu proprio or upon motion, forthwith dismiss the
case.
SEC. 2. Suppletory application of the Rules of Court. -
The Rules of Court, in so far as they may be applicable and
are not inconsistent with these Rules, are hereby adopted
to form an integral part of these Rules.
SEC. 3. Construction. - These Rules shall be liberally
construed in order to promote their objective of securing
a just, summary, speedy and inexpensive determination
of every action or proceeding.
SEC. 4. Executory nature of decisions and orders. - All
decisions and orders issued under these Rules shall
immediately be executory. No appeal or petition taken
therefrom shall stay the enforcement or implementation
of the decision or order, unless restrained by an appellate
court. Interlocutory orders shall not be subject to appeal.
SEC. 5. Venue. - All actions covered by these Rules
shall be commenced and tried in the Regional Trial Court
which has jurisdiction over the principal office of the
corporation, partnership, or association concerned.
Where the principal office of the corporation, partnership
or association is registered in the Securities and Exchange
Commission as Metro Manila, the action must be filed in
the city or municipality where the head office is located.
SEC. 6. Service of pleadings. - When so authorized by
the court, any pleading and/or document required by
these Rules may be filed with the court and/or served
upon the other parties by facsimile transmission (fax) or
electronic mail (e-mail). In such cases, the date of
transmission shall be deemed to be prima facie the date of
service.
SEC. 7. Signing of pleadings, motions and other
papers. - Every pleading, motion, and other paper of a
party represented by an attorney shall be signed by at
least one attorney of record in the attorneys individual
name, whose address shall be stated. A party who is not
represented by an attorney shall sign the pleading,
motion, or other paper and state his address.
The signature of an attorney or party constitutes a
certification by the signer that he has read the pleading,
motion, or other paper; that to the best of his knowledge,
information, and belief formed after reasonable inquiry, it
is well grounded in fact and is warranted by existing law
or a good faith argument for the extension, modification,
or reversal of existing jurisprudence; and that it is not
interposed for any improper purpose, such as to harass or
to cause unnecessary delay or needless increase in the
cost of litigation.
If a pleading, motion, or other paper is not signed, it
shall be stricken off the record unless it is promptly signed
by the pleader or movant, after he is notified of the
omission.
SEC. 8. Prohibited pleadings. - The following
pleadings are prohibited:
(1) Motion to dismiss;
(2) Motion for a bill of particulars;
(3) Motion for new trial, or for reconsideration of
judgment or order, or for re-opening of trial;
(4) Motion for extension of time to file pleadings,
affidavits or any other paper, except those filed
due to clearly compelling reasons. Such motion
must be verified and under oath; and
(5) Motion for postponement and other motions of
similar intent, except those filed due to clearly
compelling reasons. Such motion must be
verified and under oath.

SEC. 9. Assignment of cases. - All cases filed under

Proposed Interim Rules Of Procedure
Governing Intra-Corporate Controversies
Under R.A. No. 8799
A.M. No. 01-2-04-SC
(Effective April 1, 2001)

COMMERCIAL LAW
CORPORATION LAWS
126

2009 BAR OPERATIONS
these Rules shall be tried by judges designated by the
Supreme Court to hear and decide cases transferred from
the Securities and Exchange Commission to the Regional
Trial Courts and filed directly with said courts pursuant to
Republic Act No. 8799, otherwise known as the Securities
and Regulation Code.

RULE 2
COMMENCEMENT OF ACTION
AND PLEADINGS

SECTION 1. Commencement of action. - An action
under these Rules is commenced by the filing of a verified
complaint with the proper Regional Trial Court.
SEC. 2. Pleadings allowed. - The only pleadings
allowed to be filed under these Rules are the complaint,
answer, compulsory counterclaims or cross-claims
pleaded in the answer, and the answer to the
counterclaims or cross-claims.
SEC. 3. Verification. - The complaint and the answer
shall be verified by an affidavit stating that the affiant has
read the pleading and the allegations therein are true and
correct based on his own personal knowledge or on
authentic records.
SEC. 4. Complaint. - The complaint shall state or
contain:
(1) the names, addresses, and other relevant
personal or juridical circumstances of the parties;
(2) all facts material and relevant to the plaintiffs
cause or causes of action, which shall be
supported by affidavits of the plaintiff or his
witnesses and copies of documentary and other
evidence supportive of such cause or causes of
action;
(3) the law, rule, or regulation relied upon, violated,
or sought to be enforced;
(4) a certification that (a) the plaintiff has not
theretofore commenced any action or filed any
claim involving the same issues in any court,
tribunal or quasi-judicial agency, and, to the best
of his knowledge, no such other action or claim is
pending therein; (b) if there is such other action
or claim, a complete statement of the present
status thereof; and (c) if he should thereafter
learn that the same or similar action or claim has
been filed or is pending, he shall report that fact
within five (5) days therefrom to the court; and
(5) the relief sought.
SEC. 5. Summons. - The summons and the complaint
shall be served together not later than five (5) days from
the date of filing of the complaint.
(a) Service upon domestic private juridical entities. - If
the defendant is a domestic corporation, service shall be
deemed adequate if made upon any of the statutory or
corporate officers as fixed by the by-laws or their
respective secretaries. If the defendant is a partnership,
service shall be deemed adequate if made upon any of the
managing or general partners or upon their respective
secretaries. If the defendant is an association, service
shall be deemed adequate if made upon any of its officers
or their respective secretaries.
(b) Service upon foreign private juridical entity. -
When the defendant is a foreign private juridical entity
which is transacting or has transacted business in the
Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if
there be no such agent, on the government official
designated by law to that effect, or on any of its officers
or agents within the Philippines.
SEC. 6. Answer. - The defendant shall file his answer
to the complaint, serving a copy thereof on the plaintiff,
within fifteen (15) days from service of summons.
In the answer, the defendant shall:
(1) Specify each material allegation of fact the truth
of which he admits;
(2) Specify each material allegation of fact the truth
of which he does not admit. Where the
defendant desires to deny only a part of an
averment, he shall specify so much of it as true
and material and shall deny only the remainder;
(3) Specify each material allegation of fact as to
which truth he has no knowledge or information
sufficient to form a belief, and this shall have the
effect of a denial;
(4) State the defenses, including grounds for a
motion to dismiss under the Rules of Court;
(5) State the law, rule, or regulation relied upon;
(6) Address each of the causes of action stated in
the complaint;
(7) State the facts upon which he relies for his
defense, including affidavits of witnesses and
copies of documentary and other evidence
supportive of such cause or causes of action;
(8) State any compulsory counterclaim/s and cross-
claim/s; and
(9) State the relief sought.
The answer to counterclaims or cross-claims shall be
filed within ten (10) days from service of the answer in
which they are pleaded.
SEC. 7. Effect of failure to answer. - If the defendant
fails to answer within the period above provided, he shall
be considered in default. Upon motion or motu proprio,
the court shall render judgment either dismissing the
complaint or granting the relief prayed for as the records
may warrant. In no case shall the court award a relief
beyond or different from that prayed for.
SEC. 8. Affidavits, documentary and other evidence. -
Affidavits shall be based on personal knowledge, shall set
forth such facts as would be admissible in evidence, and
shall show affirmatively that the affiant is competent to
testify on the matters stated therein. The affidavits shall
be in question and answer form, and shall comply with
the rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and
other evidence shall be attached to the appropriate
pleading; Provided, however, that affidavits,

COMMERCIAL LAW
CORPORATION LAWS
127

2009 BAR OPERATIONS
documentary and other evidence not so submitted may
be attached to the pre-trial brief required under these
Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following
cases:
(1) Testimony of unwilling, hostile, or adverse party
witnesses. A witness is presumed prima facie
hostile if he fails or refuses to execute an affidavit
after a written request therefor;
(2) If the failure to submit the evidence is for
meritorious and compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence
must be submitted not later than five (5) days prior to its
introduction in evidence.

RULE 3
MODES OF DISCOVERY

SECTION 1. In general. - A party can only avail of any
of the modes of discovery not later than fifteen (15) days
from the joinder of issues.
SEC. 2. Objections. - Any mode of discovery such as
interrogatories, request for admission, production or
inspection of documents or things, may be objected to
within ten (10) days from receipt of the discovery device
and only on the ground that the matter requested is
patently incompetent, immaterial, irrelevant or privileged
in nature.
The court shall rule on the objections not later than
fifteen (15) days from the filing thereof.
SEC. 3. Compliance. - Compliance with any mode of
discovery shall be made within ten (10) days from receipt
of the discovery device, or if there are objections, from
receipt of the ruling of the court.
SEC. 4. Sanctions. - The sanctions prescribed in the
Rules of Court for failure to avail of, or refusal to comply
with, the modes of discovery shall apply. In addition, the
court may, upon motion, declare a party non-suited or as
in default, as the case may be, if the refusal to comply
with a mode of discovery is patently unjustified.

RULE 4
PRE-TRIAL
SECTION 1. Pre-trial conference; mandatory nature. -
Within five (5) days after the period for availment of, and
compliance with, the modes of discovery prescribed in
Rule 3 hereof, whichever comes later, the court shall issue
and serve an order immediately setting the case for pre-
trial conference and directing the parties to submit their
respective pre-trial briefs. The parties shall file with the
court and furnish each other copies of their respective
pre-trial brief in such manner as to ensure its receipt by
the court and the other party at least five (5) days before
the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs,
among other matters, the following:
(1) Brief statement of the nature of the case, which
shall summarize the theory or theories of the
party in clear and concise language;
(2) Allegations expressly admitted by either or both
parties;
(3) Allegations deemed admitted by either or both
parties;
(4) Documents not specifically denied under oath by
either or both parties;
(5) Amendments to the pleadings;
(6) Statement of the issues, which shall separately
summarize the factual and legal issues involved
in the case;
(7) Names of witnesses to be presented and the
summary of their testimony as contained in their
affidavits supporting their positions on each of
the issues;
(8) All other pieces of evidence, whether
documentary or otherwise and their respective
purposes;
(9) Specific proposals for an amicable settlement;
(10) Possibility of referral to mediation or other
alternative modes of dispute resolution;
(11) Proposed schedule of hearings; and
(12) Such other matters as may aid in the just and
speedy disposition of the case.
SEC. 2. Nature and purpose of pre-trial conference. -
During the pre-trial conference, the court shall, with its
active participation, ensure that the parties consider in
detail all of the following:
(1) The possibility of an amicable settlement;
(2) Referral of the dispute to mediation or other
forms of dispute resolution;
(3) Facts that need not be proven, either because
they are matters of judicial notice or expressly or
deemed admitted;
(4) Amendments to the pleadings;
(5) The possibility of obtaining stipulations and
admissions of facts and documents;
(6) Objections to the admissibility of testimonial,
documentary and other evidence;

(7) Objections to the form or substance of any
affidavit, or part thereof;
(8) Simplification of the issues;
(9) The possibility of submitting the case for
decision on the basis of position papers,
affidavits, documentary and real evidence;
(10) A complete schedule of hearing dates; and
(11) Such other matters as may aid in the speedy and
summary disposition of the case.
SEC. 3. Termination. - The preliminary conference
shall be terminated not later than ten (10) days after its
commencement, whether or not the parties have agreed
to settle amicably.
SEC. 4. Judgment before pre-trial. - If, after
submission of the pre-trial briefs, the court determines

COMMERCIAL LAW
CORPORATION LAWS
128

2009 BAR OPERATIONS
that, upon consideration of the pleadings, the affidavits
and other evidence submitted by the parties, a judgment
may be rendered, the court may order the parties to file
simultaneously their respective memoranda within a non-
extendible period of twenty (20) days from receipt of the
order. Thereafter, the court shall render judgment, either
full or otherwise, not later than ninety (90) days from the
expiration of the period to file the memoranda.
SEC. 5. Pre-trial order; judgment after pre-trial. - The
proceedings in the pre-trial shall be recorded. Within ten
(10) days after the termination of the pre-trial, the court
shall issue an order which shall recite in detail the matters
taken up in the conference, the actions taken thereon, the
amendments allowed in the pleadings, and the
agreements or admissions made by the parties as to any
of the matters considered. The court shall rule on all
objections to or comments on the admissibility of any
documentary or other evidence, including any affidavit or
any part thereof. Should the action proceed to trial, the
order shall explicitly define and limit the issues to be tried
and shall strictly follow the form set forth in Annex A of
these Rules.
The contents of the order shall control the
subsequent course of the action, unless modified before
trial to prevent manifest injustice.
After the pre-trial, the court may render judgment,
either full or partial, as the evidence presented during the
pre-trial may warrant.

RULE 5
TRIAL

SECTION 1. Witnesses. - If the court deems necessary
to hold hearings to determine specific factual matters
before rendering judgment, it shall, in the pre-trial order,
set the case for trial on the dates agreed upon by the
parties.
Only persons whose affidavits were submitted may
be presented as witnesses, except in cases specified in
section 8, Rule 2 of these Rules. The affidavits of the
witnesses shall serve as their direct testimonies, subject
to cross-examination in accordance with existing rules on
evidence.
SEC. 2. Trial schedule. - Unless judgment is rendered
pursuant to Rule 4 of these Rules, the initial hearing shall
be held not later than thirty (30) days from the date of the
pre-trial order. The hearings shall be completed not later
than sixty (60) days from the date of the initial hearing,
thirty (30) days of which shall be allotted to the plaintiffs
and thirty (30) days to the defendants in the manner
prescribed in the pre-trial order. The failure of a party to
present a witness on a scheduled hearing date shall be
deemed a waiver of such hearing date. However, a party
may present such witness or witnesses within his
remaining allotted hearing dates.
SEC. 3. Written offer of evidence. - Evidence not
otherwise admitted by the parties or ruled upon by the
court during the pre-trial conference shall be offered in
writing not later than five (5) days from the completion of
the presentation of evidence of the party concerned. The
opposing party shall have five (5) days from receipt of the
offer to file his comments or objections. The court shall
make its ruling on the offer within five (5) days from the
expiration of the period to file comments or objections.
SEC. 4. Memoranda. - Immediately after ruling on the
last offer of evidence, the court shall order the parties to
simultaneously file, within thirty (30) days from receipt of
the order, their respective memoranda. The memoranda
shall contain the following:
(1) A Statement of the Case, which is a clear and
concise statement of the nature of the action
and a summary of the proceedings;
(2) A Statement of the Facts, which is a clear and
concise statement in narrative form of the
established facts, with reference to the
testimonial, documentary or other evidence in
support thereof;
(3) A Statement of the Issues, which is a clear and
concise statement of the issues presented to the
court for resolution;
(4) The Arguments, which is a clear and concise
presentation of the argument in support of each
issue; and
(5) The Relief, which is a specification of the order
or judgment which the party seeks to obtain.
No reply memorandum shall be allowed.
SEC. 5. Decision after trial. - The court shall render a
decision not later than (90) days from the lapse of the
period to file the memoranda, with or without said
pleading having been filed.
RULE 6
ELECTION CONTESTS
SECTION 1. Cases covered. - The provisions of this
rule shall apply to election contests in stock and non-
stock corporations.
SEC. 2. Definition. - An election contest refers to any
controversy or dispute involving title or claim to any
elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections,
and the qualifications of candidates, including the
proclamation of winners, to the office of director, trustee
or other officer directly elected by the stockholders in a
close corporation or by members of a non-stock
corporation where the articles of incorporation or by-laws
so provide.
SEC. 3. Complaint. - In addition to the requirements
in section 4, Rule 2 of these Rules, the complaint in an
election contest must state the following:
(1) The case was filed within fifteen (15) days from
the date of the election if the by-laws of the
corporation do not provide for a procedure for
resolution of the controversy, or within fifteen
(15) days from the resolution of the controversy
by the corporation as provided in its by-laws; and
(2) The plaintiff has exhausted all intra-corporate

COMMERCIAL LAW
CORPORATION LAWS
129

2009 BAR OPERATIONS
remedies in election cases as provided for in the
by-laws of the corporation.
SEC. 4. Duty of the court upon the filing of the
complaint. - Within two (2) days from the filing of the
complaint, the court, upon a consideration of the
allegations thereof, may dismiss the complaint outright if
it is not sufficient in form and substance, or, if it is
sufficient, order the issuance of summons which shall be
served, together with a copy of the complaint, on the
defendant within two (2) days from its issuance.
SEC. 5. Answer. - The defendant shall file his answer
within ten (10) days from service of summons and the
complaint. The answer shall contain the matters required
in section 6, Rule 2 of these Rules.
SEC. 6. Affidavits, documentary and other evidence. -
The parties shall attach to the complaint and answer the
affidavits of witnesses, documentary and other evidence
in support thereof, if any.
SEC. 7. Effect of failure to answer. - If the defendant
fails to file an answer within the period above provided,
the court shall, within ten (10) days from the lapse of said
period, motu proprio or on motion, render judgment as
may be warranted by the allegations of the complaint, as
well as the affidavits, documentary and other evidence on
record. In no case shall the court award a relief beyond or
different from that prayed for.
SEC. 8. Trial. - If the court deems it necessary to hold
a hearing to clarify specific factual matters before
rendering judgment, it shall, within ten (10) days from the
filing of the last pleading, issue an order setting the case
for hearing for the purpose. The order shall, in clear and
concise terms, specify the factual matters the court
desires to be clarified and the witnesses, whose affidavits
have been submitted, who will give the necessary
clarification.
The hearing shall be set on a date not later than ten
(10) days from the date of the order, and shall be
completed not later than fifteen (15) days from the date
of the first hearing. The affidavit of a witness who fails to
appear for clarificatory questions of the court shall be
ordered stricken off the record.
SEC. 9. Decision. - The Court shall render a decision
within fifteen (15) days from receipt of the last pleading,
or from the date of the last hearing as the case may be.
The decision shall be based on the pleadings, affidavits,
documentary and other evidence attached thereto and
the answers of the witnesses to the clarificatory questions
of the court given during the hearings.

RULE 7
INSPECTION OF CORPORATE BOOKS
AND RECORDS

SECTION 1. Cases covered. - The provisions of this
Rule shall apply to disputes exclusively involving the
rights of stockholders or members to inspect the books
and records and/or to be furnished with the financial
statements of a corporation, under sections 74 and 75 of
Batas Pambansa Blg. 68, otherwise known as the
Corporation Code of the Philippines.
SEC. 2. Complaint. In addition to the requirements
in section 4, Rule 2 of these Rules, the complaint must
state the following:
(1) The case is for the enforcement of plaintiffs right
of inspection of corporate orders or records
and/or to be furnished with financial statements
under sections 74 and 75 of the Corporation Code
of the Philippines;
(2) A demand for inspection and copying of books
and records and/or to be furnished with financial
statements made by the plaintiff upon
defendant;
(3) The refusal of defendant to grant the demands
of the plaintiff and the reasons given for such
refusal, if any; and
(4) The reasons why the refusal of defendant to
grant the demands of the plaintiff is unjustified
and illegal, stating the law and jurisprudence in
support thereof.
SEC. 3. Duty of the court upon the filing of the
complaint. - Within two (2) days from the filing of the
complaint, the court, upon a consideration of the
allegations thereof, may dismiss the complaint outright if
it is not sufficient in form and substance, or, if it is
sufficient, order the issuance of summons which shall be
served, together with a copy of the complaint, on the
defendant within two (2) days from its issuance.
SEC. 4. Answer. The defendant shall file his answer
within ten (10) days from service of summons and the
complaint. In addition to the requirements in section 6,
Rule 2 of these Rules, the answer must state the
following:
(1) The grounds for the refusal of defendant to grant
the demands of the plaintiff, stating the law and
jurisprudence in support thereof;
(2) The conditions or limitations on the exercise of
the right to inspect which should be imposed by
the court; and
(3) The cost of inspection, including manpower and
photocopying expenses, if the right to inspect is
granted.
SEC. 5. Affidavits, documentary and other evidence.
The parties shall attach to the complaint and answer the
affidavits of witnesses, documentary and other evidence
in support thereof, if any.
SEC. 6. Effect of failure to answer. If the defendant
fails to file an answer within the period above provided,
the court, within ten (10) days from the lapse of the said
period, motu proprio or upon motion, shall render
judgment as warranted by the allegations of the
complaint, as well as the affidavits, documentary and
other evidence on record. In no case shall the court award
a relief beyond or different from that prayed for.

COMMERCIAL LAW
CORPORATION LAWS
130

2009 BAR OPERATIONS
SEC. 7. Decision. The court shall render a decision
based on the pleadings, affidavits and documentary and
other evidence attached thereto within fifteen (15) days
from receipt of the last pleading. A decision ordering
defendants to allow the inspection of books and records
and/or to furnish copies thereof shall also order the
plaintiff to deposit the estimated cost of the manpower
necessary to produce the books and records and the cost
of copying, and state, in clear and categorical terms, the
limitations and conditions to the exercise of the right
allowed or enforced.

RULE 8
DERIVATIVE SUITS
SECTION 1. Derivative action. - A stockholder or
member may bring an action in the name of a corporation
or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the
acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to
exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the
relief he desires;
(3) No appraisal rights are available for the act or
acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall
forthwith dismiss the case.
SEC. 2. Discontinuance. - A derivative action shall not
be discontinued, compromised or settled without
approval of the court. During the pendency of the action,
any sale of shares of the complaining stockholder shall be
approved by the court. If the court determines that the
interest of the stockholders or members will be
substantially affected by the discontinuance, compromise
or settlement, the court may direct that notice, by
publication or otherwise, be given to the stockholders or
members whose interests it determines will be so
affected.

RULE 9
MANAGEMENT COMMITTEE

SECTION 1. Creation of a management committee. -
As an incident to any of the cases filed under these Rules
or the Interim Rules on Corporate Rehabilitation, a party
may apply for the appointment of a management
committee for the corporation, partnership or
association, when there is imminent danger of:
(1) Dissipation, loss, wastage or destruction of
assets or other properties; and
(2) Paralyzation of its business operations which
may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general
public.
SEC. 2. Receiver. - In the event the court finds the
application to be sufficient in form and substance, the
court shall issue an order: (a) appointing a receiver of
known probity, integrity and competence and without
any conflict of interest as hereunder defined to
immediately take over the corporation, partnership or
association, specifying such powers as it may deem
appropriate under the circumstances, including any of the
powers specified in section 5 of this Rule; (b) fixing the
bond of the receiver; (c) directing the receiver to make a
report as to the affairs of the entity under receivership
and on other relevant matters within sixty (60) days from
the time he assumes office; (d) prohibiting the incumbent
management of the company, partnership or association
from selling, encumbering, transferring or disposing in
any manner any of its properties except in the ordinary
course of business; and (e) directing the payment in full of
all administrative expenses incurred after the issuance of
the order.
SEC. 3. Receiver and management committee as
officers of the court. - The receiver and the members of
the management committee in the exercise of their
powers and performance of their duties are considered
officers of the court and shall be under its control and
supervision.
SEC. 4. Composition of the management committee. -
After due notice and hearing, the court may appoint a
management committee composed of three (3) members
chosen by the court. In the appointment of the members
of the management committee, the following
qualifications shall be taken into consideration by the
court:
(1) Expertise and acumen to manage and operate a
business similar in size and complexity as that of
the corporation, association or partnership
sought to be put under management committee;
(2) Knowledge in management and finance;
(3) Good moral character, independence and
integrity;
(4) A lack of a conflict of interest as defined in these
Rules; and
(5) Willingness and ability to file a bond in such
amount as may be determined by the court.
Without limiting the generality of the following, a
member of a management committee may be deemed to
have a conflict of interest if:
(1) He is engaged in a line of business which
competes with the corporation, association or
partnership sought to be placed under
management;
(2) He is a director, officer or stockholder charged
with mismanagement, dissipation or wastage of
the properties of the entity under management;
or
(3) He is related by consanguinity or affinity within
the fourth civil degree to any director, officer or
stockholder charged with mismanagement,
dissipation or wastage of the properties of the

COMMERCIAL LAW
CORPORATION LAWS
131

2009 BAR OPERATIONS
entity under management.
SEC. 5. Powers and functions of the management
committee. - Upon assumption to office of the
management committee, the receiver shall immediately
render a report and turn over the management and
control of the entity under his receivership to the
management committee.
The management committee shall have the power to
take custody of and control all assets and properties
owned or possessed by the entity under management. It
shall take the place of the management and board of
directors of the entity under management, assume their
rights and responsibilities, and preserve the entitys
assets and properties in its possession.
Without limiting the generality of the foregoing, the
management committee shall exercise the following
powers and functions:
(1) To investigate the acts, conduct, properties,
liabilities, and financial condition of the
corporation, association or partnership under
management;
(2) To examine under oath the directors and officers
of the entity and any other witnesses that it may
deem appropriate;
(3) To report to the court any fact ascertained by it
pertaining to the causes of the problems, fraud,
misconduct, mismanagement and irregularities
management or any other person;
(4) To employ such person or persons such as
lawyers, accountants, auditors, appraisers and
staff as are necessary in performing its functions
and duties as management committee;
(5) To report to the court any material adverse
change in the business of the corporation,
association or partnership under management;
(6) To evaluate the existing assets and liabilities,
earnings and operations of the corporation,
association or partnership under management;
(7) To determine and recommend to the court the
best way to salvage and protect the interest of
the creditors, stockholders and the general
public, including the rehabilitation of the
corporation, association or partnership under
management;
(8) To prohibit and report to the court any
encumbrance, transfer, or disposition of the
debtors property outside of the ordinary course
of business or what is allowed by the court;
(9) To prohibit and report to the court any payments
made outside of the ordinary course of business;
(10) To have unlimited access to the employees,
premises, books, records and financial
documents during business hours;
(11) To inspect, copy, photocopy or photograph any
document, paper, book, account or letter,
whether in the possession of the corporation,
association or partnership or other persons;
(12) To gain entry into any property for the purposes
of inspecting, measuring, surveying, or
photographing it or any designated relevant
object or operation thereon;
(13) To bring to the attention of the court any
material change affecting the entitys ability to
meet its obligations;
(14) To revoke resolutions passed by the Executive
Committee or Board of Directors/Trustees or any
governing body of the entity under management
and pass resolution in substitution of the same to
enable it to more effectively exercise its powers
and functions;
(15) To modify, nullify or revoke transactions coming
to its knowledge which it deems detrimental or
prejudicial to the interest of the entity under
management;
(16) To recommend the termination of the
proceedings and the dissolution of the entity if it
determines that the continuance in business of
such entity is no longer feasible or profitable or
no longer works to the best interest of the
stockholders, parties-litigants, creditors or the
general public;
(17) To apply to the court for any order or directive
that it may deem necessary or desirable to aid it
in the exercise of its powers and performance of
its duties and functions; and
(18) To exercise such other powers as may, from time
to time, be conferred upon it by the court.
SEC. 6. Action by management committee. - A
majority of its members shall be necessary for the
management committee to act or make a decision. The
chairman of the management committee shall be chosen
by the members from among themselves. The
committee may delegate its management functions as
may be necessary to operate the business of the entity
under management and preserve its assets.
SEC. 7. Transactions deemed to be in bad faith. - All
transactions made by the previous management and
directors shall be deemed fraudulent and are rescissible if
made within thirty (30) days prior to the appointment of
the receiver or management committee or during their
incumbency as receiver or management committee.
SEC. 8. Fees and expenses. - The receiver or the
management committee and the persons hired by it shall
be entitled to reasonable professional fees and
reimbursement of expenses which shall be considered as
administrative expenses.
SEC. 9. Immunity from suit. - The receiver and
members of the management committee and the persons
employed by them shall not be subject to any action,
claim or demand in connection with any act done or
omitted by them in good faith in the exercise of their
functions and powers. All official acts and transactions of
the receiver or management committee duly approved or
ratified by the court shall render them immune from any
suit in connection with such act or transaction.
SEC. 10. Reports. - Within a period of sixty (60) days
from the appointment of its members, the management
committee shall make a report to the court on the state of

COMMERCIAL LAW
CORPORATION LAWS
132

2009 BAR OPERATIONS
the corporation, partnership or association under
management. Thereafter, the management committee
shall report every three (3) months to the court or as often
as the court may require on the general condition of the
entity under management.
SEC. 11. Removal and replacement of a member of the
management committee. - A member of the management
committee is deemed removed upon appointment by the
court of his replacement chosen in accordance with
section 4 of this Rule.
SEC. 12. Discharge of the management committee. -
The management committee shall be discharged and
dissolved under the following circumstances:
(1) Whenever the court, on motion or motu proprio,
has determined that the necessity for the
management committee no longer exists;
(2) By agreement of the parties; and
(3) Upon termination of the proceedings.
Upon its discharge and dissolution, the management
committee shall submit its final report and render an
accounting of its management within such reasonable
time as the court may allow.

RULE 10
PROVISIONAL REMEDIES

SECTION 1. Provisional remedies. - A party may apply
for any of the provisional remedies provided in the Rules
of Court as may be available for the purposes. However,
no temporary restraining order or status quo order shall
be issued save in exceptional cases and only after hearing
the parties and the posting of a bond.

RULE 11
SANCTIONS

SECTION 1. Sanctions on the parties or counsel. - In
any of the following cases, the court may, upon motion or
motu proprio, impose appropriate sanctions:
(1) In case the court determines in the course of the
proceeding that the action is a nuisance or
harassment suit;
(2) In case a pleading, motion or other paper is filed
in violation of section 7, Rule 1 of these Rules;
(3) In case a party omits or violates the certification
required under section 4, Rule 2 of these Rules;
(4) In case of unwarranted denials in the answer to
the complaint;
(5) In case of willful concealment or non-disclosure
of material facts or evidence;
The sanctions may include an order to pay the other
party or parties the amount of the reasonable expenses
incurred because of the act complained of, including
reasonable attorneys fees.
SEC. 2. Disciplinary sanctions on the judge. - The
presiding judge may, upon a verified complaint filed with
the Office of the Court Administrator, be subject to
disciplinary action under any of the following cases:
(1) Failure to observe the special summary
procedures prescribed in these Rules; or
(2) Failure to issue a pre-trial order in the form
prescribed in these Rules.

RULE 12
FINAL PROVISIONS

SECTION 1. Severability. - If any provision or section
of these Rules is held invalid, the remaining provisions or
sections shall not be affected thereby.
SEC. 2. Effectivity. - These Rules shall take effect on 1
April 2001 following its publication in two (2) newspapers
of general circulation in the Philippines.

Annex A

Republic of the Philippines
_______ Judicial Region
Regional Trial Court
Branch ___

NAME(s) OF PLAINTIFF/S,
Plaintiff/s,
- versus - Case No. __________
NAME(s) OF DEFENDANT/S,
Defendant/s.
xx

PRE-TRIAL ORDER

I. Summary of the Case

II. Preliminary Matters
A. Amendments allowed in the pleadings
B. Rulings on all objections to or comments on
admissibility of any documentary or other
evidence
C. Other matters taken up in conference not
covered by the subsequent items and actions
taken thereon.

III. Statement of the Facts
A. Admitted
B. Disputed
1. Version of the Plaintiff
2. Version of the Defendant

IV. Issues to be Resolved
A. Factual
B. Legal

V. Applicable Laws

COMMERCIAL LAW
CORPORATION LAWS
133

2009 BAR OPERATIONS
VI. Evidence for the Parties

All evidence to be adduced and presented by both
parties shall be limited to those identified below. All
documentary evidence have already been pre-marked
and copies thereof, after comparison with the original,
have been given the other party or such party has been
given an opportunity to examine the same in cases when
generating copies proves impractical. The testimonies of
the witnesses have all been reduced to affidavit form in
accordance with these Rules and copies thereof given to
the other party.
No other evidence shall be allowed other than those
indicated below except in accordance with section 8, Rule
2 of the Interim Rules of Procedure for Intra-Corporate
Controversies.

A. Evidence of the Plaintiff
1. Documentary Evidence
a) Document No. 1 (Exh. ___ )
(1) Name/Type
(2) Pre-Marking Number
(3) Summary
(4) Purpose
b) Document No. 2 (Exh. ___ )
(1) Name/Type
(3) Summary
(4) Purpose
(Additional documentary evidence shall be
similarly presented)
2. Testimonial Evidence
a) Name of First Witness
(1) Purpose of the testimony
(2) Estimated length of testimony
b) Name of Second Witness
(Additional witnesses shall be similarly
presented)
3. Other Evidence
B. Evidence of the Defendant
1. Documentary Evidence
a) Document No. 1 (Exh. ___ )
(1) Name/Type
(3) Summary
(4) Purpose
b) Document No. 2 (Exh. ___ )
(1) Name/Type
(3) Summary
(4) Purpose
(Additional documentary evidence shall be
similarly presented)
2. Testimonial Evidence
a) Name of First Witness
b) Name of Second Witness
(Additional witnesses shall be similarly
presented)
3. Other Evidence

VII. Hearing Dates

(These hearing dates, which should be scheduled not
later than thirty (30) days from the completion at the pre-
trial, shall be strictly followed and all postponements by
either party shall be deducted from such partys allotted
time to present evidence.)

A. Schedule of Plaintiffs Presentation of Evidence

B. Schedule of Defendants Presentation of Evidence

COMMERCIAL LAW
BANKING LAWS
134

2009 BAR OPERATIONS

Banks
- entities engaged in the lending of funds obtained in
the form of deposits
- an investment company that performs such functions
is NOT a bank; but one which loans out the money of
its customers, collects the interests and charges a
commission to both lender and borrower is engaged
in banking (Banas v. Asia Pacific Finance Corp., Oct. 18, 2000;
Republic vs. SCAC, G.R. No. L-20583)

Classification of Banks
a. Commercial banks;
b. Universal banks
c. Thrift banks, composed of:
(i) Savings and mortgage banks;
(ii) Stock savings and loan associations; and
(iii) Private development banks
b) Rural banks
c) Islamic banks
d) Cooperative banks
e) Other classifications of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.

POWERS OF THE BANGKO SENTRAL
1. Supervisory Powers. The operations and activities of
banks shall be subject to supervision of the Bangko
Sentral. It shall also have supervision over the
operations of and exercise regulatory powers over
quasi-banks, trust entities and other financial
institutions which under special laws are subject to
Bangko Sentral supervision.
Quasi-banks shall refer to entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of re-
lending or purchasing of receivables and other
obligations
Deposit substitutes is defined as an alternative form
of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's
own account, for the purpose of relending or
purchasing of receivables and other obligations.
These instruments may include, but need not be
limited to, bankers acceptances, promissory notes,
participations, certificates of assignment and similar
instruments with recourse, and repurchase
agreements.
Supervision shall include the following:
a. The issuance of rules of, conduct or the
establishment standards of operation for uniform
application to all institutions or functions covered,
taking into consideration the distinctive character
of the operations of institutions and the
substantive similarities of specific functions to
which such rules, modes or standards are to be
applied
b. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board
c. Overseeing to ascertain that laws and regulations
are complied with
d. Regular investigation which shall not be oftener
than once a year from the last date of examination
to determine whether an institution is conducting
its business on a safe or sound basis: Provided,
That the deficiencies/irregularities found by or
discovered by an audit shall be immediately
addressed
e. Inquiring into the solvency and liquidity of the
institution; or
f. Enforcing prompt corrective action.
2. The Monetary Board may prescribe ratios, ceilings,
limitations, or other forms of regulation on the
different types of accounts and practices of banks
and quasi-banks which shall, to the extent feasible,
conform to internationally accepted standards,
including of the Bank for International Settlements
(BIS).
The Monetary Board may exempt particular
categories of transactions from the
abovementioned regulations, but not limited
to:
1. Exceptional cases or
2. To enable a bank or quasi-bank under
rehabilitation or during a merger or
consolidation to continue in business, with
safety to its creditors, depositors and the
general public.
3. Authorize person or entity to engage in banking
operations or quasi-banking functions
No person or entity shall engage in banking
operations or quasi-banking functions
without authority from the Bangko Sentral:
Provided, however, That an entity authorized
by the Bangko Sentral to perform universal or
commercial banking functions shall likewise
have the authority to engage in quasi-banking
functions.

Upon issuance of this authority, such person
or entity may commence to engage in
banking operations or quasi-banking
function and shall continue to do so
unless such authority is sooner
1. Surrendered,
THE GENERAL BANKING LAW OF 2000

REPUBLIC ACT NO. 8791

COMMERCIAL LAW
BANKING LAWS
135

2009 BAR OPERATIONS
2. Annulled by the Bangko Sentral in
accordance with this Act or other special
laws.
3. Revoked,
4. Suspended
Persons or entities found to be performing
banking or quasi-banking functions without
authority from the Bangko Sentral shall be
subject to appropriate sanctions under the
New Central Bank Act and other applicable
laws.
4. The department head and the examiners of the
appropriate supervising and examining department
are authorized to administer oaths to any such
person, employee, officer, or director of any such
entity and to compel the presentation or
production of such books, documents, papers or
records that are reasonably necessary to ascertain
the facts relative to the true functions and operations
of such person or entity.
Failure or refusal to comply with the required
presentation or production of such books,
documents, papers or records within a reasonable
time shall subject the persons responsible therefore
to the penal sanctions provided under the New
Central Bank Act.
5. The Bangko Sentral shall, when examining a bank,
have the authority to examine an enterprise which
is wholly or majority-owned or controlled by the
bank.
6. Phase Out of Bangko Sentral Powers Over Building
and Loan Associations.
Within a period of three (3) years from the
effectivity of this Act, the Bangko Sentral
shall phase out and transfer its supervising
and regulatory powers over building and
loan associations to the Home Insurance and
Guaranty Corporation which shall assume
the same.
Conditions in the organization of bank or quasi-bank
1. That the entity is a stock corporation;
2. That its funds are obtained from the public,
which shall mean twenty (20) or more
persons; and
3. That the minimum capital requirements
prescribed by the Monetary Board for each
category of banks are satisfied

Other Considerations
1. Capability in terms of their financial resources and
technical expertise and integrity.
2. The bank licensing process shall incorporate
a. an assessment of the banks ownership
structure, directors and senior
management,
b. its operating plan
c. internal controls
d. its projected financial condition and
capital base.

Issuance of Stocks
Par value stocks only
Treasury Stocks - No bank shall purchase or acquire
shares of its own capital stock or accept its own
shares as a security for a loan,

except when authorized by the Monetary Board:

Provided, That in every case the stock so
purchased or acquired shall, within six (6) months
from the time of its purchase or acquisition, be
sold or disposed of at a public or private sale.

Foreign Stockholdings
Foreign individuals and non-bank corporations may
own or control up to forty percent (40%) of the voting
stock of a domestic bank. This rule shall apply to
Filipinos and domestic non-bank corporations.

The percentage of foreign-owned voting
stocks in a bank shall be determined by the
citizenship of the individual stockholders in that
bank.

The citizenship of the corporation which is a
stockholder in a bank shall follow the citizenship
of the controlling stockholders of the corporation,
irrespective of the place of incorporation. {Control
Test applies}

Matters which must be fully disclosed in all transactions
by corporations or related groups of persons with the
bank {Scope of RELATED INTEREST}
1. Stockholdings of Family Groups of Related
Interests
Stockholdings of individuals related to each
other within the fourth degree of consanguinity
or affinity, legitimate or common-law, shall be
considered family groups or related interests.
2. Corporate Stockholdings.
Two or more corporations owned or controlled
by the same family group or same group of
persons shall be considered related interests

The Securities and Exchange Commission shall not
register the articles of incorporation of any bank, or
any amendment thereto, unless accompanied by a
certificate of authority issued by the Monetary Board,
under its seal.

Evidence to be submitted for the issuance of the
certificate of authority
a) That all requirements of existing laws and
regulations to engage in the business for which
the applicant is proposed to be incorporated
have been complied with;

COMMERCIAL LAW
BANKING LAWS
136

2009 BAR OPERATIONS
b) That the public interest and economic
conditions, both general and local, justify the
authorization; and
c) That the amount of capital, the financing,
organization, direction and administration, as
well as the integrity and responsibility of the
organizers and administrators reasonably
assure the safety of deposits and the public
interest.

The Securities and Exchange Commission shall not
register the by-laws of any bank, or any amendment
thereto, unless accompanied by a certificate of
authority from the Bangko Sentral.

Board of Directors

At least five (5), and a maximum of fifteen (15)
members of the board or directors of a bank, two (2)
of whom shall be independent directors.

An "independent director" shall mean a person
other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests.

In the case of a bank merger or consolidation, the
number of directors shall not exceed twenty-one (21)

Non-Filipino citizens may become members of the
board of directors of a bank to the extent of the
foreign participation in the equity of said bank.

The meetings of the board of directors may be
conducted through modern technologies such as, but
not limited to,
1. teleconferencing and
2. video-conferencing.

Fit and Proper Rule.
The Monetary Board shall prescribe, pass upon and
review the qualifications and disqualifications of
individuals elected or appointed bank directors or
officers and disqualify those found unfit.
Ratio: To maintain the quality of bank management and
afford better protection to depositors and the public in
general

After due notice to the board of directors of the bank, the
Monetary Board may disqualify, suspend or remove any
bank director or officer who commits or omits an act
which render him unfit for the position.

In determining whether an individual is fit and proper to
hold the position of a director or officer of a bank, regard
shall be given to his
1. Experience.
2. Competence
3. Integrity
4. Training
5. Education

Prohibition on Public Officials
Except as otherwise provided in the Rural Banks Act,
no appointive or elective public official whether full-
time or part-time shall at the same time serve as
officer of any private bank,
save in cases where
1. Such service is incident to financial assistance
provided by the government or a government
owned or controlled corporation to the bank or
2. Unless otherwise provided under existing laws.

Bank Branches
Universal or commercial banks may open branches or
other offices within or outside the Philippines upon
prior approval of the Bangko Sentral. {all other banks
shall be governed by pertinent laws.}

A bank may, subject to prior approval of the
Monetary Board, use any or all of its branches as
outlets for the presentation and/or sale of the
financial products of its allied undertaking or of its
investment house units.

A bank authorized to establish branches or other
offices shall be responsible for all business
conducted in such branches and offices to the same
extent and in the same manner as though such
business had all been conducted in the head office.
A bank and its branches and offices shall be
treated as one unit.

Strikes and Lockouts
- Any strike or lockout involving banks,
- if unsettled after seven (7) calendar days
- shall be reported by the Bangko Sentral to the
Secretary of Labor who:
1. May assume jurisdiction over the dispute or
2. Decide it or
3. Certify the same to the National Labor
Relations Commission for compulsory
arbitration.
However, the President of the Philippines may
at any time intervene and assume jurisdiction
over such labor dispute in order to settle or
terminate the same.

Ratio: The banking industry is declared as
indispensable to the national interest

Operations Of Universal Banks and Commercial Banks
Powers of a Universal Bank
1. General powers incident to corporations
2. Powers necessary to carry on the business
banking such as
a. accepting drafts and issuing letters of
credit;
b. discounting and negotiating promissory
notes, drafts, bills of exchange, and
other evidences of debt;
c. accepting or creating demand deposits;

COMMERCIAL LAW
BANKING LAWS
137

2009 BAR OPERATIONS
Note: A bank other than a universal
or commercial bank cannot accept
or create demand deposits except
upon prior approval of, and subject
to such conditions and rules as may
be prescribed by the Monetary
Board. (sec 22)
d. receiving other types of deposits and
deposit substitutes;
e. buying and selling foreign exchange
and gold or silver bullion;
f. acquiring marketable bonds and other
debt securities; and
g. extending credit,.
3. powers of an investment house as provided in
existing laws and the power to invest in non-
allied enterprises as provided in this Act.

Operations Of Commercial Banks
Powers of a Commercial Bank.
- same as (1) and (2) of Universal banks

Universal Banks Commercial Banks
Equity
Investments
A universal bank
may invest in the
equities of allied**
and non-allied
enterprises
A commercial bank
may invest only in
the equities of
allied** enterprises

**Allied enterprises may either be
financial or non-financial.
Conditions
to equity
investment
a. The total
investment in
equities of allied
and non-allied
enterprises shall
not exceed fifty
percent (50%) of
the net worth of
the bank; and

b. The equity
investment in
any one
enterprise,
whether allied or
non-allied, shall
not exceed
twenty-five
percent (25%) of
the net worth**
of the bank.

c. Subject to prior
approval of the
Monetary Board
a. The total
investment in
equities of allied
enterprises shall
not exceed
thirty-five
percent (35%) of
the net worth of
the bank; and

b. The equity
investment in
any one
enterprise shall
not exceed
twenty-five
percent (25%) of
tile net worth of
the bank.

c. Subject to prior
approval of the
Monetary Board

**net worth shall mean the total of the unimpaired
paid-in capital including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves and other
adjustments as may be required by the Bangko Sentral
Equity a. May own up to a. May own up to
Investments
in Financial
Allied
Enterprises
one hundred
percent (100%)
of the equity in
o a thrift
bank,
o a rural bank
or
o a financial
allied
enterprise
b. A publicly-listed
universal may
own up to one
hundred percent
(100%) of the
voting stock of
only one other
universal or
commercial
bank
one hundred
percent (100%)
of the equity of
o a thrift bank
or
o a rural bank
b. Where the
equity
investment of a
commercial
bank is in other
financial allied
enterprises,
including
another
commercial
bank, such
investment shall
remain a
minority holding
in that
enterprise
{??? A
publicly-listed
commercial
bank may own
up to one
hundred
percent
(100%) of the
voting stock of
only one other
universal or
commercial
bank (sec 25)}
Equity
Investments
in Non-
Financial
Allied
Enterprises.
May own up to one
hundred percent
(100%) of the
equity in a non-
financial allied
enterprise.
May own up to one
hundred percent
(100%) of the
equity in a non-
financial allied
enterprise
Equity
Investments
in Quasi-
Banks.

To promote
competitive
conditions in
financial markets,
the Monetary
Board may further
limit to forty
percent (40%)
equity investments
of universal banks
in quasi-banks.
This rule shall also
apply in the case of
commercial banks.

-do-
Equity
Investments
in Non-
Allied
Enterprises
- The equity
investment of a
universal bank,
or
- of its wholly or
majority-owned
subsidiaries,

-None-

COMMERCIAL LAW
BANKING LAWS
138

2009 BAR OPERATIONS
- in a single non-
allied enterprise
- shall not exceed
thirty-five
percent (35%) of
the total equity
in that
enterprise
- nor shall it
exceed thirty-
five percent
(35%) of the
voting stock in
that enterprise.

PROVISIONS APPLICABLE TO ALL BANKS, QUASI-
BANKS, AND TRUST ENTITIES

Other Banking Services
In addition to the operations specifically authorized
in this Act, a bank may perform the following
services:

1. Receive in custody funds, documents and
valuable objects;
2. Act as financial agent and buy and sell, by
order of and for the account of their
customers, shares, evidences of
indebtedness and all types of securities;
3. Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
4. Upon prior approval of the Monetary Board,
act as managing agent, adviser, consultant
or administrator of investment
management/advisory/consultancy
accounts; and
5. Rent out safety deposit boxes.

The bank shall perform the services permitted under
Subsections 1.,.2, 3. and.4. as depositary OR as an
agent. Accordingly, it shall keep the funds, securities and
other effects which it receives duly separate from the
bank's own assets and liabilities.

In case a bank or quasi-bank notifies the Bangko Sentral
or publicly announces a
1. bank holiday, OR
2. In any manner suspends the payment of its
deposit liabilities continuously for more than
thirty (30) days,
the Monetary Board may summarily and without need for
prior hearing close such banking institution and place it
under receivership of the Philippine Deposit Insurance
Corporation.

Acceptance of Demand Deposits.
A bank other than a universal or commercial bank
cannot accept or create demand deposits except
upon prior approval of, and subject to such conditions
and rules as may be prescribed by the Monetary
Board.

Risk-Based Capital
The Monetary Board shall prescribe the minimum
ratio which the net worth of a bank must bear to its
total risk assets which may include contingent
accounts.
- the ratio be determined on the basis of the net
worth and risk assets of a bank and its
subsidiaries, financial or otherwise,
- MB may prescribe the composition and the
manner of determining the net worth and total
risk assets of banks and their subsidiaries:
- Provided, That in the exercise of this authority,
the Monetary Board shall, to the extent
feasible conform to internationally accepted
standards, including those of the Bank for
International Settlements (BIS), relating to
risk-based capital requirements:
- Provided further, That it may alter or suspend
compliance with such ratio whenever
necessary for a maximum period of one (1)
year:
- Provided, finally, That such ratio shall be
applied uniformly to banks of the same
category.

In case a bank does not comply with the
prescribed minimum ratio:
1. The Monetary Board may limit or
prohibit the distribution of net profits by
such bank and may require that part or
all of the net profits be used to increase
the capital accounts of the bank until
the minimum requirement has been
met
2. The Monetary Board may, furthermore,
restrict or prohibit the acquisition of
major assets and the making of new
investments by the bank, with the
exception of purchases of readily
marketable evidences of indebtedness
of the Republic of the Philippines and of
the Bangko Sentral and any other
evidences of indebtedness or
obligations the servicing and repayment
of which are fully guaranteed by the
Republic of the Philippines, until the
minimum required capital ratio has
been restored.

In case of a bank merger or consolidation, or when
a bank is under rehabilitation under a program
approved by the Bangko Sentral, Monetary Board
may temporarily relieve the surviving bank,
consolidated bank, or constituent bank or
corporations under rehabilitation from full
compliance with the required capital ratio under
such conditions as it may prescribe.

COMMERCIAL LAW
BANKING LAWS
139

2009 BAR OPERATIONS
Before the effectivity of rules which the Monetary
Board is authorized to prescribe under this
provision, Section 22 of the General Banking Act,
as amended, Section 9 of the Thrift Banks Act, and
all pertinent rules issued pursuant thereto, shall
continue to be in force.
Limit on Loans, Credit Accommodations and
Guarantees
Except as the Monetary Board may otherwise
prescribe for reasons of national interest, the total
amount of loans, credit accommodations and
guarantees that may be extended by a bank to any
person, partnership, association, corporation or other
entity shall at no time exceed twenty percent (20%)
of the net worth of such bank.
The basis for determining compliance with single
borrower limit is the total credit commitment of
the bank to the borrower.

Unless the Monetary Board prescribes otherwise, the
total amount of loans, credit accommodations and
guarantees prescribed in the preceding paragraph
may be increased by an additional ten percent
(10%) of the net worth of such bank
Provided the additional liabilities of any
borrower are adequately secured by trust
receipts, shipping documents, warehouse
receipts or other similar documents transferring
or securing title covering readily marketable,
non-perishable goods which must be fully
covered by insurance.

The above prescribed ceilings shall include:
(a) the direct liability of the maker or acceptor
of paper discounted with or sold to such bank
and the liability of a general endorser,
drawer or guarantor who obtains a loan or
other credit accommodation from or discounts
paper with or sells papers to such bank;
(b) in the case of an individual who owns or
controls a majority interest in a corporation,
partnership, association or any other entity,
the liabilities of said entities to such bank;
(c) in the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
corporation owns or controls a majority
interest; and
(d) in the case of a partnership, association or
other entity, the liabilities of the members
thereof to such bank.

NOTE:
Even if a parent corporation, partnership,
association, entity or an individual who owns or
controls a majority interest in such entities has
no liability to the bank, the Monetary Board may
prescribe the combination of the liabilities of
subsidiary corporations or members of the
partnership, association, entity or such individual
under certain circumstances, including but not
limited to, any of the following situations:
(a) the parent corporation, partnership,
association, entity or individual
guarantees the repayment of the
liabilities;
(b) the liabilities were incurred for the
accommodation of the parent
corporation or another subsidiary or of the
partnership or association or entity or
such individual; or
(c) the subsidiaries though separate entities
operate merely as departments or
divisions of a single entity.
Other credit accommodations and guarantees
shall exclude:

(a) loans and other credit accommodations
secured by obligations of the Bangko
Sentral or of the Philippine Government;
(b) loans and other credit accommodations
fully guaranteed by the government as to
the payment of principal and interest;
(c) loans and other credit accommodations
covered by assignment of deposits
maintained in the lending bank and held in
the Philippines;
(d) loans, credit accommodations and
acceptances under letters of credit to the
extent covered by margin deposits; and
(e) other loans or credit accommodations
which the Monetary Board may from time
to time, specify as non-risk items.

NOTE:
Loans and other credit accommodations,
deposits maintained with, and usual
guarantees by a bank to any other bank or
non-bank entity, whether locally or abroad,
shall be subject to the limits as herein
prescribed.

Certain types of contingent accounts of
borrowers may be included among those
subject to these prescribed limits as may be
determined by the Monetary Board.

Restriction on Bank Exposure to Directors, Officers,
Stockholders and Their Related Interests (DOSRI)
- No director or officer of any bank
- shall, directly or indirectly, for himself or as the
representative or agent of others,
a. borrow from such bank
b. nor shall he become a guarantor, endorser
or surety for loans from such bank to
others,
c. or in any manner be an obligor or incur any
contractual liability to the bank
except with the written approval of the
majority of all the directors of the bank,
excluding the director concerned:

COMMERCIAL LAW
BANKING LAWS
140

2009 BAR OPERATIONS
Provided, That such written
approval shall not be required for
loans, other credit accommodations
and advances granted to officers
under a fringe benefit plan approved
by the Bangko Sentral. The required
approval shall be entered upon the
records of the bank and a copy of such
entry shall be transmitted forthwith
to the appropriate supervising and
examining department of the Bangko
Sentral.

NOTE:
Dealings of a bank with any of its directors, officers or
stockholders and their related interests shall be upon
terms not less favorable to the bank than those offered to
others.

Effect of violation to the provision
1. Office may be declared vacant and
2. The director or officer shall be subject to the penal
provisions of the New Central Bank Act.

The Monetary Board may regulate the amount of loans,
credit accommodations and guarantees that may be
extended, directly or indirectly, by a bank to its DOSRI, as
well as investments of such bank in enterprises owned or
controlled by said DOSRI

However, the outstanding loans, credit accommodations
and guarantees which a bank may extend to each of its
DOSRI, shall be limited to an amount equivalent to their
respective unencumbered deposits and book value of
their paid-in capital contribution in the bank:
Provided, however, That loans, credit accommodations
and guarantees secured by assets considered as non-risk
by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and
advances to officers in the form of fringe benefits granted
in accordance with rules as may be prescribed by the
Monetary Board shall not be subject to the individual
limit.

NOTE:
The limit on loans, credit accommodations and
guarantees prescribed herein shall not apply to loans,
credit accommodations and guarantees extended by a
cooperative bank to its cooperative shareholders.
Loans and Other Credit Accommodations Against Real
Estate
Except as the Monetary Board may otherwise prescribe,
loans and other credit accommodations against real
estate shall not exceed seventy-five percent (75%) of
the appraised value of the respective real estate
security, plus sixty percent (60%) of the appraised
value of the insured improvements, and such loans may
be made to the owner of the real estate or to his
assignees.
Loans And Other Credit Accommodations on Security
of Chattels and Intangible Properties
Except as the Monetary Board may otherwise prescribe,
loans and other credit accommodations on security of
chattels and intangible properties such as, but not limited
to, patents, trademarks, trade names, and copyrights
shall not exceed seventy-five percent (75%) of the
appraised value of the security, an such loans and other
credit accommodation may be made to the title-holder of
the chattels and intangible properties or his assignees.
Grant and Purpose of Loans and Other Credit
Accommodations
A bank shall grant loans and other credit
accommodations only in amounts and for the periods of
time essential for the effective completion of the
operations to be financed. Such grant of loans and other
credit accommodations shall be consistent with safe and
sound banking practices.
The purpose of all loans and other credit
accommodations shall be stated in the application and in
the contract between the bank and the borrower.
If the bank finds that the proceeds of the loan or other
credit accommodation have been employed, without its
approval, for purposes other than those agreed upon with
the bank, it shall have the right to (1) terminate the loan
or other credit accommodation and (2) demand
immediate repayment of the obligation.
Requirement for Grant of Loans or 0ther Credit
Accommodations
Debtor should be capable of fulfilling his commitments to
the bank
Toward this end, a bank may demand
a. A statement of their assets and liabilities and
b. of their income and expenditures and
c. other information as may be prescribed by law or
by rules and regulations of the Monetary Board
to enable the bank to properly evaluate the
credit application which includes the
corresponding financial statements submitted
for taxation purposes to the Bureau of Internal
Revenue.
Effect of false or incorrect detail,
a. The bank may terminate any loan or other credit
accommodation granted on the basis of said
statements and
b. Shall have the right to demand immediate
repayment or liquidation of the obligation.

COMMERCIAL LAW
BANKING LAWS
141

2009 BAR OPERATIONS
Unsecured Loans or Other Credit Accommodations.
The Monetary Board is hereby authorized to issue such
regulations as it may deem necessary with respect to
unsecured loans or other credit accommodations that
may be granted by banks.
Authority to Prescribe Terms and Conditions of Loans
and Other Credit Accommodations
The Monetary Board, may prescribe the maturities, as
well as related terms and conditions for various types of
bank loans and other credit accommodations.
Any change by the Board in the maximum maturities, as
well as related terms and conditions for various types of
bank loans and other credit accommodations. Any change
by the Board in the maximum maturities shall apply only to
loans and other credit accommodations made after the
date of such action.
Amortization on Loans and Other Credit
Accommodations
The amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of the
operations to be financed.
1. In case of loans and other credit accommodations
with maturities of more than five (5) years,
- provisions must be made for periodic
amortization payments, but such payments must
be made at least annually:
- Provided, however, That when the borrowed
funds are to be used for purposes which do not
initially produce revenues adequate for regular
amortization payments therefrom, the bank may
permit the initial amortization payment to be
deferred until such time as said revenues are
sufficient for such purpose, but in no case shall
the initial amortization date be later than five (5)
years from the date on which the loan or other
credit accommodation is granted.
2. In case of loans and other credit accommodations to
micro finance sectors, the schedule of loan
amortization shall take into consideration the
projected cash flow of the borrower and adopt this
into the terms and conditions formulated by banks.
Prepayment of Loans and Other Credit
Accommodations
A borrower may at any time prior to the agreed maturity
date prepay, in whole or in part, the unpaid balance of any
bank loan and other credit accommodation, subject to
such reasonable terms and conditions as may be agreed
upon between the bank and its borrower.
Foreclosure of Real Estate Mortgage
In the event of foreclosure, whether judicially or extra-
judicially,
- of any mortgage on real estate which is security
for any loan or other credit accommodation
granted,
- the mortgagor or debtor whose real property has
been sold for the full or partial payment of his
obligation shall have the right within one year
after the sale of the real estate, to redeem the
property by paying
1. the amount due under the mortgage
deed, with interest thereon at rate
specified in the mortgage, and
2. all the costs and expenses incurred by
the bank or institution from the sale
and custody of said property less the
income derived therefrom.
- However, the purchaser at the auction sale
concerned whether in a judicial or extra-judicial
foreclosure shall have the right to enter upon and
take possession of such property immediately
after the date of the confirmation of the auction
sale and administer the same in accordance with
law.
NOTE: Any petition in court to enjoin or restrain the
conduct of foreclosure proceedings instituted pursuant to
this provision shall be given due course only upon the filing
by the petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the
foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose
property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in
accordance with this provision until, but not after, the
registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever is
earlier.
Renewal or Extension of Loans and Other Credit
Accommodations
The Monetary Board may, by regulation, prescribe the
conditions and limitations under which a bank may grant
extensions or renewals of its loans and other credit
accommodations.
Provisions for Losses and Write-Offs
Bad Debts - All debts due to any bank on which interest
is past due and unpaid for such period as may be
determined by the Monetary Board, unless the same are
welt-secured and in the process of collection
The Monetary Board may fix, by regulation or by order in
a specific case, the amount of reserves for bad debts or
doubtful accounts or other contingencies. Writing off of
loans, other credit accommodations, advances and other

COMMERCIAL LAW
BANKING LAWS
142

2009 BAR OPERATIONS
assets shall be subject to regulations issued by the
Monetary Board.
Ceiling on Investments in Certain Assets.
- Any bank may acquire real estate as shall be
necessary for its own use in the conduct of its
business:
- Provided, however, That the total investment in such
real estate and improvements thereof including bank
equipment, shall not exceed fifty percent (50%) of
combined capital accounts:
- Provided, further, That the equity investment of a
bank in another corporation engaged primarily in real
estate shall be considered as part of the banks total
investment in real estate, unless otherwise provided
by the Monetary Board. (sec 51)
NOTE: Notwithstanding the limitations above-mentioned
(sec 51), a bank may acquire, hold or convey real
property under the following circumstances:
1. Such as shall be mortgaged to it in good faith by
way of security for debts;
2. Such as shall be conveyed to it in satisfaction of
debts previously contracted in the course of its
dealings; or
3. Such as it shall purchase at sales under judgments,
decrees, mortgages, or trust deeds held by it and
such as it shall purchase to secure debts due it. (sec
52)

Any real property acquired or held under the
circumstances enumerated in the above paragraph (sec
52) shall be disposed of by the bank within a period of five
(5) years or as may be prescribed by the Monetary Board:
Provided, however, That the bank may, after said period,
continue to hold the property for its own use, subject to
the limitations of the preceding section (sec 51)

Prohibited Transactions
1. A bank shall not directly engage in insurance business
as the insurer
2. No director, officer, employee, or agent of any bank
shall
a. Make false entries in any bank report or statement
or participate in any fraudulent transaction,
thereby affecting the financial interest of, or
causing damage to, the bank or any person;
b. Without order of a court of competent jurisdiction,
disclose to any unauthorized person any
information relative to the funds or properties in
the custody of the bank belonging to private
individuals, corporations, or any other entity:
Provided, That with respect to bank deposits, the
provisions of existing laws shall prevail;
c. Accept gifts, fees, or commissions or any other
form of remuneration in connection with the
approval of a loan or other credit accommodation
from said bank;
d. Overvalue or aid in overvaluing any security for the
purpose of influencing in any way the actions of the
bank or any bank; or
e. Outsource inherent banking functions.
3. No borrower of a bank shall
a. Fraudulently overvalue property offered as
security for a loan or other credit accommodation
from the bank;
b. Furnish false or make misrepresentation or
suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other
credit accommodation or extending the period
thereof;
c. Attempt to defraud the said bank in the event of a
court action to recover a loan or other credit
accommodation; or
d. Offer any director, officer, employee or agent of a
bank any gift, fee, commission, or any other form
of compensation in order to influence such
persons into approving a loan or other credit
accommodation application.
4. No examiner, officer or employee of the Bangko
Sentral or of any department, bureau, office, branch
or agency of the Government that is assigned to
supervise, examine, assist or render technical
assistance to any bank shall commit any of the acts
enumerated in this Section or aid in the commission
of the same.
The making of false reports or misrepresentation or
suppression of material facts by personnel of the
Bangko Sentral ng Pilipinas shall be subject to the
administrative and criminal sanctions provided under
the New Central Bank Act.
5. Consistent with the provisions of Republic Act No.
1405, otherwise known as the Banks Secrecy Law, no
bank shall employ casual or non regular personnel or
too lengthy probationary personnel in the conduct of
its business involving bank deposit
6. Prohibition on Dividend Declaration. No bank or
quasi-bank shall declare dividends, if at the time of
declaration:
a. Its clearing account with the Bangko Sentral is
overdrawn; or
b. It is deficient in the required liquidity floor for
government deposits for five (5) or more
consecutive days, or
c. It does not comply with the liquidity
standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds
available for dividend declaration; or
d. It has committed a major violation as may be
determined by the Bangko Sentral.

COMMERCIAL LAW
BANKING LAWS
143

2009 BAR OPERATIONS
Conducting Business in an Unsafe or Unsound Manner
In determining whether a particular act or omission,
which is not otherwise prohibited by any law, rule or
regulation affecting banks, quasi-banks or trust entities,
may be deemed as conducting business in an unsafe or
unsound manner for purposes of this Section, the
Monetary Board shall consider any of the following
circumstances:
1. The act or omission has resulted or may result in
material loss or damage, or abnormal risk or danger
to the safety, stability, liquidity or solvency of the
institution;
2. The act or omission has resulted or may result in
material loss or damage or abnormal risk to the
institution's depositors, creditors, investors,
stockholders or to the Bangko Sentral or to the public
in general;
3. The act or omission has caused any undue injury, or
has given any unwarranted benefits, advantage or
preference to the bank or any party in the discharge
by the director or officer of his duties and
responsibilities through manifest partiality, evident
bad faith or gross inexcusable negligence; or
4. The act or omission involves entering into any
contract or transaction manifestly and grossly
disadvantageous to the bank, quasi-bank or trust
entity, whether or not the director or officer profited
or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in
conducting its business in an unsafe or unsound manner,
the Monetary Board may, without prejudice to the
administrative sanctions provided in Section 37 of the
New Central Bank Act, take action under Section 30 of the
same Act and/or immediately exclude the erring bank
from clearing, the provisions of law to the contrary
notwithstanding.

Independent Auditor
The Monetary Board may require a bank, quasi-bank or
trust entity to engage the services of an independent
auditor to be chosen by the bank, quasi-bank or trust
entity concerned from a list of certified public
accountants acceptable to the Monetary Board.

The term of the engagement shall be as prescribed by the
Monetary Board which may either be
a. on a continuing basis where the auditor shall
act as resident examiner, or
b. on the basis of special engagements;
but in any case, the independent auditor
shall be responsible to the banks, quasi-
banks or trust entitys board of directors. A
copy of the report shall be furnished to the
Monetary Board.

The Monetary Board may also direct the board of
directors of a bank, quasi-bank, trusty entity and/or the
individual members thereof; to conduct, either personally
or by a committee created by the board, an annual
balance sheet audit of the bank, quasi-bank or trust entity
to review the internal audit and control system of the
bank, quasi-bank or trust entity and to submit a report of
such audit.

Financial Statements

Every bank, quasi-bank or trust entity shall submit to the
appropriate supervising and examining department of the
Bangko Sentral financial statements in such form and
frequency as may be prescribed by the Bangko Sentral.

Such statements, which shall be as of a specific date
designated by the Bangko Sentral, shall show thee actual
financial condition of the institution submitting the
statement, and of its branches, offices, subsidiaries and
affiliates, including the results of its operations, and shall
contain such information as may be required in Bangko
Sentral regulations.

Publication of Financial Statements
- in such terms understandable to the layman and in
such frequency as may be prescribed Bangko Sentral,
- in English or Filipino,
- at least once every quarter in a newspaper of general
circulation in the city or province where the principal
office,
in the case of a domestic institution or the principal
branch or office in the case of a foreign bank, is
located, but if no newspaper is published in the same
province, then in a newspaper published in Metro
Manila or in the nearest city or province.

The Bangko Sentral may by regulation prescribe the
newspaper where the statements prescribed herein shall
be published.

The Monetary Board may allow the posting of the
financial statements of a bank, quasi-bank or trust entity
in public places it may determine, lieu of the publication
required in the preceding paragraph, when warranted by
the circumstances.
Additionally, banks shall make available to the public in
such form and manner as the Bangko Sentral may
prescribe the complete set of its audited financial
statements as well as such other relevant information
including those on enterprises majority-owned or
controlled by the bank, that will inform the public of the
true financial condition of a bank as of any given time.
In periods of national and/or local emergency or of
imminent panic which directly threaten monetary and
banking stability, the Monetary Board, by a vote of at
least five (5) of its members, in special cases and upon
application of the bank, quasi-bank or trust entity, may
allow such bank, quasi-bank or trust entity to defer for a
stated period of time the publication of the statement of
financial condition required herein.

COMMERCIAL LAW
BANKING LAWS
144

2009 BAR OPERATIONS
Publication of Capital Stock
A bank, quasi-bank or trust entity incorporated under the
laws of the Philippines shall not publish the amount of its
authorized or subscribed capital stock without indicating
at the same time and with equal prominence, the amount
of its capital actually paid up.
No branch of any foreign bank doing business in the
Philippines shall in any way announce the amount of the
capital and surplus of its head office, or of the bank in its
entirety without indicating at the same time and with
equal prominence the amount of the capital, if any,
definitely assigned to such branch, such fact shall be
stated in, and shall form part of the publication.
Settlement of Disputes
The provisions of any law to the contrary
notwithstanding, the Bangko Sentral shall be consulted
by other government agencies or instrumentalities in
actions or proceedings initiated by or brought before
them involving controversies in banks, quasi-banks or
trust entities arising out of and involving
a. relations between and among their directors, officers
or stockholders,
b. as well as disputes between any or all of them and
the bank, quasi-bank or trust entity of which they are
directors, officers or stockholders.

Unauthorized Advertisement or Business
Representation
No person, association, or corporation unless duly
authorized to engage in the business of a bank, quasi-
bank, trust entity, or savings and loan association as
defined in this Act, or other banking laws,
a. shall advertise or hold itself out as being engaged in
the business of such bank, quasi-bank, trust entity, or
association, or
b. use in connection with its business title, the word or
words bank, banking, banker, quasi-bank,
quasi-banking, quasi-banker, savings and loan
association, trust corporation, trust company or
words of similar import or transact in any manner the
business of any such bank, corporation or
association.
Penalty for Violation of this Act
Unless otherwise herein provided, the violation of any of
the provisions of this Act shall be subject to Sections 34,
35, 36 and 37 of the New Central Bank Act.

If the offender is a director or officer of a bank, quasi-bank
or trust entity, the Monetary Board may also suspend or
remove such director or officer.

If the violation is committed by a corporation, such
corporation may be dissolved by quo warranto
proceedings instituted by the Solicitor General.

PLACEMENT UNDER CONSERVATORSHIP

Provided, That this Section shall also apply to
conservatorship proceedings of quasi-banks.
Appointment of Conservator {The conservator should be
competent and knowledgeable in bank operations and
management}
Grounds:
a. a bank or a quasi-bank is in a (1) state of continuing
inability or (2) unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors,
Responsibility of the conservator:
a. to take charge of the assets, liabilities, and the
management thereof, reorganize the management,
collect all monies and debts due said institution,
and exercise all powers necessary to restore its
viability.
b. shall report and be responsible to the Monetary
Board and
c. shall have the power to overrule or revoke the
actions of the previous management and board of
directors of the bank or quasi-bank.
The Monetary Board shall terminate the conservatorship
a. After the expiration of one (1) year {The
conservatorship shall not exceed one (1) year}
b. When it is satisfied that the institution can continue
to operate on its own and the conservatorship is no
longer necessary or
c. On the basis of the report of the conservator or of
its own findings, determine that the continuance in
business of the institution would involve probable
loss to its depositors or creditors
CESSATION OF BANKING BUSINESS
Voluntary Liquidation
In case of voluntary liquidation of any bank organized
under the laws of the Philippines, or of any branch or
office in the Philippines of a foreign bank, written notice
of such liquidation shall be sent to the Monetary Board
before such liquidation is undertaken, and the Monetary
Board shall have the right to intervene and take such
steps as may be necessary to protect the interests of
creditors.

COMMERCIAL LAW
BANKING LAWS
145

2009 BAR OPERATIONS
Receivership and Involuntary Liquidation
The grounds and procedures for placing a bank under
receivership or liquidation, as well as the powers and
duties of the receiver or liquidator appointed for the bank
shall be governed by the provisions of Sections 30, 31, 32,
and 33 of the New Central Bank Act:
Provided, That the petitioner or plaintiff files with the
clerk or judge of the court in which the action is pending a
bond, executed in favor of the Bangko Sentral, in an
amount to be fixed by the court.
This Section shall also apply to the extent possible to the
receivership and liquidation proceedings of quasi-banks.
Grounds for receivership
- is unable to pay its liabilities as they become due in
the ordinary course of business: Provided, That this
shall not include inability to pay caused by
extraordinary demands induced by financial panic
in the banking community;
(a) has insufficient realizable assets, as
determined by the Bangko Sentral, to meet
its liabilities; or
(b) cannot continue in business without
involving probable losses to its depositors or
creditors; or
(c) has willfully violated a cease and desist order
that has become final, involving acts or
transactions which amount to fraud or a
dissipation of the assets of the institution;
in which cases, the Monetary Board may summarily and
without need for prior hearing forbid the institution
from doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as receiver
of the banking institution.
For a quasi-bank, any person of recognized competence
in banking or finance may be designed as receiver.
Liquidation
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business the
Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to
proceed with the liquidation of the institution. The
receiver shall:
(1) file ex parte with the proper regional
trial court, and without requirement of
prior notice or any other action, a
petition for assistance in the liquidation
of the institution pursuant to a
liquidation plan adopted by the
Philippine Deposit Insurance
Corporation
(2) Upon acquiring jurisdiction, the court
shall, upon motion by the receiver after
due notice, adjudicate disputed claims
against the institution, assist the
enforcement of individual liabilities of
the stockholders, directors and officers,
and decide on other issues as may be
material to implement the liquidation
plan adopted.
(3) convert the assets of the institutions
to money, dispose of the same to
creditors and other parties, for the
purpose of paying the debts of such
institution in accordance with the rules
on concurrence and preference of
credit under the Civil Code
(4) institute such actions as may be
necessary to collect and recover
accounts and assets of, or defend any
action against, the institution.
The assets of an institution under
receivership or liquidation shall be deemed
in custodia legis in the hands of the receiver
and shall, from the moment the institution
was placed under such receivership or
liquidation, be exempt from any order of
garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken shall be final
and executory, and may not be restrained or set aside by
the court except on petition for certiorari on the ground
that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or
excess of jurisdiction.

The petition for certiorari may only be filed by the
stockholders of record representing the majority of the
capital stock within ten (10) days from receipt by the
board of directors of the institution of the order directing
receivership, liquidation or conservatorship.
Distribution of Assets
In case of liquidation of a bank or quasi-bank, (1) after
payment of the cost of proceedings, including
reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall (2) pay the debts
of such institution, under order of the court, in
accordance with the rules on concurrence and
preference of credit as provided in the Civil Code.
Disposition of Revenues and Earnings.
All revenues and earnings realized by the receiver in
winding up the affairs and administering the assets of any
bank or quasi-bank within the purview of this Act shall be
used to pay the costs, fees and expenses mentioned in
the preceding section, salaries of such personnel whose
employment is rendered necessary in the discharge of the

COMMERCIAL LAW
BANKING LAWS
146

2009 BAR OPERATIONS
liquidation together with other additional expenses
caused thereby.
The balance of revenues and earnings, after the payment
of all said expenses, shall form part of the assets available
for payment to creditors.
Penalty for Transactions After a Bank Becomes
Insolvent
Any director or officer of any bank declared insolvent or
placed under receivership by the Monetary Board who
1. refuses to turn over the banks records and
assets to the designated receivers, or
2. who tampers with banks records, or
3. who appropriates for himself for another
party or destroys or causes the
misappropriation and destruction of the
banks assets, or
4. who receives or permits or causes to be
received in said bank any deposit, collection
of loans and/or receivables, or
5. who pays out or permits or causes to be
transferred any securities or property of said
bank
shall be subject to the penal provisions of the New Central
Bank Act.
LAWS GOVERNING OTHER TYPES OF BANKS
The provisions of this Act, however, insofar as they are
not in conflict with the provisions of the Thrift Banks Act,
the Rural Banks Act, and the Cooperative Code shall
likewise apply to thrift banks, rural banks, and
cooperative banks, respectively. However, for purposes
of prescribing the minimum ratio which the net worth of a
thrift bank must bear to its total risk assets, the provisions
of Section 33 of this Act shall govern.

FOREIGN BANKS

Transacting Business in the Philippines
The entry of foreign banks in the Philippines through
the establishment of branches shall be governed by
the provisions of the Foreign Banks Liberalization
Act.
The conduct of offshore banking business in the
Philippines shall be governed by the provisions of the
Presidential Decree No. 1034, otherwise known as
the Offshore Banking System Decree.

Acquisition of Voting Stock in a Domestic Bank
Within seven (7) years from the effectivity of this act
and subject to guidelines issued pursuant to the
Foreign Banks Liberalization Act, the Monetary
Board may authorize a foreign bank to acquire up to
one hundred percent (100%) of the voting stock of
only one (1) bank organized under the laws of the
Republic of the Philippines.

Within the same period, the Monetary Board may
authorize any foreign bank, which prior to the
effectivity of this Act availed itself of the privilege to
acquire up to sixty percent (60%) of the voting stock
of a bank under the Foreign Banks Liberalization Act
and the Thrift Banks Act, to further acquire voting
shares such bank to the extent necessary for it to own
one hundred percent (100%) of the voting stock
thereof.

HOWEVER: In the exercise of the authority, the
Monetary Board shall adopt measures as may be
necessary to ensure that at all times the control of
seventy percent (70%) of the resources or assets of
the entire banking system is held by banks which are
at least majority-owned by Filipinos.

NOTE: Any right, privilege or incentive granted to a
foreign bank under this Section shall be equally
enjoyed by and extended under the same conditions
to banks organized under the laws of the Republic of
the Philippines.

Local Branches of Foreign Banks
In the case of a foreign bank which has more than
one (1) branch in the Philippines, all such branches
shall be treated as one (1) unit for the purpose of this
Act, and all references to the Philippine branches of
foreign banks shall be held to refer to such units.

Head Office Guarantee
In order to provide effective protection of the
interests of the depositors and other creditors of
Philippine branches of a foreign bank, the head office
of such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are
creditors of a branch in the Philippines of a foreign
bank shall have preferential rights to the assets of
such branch in accordance with the existing laws.

Summons and Legal Process
Summons and legal process served upon the
1. Philippine agent or designated to
accept
2. Head of any foreign bank service thereof
shall give jurisdiction to the courts over such bank,
and service of notices on such agent or head shall be
as binding upon the bank which he represents as if
made upon the bank itself.

Should the authority
1. be revoked, or
2. should such agent or head become mentally
incompetent or
3. otherwise unable to accept service while
exercising such authority,
it shall be the duty of the bank (1) to name and
designate promptly another agent or head upon
whom service of summons and processes in legal
proceedings against the bank and of notices affecting

COMMERCIAL LAW
BANKING LAWS
147

2009 BAR OPERATIONS
the bank may be made, and (2) to file with the SEC a
duly authenticated nomination of such agent.

In the absence of the agent or head or should there
be no person authorized by the bank upon whom
service of summons, processes and all legal notices
may be made, service of summons, processes and
legal notices may be made upon the Bangko Sentral
Deputy Governor In-Charge of the supervising and
examining departments and such service shall be as
effective as if made upon the bank or its duly
authorized agent or head.

The said deputy Governor shall register and transmit
by mail to the president or the secretary of the bank
at its head or principal office a copy, duly certified by
him, of the summons, process, or notice. The
sending of such copy of the summons, process, or
notice shall be a necessary part of the services and
shall complete the service.
The registry receipt of mailing shall be prima facie
evidence of the transmission of the summons,
process or notice.
All costs necessarily incurred by the said Deputy
Governor for the making and mailing and sending of
a copy of the summons, process, or notice shall be
paid in advance by the party at whose instance the
service is made.

Laws Applicable
In all matters not specifically covered by special
provisions applicable only to a foreign bank or its
branches and other offices in the Philippines any
foreign bank licensed to do business in the
Philippines shall be bound by the provisions of this
Act, all other laws, rules and regulations applicable to
banks organized under the laws of the Philippines of
the same class,
except those that provide for the (1) creation, (2)
formation, (3) organization or (4) dissolution of
corporations or (5)for the fixing of the relations,
liabilities, responsibilities, or duties of stockholders,
members, directors or officers of corporations to
each other or to the corporation.

Revocation of License of a Foreign Bank
The Monetary Board may revoke the license to
transact business in the Philippines of, any foreign
bank,
1. If it finds that the foreign bank is insolvent, or
2. In imminent danger thereof or that its
continuance in business will involve probable loss
to those transacting business with it.
After the revocation of its license, it shall be unlawful
for any such foreign banks to transact business in the
Philippines unless its license is renewed or reissued.

After the revocation of such license, the Bangko
Sentral shall take the necessary action to protect the
creditors of such foreign bank and the public. The
provisions of the New Central Bank Act on sanctions
and penalties shall likewise be applicable.
TRUST OPERATIONS
Authority to Engage in Trust Business
- Only a stock corporation or a person duly
authorized by the Monetary Board to engage in
trust business
- shall act as a trustee or administer any trust or
hold property in trust or on deposit for the use,
benefit, or behalf of others.

For purposes of this Act, such a corporation shall be
referred to as a trust entity.

The SEC shall not register the articles of
incorporation and by-laws or any amendment
thereto, of any trust entity, unless accompanied by a
certificate of authority issued by the Bangko Sentral.

Minimum Capitalization. A trust entity, before it
can engage in trust or other fiduciary business, shall
comply with the minimum paid-in capital
requirement which will be determined by the
Monetary Board.

Conduct of Trust Business
A trust entity shall administer the funds or property
under its custody with the diligence that a prudent
man would exercise in the conduct of an enterprise of
a like character and with similar aims.

Prohibited transactions
No trust entity shall, for the account of the trustor or
the beneficiary of the trust, purchase or acquire
property from, or sell, transfer, assign, or lend money
or property to, or purchase debt instruments of,
1. any of the departments, directors,
officers, stockholders, or employees of
the trust entity,
2. relatives within the first degree of
consanguinity or affinity, or
3. the related interests, of such directors,
officers and stockholders,
unless the transaction is specifically authorized by the
trustor and the relationship of the trustee and the
other party involved in the transaction is fully
disclosed to the trustor of beneficiary of the trust
prior to the transaction.

Powers of a Trust Entity
A trust entity, in addition to the general powers incident
to corporations, shall have the power to:
1. Act as trustee on any mortgage or bond issued
by any municipality, corporation, or any body
politic and to accept and execute any trust
consistent with law;
2. Act under the order or appointment of any court
as guardian, receiver, trustee, or depositary of
the estate of any minor or other incompetent
person,
3. Act under the appointment of any court as
receiver and depositary of any moneys paid into
court by parties to any legal proceedings and of

COMMERCIAL LAW
BANKING LAWS
148

2009 BAR OPERATIONS
property of any kind which may be brought
under the jurisdiction of the court;
4. Act as the executor of any will when it is named
the executor thereof;
5. Act as administrator of the estate of any
deceased person, with the will annexed, or as
administrator of the estate of any deceased
person when there is no will;
6. Accept and execute any trust for the holding,
management, and administration of any estate,
real or personal, and the rents, issues and profits
thereof; and
7. Establish and manage common trust funds,
subject to such rules and regulations as may be
prescribed by the Monetary Board.

For the Faithful Performance of Trust Duties
1. Before transacting trust business, every trust
entity shall deposit with the Bangko Sentral, as
security for the faithful performance of its trust
duties, cash or securities approved by the
Monetary Board in an amount equal to or not
less than Five hundred thousand pesos
(P500,000.00) or such higher amount as may
fixed by the Monetary Board:
Provided, however, That the Monetary Board
shall require every trust entity to increase the
amount of its cash or securities on deposit with
the Bangko Sentral Should the capital and
surplus fall below said amount,
- A trust entity so long as it shall continue to
be solvent and comply with laws or
regulations shall have the right to collect the
interest earned on such securities deposited
with the Bangko Sentral and,
- from time to time, with the approval of the
Bangko Sentral, to exchange the securities
for others.
- If the trust entity fails to comply with any
law or regulation, the Bangko Sentral shall
retain such interest on the securities
deposited with it for the benefit of rightful
claimants.
- All claims rising out of the trust business of a
trust entity shall have priority over all other
claims as regards the cash or securities
deposited as above provided.
2. Before an executor, administrator, guardian,
trustee, receiver or depositary appointed by the
court enters upon the execution of his duties, he
shall, upon order of the court, file a bond in such
sum as the court may direct.
NOTE: No bond or other security shall be
required by the court from a trust entry for
the faithful performance of its duties as
court-appointed trustee, executor,
administrator, guardian, receiver, or
depositary. However, the court may, upon
proper application with it showing special
cause therefore, require the trust entity to
post a bond or other security for the
protection of funds or property confided to
such entity.

Separation of Trust Business from General Business
The trust business shall be kept separate and distinct
from the general business including all other funds,
properties, and assets of such trust entity. The
accounts of all such funds, properties, or securities
shall likewise be kept separate and distinct from the
accounts of the general business of the trust entity.

Investment Limitations of a Trust Entity
Unless otherwise directed by the instrument creating
the trust, the lending and investment of funds and
other assets acquired by a trust entity as executor,
administrator, guardian, trustee, receiver or
depositary of the estate of any minor or other
incompetent person shall be limited to loans or
investments as may be prescribed by law, the
Monetary Board or any court of competent
jurisdiction.

Exemption of Trust Assets from Claims
No assets held by a trust entity in its capacity as
trustee shall be subject to any claims other than
those of the parties interested in the specific trusts.

Establishment of Branches of a Trust Entity
The ordinary business of a trust entity shall be
transacted at the place of business specified in its
articles of incorporation.

With prior approval of the Monetary Board, establish
branches in the Philippines and the said entity shall
be responsible for all business conducted in such
branches to the same extent and in the same manner
as though such business had all been conducted in
the head office.

For the purpose of this Act, the trust entity and its
branches shall be treated as one unit.

COMMERCIAL LAW
BANKING LAWS
149

2009 BAR OPERATIONS

Establishment and organization of Bangko Sentral ng
Pilipinas
- The central Bank shall be the central monetary
authority that shall function and operate as an
independent and accountable body corporate in the
discharge of its mandated responsibilities concerning
money, banking and credit.
- It is a government-owned-and-controlled corporation
but it was created as an autonomous body corporate
governed by the provisions of its charter (RA 265). It
enjoys fiscal and administrative autonomy.( Sec1;
Chapter I )

Corporate powers (Sec 5; Chapter I)
1. authorized to adopt, alter and use a corporate seal
2. lease or own real and personal property
3. sell or dispose of the corporate properties
4. to sue or be sued
5. to do and perform any and all things that may be
necessary or proper to carry out the purposes of this
Act
6. may acquire and hold assets and incur liabilities in
connection with its operations
7. may compromise, condone or release in whole or in
part, any claim of or settled liability to the Bangko
Sentral

- It has a capital of its own; P50B to be fully subscribed
by the Government, P10B of which shall be fully paid
by the Government upon the effectivity of the Act
and the balance to be paid within a period of 2 years
from the effectivity of the Act.
- It has a capital of its own and operates under a
budget prepared by its own Monetary Board and
appropriates money for its own operations and other
expenditures independently of the national budget. It
does not depend on the national government for the
financing of its operations; it is the national
government that occasionally resorts to it for needed
budgetary accommodations.

RESPONSIBILITIES AND PRIMARY OBJECTIVES
(Sec 3; Chapter I)

Responsibilities:
1. Provide policy directions in the areas of money,
banking and credit
2. Shall have supervision over the operations of banks;
and
3. Exercise such regulatory powers as provided in this
Act and other pertinent laws over the operation of
banks and pertinent laws over the operations of
finance companies and non-bank financial institution
performing quasi-banking functions.

Primary objectives:
1. Maintain price stability conducive to a balanced and
sustainable growth of the economy
2. Promote and maintain monetary stability and the
convertibility of the peso (it includes power to
regulate no-dollar imports; owing to the influence
and effect that the same may and do have upon the
stability of our peso and its international value)

THE MONETARY BOARD
- shall exercise all the powers and functions of the
Central Bank

The exercise of authority (sec15; Chapter II)
The monetary board shall:
1. issue rules and regulations it considers necessary for
the effective discharge of the responsibilities and
exercise of the powers vested upon the Monetary
Board and Bangko Sentral;
2. direct the management, operations and
administrations of Bangko Sentral, reorganize its
personnel, and issue such rules and regulations as it
may deem necessary or convenient;
3. Establish a human resource management system
which shall govern the selection, hiring.
Appointment, transfer, promotion or dismissal of all
personnel. AIM OF SYSTEM: establish
professionalism and excellence at all levels of Bangko
Sentral in accordance with sound principles of
management.
4. Adopt an annual budget for and authorize
expenditures by the Bangko Sentral as are in the
interest of effective administration and operations of
the bank in accordance with applicable laws and
regulations; and
5. Indemnify its members and other officials of Bangko
Sentral, including personnel of departments
performing supervision and examination functions
against all costs and expenses reasonably incurred by
such persons. ( civil or criminal action, suit or
proceeding which he may be a party by reason of
performance of his functions or duties )

Composition of the monetary board
- 7 members appointed by the President of the
Philippines for a term of 6 years
- The seven members are:
a. Governor of Bangko Sentral shall be the
Chairman of the Monetary Board; his
appointment is subject to the confirmation by
Commission of Appointments
b. Members of the Cabinet designated by the
President of the Philippines
c. 5 members who shall come from the private
sector, all shall serve full-term
- 3 shall have a term of 6 years
- 2 shall have a term of 3 years
***No member of the Monetary Board may be
reappointed more than once.

THE NEW CENTRAL BANK ACT
RA 7653

COMMERCIAL LAW
BANKING LAWS
150

2009 BAR OPERATIONS
THE GOVERNOR OF BANGKO SENTRAL
The powers and duties of the Governor:
1. As a chief executive officer of Bangko Sentral; his
powers and duties are:
a) prepare the agenda for the meetings of the
Monetary Board and submit for the
consideration of the board the policies and
measures necessary to carry out the purpose of
the Act;
b) execute and administer the policies and
measures approved by the Monetary Board;
c) direct and supervise the operations and internal
administration of the Bangko Sentral;
d) appoint and fix the remuneration and other
emoluments of personnel below the rank of a
department head in accordance with the position
and compensation plans approved by the board,
as well as to impose disciplinary measures upon
personnel of Bangko Sentral
e) render opinions, decisions or rulings, which shall
be final and executory until reversed or modified
by the board, on matters regarding application
or enforcement of laws pertaining to institutions
supervised by the Bangko Sentral and laws
pertaining to quasi-banks; and
f) exercise such other powers as may be vested in
him by the Monetary Board.

2. As a principal representative of the Monetary Board
and the Bangko Sentral; he is empowered to:
a) represent the Monetary Board and Bangko
Sentral in all dealings with other offices, agencies
and instrumentalities of the Government and all
other persons or entities, public or private,
whether domestic, foreign or international;
b) sign contracts entered into by the Bangko
Sentral, notes and securities issued by the
Bangko Sentral, all reports, balance sheets,
profit and loss statements, correspondence and
other documents of the Bangko Sentral

3. the signature of the Governor may be in facsimile
whenever appropriate
a) represent the Bangko Sentral, either personally
or through counsel as may be authorized by the
Monetary Board in any legal proceedings, action
or specialized legal studies; and
b) delegate his power to represent the Bangko
Sentral to other officers upon his own
responsibility

4. The Governor also has emergency powers where
time is insufficient to call a meeting of the Monetary
Board. There are 2 requirements for the exercise of
this power, they are:
a) There must be the concurrence of 2 other
members of the monetary Board
b) He must submit a report to the President and
Congress within 72 hours after the action has
been taken.
g) At the soonest possible time, the Governor
shall call a meeting of the Monetary Board
to submit his action for ratification.

THE DEPUTY GOVERNORS
- the Governor, with the approval of the Monetary
Board, shall appoint not more than 3 deputy
governors who shall perform duties as may be
assigned to them by the Governor and the Board.
- In the absence of the Governor, the Deputy
designated shall act as chief executive of the Bangko
Sentral and shall exercise the powers and perform
the duties of the Governor.

QUALIFICATIONS OF THE MEMBERS OF THE BOARD
1. must be a natural born citizen of the Philippines
2. at least 40 yrs old for the Governor and at least
35 yrs old for the other members
3. of good moral character
4. of unquestionable integrity
5. of known probity and patriotism
6. with recognized competence in social and
economic discipline

DISQUALIFICATIONS OF THE MEMBERS OF THE
BOARD
1. Disqualified from being a director, officer,
employee, consultant, and lawyer, agent ore
stockholder of any bank, quasi-bank or any other
institution subject to supervision or examination
by the Bangko Sentral;
2. Members coming from private sector shall not
hold any other public office/public employment
during their tenure;
3. Connected directly with any multilateral banking
or financial institution or has substantial interest
in any private bank in the Philippines within 1
year prior to his appointment;
4. Employed in any such institution within 2 years
after expiration of his term except when he
serves as an official representative of the
Philippines to such institution.

REMOVAL
- the President may remove any member for the
following reasons:
1. if the member is subsequently disqualified under
the provision of this Act;
2. if he is physically or mentally incapacitated that
he cannot properly discharge his duties and
responsibilities and such incapacity lasted for
more than 6 months;
3. if the member is guilty of acts or operations which
are of fraudulent or illegal character or which are
manifestly opposed to the aims and interest of
Bangko Sentral; or
4. if the member no longer possesses the
qualification specified in this Act.

COMMERCIAL LAW
BANKING LAWS
151

2009 BAR OPERATIONS
Vacancy
- created by death, resignation or removal of any
member shall be filled by the appointment of a new
member to complete the unexpired period of the
term of the member concerned.

Meetings
- meet at least once a week

Quorum
- presence of 4 members shall constitute a quorum
- PROVIDED, that in all cases the Governor or his duly
designated alternate shall be among the 4.

Vote
- concurrence of at least 4 members for decisions of
monetary Board

Salary
- shall be fixed by the President of the Philippines at
a sum commensurate to the importance and
responsibility attached to the position
- any member of the Monetary Board with personal or
pecuniary interest in any matter in the agenda of
Board shall disclose his interest to the Board and shall
retire from the meeting when matter is taken up.

OPERATIONS OF THE BANGKO SENTRAL
1. Shall prepare data and conduct economic research
for the guidance of the monetary board in the
formulation and implementation of its policies.
- Data includes:
a) forecast of the balance of payments of
Philippines
b) statistics on the monthly movement of the
monetary aggregates, of prices and other
statistical series
c) economic studies useful for the formulation
and analysis of monetary, banking, credit
and exchange policies
2. Shall have authority to request from government
offices and instrumentalities, or GOCCs, any data
which it may require for the proper discharge of its
functions and responsibilities.
3. Shall promote and sponsor the training of technical
personnel in the field of money and banking
authorized to defray the costs of study, at home or
abroad, of qualified employees of the Bangko
Sentral, of promising university graduates or any
other qualified person who shall be determined by
proper competitive examinations.
4. Shall have supervision over, and conduct periodic or
special examinations of, banking institutions and
quasi-banks, including subsidiaries and affiliates
engaged in allied activities.

Subsidiary
- a corporation more than 50% of voting stock of which
is owned by a bank or quasi-bank

Affiliate
- a corporation the voting stock of which, to the extent
of 50% or less, is owned by a bank or quasi-bank or
which is related or linked to such institution or
intermediary through common stockholders or such
other factors as determined by the Board.

SUPERVISION AND EXAMINATION
- the department heads and examinees of the
supervising or examining departments are hereby
authorized to:
a. administer oaths of any director, officer or
employee of any institution under their
respective supervision or subject to their
examination;
b. compel the presentation of all books,
documents, papers or records necessary in their
judgment to ascertain the facts relative to the
true condition of any institution;
c. compel the presentation of books and records of
persons and entities relative to or in connection
with the operations, activities or transactions of
the institutions under examination.
- b & c is subject to the provisions of existing laws
protecting or safeguarding the secrecy as
confidentiality of bank deposits as well as
investments of private persons, natural or
juridical, in debt institutions issued by the
Government

General rule
- no restraining order or injunction shall be issued by
the court enjoining the Bangko Sentral from
examining any institution subject to the supervision
or examination by the Bangko Sentral.

Exceptions
1. action of Bangko Sentral is plainly arbitrary and made
in bad faith; and
2. petitioner files with the clerk or judge of court in
which the action is pending a bond executed in favor
of Bangko Sentral, in an amount fixed by the court.

When is supervision and examination conducted?
- the supervising and examining department head,
personally or by his deputy, shall examine the books
of every banking institution once in every 12 months
and in such other times as the Monetary Board by an
affirmative vote of 5 members may deem expedient.
- PROVIDED; that there shall be an interval of at least
12 months between annual examinations.
- examination of its books, cash and available assets
and general condition may be made at any time
during banking hours when requested to do so by the
Bangko Sentral.

Fees
- banking and quasi-banking institutions which are
subject to examination shall pay to Bangko Sentral
an annual fee in an amount equivalent to a percentage
as may be prescribed by the Monetary Board of its
average total assets during the preceding year

COMMERCIAL LAW
BANKING LAWS
152

2009 BAR OPERATIONS
- paid within the first 30 days of each year, shown in its
end-of-the-month balance sheet

THE CONSERVATOR
Whenever on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or a quasi-bank is in a
state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the
interest of depositors and creditors; shall appoint a
conservator.

Powers of the Conservator
1. take charge of assets, liabilities and the management
thereof;
2. reorganize the management
3. collect all monies and debts due said institution
4. exercise all powers necessary to restore viability of its
banking institution
5. report and be responsible to the Monetary Board;
and
6. shall have the power to overrule or revoke the actions
of the previous management and Board of directors
of the bank or quasi-bank

Term of office
- the conservatorship shall not exceed 1 year

Remuneration of the Conservator
- To be fixed by the Monetary Board in an amount not
to exceed 2/3 of the salary of the President of the
Institution in 1 year, payable in 12 equal monthly
payments.
- Rules on Remuneration:
1. if at any time within the 1 year period, the
conservatorship is terminated on the ground that
the institution can operate on its own, the
conservator shall receive the balance of the
remuneration which he would have received up
to the end of the year.
2. if the conservatorship is terminated on other
grounds, the conservator shall not be entitled to
such remaining balance.
3. if the Monetary Board appoints a conservator
connected with the Bangko Sentral, he shall not
be entitled to receive any remuneration or
emolument from the Bangko Sentral during the
conservatorship.

Termination of the Conservatorship
1. When the Monetary Board is satisfied that the
institution can continue to operate on its own
and the conservatorship is no longer necessary.
2. When on the basis of the report of the
conservator or of the Monetary Boards own
findings, determine that the continuance in
business of the institution would involve
probable loss to its depositors or creditors,
provisions on receivership and liquidation will
apply.

THE AUDITOR
Chairman of the Commission on Audit shall act as the ex-
officio auditor of the Bangko Sentral and is empowered
and authorized to:
a. appoint a representative who shall be the
auditor of Bangko Sentral
b. fix salary of such representative
c. appoint and fix the salaries and number or
personnel to assist said representative in his
work.

The representative must be:
a. a certified public accountant
b. with at least 10 years experience

No relative of any member of the Monetary Board or the
Chairman of the Commission within the 6
th
degree of
consanguinity or affinity shall be appointed such
representative.

RECEIVERSHIP AND LIQUIDATION

Receivership
- Banking institution
= Monetary Board may summarily and without
need for prior hearing forbid the institution
from doing business in the Philippines and
designate the Philippine Deposit Insurance
Corporation as receiver.
- Quasi-banking Institution
= any person of recognized competence in
banking or finance may be designated as
receiver by the Monetary Board.

- A receiver shall be appointed when the Monetary
Board finds that a bank or quasi-bank:
a. is unable to pay its liabilities as they become due
in the ordinary course of business, BUT it shall
not include inability to pay caused by
extraordinary demands induced by financial
panic in banking community;
b. has insufficient realizable assets, as determined
by Bangko Sentral, to meet its liabilities;
c. cannot continue in business without involving
probable losses to its depositors/creditors;
d. has willfully violated a cease and desist order
that had become final and involves
acts/transactions which amount to fraud or a
dissipation of the assets of the institution.

- during rehabilitation receivership, the assets are held
in trust for the equal benefit of all creditors to
preclude one from obtaining an advantage or
preference over another by the expediency of an
attachment, execution or otherwise.

- Equality is equity means when a corporation
threatened by bankruptcy is taken over by a receiver,
all the creditors should stand on an equal footing. Not
anyone of them should be given any preference by
paying one or some of them ahead of the others.

COMMERCIAL LAW
BANKING LAWS
153

2009 BAR OPERATIONS
Requirements before a bank may be found insolvent
and declared dissolved
1. an examination shall be conducted by the head of the
appropriate supervising or examining department or
his examiners or agents into the condition of the
bank;
2. it shall be disclosed in the examination that the
condition of the bank is one of insolvency or that its
continuance in business would involve probable loss
to its depositors and creditors;
3. the department head concerned shall inform the
Monetary Board in writing, of the facts; and
4. the Monetary Board shall find the statements of the
department head to be true.

- The bank shall be considered as insolvent when
the realizable assets of a bank or a non-bank
financial intermediary performing quasi-banking
functions as determined by the Central Bank are
insufficient to meet its liabilities.

Powers of the Receiver
1. Immediately gather and take charge of all the assets
and liabilities of the institution;
2. Administer the assets and liabilities for the benefit of
its creditors; and
3. Exercise the general powers of receiver under the
Revised Rules of Court BUT shall not pay or commit
any act that will involve the transfer or disposition of
any assets of the institution;
4. May deposit or place the funds of the institution in
nonspeculative investments.

- The receiver shall determine as soon as possible,
but not later than 90 days from take-over,
whether the institution may be rehabilitated or
otherwise placed in such a condition so that it
may be permitted to resume business with safety
to its depositors and creditors and the general
public.
- If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business, the Monetary Board shall notify in
writing the Board of Directors of its findings and
direct the receiver to proceed with the
liquidation of the institution.

Liquidation

- Banking Institution
= receiver shall file ex parte with the proper
RTC a petition for assistance in the
liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine
Deposit Insurance Corporation
- Quasi-banking Institution
= receiver shall also file an ex parte petition for
assistance in liquidation, the plan to be
adopted by the monetary Board.

Procedure of Liquidation:
1. the court shall, upon acquiring jurisdiction, upon
motion of the receiver, assist the enforcement of
individual liabilities of the stockholders, directors and
officers, and decide on other issues as may be
material to implement the liquidation plan adopted;
2. convert the assets of the institution to money,
dispose of the same to the creditors and other
parties, for the purpose of paying the debts in
preference of credit;
3. may institute such actions as may be necessary to
collect and recover accounts and assets of, or defend
any action against the institution.

Important points to remember:
- ** the assets of an institution under receivership or
liquidation shall be deemed in custodia legis in the
hands of the receiver and shall from the moment of
institution was placed under receivership or
liquidation be exempt from any order of
garnishment, levy, attachment or execution.
- ** the actions of the Monetary Board taken under
appointment of conservator, receivership or
liquidation shall be final and executory, and may not
be restrained or set aside by the court except on
petition for certiorari on the ground of excess of
jurisdiction or with such abuse of discretion as to
amount to lack or excess of jurisdiction.

REPORTS AND PUBLICATIONS
The reports to be submitted and published by the Banko
Sentral are the following:
1. General balance sheet- shows the volume and
composition of its assets and liabilities as of the last
working day of the month.
WHEN TO PUBLISH: Within 60 days after the end of
each month except for the month of December which
shall be submitted within ninety days after the end
thereof.
2. Analysis of economic and financial development.
WHEN TO PUBLISH: Not later than 90 days after the
end of each quarter.
3. Profit and loss statement- reasonable detail of Banko
Sentrals operation.
WHEN TO PUBLISH: Within 90 days after the end of
the year.
4. A review of the state of the financial system.
WHEN TO PUBLISH: 120 days after the end of each
semester.
5. Abnormal movements in monetary aggregates and
the general price level
WHEN TO PUBLISH: as soon as practicable
6. Remedial measures in response to such abnormal
movements.
WHEN TO PUBLISH: not later than 72 hrs after they
are taken
7. Annual report on the condition of the Bangko
Sentral.
WHEN TO PUBLISH: before the end of March of each
year

COMMERCIAL LAW
BANKING LAWS
154

2009 BAR OPERATIONS
The annual report shall also include:
1. a financial condition of the Bangko Sentral; and
2. a statistical appendix which shall present the
following:
a. monthly movement of monetary aggregate and
their components
b. monthly movement of purchases and sales of
foreign exchange and of intl reserves of the
Bangko Sentral
c. balance of payments of the Philippines
d. monthly indices of consumer prices and of
import and export prices
e. monthly movement, in summary form, of
exports and imports by volume and value
f. monthly movements of the accounts of the
Bangko Sentral and of other banks
g. principal data on govt receipts and expenditures
and on the status of the public debt, both
domestic and foreign; and
h. texts of the major legal and administrative
measures adopted by the govt and the
monetary Board during the year which relate to
the functions or operations of the Bangko
Sentral or of the financial system.

PROFITS AND LOSSES
- Net Profits
= in the calculation of profits, the Bangko Sentral
shall make adequate allowance or establish
adequate reserves for bad and doubtful
accounts.
- the net profits and losses shall be determined by the
Bangko Sentral within the first 30 days following the
end of each year
- the determination and carrying out the distribution of
the net profits shall be made within the first 650 days
following the end of each fiscal year and the rules on
such distribution are:
a. 50% of the net profits shall be carried to surplus;
and
b. the remaining 50% shall revert back to the
national treasury

Revaluation of profits and losses
- Profits or losses arising from any revaluation of the
Bangko Sentrals net assets or liabilities in gold or
foreign currencies shall not be included in the
computation of the annual profits and losses it shall
be offset by any amounts which are:
a. owed by the Philippines to any international or
regional inter-govt financial institution of which
the Philippines is a member; or
b. owed by these institutions to the Philippines.

Revaluation of International Reserves
- this is a special frozen account where the remaining
profit or loss shall be carried and the net balance of
which shall appear either among the liabilities or
among the assets of Bangko Sentral, depending on
whether the revaluations have produced net profits
or net losses

Fiscal Year
- begins on January 1
st
and end on December 31
st
of
each year

THE BANGKO SENTRAL
AND
THE MEANS OF PAYMENT

The unit of monetary value in the Philippines is the peso.

Currency
- means all Philippine notes and coins issued or
circulating in accordance with the provisions of the
Act.
- the Bangko Sentral shall have the sole power
and authority to issue currency, within the
territory of the Philippines
- the Bangko Sentral shall also have the
authority to investigate, make arrests,
conduct searches and seizures in accordance
with law, for the purpose of maintaining the
integrity of the currency.
- the Monetary Board may issue regulations
as it may deem advisable in order to prevent
the circulation of foreign currency or of
currency substitutes as well as prevent the
reproduction of facsimiles of Bangko Sentral
notes

Liability for notes and coins
- notes and coins issued by the Bangko Sentral shall be
liabilities of the Banko Sentral and may be issued
only against, and in amounts not exceeding, the
assets of the Bangko Sentral.
- all notes and coins issued by the Bangko Sentral shall
be fully guaranteed by the Govt of the Philippines
and shall be legal tender in the Philippines for all
debts, both public and private.
- Coins shall be legal tender:
a. in the amounts not exceeding P50 for
denominations of 25cents and above; and
b. in amounts not exceeding P20 for denominations
of 10cents or less

Characteristics of the currency
The Monetary Board shall, with approval of the President:
1. Prescribe the denominations, dimensions, designs,
inscriptions and other characteristics of notes issued
by Bangko Sentral;
2. Prescribe the weight, fineness, designs,
denominations and other characteristics of the coins
issued by the Bangko Sentral;
3. Prescribe the amounts of the notes and coins to be
printed and minted.
Notes shall bear the signatures, in facsimiles, of the
President and of the Governor of the Bangko Sentral.

INTERCONVERTIBILITY OF CURRENCY
Bangko Sentral shall exchange, on demand and without
charge, Philippine currency of any denomination for
Philippine notes and coins of any other denomination

COMMERCIAL LAW
BANKING LAWS
155

2009 BAR OPERATIONS
requests. If Bangko Sentral is temporarily unable to
provide notes or coins of the denominations requested, it
shall meet its obligations by delivering notes and coins of
the denominations which most nearly approximate those
requested.

Replacement of currency unfit for circulation
General rule:
Bangko Sentral shall withdraw from circulation
and shall demonetize all notes and coins which
for any reason whatsoever are unfit for
circulation and shall replace them by adequate
notes and coins.
Exception:
coins which show signs of filing, clipping or
perforation, and notes which have lost more than
2/5 of their surface or all of the signatures
inscribed thereon shall not be replaced by the
Bangko Sentral and shall be withdrawn from
circulation and demonetized without
compensation to the bearer.

Replacement of old notes and coins
Replacement happens when Bangko Sentral call
in for replacement of notes of any series or
denominations which are more than % years old
and coins which are more than 10 years old.

Notes and coins called in for replacement in accordance
with this provision shall remain legal tender for a period of
1 year from the date of call after this period, they shall
cease to be legal tender but during the following year or
for such longer period, it maybe exchanged at par and
without charge in the Bangko Sentral.

Demand deposits all those liabilities of the Bangko
Sentral and of other Banks which are denominated in
Philippine currency and are subject to payment in legal
tender upon demand by the presentation of checks.

- checks representing demand deposits do not
have legal tender power and their acceptance in
the payment of debts, both public and private, is
at the option of the creditor

GUIDING PRINCIPLES OF MONETARY
ADMINISTRATION BY THE BANGKO SENTRAL

A. Domestic Monetary stabilization
Monetary Board shall endeavor to control any
expansion or contraction in monetary aggregates which is
prejudicial to the attainment or maintenance of price
stability.
Monetary Board shall have due regard for their
effects on the availability and cost of money and credit to
particular sectors of the economy as well as to the
economy as a whole, and their effects on the relationship
of domestic prices and costs to world prices and costs.

Actions when abnormal movements in monetary
aggregates occur
whenever abnormal movements in the
monetary aggregates, in credit or in prices
endanger the stability of the Philippine economy
or important sectors thereof, the Monetary
Board shall:
a. take such remedial measures as are
appropriate and within the powers
granted to the Monetary Board and the
Bangko Sentral; and
b. submits to the President of the
Philippines and Congress and make
public, a detailed report which shall
include:
1. causes of the rise or fall of the monetary
aggregates of credit or of prices;
2. the extent to which the changes in the
monetary aggregates, in credit, or in
prices have been reflected in changes in
the level of domestic output,
employment, wages and economic
activity in general and the nature and
significance of any such changes; and
3. the measures which the Monetary
Board has taken and the other
monetary, fiscal or administrative
measures which it recommends to be
adopted.

B. International Monetary Stabilization
The Bangko Sentral shall exercise its powers to
preserve the International value of the peso and to
maintain its convertibility into other freely convertible
currencies primarily for, although not necessarily limited
to, current payments, for foreign trade and industry.

How to maintain such stability and convertibility:
The Bangko Sentral shall maintain International
reserves adequate to meet any foreseeable net demands
on the Bangko Sentral for foreign currencies.

Guide to monetary board in judging adequacy of
international reserves:
1. the prospective receipts and payment of foreign
exchange by the Philippines;
2. give special attention to the volume and maturity of
the Bangko Sentrals own liabilities in foreign
currencies;
3. give special attention also to the volume and
maturity of the foreign exchange assets and liabilities
of other banks operating in the Philippines; and
4. give special attention to the volume and maturity of
the foreign exchange assets and liabilities of all other
persons and entities in the Philippines.

Composition of International reserves
It includes, but not limited to:
a. gold; and
b. assets in foreign currencies which includes:
- documents and instruments customarily
employed for the international transfer of funds

COMMERCIAL LAW
BANKING LAWS
156

2009 BAR OPERATIONS
- demand and time deposits in Central Banks,
treasuries and commercial banks abroad
- foreign govt securities; and
- foreign notes and coins

The Monetary Board shall:
1. endeavor to hold the foreign exchange resources of
the Bangko Sentral in freely convertible currencies;
2. give particular consideration to the prospects of
continued strengths and convertibility of the
currencies in which the reserve is maintained,
including anticipated demands to such currencies;
3. issue regulations determining the other qualifications
which foreign exchange assets must meet in order to
be included in the international reserves of the
Bangko Sentral.

Actions when international stability of peso is
threatened:
The Monetary Board shall:
a. take such remedial measures as are appropriate
and within the powers granted to the Monetary
Board and the Bangko Sentral; and
b. submits to the President and to congress a detailed
report which shall include a description and analysis
of:
1. nature and causes of existing or imminent
decline;
2. remedial measures already taken or to be
taken by the Monetary Board
3. monetary, fiscal or administrative measures;
and
4. character and extent of the cooperation
required from other govt agencies for the
successful execution of the policies of the
Monetary Board.

When threatened:
1. whenever the international reserve of the Bangko
Sentral falls to a level which the Monetary Board
considers inadequate to met the prospective net
demands on the Bangko Sentral for foreign
currencies;
2. whenever the international reserves appears to be in
imminent danger of falling to such a level;
3. whenever the international reserve is falling as a
result of payments or remittances abroad which is
contrary to the national welfare.

INSTRUMENTS OF BANGKO SENTRAL ACTION

In order to achieve the primary objective of price stability,
the Monetary Board shall rely on its moral influence and
the powers granted to it for the management of
monetary aggregates.

Purchases and sales
1. Gold
- the Bangko Sentral may buy and sell gold in any
form; such purchases and sales shall be made in
the national currency at the prevailing
international market price as determined by the
Monetary Board.

2. Foreign Exchange
- The Bangko Sentral may buy and sell foreign
notes and coins, and documents and instruments
of types customarily employed for the intl
transfer of funds.
- Foreign exchange may be had with the following
entities or persons:
a. Banking institutions operating in the
Philippines;
b. The government, its political subdivisions
and instrumentalities
c. Foreign or intl financial institutions
d. Foreign gobs and their instrumentalities;
and
e. Other entities and persons which the
Monetary Board is hereby empowered to
authorize as foreign exchange dealers.

How to maintain convertibility of peso
1. buy any quantity of foreign exchange offered
2. sell any quantity of foreign exchange demanded by
such institution
PROVIDED, that the foreign currencies so offered
or demanded are freely convertible into gold or
Us dollars; but their requirement shall not apply
to demands for foreign notes and coins.

- Bangko Sentral shall avoid the acquisition and
holdings of currencies which are not freely
convertible and may acquire such currencies to
an amount exceeding the minimum balance
necessary to cover current demands only when
such is considered by Monetary Board to be in
the national interest.

EXCHANGE RATES
the Monetary Board shall determine:
1. The exchange rate policy of the country;
2. The rates of which the Bangko Sentral shall buy and
sell spot exchange;
3. Establish deviation limits from the effective exchange
rate(s) as it may deem proper; and
4. The rates for other types of foreign exchange
transactions by the Bangko Sentral including
purchases and sales of foreign notes and coins.

- The Bangko Sentral shall not collect any
additional commissions/charges of any sort other
than the actual telegraphic/ cable costs incurred
by it.
- The Bangko Sentral shall endeavor to maintain
at all times a net positive foreign asset position
so that its gross foreign exchange assets will

COMMERCIAL LAW
BANKING LAWS
157

2009 BAR OPERATIONS
always exceed its gross foreign liabilities in case
the amount in peso of the liabilities exceed twice
the amount in peso of the assets; Bangko Sentral
shall submit a report to Congress stating the
origin of these liabilities and the manner they will
be paid within 60 days from the date the limit is
exceeded.

EMERGENCY RESTRICTIONS ON EXCHANGE
OPERATIONS
During an exchange crisis or in time of national
emergency or crisis, the Monetary Board:
1. May temporarily suspend or restrict sales of
exchange by the Bangko Sentral, with the
concurrence of at least 5 of its members; and
2. May subject all transactions in gold and foreign
exchange to license by the Bangko Sentral and any
foreign exchange thereafter obtained by any person
or entity in the Philippines be delivered to Bangko
Sentral or to any bank or agent designated by the
Bangko Sentral for the purpose.

REGULATIONS OF FOREIGN EXCHANGE OPERATION
OF BANKS
1. May require the banks to sell to Bangko Sentral or to
other banks all or part of their surplus holdings of
foreign exchange;
2. Determine the net assets and net liabilities of banks
and shall take into account the banks net worth,
outstanding liabilities or such other financial or
performance ratios;
3. Require banks to have a Balanced Currency Position
maintain a balanced position between their assets
and liabilities in Philippine peso or in any other
currency in which they operate;
4. Issue regulations governing banks purchases and
sales of non-spot exchanges;
5. Banks shall bear the risks of noncompliance with the
terms of foreign exchange documents and
instruments which they buy and sell and other
typically commercial or banking risks;
6. Banks shall report to Bangko Sentral the volume and
composition of their purchases and sales of gold and
foreign exchange each day and furnish additional
information with regard to the movements in their
accounts in foreign currencies;
7. Monetary Board may also require other persons and
entities to report to it currently all transactions or
operations in gold and in foreign exchange.

LOANS TO BANKS AND OTHER OFFICIAL
INSTITUTIONS

Credit Policy
- the rediscounts, discounts, loans and advances
which the Bangko Sentral is authorized to extend
to banking institutions shall be used to influence
the volume of credit consistent with the
objective of price stability.

A. NORMAL CREDIT OPERATIONS
1. Commercial credits
the Bangko Sentral may rediscount, discount, buy
and sell bills, acceptances, promissory notes and
other credit instruments with maturities of not more
than 180 days from date of rediscount, discount or
acquisition and resulting from transactions related to:
a. importation, exportation, purchase or
sale of readily saleable goods and
products, or their transportation within
the Philippines; or
b. storing of non-perishable goods and
products which are duly insured and
deposited, under conditions assuring
their preservation in authorized bonded
warehouses or in other places approved
by the monetary board
2. Production credits
the Bangko Sentral may rediscount, discount, buy
and sell bills, acceptances, promissory notes and
other credit instruments having maturities of not
more than 360 days from the date of their rediscount,
discount or acquisition and resulting from
transactions related to production or processing of
agricultural, animal, mineral and industrial products.
- this shall be secured by a pledge of the
respective crops or products but if the
original loan granted by the Bangko Sentral
is secured by a lien or mortgage on real
estate property 70% of the appraised value
equals or exceeds the amount of loans
granted, then products need not be pledged.
3. Other credits
special credit instruments not otherwise
rediscountable under (a) and (b) may be
rediscountable in accordance with rules and
regulation which Bangko Sentral shall prescribe.
4. Advances may be granted by Bangko Sentral
against `the following kinds of collateral:
a. gold coins or bullion;
b. securities representing obligations of the
Bangko Sentral or other domestic credit
institutions of recognized solvency;
c. credit instruments for commercial credits;
d. credit instruments for production credits;
e. utilized portions of advances in current
account covered by regular overdraft
agreements;
f. negotiable treasury bills, certificate of
indebtedness, notes and other negotiable
obligations of the govt maturing within 3
years from date of advance; and
g. negotiable bonds issued by the govt having
maturities of not more than 10 years from
date of advance

B. SPECIAL CREDIT OPERATIONS
Loans for liquidity purposes the Bangko
Sentral may extend loans and advances to
banking institutions for a period of not more than
7 days without any collateral for the purpose of

COMMERCIAL LAW
BANKING LAWS
158

2009 BAR OPERATIONS
providing liquidity to the banking system in
times of need.

C. EMERGENCY CREDIT OPERATIONS
1. In periods of national or local emergency or during
imminent financial panic which directly threaten
monetary banking stability, the Monetary Board
may, by a vote of at least 5 of its members, authorize
Bangko Sentral to grant extraordinary loans or
advances secured by assets.
- Amount of loan or advance: shall not exceed the
sum of 50% of total deposits and deposit
substitutes of the banking institution.
- Manner of Paying: shall be disbursed in 2 or more
tranches; 1
st
tranch shall be limited to 25% of the
total deposits and deposit substitute of the
institution and shall be secured by govt
securities to the extent of their applicable loan
valued and other unencumbered first class
collaterals which monetary Board may approve.
2. the Monetary Board may, at its discretion, even
during normal periods, authorize Bangko Sentral to
grant emergency loans or advances for the purpose
of assisting a bank in precarious financial condition or
under serious financial pressures brought by
unforeseen events or events which through
foreseeable could not be prevented by the bank.
REQUISITES:
a. monetary board shall ascertain that the
bank is not insolvent;
b. that the bank has the assets defined to
secure the advances;
c. there should be a concurrent vote of at least
5 members of the Monetary Board

Credit term or requirements
1. the Bangko Sentral shall collect interest and other
appropriate charges on all loans and advances it
extends
2. the document rediscounted, discounted or accepted
as collateral by the Bangko Sentral should bear the
endorsement of the institution from which they are
received;
3. documents rediscounted, discounted, or accepted as
collateral by Bangko Sentral must be withdrawn by
the borrowing institution in the dates of their
maturities or upon liquidation of obligation
- banks shall have the right at any time to
withdraw any document presented as collateral
upon payment in full of the corresponding debt
to Bangko Sentral including interest charges.
4. monetary board prescribe additional conditions
which borrowing institutions must satisfy in order to
have access to the credit of Bangko Sentral

OPEN MARKET OPERATIONS
The open market purchases and sales of securities by
Bangko Sentral shall be made exclusively in accordance
with its primary objective of achieving price stability.

What to buy and sell in open market
1. evidences of indebtedness issued directly by the
Government
2. evidences of indebtedness issued by Government
instrumentalities and fully guaranteed by the
Government
- these evidences of indebtedness must be freely
negotiable and regularly serviced and must be
available to the general public through banking
institutions and local government treasuries in
denominations of a thousand pesos or more
3. Bangko Sentral may also issue, place, buy and sell
freely negotiable evidences of indebtedness of the
Bangko Sentral in order to provide the latter with
effective instruments for open market operations
- these issuances shall only be made in cases of
extraordinary movement in price levels.

Bangko Sentrals Portfolio
- at least once a month, the Monetary Board shall
review the portfolio of Bangko Sentral especially
considering whether a sufficiently large part of the
portfolio consists of assets with early maturities, in
order that contraction in Bangko Sentral credit may
be effected promptly whenever the national
monetary policy so requires.

BANK RESERVES
- in order to control the volume of money created by
the credit operations of the banking systems, all
banks operating in the Philippines shall be required to
maintain reserves against their deposit liabilities
- this required reserves of each bank shall be
proportional to the volume of its deposit liabilities
and shall ordinarily take the form of a deposit in the
Bangko Sentral
- the Monetary Board may exempt from reserve
requirement deposits and deposit substitutes with
remaining maturities of 2 years or more as well as
interbank borrowings.

DEPOSIT SUBSTITUTES
- an alternative form of obtaining funds from the
public (other than deposits) through the issuance,
endorsement or acceptance of debt instruments for
the borrowers own account, for the purpose of
relending or purchasing of receivables and other
obligations; examples of these instruments are:
1. bankers acceptances
2. promissory notes
3. participations
4. certificates of assignment and similar
instruments with recourse; and
5. purchase agreements

- the Monetary Board may fix and alter the
minimum reserve ratios applicable to deposits
denominated in both peso and foreign
currencies, as well as to deposit substitutes,
which each bank maintains.

COMMERCIAL LAW
BANKING LAWS
159

2009 BAR OPERATIONS
Computation of reserves
- It shall be calculated daily at the end of the day on the
basis of the amount of the institutions reserves and
the amount of its liability accounts against which
reserves are required to be maintained.
- Whenever it becomes necessary to increase reserve
requirements against existing liabilities, the increase
shall be made in a gradual manner and shall not
exceed 4% points in any 30 day period.

Reserve deficiencies
- occurs whenever the reserve position of any bank or
quasi-bank is below the required minimum; EFFECT:
shall pay the Bangko Sentral 1/10 of 1% per day on
the amount of the deficiency or the prevailing 91 day
treasury bill rate plus 3% points, whichever is higher

- The banks and quasi-banks shall ordinarily be
permitted to affect any reserve deficiency
occurring on one or more days of the week with
any excess reserves which they may hold on
other days of the same week and shall be
required to pay the penalty only on the average
daily deficiency during the week.
- The Monetary Board may modify or set aside the
reserve deficiency penalties for part or the entire
period of a) a strike or lockout affecting a bank or
quasi-bank, b) or of a national emergency
affecting operations of banks or quasi-banks.

Interbank settlement
Bangko Sentral shall establish facilities for interbank
clearing under such rules and regulations as the Monetary
Bank may prescribe; the deposit reserves maintained by
the banks in the Bangko Sentral serve as basis for the
clearing of checks and the settlement of interbank
balances.

Exemption from attachment and other purposes
Deposits maintained by banks with the Bangko Sentral as
part of their reserve requirement shall be exempt from
attachment, garnishment, or any other order or process
of any court, government agency or any other
administrative body issued to satisfy the claim of a party
other than the government.
- The Monetary Board shall use the powers
granted to it to ensure that the supply,
availability and cost of money are in accord with
the needs of the Philippine economy and that
bank credit is not granted for speculative
purposes prejudicial to the national interest.

FUNCTIONS AS BANKER AND FINANCIAL ADVISOR
OF THE GOVERNEMENT

Functions as Banker of the Government
1. The Bangko Sentral shall act as a banker of the
Government, its political subdivisions and
instrumentalities.
2. The Bangko Sentral shall represent the Government
in all dealings, negotiations and transactions with the
International Monetary Fund, International Bank for
Reconstruction and Development and with other
foreign or international financial institutions or
agencies.
3. The Bangko Sentral shall be the official depository of
the Government, its political subdivision and
instrumentalities as well as GOCCs, their cash
balances should be deposited with the Bangko
Sentral, with only minimum working balances to be
held by government owned banks and such other
banks as the Monetary Board may designate.
4. The Bangko Sentral shall open a general cash
account for the treasurer of the Philippines, in which
the liquid funds of the government shall be deposited
5. In the performance of its functions as fiscal agent, the
Bangko Sentral may engage the services of other
government owned and controlled banks and of other
domestic banks for operations in localities at home or
abroad in which the Bangko Sentral does not have
offices or agencies adequately equipped to perform said
operations

THE MARKETING AND STABILIZATION OF
SECURITIES FOR THE ACCOUNT OF THE
GOVERNMENT

The issue of government securities
- the issue of securities representing obligations of the
government and its instrumentalities may be made
through the Bangko Sentral which may act as agent
of, and for the account of, the government or its
respective subdivisions or instrumentality.
- HOWEVER, Bangko Sentral shall not guarantee the
placement of said securities, and shall not subscribe
to their issue except to replace its maturing holdings
of securities.

The placing of government securities
- the Bangko Sentral may place the securities through
direct sale to financial institutions and the public
- the Bangko Sentral shall not be a member of any
stock exchange or syndicate, but may intervene
therein for the sole purpose of regulating their
operations in the placing of government securities.

FUNCTIONS AS FINANCIAL ADVISOR OF THE
GOVERNMENT

Financial advices on official credit operations:
a. the government (through the secretary of
Finance)
b. political subdivisions and instrumentalities
of the government; BEFORE undertaking
any credit operations abroad shall request
the opinion, in writing, of the Monetary
Board on the monetary implications of the
contemplated actions.

Basis of opinion:
1. based on the gold and foreign exchange
resources and obligations of the nation;

COMMERCIAL LAW
BANKING LAWS
160

2009 BAR OPERATIONS
2. based on the effects of the proposed
operation on the balance of payments; and
3. based on money aggregates

SECURITIES STABILIZATION FUND
- shall be administered by the Bangko Sentral for the
account of the Government.
- Operation: consists of purchases and sales, in the
open market, of bonds and other evidence of
indebtedness issued or fully guaranteed by the
Governmen
- Purpose: to increase the liquidity and stabilize the
value of said securities in order to promote private
investment in government obligations
- Resources: shall come from the balance of the fund
held by the Central Bank
- Profits and Losses: shall retain any net profits which
it may make on its operations, regardless of whether
said profits arise from capital gains or from interest
earnings; shall correspondingly bear any net losses
which it may incur.

PRIVILEGES AND PROHIBITIONS

PRIVILEGES

1. Tax Exemptions
- the Bangko Sentral shall be exempt for a period
of 5 years from the approval of the Act from all
national, provincial, municipal and city taxes,
fees, charges and assessments.
- this exemption shall apply to
a. all property of Bangko Sentral,
b. resources, receipts, expenditures, profits
and income of Bangko Sentral,
c. as well as to all contracts, deeds, documents
and transactions relate to the conduct of the
business of Bangko Sentral

2. Exemption from custom duties
- the importation and exportation by the Bangko
Sentral of
a. notes and coins;
b. of gold and other metals to be used for the
conduct of business of Bangko Sentral and
c. importation of all equipment needed for
bank note production, minting of coins,
metal refining and other security printing
operations.

PROHIBITIONS
1. the Bangko shall not acquire shares of any kind or
accept them as collateral
2. shall not participate in the ownership or management
of any enterprise, either directly or indirectly
3. shall not engage in development banking or financing

COMMERCIAL LAW
BANKING LAWS
161

2009 BAR OPERATIONS

No rural bank shall be operated without a certificate
of authority from the Monetary Board of the Central
Bank. Rural banks shall be organized in the form of
stock corporations
Upon consultation with the rural banks in the area,
duly established cooperatives and corporations
primarily organized to hold equities in rural banks
may organize a rural bank and/or subscribe to the
shares of stock of any rural bank. Provided, that a
cooperative or corporation owning or controlling the
whole or majority of the voting stock of the rural
bank shall be subject to special examination and to
such rules and regulations as the Monetary Board
may prescribe.
The capital stock of any rural bank shall be fully
owned and held directly or indirectly by citizens of
the Philippines or corporations, associations or
cooperatives qualified under Philippine laws to own
and hold such capital stock with the exception of
shareholdings of corporations organized primarily to
hold equities in rural banks and of Filipino- controlled
domestic banks.
If the subscription of private share holders to the
capital stock cannot be secured or is not available, or
insufficient to meet the normal credit needs of the
locality -- the Land Bank of the Philippines, the
Development Bank of the Phil., or any government-
owned or controlled bank or financial institution shall
subscribe to the capital stock of such rural bank,
which shall be paid in full at the time of subscription,
in an amount equal to the fully paid subscribed and
unimpaired, capital of the private stockholders.
PROVIDED, such shares may be sold at any time at
market value to private individuals who are citizens of
the Philippines, and that the registered stockholders
shall have the right of preemption within 1 year from
the date of offer in proportion to their respective
holdings, but in the absence of such buyer,
preference shall be given to residents of the locality
or province where the rural bank is located.

- To provide supplemental capital until the bank has
accumulated enough capital of its own or stimulate
private investments, the same institutions shall also
subscribe within 30 days to the capital stock of any
rural bank in an amount equal to the equity
investment of the private shareholders which shall be
paid in full at the time of the subscription right of
preemption is also available; If such stock held is sold
to private individuals, the same may be converted
into common stock. Stocks held shall be made
preferred only as to assets upon liquidation and
without power to vote and shall share in dividend
distributions from the date of issuance in the
amount:
a. 4%-- on the 1
st
and 2
nd
years
b. 6%-- on the 3
rd
and 4
th
years
c. 8%-- on the 5
th
and 6
th
years
d. 10%-- on the 7
th
and 8
th
years
e. 12%-- on the 9
th
to the 15
th
years
without preference

- The corporate secretary of the bank shall submit
to the Central Bank and the SEC a report on
every transfer of preferred stock to private
shareholders. When all the preferred shares of
stock have been sold to private shareholders, the
Articles of Incorporation of the bank shall be
amended to reflect the conversion.

All members of the Board of Directors of the rural
bank shall be citizens of the Philippines at the time of
their assumption to office
- NO director or officer shall for himself or as a
representative or agent of another, borrow any
of the deposits or funds of such banks, nor shall
he become a guarantor, indorser, or surety for
loans from such bank or others, or in any manner
be an obligor for money borrowed from the bank
or loaned by it except with the written approval
of the majority of the directors of the bank,
excluding the director concerned. Any such
approval shall be entered upon the records of the
corporation and a copy of such entry shall be
transmitted to the appropriate supervising
department.
- The Monetary Board may regulate the amount of
credit accommodations that may be extended
directly to the directors, officers or stockholders
of rural banks of banking institutions. However,
the outstanding credit accommodations to each
of its stockholders owning 2% or more of the
subscribed capital stock, its directors, or officers
shall be limited to an amount equivalent to the
respective outstanding deposits and book value
of the pad-in capital contributions in the bank.

Loans or advances extended by rural banks shall be
primarily for the purpose of meeting the normal
credit needs of farmers, fishermen or farm families
owning or cultivating land dedicated to agricultural
production as well as the normal credit needs of
cooperatives and merchants. In granting loans,
preference shall be given to the application of
farmers and merchants whose cash requirements are
small
Loans may be granted by rural banks on the security
of lands on the following:
a. those without Torrens title where the owner of
private property can show 5 years or more of
peaceful, continuous and uninterrupted
possession in concept of owner
b. portions of friar land estates or other lands
administered by the Bureau of Lands that are
covered by sales contracts and the purchasers
have paid at least 5 years installment thereon,
without the necessity of prior approval and
consent by the Director of Lands

RURAL BANKS ACT OF 1992
R.A. NO. 7353

COMMERCIAL LAW
BANKING LAWS
162

2009 BAR OPERATIONS
c. portions of other estates under the
administration of the Department of Agrarian
Reform or other governmental agency which are
likewise covered by sales contracts (same
conditions as above stated)
d. homesteads or free patent lands pending the
issuance of titles but already approved

- When the corresponding titles are issued, the
same shall be delivered to the Register of Deeds
of the province where such lands are situated for
the annotation of the encumbrance

- In case of lands homestead or free patent titles,
copies of the notices for the presentation of the
final proof shall also be furnished the creditor
rural bank; That the applicant has already made
improvements on the land and the loan applied
for is to be used for further development of the
same or for other productive economic activities

- The appraisal and verification of the status of a
land is a full responsibility of the rural bank and
any loan granted on any land which shall be
found later to be forest zone shall be for the sole
account of the rural bank.

Rural banks may, devote a portion of their loanable
funds to meeting the normal credit needs of small
business enterprise; Provided, the loans shall not
exceed 15% of he net worth of a rural bank or such
amount as the Monetary Board may prescribe.
All supervised past due and restructured past due
loans, including those covered under existing
rehabilitation programs of the Central Bank, and 50%
of non-supervised past due shall be converted into
preferred stocks of the rural bank and issued in favor
of the Land Bank of the Phil., the DBP or any
government-owned or controlled bank or financial
institution, Provided:
a. penalties thereon are waived except accrued
interest on arrearages
b. equivalent penalties due from corresponding
farmers are waived
c. rural banks that prefer to settle their
arrearages under a plan of payment or a
combination of both plan of payment and
conversion may do so
d. rural banks shall match these preferred
stocks wit private equity in equal annual
installments over a period of 15 years to
begin 3 years after conversion

SUPERVISORY POWERS OF THE MONETARY BOARD
a. placing the limits to the maximum credit
allowed to any individual borrower
b. prescribing the interest rate
c. determining the loan period and loan
procedures
d. indicating the manner in which technical
assistance shall be extended to rural banks
e. imposing a uniform accounting system and
manner in keeping the accounts and records
of rural banks
f. instituting periodic surveys of loan and
lending procedures, audits, test-check of
cask and other transactions of the rural
banks
g. conducting training courses for personnel of
rural banks
h. supervising the business operations of the
rural bank, in general
i. prescribe the amount, value and class of
stock issued by any rural bank

SUPERVISORY POWERS OF THE CENTRAL BANK
a. enforce laws, orders, instructions, rules and
regulations promulgated by the Monetary
Board applicable to rural banks
b. to require rural banks, their directors,
officers and agents to conduct and manage
the affairs of the banks in a lawful and
orderly manner
c. upon proof of violation of the provisions
above mentioned, or that the affairs of the
bank are conducted in a manner
substantially prejudicial to the interest of
the government, depositors or creditors, to
take over the management of such bank
when authorized to do so by the Monetary
Board after due hearing process until a new
board of directors and officers are elected
and qualified

- The management of the rural bank by the
Central Bank shall be without expense to the
rural bank, except such is actually necessary for
its operation, pending the election and
disqualification of a new board of directors and
officers

- The director and the examiners of the central
bank charged with the supervision of rural banks
are authorized to administer oaths to any
director, officer or employee of any rural bank or
to any voluntary witness and to compel the
presentation of all books, documents, papers or
records necessary in his or their judgment to
ascertain the facts relative to the true condition
of any rural bank of to any loan.

POWERS OF RURAL BANKS
a. Accept savings and time deposits
b. Open current or checking accounts,
provided the bank has net assets of at least
P5,000,000
c. Act as correspondent for other financial
institutions
d. Act as collection agent
e. Act as official depository of municipal, city or
provincial funds in the municipality. City or
province where it is located

COMMERCIAL LAW
BANKING LAWS
163

2009 BAR OPERATIONS
f. Rediscount paper wit the PNB, Land Bank of
the Phil., Development Bank of the Phil., or
any banking institution, including its
branches and agencies
g. Offer other banking services as provided in
sec. 72 RA No. 337
h. Extend financial assistance to private and
public employees

Investment in allied undertakings shall include:
1. Banks, financial institutions and non-bank financial
intermediaries
2. Warehousing and other post-harvest facilities
3. Fertilizer and agricultural chemical and pesticides
distribution
4. Farm equipment distribution
5. Trucking and transportation of agricultural products
6. Marketing of agricultural products
7. Leasing
8. Other undertakings as may be determined by the
Monetary Board, provided:
a. the total investment to equities shall not exceed
25% of the net worth of the rural bank
b. the equity investment in any single enterprise
shall be limited to 15% of the net worth of the
rural bank
c. the equity investment in any single enterprise
shall remain a minority holding in that enterprise

The LBP, DBP, or any government owned or
controlled bank or financial institution shall within 6
days of certification of the Monetary Board, which
shall be final, extend to a rural bank loans repayable
in 10 years, with concessional rates of interest,
against security which may be offered by any
stockholder/s of said bank provided:
a. That the Monetary Board is convinced that the
resources of the bank are inadequate to meet the
legitimate credit requirements of the locality
wherein the bank is established
b. That there is dearth of private capital in the said
locality
c. That it is not possible for the stockholders of the
rural bank to increase the paid-up capital
thereof.

In an emergency or when a financial crisis is
imminent, the Central Bank may give a loan to any
rural bank against assets of the rural bank which may
be considered acceptable by a concurrent vote of at
least 4 members of the Monetary Board
To encourage consolidation and mergers of rural
banks, there are 5 or more rural banks within the
region that merge and consolidate within 3 years
from the enactment of this Act, the merged or
consolidated entity will be given the ff incentives for
a period of 7 years:
a. Its deposit liabilities shall be subjected to only 1/3
of reserves normally required for rural banks
b. Its reserve requirement can all be maintained
under interest-bearing government securities
but kept unencumbered with government
financial institutions or the Central Bank
c. It shall have unrestricted branching right within
the region, free from any assessment or
surcharges required in setting up a branch but
under the coordination with the Central Bank
which will have to assess that there are qualified
personnel, control and procedures to operate the
branch

Every individual acting as officer or employee of a
rural bank and handling funds or securities
amounting to P5, 000 or more in any 1 year, shall be
covered by an adequate bond as determined by the
Monetary Board; the by-laws of the bank may also
provide for the bonding of other employees or
officers of rural banks

EXEMPTIONS
a. Stockholdings in a rural bank shall be exempt from
any ownership ceiling for a period of 10 years from
the approval of this Act. The exemption shall require
the approval of the Monetary Board
b. The foreclosure of mortgages covering loans granted
by rural banks and executions of judgment thereon
involving real properties levied upon by the sheriff
shall be exempt from the publications in newspaper
where the total amount of loan, excluding interest
due and unpaid, does not exceed P100, 000. It shall
be sufficient if the notices of foreclosure and
execution of judgment are posted in the most
conspicuous area of the municipal building, the
municipal public market, rural bank, barangay hall,
barangay public market where the land mortgaged is
situated during the period of 60 days immediately
preceding the public auction or execution of
judgment. Proof of publication shall be accomplished
by an affidavit.
c. All rural banks shall be exempt from the payment of
all taxes, fees and charges of whatever nature and
description, except the corporate income tax and
local taxes, fees and charges, for a period of 5 years
from the date of commencement of operations and
from the approval of this Act for rural banks already
in operation as of approval of this Act.
d. Deposits of rural banks with government-owned or
controlled financial institutions like the LBP, DBP,
and the PNB are exempted from the Single
Borrowers Limit imposed by the General Banking
Act.
e. Any city or municipal trial court judge in his capacity
as notary public ex officio shall administer oath or
acknowledge the instruments of any rural bank and
its borrowers or mortgagors, free from all charges,
fees and documentary stamp tax relative to any loan
or transaction not exceeding P50,000
f. The registration of any instrument to any register of
deeds by any rural bank and its borrowers or
mortgagors, shall be free from all charges, fees and
documentary stamp tax, relating to loans or
transactions in an amount not exceeding P50, 000. In
instruments related to assignments of several

COMMERCIAL LAW
BANKING LAWS
164

2009 BAR OPERATIONS
mortgages consolidated in a single deed, if any, shall
be levied only on the amount in excess of P50,000 of
the consideration in the assignment of each
mortgage

PROHIBITIONS
A fine of not more than P10, 000, or imprisonment for not
less than 6 months but not more than 10 years or both, at
the discretion of the court, shall be imposed upon:

a. Any officer, employee, or agent of a rural bank who
shall:
1. Make false entries in any bank report or statement
2. Without order of a court, disclose any information
relative to the funds or properties in the custody of t
he bank belonging to private individuals,
corporations, or any other entity
3. Accept gifts, fees or commission or any other form of
remuneration in connection with the approval of a
loan from said bank
4. Overvalue or aid in overvaluing any security for the
purpose of influencing in any way the action of the
bank in any loan
5. Appear and sign as guarantor, indorser, or surety for
loans granted
6. Violate any of the provisions of this Act

b. Any applicant for a loan from, or borrower of a rural
bank who shall:
1. Misuse, misapply, or divert the proceeds of the loan
obtained by him from its declared purposes
2. Fraudulently overvalue property offered as security
for a loan fro said bank
3. Give out or furnish false or willful misrepresentation
of material facts for the purpose of obtaining,
renewing, or increasing a loan or extending the
period thereof
4. Attempt to defraud the said bank in the event of
court action to recover a loan
5. Offer any officer, employee or agent of a rural bank
as a gift, fee or commission or other form of
compensation in order to influence such bank
personnel into approving a loan application
6. Dispose or encumber the property or the crops
offered as security for the loan

c. Any examiner, or officer or employee of the Central
Bank of the Phil. or of any department , bureau, office,
branch or agency of the government who is assigned to
examine, supervise, assist or render technical service to
rural banks who shall connive or aid in the commission
of the same

a. Any municipal trial judge or register of deeds who
shall demand or accept, directly or indirectly, any
gift, fee, commission or other form of compensation
in connection with the service, or shall arbitrarily or
without reasonable cause delay the acknowledgment
or administration of oath or the registration of
documents required to be performed and by said
register of deeds shall be punished by a fine of not
more than P1, 000 or by imprisonment for not more
than 1 year, or both

b. Any bank not organized under this Act and any
person, association, or corporation doing the
business of banking, not authorized under this Act
which shall use the words Rural Banks as part of the
name or title of such bank or of such person,
association, or corporation, shall be punished by a
fine of not less than P50 for each day during which
said words are so used.

COMMERCIAL LAW
BANKING LAWS
165

2009 BAR OPERATIONS

CHAPTER XIIISPECIAL PROVISIONS RELATING TO
COOPERARIVE BANKS

Cooperative bank
- is one organized by, the majority shares of which is
owned and controlled by, cooperatives primarily to
provide financial and credit services to cooperatives.
The term cooperative bank shall include cooperative
rural banks

Functions of a cooperative bank
1. To carry on banking and credit services for the
cooperatives
2. To receive financial aid or loans from the government
and the Central Bank of the Phil. for and in behalf of
the cooperative banks and primary cooperatives and
their federations engaged in business and to
supervise the lending and collection of loans
3. To mobilize savings of its members for the benefit of
the cooperative and their federations
4. To act as a balancing medium for the surplus funds of
cooperatives and their federations
5. To discount bills and promissory notes issued and
drawn cy cooperatives
6. To issue negotiable instruments to facilitate the
activities of cooperatives
7. To issue debentures subject to the approval of and
under conditions and guarantees to be prescribed by
the government
8. To borrow money from banks and other financial
institutions within the limit to be prescribed by the
Central Bank
9. To carry out all other functions as may be prescribed
by the Authority. Provided, that the performance of
any banking function shall be subject to prior
approval by the Central Bank and it satisfies all
requirements for registration as a cooperative

- No entry shall be registered by the Cooperative
Development Authority as a cooperative bank unless
articles of cooperation and by-laws thereof as well as
its establishment and operation as a cooperative
bank have been approved by the Central Bank.

- Membership of a cooperative bank shall include only
cooperatives and federations of cooperatives.

- The number, composition and voting rights of the
board of directors shall be defined in the articles of
cooperation and by-laws of the cooperative bank.

- Cooperatives may obtain loans from a cooperative
bank. Loans granted by a coop. bank shall be
reported to the Central Bank.

- The cooperative banks registered under this code
shall be under the supervision of the Central Bank.
The Central Bank upon consultation with the agency
and the cooperative movement shall formulate
guidelines regarding the operation and banking
transactions of cooperative banks. Cooperative banks
may be exempted from Central Bank rules and
regulations, applicable to other types of banks, which
would impede the cooperative rural bank from
performing legitimate financial and banking to its
members.
- A national coop. shall have a minimum authorized
share capital of P200, 000,000. The authorized share
capital shall be divided into such number of shares
with a minimum par value of P1, 000 per share
- A local coop. bank shall have a minimum authorized
share capital of P20,000,000 divided into such
number of shares with a minimum par value of P100
per share.

Privileges
- subject to the approval of the Central Bank and
compliance w/ applicable banking laws, rules and
regulations
1. Coop. banks registered under this code shall be
given the same privilege granted to the rural
banks, private development banks, commercial
banks, and all other banks to rediscount notes
with the Central Bank, the Land Bank of the
Philippines and other banks without affecting in
any way the provisions if this code
2. To act as depository of government funds

- Whenever a coop. bank organized under this
code is distressed or may need assistance in the
rehabilitation of its financial condition or to avoid
bankruptcy, the Monetary Board of the Central
Bank shall designate an official of the Central
Bank or a person of recognized competence in
banking or finance as receiver or conservator of
the said bank.

AN ACT TO ORDAIN
A COOPERATIVE CODE OF THE PHILIPPINES
R.A. NO. 6938

COMMERCIAL LAW
BANKING LAWS
166

2009 BAR OPERATIONS

Background
Republic Act no. 6426 established the foreign currency
deposit account system in the country in 1972. essentially,
it allowed any person to deposit, and banks to accept for
deposit, any foreign currency acceptable as part of our
international reserve.

Who may deposit:
- Any person
a. Judicial
b. Natural

Authority of the Central Bank:
a. To accept deposits and to accept foreign
currencies in trust: Provided, that numbered
accounts for recording and servicing of such
deposits shall be allowed;
b. To issue certificates to evidence such deposits;
c. To discount such certificates;
d. To accept said deposits as collateral as loans
subject to such rules and regulations as maybe
promulgated by the Central Bank from time to
time.
e. To pay interest in foreign currency on such
deposits.

Purpose:
Foreign currencies which are acceptable as acceptable
as part of the international reserved except those which
are required by the Central Bank to be surrendered.

Foreign Currency cover requirements:
- Shall maintain at all times a 100% foreign currency
cover for their deposit liabilities of which cover at
least 15% shall be in the form of foreign currency
deposit with the Central Bank
- A balance in the form of foreign currency deposits
or foreign currency loans or securities which loans or
securities shall be of short term maturities and
readily marketable.
- May include loans to domestic enterprises which are
export evented or registered with the Board of
Investments.
- Foreign currency cover shall be in the same currency
as that of the corresponding foreign currency deposit
liability.
- The Central Bank may pay interest on the foreign
currency deposit and if requested shall exchange
the foreign currency notes and coins into foreign
currency instruments drawn on its depository banks.

Withdrawability and transferability of deposits:
- There shall be no restriction on the
withdrawal by the depositor of his deposit
or on the transferability of his deposit.

Tax exemption of interests on deposits.
- The interest on deposits belonging to non resident
nor engaged in trade or business in the Phils., shall
be exempt from income tax.

Unique features of the Act
Unlike ordinary bank deposits, foreign currency deposits
have the following features:

(a) Absolute Confidentiality
- a foreign currency deposit cannot be examined,
inquired or looked into y any person or office,
whether public or private, or judicial,
administrative or legislative (Sec. 8, as amended
by PD 1246(1977) except:

1. Upon the written permission of the depositor;
2. Without need of a court order, if the anti-money
laundering council determines that a particular
deposit or investment with any banking
institution is related to any one of the following
unlawful activities:
a. kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended (Sec.
3(i)(1));
b. violations of sections
4,5,6,8,9,10,12,13,14,15, and 16 of Republic
Act No. 9165, otherwise known as the
Comprehensive Dangerous Drugs Act of
2002 (Sec. 3(i)(2)); and
c. hijacking and other violations under
Republic Act No. 6235; destructive arson and
murder, as defined under the revised penal
code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets (Sect.
3(i)(12).
3. Upon order of the court, if the anti-money
laundering council determines that a particular
institution is related to any one of the unlawful
activities under Sec. 3(i), except those referred to
in Section 3(i)(1), (2) and (12), of RA 9160 or a
money laundering offense under Section 4 (Sec.
11, RA 9160);and,
4. Inquiry into or examination of any deposit or
investment with any banking institution when
the examination is made by the BSP in the
course of a periodic or special examination in
accordance with the rules of examination of the
BSP (Sec. 11, RA 1960; see also Sec. 4, RA 8791).

(b) Numbered Accounts
- authorized banks may adopt a numbered
account system for recording and servicing
deposits in non-checking accounts (Sec. 3 in
relation to Sec. 9 (a), RA 9160, as amended).

FOREIGN CURRENCY DEPOSIT ACT
RA 6426

COMMERCIAL LAW
BANKING LAWS
167

2009 BAR OPERATIONS
(c) Taxes
- the foreign currency deposits, including interests
and all other income or earnings of such
deposits, are exempt from any and all taxes
whatsoever irrespective of whether or not these
deposits are made by residents or non-residents
and, in the latter case, irrespective whether or
not the non-residents are engaged in trade or
business in the Philippines (Sec. 6, as amended
by PD 1246). Note, however, that under sections
24(B)(1), 27(D)(1) and 28(A)(7)(a) of the NIRC, the
interest receive by the individual (Except a non-
resident individual), domestic corporation and
resident foreign corporation from such deposits
shall, effective January 1, 1998, be subject to a
final income tax of 7.5%.

(d) Court order or process
- they are exempt from attachment, garnishment
or any other order or process of any court,
legislative or administrative body, or
government agency whatsoever (Sec. 8 as
amended by PD 1246) except the Court of
Appeals, upon application ex parte by the anti-
money laundering council and after
determination that probable cause exists that
any monetary instrument or property is in any
way related to an unlawful activity as defined in
Section 3(i) of the anti-money laundering act,
may freeze the account into which the monetary
instrument or property is deposited (Sec. 10, RA
9160, as amended).

(e) New enactment or regulation
- in the event a new enactmentor regulation is
issued decreasing the rights granted under the
law, such new enactment or regulation shall not
apply to foreign currency deposits already made
or existing at the time of issuance of such new
enactment or regulation (Sec. 12-A, as inserted
by PD 1246).

Case
Salvacion, et al vs. Central Bank, et al.
GR No. 94723, Aug. 21, 1997

Petitioner Karen E. Salvacion, a minor, was detained and
raped by Greg Bartelli, an American tourist. Salvacion was
later on rescued by the police, Bartelli was arrested, and
criminal cases for serious illegal detention and rape were
filed against the latter. A case for damages was also filed
by Salvacion and her parents against Bartelli. Bartelli was
able to escape from jail and the criminal cases against him
were thereafter archived. However, the civil case for
damages against Bartelli continued and judgment was
rendered in favor of Salvacion and her parents. At the
time of his arrest, Bartelli maintained a U.S Dollar deposit
account with China Banking Corporation (CBC). When the
petitioner to have the bank deposit of Bartelli with CBC
garnished to satisfy the judgment rendered in their favor,
the bank refused citing Section 8 of Republic Act No.
6426, as amended, which exempt foreign currency
deposit accounts from attachment, garnishment or any
other order or process of any court, legislative or
administrative body, or government agency whatsoever.

The court ruled that Section 8 of Republic Act No. 6426
does not protect and would not apply to the foreign
currency deposit of a transient alien depositor under the
peculiar circumstances of this case and ordered CBC to
release to Salvacion and her parents the dollar deposit of
bartelli in such amount as would satisfy judgment.

Comment: this case should not be understood as
removing from foreign currency deposits accounts
maintained by transient alien depositors the benefit and
protection afforded by that Section 8 of Republic Act No.
6426. such benefit and protection may be removed only
under circumstances similar to the facts of this case.

Case
Intengan, et al vs CA, et al,
G.R. No. 128996, February 15, 2002

The court held that the accounts in question, being U.S.
Dollar deposits, are not covered by the law on secrecy of
bank deposits (RA 1405, as amended) but by the foreign
currency deposit act (RA 6426, as amended). Thus, a case
for violation of the latter law should have been the proper
case brought against private respondents Vic Lim, a vice
president of Citibank, and Joven Reyes, Vice
President/Business Manager of the Global Consumer
Banking Group of Citibank, who admitted that they had
disclosed details of petitioners dollar deposits without
the latters written permission. According to the court,
Lims act of disclosing details of petitioners bank records
regarding their foreign currency deposits, with the
authority of Reyes, would appear to belong tot hat
species of criminal acts punishable by special laws called
malum prohibitum.

The private respondents, however, could no longer be
charged under RA 6426, a special law, as the offense has
prescribed. Being a special law, the provisions of Act No.
3326, entitled An Act to Establish Periods of Prescription
for Violations Penalized by Special Acts and Municipal
Ordinances and to Provide When Prescription Shall Begin
to Run, as amended by Act No. 3763, are applicable. A
violation of RA 6426 shall subject the offender to
imprisonment of not less than 1 year or more than 5
years, or to a fine of not less than P5,000.00 nor more
than P25,000.00, or both. Applying Act 3326, the offense
prescribes in 8 years. The filing of complaint or
information for alleged violation of RA 1405 did not have
the effect of tolling the prescriptive period. It is the filing
of the complaint or information corresponding to the
correct offense which produces that effect.

COMMERCIAL LAW
BANKING LAWS
168

2009 BAR OPERATIONS

THRIFT BANKS
- include savings and mortgage banks, private
development banks, and stock savings and loans
associations organized under existing laws, and any
banking corporations that may be organized for the
following purposes:
a. Accumulating the savings of depositors and
investing them, together with capital loans
secured by bonds, mortgage in real estate and
insured improvements thereon, chattel
mortgage, bonds and other forms of security or
in loans for personal or household finance,
whether secured or not, or in financing for
homebuilding and home development; in readily
marketable and debt securities; in commercial
papers and accounts receivables, draft, bills of
exchange, acceptances or notes arising out of
commercial transactions;
b. Providing short-term working capital, medium
and term financing, to businesses engaged in
agriculture, services, industry and housing and
c. Providing diversified financial and allied services
for its chosen market and constituencies
especially for small and medium enterprises and
individuals.

ORGANIZATION
- A thrift bank shall be organized in the form of Stock
Corporation. The Monetary Board (of the Central
Bank of the Philippines) shall fixed the minimum
paid-up capital taking into account the development
thrusts of this Act and due protection of the public.
No thrift bank shall be organized without a certificate
of authority from monetary board.

- The articles of incorporation, or any amendment
thereto shall not be registered by the SEC unless
accompanied by a certificate of authority issued by
the monetary board under its official seal.
= Requirements for the issuance of certificate:
1. All the requirements of the existing laws
and regulations to engage in business
for which the applicant is proposed to
be incorporated have been complied
with
2. That public interest and the economic
conditions, both general and local,
justify the authorization
3. The amount of capital, the financing
organization, direction and
administration, as well as the integrity
and the responsibility of the organizers
and the administrators reasonably
assure the safety of the interest which
the public may entrust to them

- The monetary board may pass upon and review the
qualifications of persons who are elected or
appointed bank directors and officers, and disqualify
those unfit.
- At least majority of the members of the board of
directors shall be citizen of the Philippines. NO
appointive or elected official, whether full time or
part time, shall at the same time serve as officer of
any thrift bank, except in cases where such service is
incident to financial assistance provided by the
government owned or controlled corporation to the
bank.
- In case of merger or consolidation, the limitation on
the number of directors in a corporation (sec. 14 of
the corporation code of the Philippines) shall not be
applied so that membership in the new board may
include up to the total number of directors provided
for in the respective articles of incorporation of the
merging/consolidating banks.

OWNERSHIP AND CAPITAL REQUIREMENTS
- At least 40% of the voting stock shall be owned by
citizens of the Philippines, except where a new bank
may be established as a result of a
merger/consolidation with foreign holdings in which
case, the resulting foreign holdings shall not be
increased but may be reduced and, once reduced,
shall not be increased thereafter beyond 60% of the
voting stock of thrift banks.
- The percentage of the foreign-owned voting stocks
shall be determined by the citizenship of individual
holders and in case of corporations owning shares, by
the citizenship of each stockholder in the said
corporations.
- The combined capital accounts shall not be less than
an amount equal to 10% of the risk assets.

Risk assets
- total asset minus the following assets:
a. cash on hand
b. amount from Bangko Sentral
c. evidences of indebtedness of the republic of the
Philippines and of the Bangko Sentral. And any
other evidences of indebtedness or obligations
the servicing and repayment of which are fully
guaranteed by the Rep. of the Phil.
d. loans to extent covered by hold-out on, or
assignment of deposits maintained in the
lending bank and held in the Philippines
e. other non-risk items as the Monetary Board may
authorize to be deducted from the total assets.

- Whenever the capital accounts are deficient, the
Monetary Board shall limit or prohibit the distribution
of net profit and shall require that part or all of net
profits be used to increase the capital accounts until
the requirement has been met. The Board may
restrict or prohibit the making of new investments of
any sort by bank, with the exception of purchases of
evidences of indebtedness above mentioned.

THRIFT BANKS ACT OF 1995

R.A NO. 7906

COMMERCIAL LAW
BANKING LAWS
169

2009 BAR OPERATIONS
POWERS OF THRIFT BANKS
1. accept savings and time deposit
2. open current or checking accounts, provided that the
bank has net assets of at least P20,00,000
3. act as correspondent for other financial institutions
4. act as collection agent for government entities,
including but not limited to, the BIR, SSS, & the
Bureau of customs
5. act as official depository national agencies and
municipal, city or provincial funds in the municipality,
city or province where the thrift bank is located
6. rediscount paper with the PNB, Land Bank of the
Philippines, Development Bank of the Philippines,
and other GOCCs
7. issue mortgage and chattel mortgage certificates,
buy and sell them for its own account or for others, or
accept and receive them in payment or as
amortization of its loan
= such mortgage and chattel mortgage certificates
shall be issued exclusively in national currency
and exclusively for the financing of equipment
loans, mortgage loans for the acquisition of
machinery and other fixed installations,
conservation, enlargement or improvement of
productive properties and real estate mortgage
loans for
(1) the construction, acquisition, expansion
or improvement of rural and urban
properties;
(2) the financing of similar loans and
mortgages; and
(3) such other purposes as may be
authorized by the Monetary Board.
8. purchase, hold and convey real estate
9. engage in quasi-banking and monetary market
operations
10. open domestic letters of credit
11. extend credit facilities to private and government
employees
12. extend credit against the security of jewelry, precious
stones and articles of similar nature

Limitations on lending authority
- the direct indebtedness to thrift banks of any person,
company, corporation, or firm, including the
indebtedness of members of a partnership and
association, for money borrowed shall in no time
exceed 15% of unimpaired capital and surplus of the
bank except:
a. loans secured by obligation of the Central Bank
b. loans fully guaranteed by the government as to
payment of principal and interest
c. loans to the extent covered by the hold-out on,
or assignment of, deposits maintained in the
lending bank and held in the Philippines
d. other loans or credits as the Monetary Board
may specify a non-risk assets

- The total indebtedness may amount to a further
15% of the unimpaired capital and surplus of
such bank provide the additional indebtedness is
for the purpose of financing subdivision or
housing development, medium and low income
borrowers and agriculture on a full secured basis.

Investments in allied undertakings
- include institutions engaged in the following
activities:
1. banking and financing
2. warehousing and other post harvesting activities
3. fertilizer & agricultural chemical & pesticides
distribution
4. farm equipment distribution
5. trucking and transportation
6. marketing of agricultural products
7. leasing
8. other undertakings as determined by the Board
- Provided:
a. that the total investments in equities shall not
exceed 25% of the net worth of the thrift
bank
b. the equity investment in any single enterprise
shall be limited to 15% of the net worth of the
thrift bank
c. the equity investment in any single enterprise
shall remain a minority holding in that enterprise
d. the equity investment in other banks shall be
subject to the same provisions governing similar
investments of commercial banks and shall be
deducted from the investing banks net worth for
the purpose of computing of the prescribed ratio
as provided in sec.9 hereof (re: combined capital
accounts)

SUPERVISORY POWERS OF THE MONETARY BOARD
OVER THRIFT BANKS
a. placing limits to the maximum credit allowed to any
individual borrower
b. indicating the manner in which technical assistance
shall be extended to thrift banks
c. imposing a uniform accounting system and manner
of keeping the accounts and records of thrift banks
d. instituting periodic surveys of loans and lending
procedures, audits, test-check of cash and other
transactions of the thrift banks

SUPERVISORY POWERS OF THE CENTRAL BANK
OVER THRIFT BANKS
a. to enforce the laws, orders, instructions, rules and
regulations promulgated by the Monetary Board
applicable to thrift banks
b. to require thrift banks, their directors, officers and
agents to conduct and manage the affairs of the thrift
bank in a lawful and orderly manner
c. to appoint a conservator upon proof that the bank or
its board of directors or officers are conducting and
managing the affairs of the bank in a manner
contrary to laws, orders, instructions promulgated by
the Monetary Board or in manner substantially
prejudicial to the interest of the government,
depositors, creditors, or the general public

- The director and examiners of the department of
Bangko Sentral charged with the supervision of

COMMERCIAL LAW
BANKING LAWS
170

2009 BAR OPERATIONS
thrift banks are authorized to administer oaths to
any director, officer, or employee of any thrift
bank or to any voluntary witness and to compel
the presentation of al books, documents, papers
or records necessary in his or their judgment to
ascertain the facts relative to the true conditions
of any thrift bank or to any loan.

INCENTIVES
1. Reserve requirement imposed in thrift banks by the
Monetary Board shall enjoy equitable preferential
terms those imposed on commercial banks
2. Thrift banks shall have unrestricted branching right
within the region, free from any assessment or
surcharges required in setting up a branch, but under
the coordination with the Bangko Sentral which will
have to assess that there are qualified personnel,
control and procedures to operate the branch.
3. A thrift bank may publish its statement of condition
in a newspaper of general circulation, or post it in the
most conspicuous area of its premises, municipal
building, municipal public market, barangay hall and
barangay public market, if any, where the bank
concerned is located.

EXEMPTIONS
a. all thrift banks, whether created organized under this
Act or in operation as of the date of effectivity of this
Act, shall be exempt from payment of all taxes, fees
and charges for a period of 5 years, counted from the
date of commencement of operations for banks
created under this Act and from the date of
effectivity of this Act for existing banks
b. The foreclosure of mortgage covering loans granted
and executions of judgments thereon involving real
properties and levied upon by a sheriff shall be
exempt from publication requirements where the
total amount of the loan, excluding interest due and
unpaid, does not exceed P100,000.
** It shall be sufficient publication if the notice of
foreclosure and execution of judgment are posted in
the conspicuous area of a thrift banks premises,
municipal building, mun. public market, barangay
hall, and barangay public market where the land
mortgaged is situated within a period of 60 days
immediately preceding the public auction of the
execution of judgment. Proof of publication shall be
accomplished by an affidavit of the sheriff of the
officer conducting the foreclosure sale or execution
of judgment.
c. Any metropolitan, municipal, or municipal circuit trial
court judge in his capacity as notary public ex officio
shall administer oath or acknowledge the instrument
of any thrift bank and its borrowers or mortgagor free
from all charges, fees and documentary stamp tax,
collectible under existing laws, relative to any loan or
transaction not exceeding P50.00
d. The registration of any instrument, whether
voluntary or involuntary to the register of deeds by
any thrift bank and its borrowers and mortgagors
shall be free from all charges, fees and documentary
stamp tax relaying to loans or transactions in an
amount not exceeding P50,000.

- Charges shall be collected, if any, on the amount
in excess of P50, 000. Instrument related to
assignments of several mortgages consolidated
in a single deed, if any, shall be levied only on the
amount in excess of P50, 000 of the
consideration in the assignment of each
mortgage.

e. Any thrift bank shall be exempt from any ownership
ceiling for a period of 10 years from the effectivity of
this act.

PROHIBITIONS
A fine of not more than P10, 000 or imprisonment for not
less than 6 months but not more that 10 years, or both
shall be imposed upon:

A. Any officer, employee, or agent of a thrift bank who
shall:
1. Make false entries in any bank report or statement
2. Without order of a court of competent jurisdiction,
disclose any information relative to the funds or
properties in the custody of the bank belonging to
private individuals, corporations, or any other entity.
3. Accept gifts, fees or commissions or any other form
of remuneration in connection with the approval of a
loan from said bank
4. Overvalue or aid in the overvaluing any security for
the purpose of influencing in any way the action of
the bank on any loan
5. Appear and sign as guarantor, indorser, or surety for
loans granted
6. Violate any provision of this Act

B. Any applicant for a loan from, or borrower of a thrift
bank who shall:
1. Misuse, misapply or divert the proceeds of the loan
obtained by him from its declared purposes
2. Fraudulently overvalue property offered as security
for a loan from said bank
3. Give out or furnish false or willful misinterpretation of
material facts for the purpose of obtaining, renewing,
or increasing a loan extending the period thereof
4. Attempt to defraud the said bank in the event of
court action to recover the loan
5. Offer any officer, employee or agent of a thrift bank a
gift, fee, commission or other forms of compensation
in order to influence such bank personnel into
approving a loan application
6. Dispose or encumber the property offered as security
for a loan

C. Any examiner, or officer or employee of the Bangko
Sentral or of any department, bureau, office, branch,
or agency of the government who is assigned to
examine, supervise, assist or render technical service to
thrift banks and who shall connive or aid in the
commission of the same

COMMERCIAL LAW
BANKING LAWS
171

2009 BAR OPERATIONS
D. Any MeTC, MTC, or MCTC judge or register of deeds
who shall demand or accept, directly or indirectly, any
gift, fee, commission, or any other from of
compensation in connection with the service, or shall
arbitrarily and without reasonable cause delay the
acknowledgment or administration of oath or the
registration of documents shall be punished with a
fine of not more than P1, 000 or imprisonment of not
more that 1 year, or both.

E. Any bank not organized under this Act and any
person, association, or corporation doing business of
banking, not authorized under this Act or existing laws
which shall use the words Development Bank,
Savings Bank, Savings and Mortgage Bank, or
Savings and Loan Association, as part of the name or
title of such bank or of such person, assoc., or corp.
shall be punished by a fine of not less than P100, but in
no case to exceed P30,000, for each day during which
the said words are used.

COMMERCIAL LAW
BANKING LAWS
172

2009 BAR OPERATIONS

All deposits of whatever nature with banks or banking
institutions in the Philippines, including investments in
bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities is covered
by this law.

Money-market placement is NOT covered, because it is
NOT deposited in the bank.

Purposes of the law
1. Encourage people to deposit in banking institutions;
and
2. Discourage private hoarding so that banks may lend
such funds and assist in the economic development
of the country

Prohibited Acts
1. Examination and inquiry or looking into all deposits,
of whatever nature, with the banks in the Philippines
including investment in bonds issued by the
government.
2. Any disclosure by any official or employee of any
banking institution to any unauthorized person of any
information concerning the said deposits.

GENERAL RULE
All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in
bonds issued by the Government, its political subdivisions
and instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office.

EXCEPTIONS:

A. RA 1405
1. when the examination is made in the course of a
special or general examination of a bank and is
specifically authorized by the Monetary Board after
being satisfied that there is reasonable ground to
believe that a bank fraud or serious irregularity has
been or is being committed and that it is necessary to
look into the deposit;
2. when the examination is made by an independent
auditor hired by the bank to conduct its regular audit
provided that the examination is for audit purposes
only and the results thereof shall be for the exclusive
use of the bank;
4. upon written permission of the depositor, or in cases
of impeachment;
5. upon order of a competent court in cases of bribery
or dereliction of duty of public officials, or in cases of
unexplained wealth under the Anti-graft Law;
6. in cases where the money invested or deposited is
the subject matter of the litigation.
- It shall be unlawful for any official or employee of a
bank to disclose to any person other than those
under the exceptions, or for an independent auditor
hired by a bank to conduct its regular audit to
disclose to any person other than a bank director,
official or employee authorized by the bank, any
information concerning said deposits.

B. Anti-Graft and Corrupt Practices Act
- Upon the order of a competent court or tribunal in
cases involving unexplained wealth
- This law is intended to amend RA 1405 by providing
an additional exception to the rule against the
disclosure of bank deposits (PNB v Gancayco, September
30, 1965)

C. National Internal Revenue Code
- Upon inquiry by the Commissioner of Internal
Revenue into the bank deposits of
1. A decedent to determine his gross estate;
2. Any taxpayer who has filed an application for
compromise of his tax liability under Sec.
204(A)(2) by reason of financial incapacity to pay
his tax liability
= He must file a written waiver of his privilege
under RA 1405 or other general or special
laws and such waiver shall constitute the
authority of the Commissioner to inquire
into the bank deposits of the taxpayer

D. Anti-Money Laundering Act
- Inquiry or examination by the AMLC upon order of
any competent court in cases of violation of the
AMLA, if there is probable cause that the deposits or
investments are related to an unlawful activity or a
money laundering offense
- Except that no court order shall be required in the
following unlawful activities:
1. Kidnapping for ransom under Art. 267, RPC
2. Violations of the Comprehensive Dangerous Act
of 2002
3. Hijacking and other violations under RA 6235
4. Destructive arson and murder under RPC,
including those perpetrated by terrorists against
non-combatant persons and similar targets

E. Unclaimed Balances Act
- Disclosure to the Treasurer of the Philippines of
dormant deposits for at least 10 years

IMPORTANT POINTS TO REMEMBER:

- Court cannot order production of bank deposit
records of depositor unless exempted.
- Stockholders cannot inquire as to the existence of
bank deposits and how much, of his debtor
- Writ of garnishment may be issued against debtors
bank deposits because the inquiry refers only as to
WON the debtor had a deposit in the bank
concerned. There was really no inquiry as to the
outstanding balance.

SECRECY OF BANK DEPOSITS LAW
RA 1405

COMMERCIAL LAW
BANKING LAWS
173

2009 BAR OPERATIONS

Requisites for In-Camera Inspection of Bank Deposits
1. Pending case before a court of competent jurisdiction
2. Account must be clearly identified
3. The inspection is limited to the subject of the pending
litigation
4. The bank personnel and account holder must be
notified to be present during the inspection
5. The inspection must cover only the account identified
in the pending case

- Investigation by the Office of the Ombudsman is
NOT considered pending litigation before any
court of competent authority. Such investigation
would not warrant the opening of the bank
account for inspection.

PENALTIES
1. Imprisonment of not more than 5 years; or
2. A fine of not more than P20,000; or
3. Both, in the discretion of the court

ELEMENTS OF UNCLAIMED BALANCES
1. Include credits or deposits of
a. Money
b. Bullion
c. Security, or
d. Other evidence of indebtedness
2. The credit or deposit must be with a bank, building
and loan association, or trust corporation; and
3. The credit or deposit is in favor of a person
a. Who is known to be dead, or
b. Who has not made further deposits or
withdrawals during the preceding 10 years or
more

LEGAL CONSEQUENCE
The unclaimed balances may be subject to escheat
proceedings,
a. after proper publication and
b. the depositors still do not lay claim to them

- Demand drafts CANNOT be escheated, but
telegraphic notes can be escheated (Republic v
FNCB, December 30, 1961)

UNCLAIMED BALANCES LAW

COMMERCIAL LAW
BANKING LAWS
174

2009 BAR OPERATIONS

Anti-Money Laundering
- A crime whereby the proceeds of an
unlawful activity are translated thereby
making them appear to have originated
from legitimate sources.

Purposes:
1. integrity & confidentiality of bank accounts shall be
protected and preserved
2. Ensure that the Philippines shall not be used as a
money laundering site for the proceeds of any
unlawful activity.
3. Philippines shall not extend cooperation in
transnational and prosecutions of persons involved in
money laundering activities wherever committed.

Three stages:
1. Placement/infusion
- physical and actual delivery of cash proceeds
that originated from an illegal activity such
as:
a. smuggling of bulk currency
b. illegal-sourced money with legitimate
deposits
c. cash deposits in small denominations
d. cash deposits with several banks

2. Layering
- Process of separating the illicit proceeds
from their source by creating "layers" of
transactions with the end in view of
disguising the source and make it appear as
insignificant.

3. Integration
- Layered accounts are then re-introduced
into the economy under the stamp of
legitimacy; through the re-entry into the
financial system it would appear that the
laundered money is normal or legitimate
business funds.

DEFINITIONS
transaction
- any act establishing any right or obligation
or giving rise to any contractual or legal
relationship between the parties; includes
any movement or activity concerning funds
by any means with a covered institution
proceeds
- Amount taken from an unlawful activity;
includes material results, profits, effect and
any amount realized from any illegal
activity.
- All monetary, financial or economic means,
documents, papers, things or devices used in
having or having any relation to any unlawful
activity and all moneys, expenditures,
payments, disbursements, costs, outlays,
charges, accounts for the financing
operations and maintenance of any illegal
activity.
monetary instrument
- coins, currency of legal tender in the
Philippines, or of any other country
- drafts, checks and notes
- securities or negotiable instruments, bonds,
commercial papers, deposit certificates,
trust certificates, custodial receipts or
deposit substitute instruments, trading
orders, transaction tickets and confirmation
of sale or investments and money market
instruments
client
- any person or corporate entity that
maintains an account or transacts business
with any financial institution on whose
behalf an account is maintained or a
transaction is conducted, as well as the
beneficiary of said transaction.
suspicious transaction
- one that merits closer examination, in order
to verify that it is from a legitimate source
such as
a. no underlying legal/trade obligation
b. client is not properly identified
c. amount involved is not commensurate with
the business or financial capacity of the
client
d. client's transaction is structured in order to
avoid being the subject of reporting
requirements
e. circumstance relating to the transaction
WHICH IS OBSERVED TO deviate from the
profile of the client and/or the client's past
transactions with the covered institution
f. transaction is in a way related to an unlawful
activity under this Act that is about to be, is
being or has been committed
g. Any transaction that is similar OR
ANALOGOUS to any of the foregoing.

unlawful activities
a. drug trafficking or violation of RA No. 9165
(Comprehensive Dangerous Act of 2002)
b. kidnap for ransom
c. anti-graft and corrupt practices act
d. plunder
e. robbery and extortion
f. jueteng and masiao ( illegal gambling)
g. piracy on the high seas
h. qualified theft
i. swindling
j. smuggling (under RPC and RA Nos. 455 &1937)
k. violations of E-commerce Act of 2000
l. hijacking

covered institutions
- banks, non-banks, quasi-banks, trust entities

ANTI-MONEY LAUNDERING ACT
R.A. 9160

COMMERCIAL LAW
BANKING LAWS
175

2009 BAR OPERATIONS
- insurance companies
- those supervised by SEC
threshold
- Highest/significant level of deposit or
placement an account may reach on a
transactional basis.
covered transaction
- Transaction in cash or other equivalent
monetary instrument involving a total
amount in excess of P500, 000.00 within one
banking day.

ANTI-MONEY LAUNDERING COUNCIL (AMLC)
Composition:
1. Governor of Bangko Sentral ng Pilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security & Exchange Commissioner

@AMLC is a collegial body where Chairman & members
of AMLC are entitled to one vote each

General Rule:
AMLC acts unanimously in discharge of functions
Exception:
In case of incapacity, absence or disability, any member
to discharge his functions, the officer designated shall act
in his stead.

SECRETARIAT
- Headed by Exec. Director,, appointed by
AMLC for a term of % years
- qualifications:
a. member of Phil. Bar
b. at least 35 years of age
c. of good moral character
d. with unquestionable integrity & known
probity
e. Must have served for at least 5 years in
Insurance Commission, SEC or BSP & shall
hold full-time permanent position within the
BSP.

General Rule:
Members of AMLC, Executive Director, all members of
Secretariat, on detail, on secondment shall not reveal in
any manner any information by reason of their office
Exception:
Under any orders of the court, Congress, or any
government offices authorized by law

@MEETING:
AMLC shall meet every first Monday of the month or as
often as may be necessary at the call of Chairman
- through modern technologies such as, but
not limited to TELECONFERENCING &
VIDEOCONFERENING

@BUDGET: appropriated by Congress
- Used to defray operational expenses, including
indemnification for LEGAL COST & EXPENSES.

Functions:
1. To require and receive covered or suspicious transaction
reports from covered institution
2. all covered transactions and suspicious transactions
shall be reported to AMLC within 5 working days
from occurrence thereof, unless the Supervising
Authority prescribes a longer period not exceeding 10
working days.
3. To issue orders addressed to the appropriate
supervising authority or the covered institution to
determine the true identity of the owner of any
monetary instrument or property subject of a
covered transaction or suspicious transaction report
or request for assistance from a foreign state, or
believed by the council, on the basis of substantial
evidence, to be in whole or in part, wherever located
representing, involving, or related to, directly or
indirectly, in any manner or by any means, the
proceeds of an unlawful activity
4. To institute civil forfeiture proceedings and all other
remedial proceedings through the Office of the
Solicitor General
- the Revised Penal code shall apply when the
court ordered for the seizure of any
monetary instrument or property, in whole
or in part, directly or indirectly

- payment in lieu of forfeiture
a. any particular money cannot, with due
diligence, be located
b. substantially alleged, destroyed, diminished
in value
c. concealed, removed to prevent the same
from being found
d. located outside the Philippines
e. place or brought outside the jurisdiction of
the court
f. Commingled with other monetary
instruments or property belonging to either
the offender himself or third person.
5. To cause the filing of complaints with the Department
of Justice or the Ombudsman for the prosecution of
money laundering offenses
6. To investigate suspicious transactions deemed
suspicious after an investigation by the AMLC,
money laundering activities, and other violations of
this Act
7. To apply before the Court of Appeals, ex parte, for
the freezing of any monetary instrument or property
alleged to be the proceeds of any unlawful activity
- effective immediately upon determination
of probable cause
- shall be for a period of 20 days unless
extended by the court
8. To implement such measures as may be necessary and
justified under the law to counteract money
laundering
9. To receive and take action in respect to any request
from foreign states for assistance in their own anti-
money laundering operations
- through conventions, resolutions & other
directives of any organizations of which
Philippines is a member. HOWEVER, AMLC

COMMERCIAL LAW
BANKING LAWS
176

2009 BAR OPERATIONS
may refuse to comply with such request,
when:
a. it contravenes provision of Constitution
b. it prejudices national interest of the
Philippines

- requirements for requests for mutual
assistance from foreign sates:
a. investigation/prosecution
b. grounds
c. identity of said person
d. covered institution believed to have been
any information which may be of assistance
to the investigation
e. all particulars necessary for the issuance of
the order/processes
f. other information
10. To develop educational programs on the pernicious
effects of money laundering, the methods and
techniques used in money laundering, the viable
means of preventing money laundering and the
effective ways of prosecuting and punishing offender
- through nationwide information campaigns
- to heighten awareness of the public of their
civic duty
11. To enlist the assistance of any branch, department,
bureau, office, agency or instrumentality of the
government including government-owned and
controlled corporations in undertaking any and all
anti-money laundering operations, which may
include the use of its personnel, facilities and
resources for the more resolute prevention, detection
and investigation of money laundering offense and
prosecution of offenders
12. To impose administrative sanctions for the violation of
laws, rules, regulations and orders and resolutions

Scope of authority of the AMLC to inquire into bank
deposits;
- inquire into or examine any particular
institution or non-bank financial institution
upon order of any competent court in cases
of violation of the law, when it has been
established that there is probable cause that
the deposits or investments are related to an
unlawful activity or a money laundering
offense except that no court is needed for
cases qualified by the law.

Effect when freeze orders are ordered by the AMLC
with the passage of RA 9194:
- Shall remain in force for a period of 30 days
after the affectivity of RA 9194, UNLESS
extended by the Court of Appeals.

Offenses and their respective penalties:
1.) Crime of money laundering
1. knowledge that any monetary instrument or
property represents, involved or relates the
proceeds of any unlawful activity, transact or
attempts to transact said monetary
instrument or property
- 7-14 years; not less than 3M and not more
than twice the value of monetary instrument
or property involved in the offense

2. knowledge that any monetary instrument or
property involves proceeds of any unlawful
activity, performs or fails to perform any act
as a result of which he facilitates the offense
of money laundering
- 4-7 years; not less than 1.5M but not more
than 3M

3. Knowledge that any monetary instrument or
instrument is required to be disclosed and
files with AMLC fails to do so.
- 6 mos.-4 years; not less than 100,000.00 but
not more than 500,000.00, or both.

2.) Failure to keep records
- 6 mos -1 year; not less than 100,000.00 but
not more than 500,000.00, or both

3.) Failure to report covered transactions
- 6 mos-4 years; not less than 100,000.00 but
not more than 500,000.00, or both

4.) Malicious reporting
- any person who,, with malice, or in bad faith,
reports or files a completely unwarranted or
false information relative to money
laundering transaction against any person
- 6 mos-4 years; not less than100,000.00 but
not more than 500,000.00 at the discretion
of the court, Provided, the offender is not
entitled to avail of the benefits of the
Probation Law

if offender is a corporation (who participated in the
commission or shall have knowingly permitted or
failed to prevent its participation)
- penalty shall be imposed upon the
responsible officers

if offender is a juridical person
- penalty: revocation of license

if offender is an alien
- penalty: 6 mos-4 years; not less than
100,000.00 but not more than 500,000.00, at
discretion of the court, and Deportation

if offender is a public official/employee
- penalty: 6 mos-4 years; not less than
100,000.00 but not more than 500,000.00
AND Perpetual/Temporary Disqualification

5.) Breach of confidentiality
- in case of breach of confidentiality that is
published or reported by media, the
responsible reporter, writer, president

COMMERCIAL LAW
BANKING LAWS
177

2009 BAR OPERATIONS
publisher, manager and editor-in-chief shall
be liable
- 3-8 years; not less than 500,000.00 but not
more than 1M

Jurisdiction of Money Laundering cases:
RTC - all cases on money laundering
Sandiganbayan - acts/omissions by public officers and
private persons who are in conspiracy with such public
officers

Prosecution of money laundering
1. any person maybe charged with & convicted of both
the offense of money laundering & unlawful activity
2. any proceeding relating to unlawful activity shall be
given precedence over the prosecution of any offense
or violation without prejudice to the freezing order &
other remedies
3. knowledge of offender that monetary instrument
relates to proceeds of unlawful activity shall be
established by DIRECT EVIDENCE or inferred from
attendant circumstances
4. No case of money laundering may be filed to the
prejudice of a candidate for an electoral office during
an election period. HOWEVER, this prohibition shall
not constitute a bar to the prosecution of any money
laundering case filed in court before the election
period.
5. AMLC may apply for provisional remedies to prevent
monetary instrument or property subject thereof
from being removed, concealed, and converted with
other organizations where there is conviction for
money laundering; the court shall issue judgment of
forfeiture in favor of government of Philippines.
HOWEVER, no asset shall be forfeited to the
prejudice of a candidate for an electoral office during
an election period.
6. Restitution for any aggrieved party

Prevention of Money Laundering
1. Customer Identification requirement
- the ff. minimum documents shall be
obtained for Individual customers:
a. name
b. present address
c. date & place of birth
d. nationality
e. nature of work and name of employer or
nature of self-employment/business
f. tax identification number, SSS, GSIS
number
g. specimen signature
h. source of funds
i. names of beneficiaries in case of insurance
contracts and whenever applicable

- for Corporate and Juridical entities:
a. articles of incorporation/partnership
b. by-laws
c. list of directors/partners
d. list of principal stockholders owning at least
2% of the capital stock
e. contact numbers
f. beneficial owners, if any
g. verification of the authority and
identification of the person purporting to act
on behalf of the client
2. Recordkeeping Requirements
a. existing and new accounts
- shall be maintained and stored for 5 years
from Oct 17, 2001 from the dates of the
accounts or transactions whichever is later
b. closed accounts
- shall be preserved and safely stored for at
least 5 years from the dates when they were
closed
c. records in case a money laundering case has been filed
in court
- Said file must be retained beyond the period
stipulated in the two preceding subsections,
as the case may be until it is confirmed that
case has finally resolved or terminated by
the court.

Key Elements in Fighting Money Laundering
1. The criminalization of money laundering
2. Institution of a system of suspicious transactions
3. Relaxing of bank secrecy laws
4. Creation of an anti-money laundering council or task
force
5. Institution of procedures for effective international
cooperation

COMMERCIAL LAW
BANKING LAWS
178

2009 BAR OPERATIONS

Purpose of the law

The purpose of the law is to create a government-owned
entity, the PDIC, that shall insure the deposit liabilities of
all banks entitled to the benefits of insurance under the
Act. Such insurance is intended to protect depositors
from situations that prevent banks from paying out
deposits, as in bank failures or closures, ant to encourage
people to deposit in banks.

Composition of governing board

a. The Secretary of Finance who shall be the ex
officio chairman of the board without
compensation.
b. The Government of the Central Bank, who shall
be the ex officio member of the board without
compensation.
c. The president of the corporation, who shall be
appointed by the President of the Philippines
from either the Government or Private sector to
serve on a full-time basis for a term of 6 years.
The President shall also serve vice chairman of
the board.
d. The members from the private sector, to be
appointed for a term of 6 years without
reappointment from the President of the
Philippines: Provided, that of those first
appointed, the first appointee shall serve a
period of 2 years.

Deposit

The term deposit means the unpaid balance of money
or its equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give
credit to a commercial, checking, savings, time or thrift
account or which is evidenced by passbook check, and/or
certificate of deposit, printed or issued in accordance with
Central Bank Rules and Regulations and other applicable
laws, together with such other obligations of a bank,
which, consistent with banking usage and practices, the
Board of Directors shall determine and prescribe by
regulations to be deposit liabilities of the bank: Provided,
That any obligation of a bank which is payable at the
office of the bank located outside of the Philippines shall
no be a deposit for any of the purposes of this Act or
included as part of the total deposits or insured deposit:
Provided, Further, That, subject to the approval of the
Board of Directors, any insured bank which is
incorporated the laws of the Philippines which maintains
a branch outside the Philippines may elect to include for
insurance its deposit obligations payable only at such
branch.

Transferred Deposit

A transferred deposit is a deposit in an insured bank
made available to a depositor by the PDIC as payment of
the insured deposit of such depositor in a closed bank and
assumed by another insured bank. By paying its liabilities
to depositors in this manner, the PDIC hopes to persuade
these depositors to keep their savings in banks where
such funds could be lent out, rather than hoarded and
kept out of the banking system.

Deposit liabilities required to be insured with the PDIC
(Sec. 4)

The deposit liabilities of any bank engaged in the business
receiving deposits are required to be insured with the
PDIC.

When the PDIC becomes liable to pay the insured
deposits (Sec. 10[c])

The PDIC becomes liable to pay the insured deposits in a
bank when the is closed by the Monetary Board of the
Bangko Sentral ng Pilipinas, that is, prohibited from doing
further business in the Philippines, on account of
insolvency and other grounds under the law.

Extent of the PDICs liability to a bank depositor (Sec.
3[g]

The PDICs liability is up to P100,000 per depositor/ per
capacity.

Liability of the PDIC
On a per bank basis.

When an insured bank is closed on account of insolvency
how will payment of the insured deposits in such bank be
made BY the PDIC? (Sec. 10[c])
= The PDIC shall pay either in cash or by
making available to each depositor a
transferred deposit in another insured bank
in an amount equal to the insured deposit of
such depositor.

If a depositor has several accounts with the bank, how will
the liability of the PDIC to him be calculated? (Sec. 3[g])
= The liability of the PDIC will be calculated by
adding together all deposits in the bank
maintained by the depositor in the same
capacity and the same right for his benefit
either in his own name in the name of
others.

Effect of payment to the depositor of his insured
deposit

Payment to the depositor of his insured deposit (1)
discharges the PDIC from any further liability to the
depositor, and (2) subrogates the PDIC to all the rights of
the depositor against the closed bank to the extent of
such payment.

THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION ACT
(PD 3591 AS AMENDED BY RA 7400)

COMMERCIAL LAW
BANKING LAWS
179

2009 BAR OPERATIONS
Notice requirement imposed by the Act on banks (Sec.
16[a])
Every insured bank is required by the Act to display at
each place of business maintained by the bank a sign or
signs stating that its deposits are insured by the PDIC. A
similar statement shall be included by the bank in its
advertisements.

PDIC vs. CA, December 22, 1997
- The PDIC was created by law and as such, is
governed primarily by the provisions of the
special by the provisions of the special law
creating it. The liability of the PDIC for insured
deposits therefore is statutory and, under RA
3591, such liability rests upon the existence of
deposits with the insured bank, not on the
negotiability or non-negotiability of the
certificates evidencing these deposits.
- In order that a claim for deposit insurance with
the PDIC may prosper, the law requires that a
corresponding deposit be placed in the insured
bank. A deposit, as defined in section 3(f) of RA
3591, may be constituted only if money or the
equivalent of money is received by a bank.

- Trust funds deposited with an insured bank and
bearer time deposit certificates with no
registered payee are excluded from the
insurance coverage

- PDIC can stop insurance coverage if assessments
against the insured bank are not paid in 30 days
after notice

COMMERCIAL LAW
BANKING LAWS
180

2009 BAR OPERATIONS

Notes compiled by

ATTY. MARIA LULU G. REYES
College of Law

SUMMARY OF CHANGES

Enhancements and refinements to powers of the corporation
New safeguards for PDIC personnel
New sanctions and penalties

ENHANCEMENTS & REFINEMENT TO THE POWERS OF THE CORPORATION

The Basic Policy of PDIC

The Corporation shall promote and safeguard the interest of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits. (Sec. 1, second par.)

Mandate of PDIC
Insure Bank deposits
Receiver / liquidator of closed banks

As deposit insurer (Sec.4 (g))

Insured deposit means the amount due to any depositor for deposits in an insured bank net of any obligation of
the depositor to the insured bank as of the date of closure, but not to exceed P250, 000. (Sec.4( g))

A joint account is insured separately from any individually owned deposit account, regardless and, or or and
/ or is used.

Additional provisions on joint accounts
Insured amount of deposit is divided to as many equal shares as there are individuals unless stipulated
otherwise in the deposit document.
All deposits in joint accounts of a depositor are added together, but the sum of his / her insured deposit in
all joint accounts should not exceed P250,000

Computation of Max. Deposit Insurance Cover (MDIC)

Example 1: Jose, no outstanding loan (amounts in thousand pesos)

Deposit
Balance
Dep.
Share
Max
Insurance
Cover
Share in max.
Insurance cover
Jose Pilar Anita
1. Jose Individual 300 300 250 250 n/a n/a
2. Jose Joint Accounts
2.1 Jose and / or Pilar 250 125 250 125 125 0
2.2 Jose and Pilar 400 200 250 125 125 0
2.3 Jose or Anita 300 150 250 125 0 125

Total 1,250 625 250 125
Total Insured deposit 875 500 250 125
Total Uninsured Deposit 375 275 75 25

PHILIPPINE DEPOSIT INSURANCE CORP.
CHARTER AMENDMENTS

COMMERCIAL LAW
BANKING LAWS
181

2009 BAR OPERATIONS

Joses total share is 625 but his maximum insurance cover is only 500. The 125 in excess of 500 is part of his uninsured
deposit

Summary

Total
Deposit
Share
Share in
Insurance
Cover
Insured
Depositor
Uninsured
Deposit
Jose 775 625 500 275
Pilar 325 250 250 75
Anita 150 125 125 25
______ _____ ______
Total 1,250 875 375

Depositors with outstanding loans
Outstanding loans, whether matured or unmatured, are netted out from total outstanding deposits, not from the
insured portion of the deposit.
If the depositor is a co-owner of a joint account, his / her insured deposit is determined by deducting the
outstanding loan from his / her share of the joint account. His / he5r loan obligation is not deducted from the share
of co-owner.

Example 2: Jose &/ or Pilar (with outstanding loan)
Deposit P400, 000
Outstanding Loan: Jose P50, 000 (unmatured); Pilar P150, 000 (matured)

Deposit
Share
(A)
O/S
Loan
(B)
Net
(C=A-B)
Max
Insurance
Cover
(D)
Insured
Deposit
(E)
Uninsured
Deposit
(F)
Jose 200 50 150 125 125 25
Pilar 200 150 50 125 50 -
Total 400 200 200 250 175 25

Depositors with loan secured by hold out
If a loan is secured by a hold-out on a joint and / or account, the loan balance is netted out from the entire
account, regardless of who among the owners of the joint account is the borrower.
If a loan is secured by a hold-out on a joint and account, the loan balance is netted out from the share of the
borrower, unless the other owner (s) consented to the hold-out agreement.

Example 3a: Jose &/ or Pilar. Deposit of P400, 000; Jose and Pilar signed the hold-out agreement for a loan of P150, 000

Acct.
Balance
(A)
O/S
Loan
(B)
Net
(C=A-B)
Deposit
Share
(D)
Max
Cover
(E)
Insured
Deposit
(E)
Uninsured
Deposit
(F)
Jose
400

150

250
125 125 125 -
Pilar

125 125 125 -
Total

400 150 250 250 250 250 -

Example 3b: Jose &/ or Pilar. Deposit of P400, 000; Jose w/ outstanding loan of P150, 000 secured by hold-out, only Jose is
signatory to hold out agreement

COMMERCIAL LAW
BANKING LAWS
182

2009 BAR OPERATIONS

Acct.
Balance
(A)
Deposit
Share
O/S
Loan
(B)
Net
(C=A-B)
Max
Cover
(E)
Insured
Deposit
(E)
Uninsured
Deposit
(F)
Jose
400

200

150

50
125 50 -
Pilar

200 0 200 125 125 75
Total

400 400 250 250 250 175 75

PDIC cannot terminate the insured status of any bank which continues to operate or received deposits.
If any insured bank fails or refuses to pay any assessment the remedies are:
An action for collection before the appropriate court
Administrative sanctions against responsible bank officials

As Receiver / Liquidator
Of Closed banks

PDIC is the statutory receiver of all closed banks. (Sec. 8-ninth, PDIC Charter; Sec. 30, R.A. 7653)
Monetary Board shall give prior notice to PDIC of its appointment as receiver of closed bank. (Sec. 10 (a))
As receiver, it shall have full control, management and administration of the affairs of the closed bank. (Sec.10 (b))

The Authority of PDIC
Examine insured banks
Investigate frauds, irregularities and anomalies
Provide financial assistance to distressed banks

Examine insured banks (Sec.8)

Examinations conducted with prior approval of monetary board
No examination can be conducted within 12 months from last examination date

Investigate frauds,
Irregularities and anomalies

The Board shall appoint investigators who shall have the power to conduct investigations on frauds, irregularities
and anomalies committed in banks (Sec. 9 (b-1))
Bases
Reports of examination conducted by PDIC and / or BSP
Complaints from depositors or from other government agency
(Sec. 9(b-1))

Power of the investigators
Administer oaths
Examine, take and preserve the testimony of any person relating to the subject of investigation (Sec. 9
(b-1))

Financial Assistance (Sec.17 (c))

Condition: When the grant of the assistance is less expensive than actual payoff and liquidation of the bank

Exception: When the MB has determined that there are systemic consequences of a probable failure or closure of an
insured bank.

Definition of systemic risk:

COMMERCIAL LAW
BANKING LAWS
183

2009 BAR OPERATIONS
The possibility that failure of one bank to settle net transactions with other banks will trigger a chain reaction
leading to a shutdown of banking activity,
Likelihood of sudden unexpected collapse of confidence in a significant portion of the banking or financial system
with potential real economic effects

Live banks
Modes:
Make loans
Purchase of assets
Assume liabilities
Make deposits
Criteria:
Essential to provide adequate banking service in the community; or
Maintain financial stability

Closed banks
Modes:
Assume liabilities
Purchase assets
Criteria:
Vital to the interest of the community; or
A severe financial climate exists which threatens the stability of a number of banks possessing significant
resources.
Approval:
- reopening and resumption of operations approved by MB

Recipient of Financial assistance:
banks in danger of closing
a corporation
acquiring control of a bank in danger of closing
consolidating with or acquiring the assets of insured bank in danger of closing

Assistance to an insured bank may take the form of
Loans
Purchase of assets
Assumption of liabilities
Making deposits
With concurrence of Monetary Board, equity or quasi-equity infusion

SAFEGUARD FOR PDIC PERSONNEL

Legal Assistance

PDIC shall underwrite or advance litigation costs and expenses in connection with any civil, criminal or administrative
action or proceeding involving PDIC personnel.
Such PDIC personnel are made a party to the action or proceeding by reason of or in connection with exercise of
authority or performance of functions or duties. (Sec 9 (f))
Personnel separated from service shall continue to be provided with legal protection in connection with any act done
or omitted by them in good faith during their tenure/employment.
In the event of compromise/settlement, the personnel to be indemnified are those identified not to have committed
any negligence or misconduct.
PDIC to advance litigation expenses upon receipt of an undertaking by the PDIC personnel to repay the amount
advanced should it determined by the Board that he is not entitled to be indemnified. (Sec.9(g))
Assistance includes grant or advance of legal fees to enable concerned PDIC personnel to engage a counsel of his
choice.(Sec.9(h))

COMMERCIAL LAW
BANKING LAWS
184

2009 BAR OPERATIONS

SANCTION AND PENALTIES

Punishable acts

Willful refusal to submit reports (Sec. 21(f)1)
Unjustified refusal to permit examination and audit of deposit record or affairs of institution (Sec.21(f)2)

Willful making of false statement or entry in bank report or document required by PDIC (Sec 21 (f)3)

Submission of false material information in relation to financial assistance extended to the bank (Sec 21 (f)4)

Splitting deposits or creation of fictitious loans or deposit accounts (Sec 21(f)5)

Refusal to allow PDIC to take over, or obstructing the takeover of a closed bank placed under its receivership (Sec 21
(f)6)

Refusal to turn over or destroying or tampering bank records (sec21(f)7)

Fraudulent disposal, transfer or concealment of any asset, property or liability of a closed bank (Sec21 (f)8)

Violation of or causing any person to violate the exemption from garnishment, levy, attachment or execution
(sec21(f))

Willful failure or refusal to comply with or violation of the provisions of R.A. 3591, commission of any other
irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Board
(Sec.21(f)10)

Criminal Penalties

Imprisonment of prision mayor or
Fine of not less than P50,000 but not more than P2 million
Or both at the discretion of the court (Sec.21 f)

Injunctions
No court except the Court of Appeals shall issue a TRO, Preliminary injunction, or preliminary mandatory injunction
against the PDIC.

Any injunction issued in violation of this provision is void & without force and effect; judge who issued the same shall
be suspended for at least 60 days without pay. (Sec.22)

Supreme Court may issue a restraining order or injunction on matters of extreme urgency involving a constitutional
issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise.

Party applying for the TRO or injunction shall post a bond in an amount to be fixed by the Supreme Court

COMMERCIAL LAW
BANKING LAWS
185

2009 BAR OPERATIONS

Notes compiled by:

ATTY. MARIA LULU G. REYES
College of Law

Options of Monetary Board over Distressed bank
Order the placement of bank under conservatorship
(Sec 29, RA 7653)
Order the placement of bank under receivership (Sec.
30, RA 7653)

CONSERVATORSHIP
Ground:
The bank or a quasi-bank is in a state of continuing
inability or willingness to maintain a condition of
liquidity deemed adequate to protect the interest of
depositors and creditors. (Sec. 29, R.A. 7653)

Who may be appointed as conservator?
Any person who is competent and knowledgeable in
bank operations and management. A person
connected with BSP may be appointed as
conservator. (Sec. 29,RA 7653)

Period of conservatorship---
Should not exceed 1 year. (Sec. 29, R.A.7653)

Powers of conservator
The Monetary Board shall grant to the conservator; as it
may deem necessary, the following powers:

to take charge of the assets, liabilities, and the
management of the bank;
reorganize the management;
collect all monies and debts due said institution;
Exercise all powers necessary to restore its viability.
(Sec. 29,R.A. 7653)
The conservator shall have the power to overrule or
revoke the actions of the previous management and
board of directors of the bank or quasi-bank. (Sec. 29,
R.A.7653)

Termination of Conservatorship

O When MB is satisfied that the institution can continue
to operate on its own and the conservatorship is no
longer necessary. (Sec. 29, R.A.7653)

O When MB determines that the continuance in
business of the bank would involve probable loss to
its depositors or creditors. In which case, bank will be
placed under receivership. (Sec. 29, R.A.7653)

The placement of a bank under conservatorship is not a
precondition to its placement under receivership. (Sec. 30,
R.A.7653)

RECEIVERSHIP

Grounds
1. When the bank is unable to pay its liabilities as
they become due in the ordinary course of
business. This shall not include inability to pay
caused by extraordinary demands induced by
financial panic in the banking community.

2. The bank has insufficient realizable assets to
meet its liabilities.

3. The bank continue in business without involving
probable losses to its depositors or creditors.

4. The bank has willfully violated a cease and desist
order under section 37 involving acts or
transactions which amount to fraud or a
dissipation of the assets of the institution. (Sec.
30, R.A.7653)

Summary nature of bank closure
If the grounds enumerated under Section 30 0f RA 7653
are present, the Monetary board may summarily and
without prior hearing forbid the bank from doing business
and designate PDIC as the banks receiver. (Sec. 30,
R.A.7653)

Is there a violation of due process if a bank is ordered closed
without prior hearing?

None. Prior hearing is not required before a bank can be
ordered closed and placed under receivership. (Rural bank
of Buhi, Inc. v. CA, 162 SCRA 288, 302; CB vs. Triumph
Savings Bank, March 30, 1993)

Rationale of receivership

The mere filing of a case for receivership can trigger a
bank run.

One can just imagine the dire consequences of a
prior hearing; bank runs would be the order of the
day, resulting in panic and hysteria. In the process,
fortunes may be wiped out and disillusionment will
run gamut of the entire banking community. (Buhi,
ibid)

A hearing may be done subsequent to the closure.
Close now hear later. (Ibid.)

Exercise of Police Power

Closure of a bank is an exercise of police power of
the State. (CB v. CA, G.R. No. 88353, May 8, 1992; CB
v. CA, G.R. No. L-50031-32, July 27,1981)

BANK RECEIVERSHIP AND LIQUIDATION

COMMERCIAL LAW
BANKING LAWS
186

2009 BAR OPERATIONS
The exercise may be the subject of judicial
review.(Ibid.)

Remedy of aggrieved bank owners

Petition for certiorari to be filled by the stockholders of
record representing the majority of the capital stock
within (10) days from receipt by the board of directors of
the bank of the order directing receivership. (Sec. 30,
R.A.7653)

Rationale why only stockholders are allowed to
question order of receivership

To ensure that the order of MB is not frustrated or
defeated by the incumbent BOD or officers who may
immediately resort to court action to prevent its
implementation or enforcement/
It is presumed that such a resolution is directed
principally against acts of said BOD and officers
which placed the bank in a state of continuing
inability to maintain a condition of liquidity adequate
to protect the interest of depositors and creditors.
Intended to protect and safeguard the rights and
interests of the stockholders.
The authority to decide on whether to contest the
resolution should be lodged with the stockholders
owning a majority of the shares for they are expected
to be more objective in determining whether the
resolution is plainly arbitrary and issued in bad faith.
(Central Bank vs. CA, May 8, 1992; Central Bank vs.
Triumph Savings, March 30,1993)

Period of Receivership
Maximum of ninety (90) days from take over . (Sec. 30,
R.A.7653)

Effect of placing a bank under receivership
The bank is prohibited from doing business. . (Sec. 30,
R.A.7653)

Concept of doing business

a continuity of commercial dealings and
arrangements, and contemplates to that, extent, the
performance of acts or words or the exercise of some of
the functions normally incident to, and in progressive
prosecution of, the purpose and object of its
organization. (Provident Savings Bank vs. CP, may 17,
1993)

bank would not be able to do new business,i.e., to
grant new loans or to accept new deposits. (Provident
Savings Bank vs. CP, may 17, 1993)

Effects of receivership

Receivership is equivalent to an injunction to restrain
the bank officers from intermeddling with the
property of the bank in any way. (Villanueva vs. CA,
244 SCRA 396)
articles of Incorporation/By-Laws of bank are
suspended. (Sec.10[b], RA 3591, as amended)
the powers, function and duties, as well as all
allowances, remunerations and perquisites of the
directors, officers and stockholders are suspended.
(Sec.10[b],Ibid)
Bank retains judicial personality. (Manalo vs. PAIC,
Oct. 8, 2001)
The only limitation is that the bank can sue and be
sued only through its receiver. (Supra.)
The assets of the bank are considered under custodia
legis. (Sec.30,RA7653; Sec. 10 (b) R.A. 3591, as
amended)
Assets of the bank are exempt from any order of
garnishment, levy, attachment, or execution. (Ibid.)
A judge, officer of the court or any person who shall
cause the issuance or implementation of writ of
garnishment, levy, attachment or execution shall be
criminally and/or administratively liable under Sec21,
(f) (9) of RA 3591, as amended.
Stay of execution against the assets of bank. (Lipana
vs. DBR, Sept. 24,1987)
Central Bank vs. Morfe (March 12, 1975)
Trust Fund doctrine The assets are held in trust
for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a
preference of another by an attachment, execution or
otherwise.

Rationale for stay of execution

Execution would unduly deplete the assets of the
bank to the obvious prejudice of another depositors
and creditors, including depositors. (Lipana, supra.)

One of the reasons of placing a bank under
receivership is to prevent creditors from having
advantage over the assets of the bank. (Lipana,
supra.)

Duties/responsibilities of Receiver

Immediately gather and take charge of all the assets
and liabilities of the bank, administer the same for the
benefit of its creditors.(Sec30,RA 7653)
Exercise the general the general powers of a receiver
under the Rules of Court (Ibid)
Determine if the bank could be rehabilitated and
permitted to resume business.(Ibid)
Bring suits to enforce liabilities to or recoveries of the
closed bank. (Sec.10 [c] [1],RA 3591, as amended)
Appoint and hire persons or entities of recognized
competence in banking or finance as its deputies and
assistants. (Sec.10 [c] [2]2, ibid)
Suspend or terminate the employment of officers
and employees of the bank (Sec.10 [e] [3], ibid.)
Collect loans and other claims of the closed bank. For
this purpose, receiver may modify, compromise or
restructure the terms and conditions of such loans or
claims as may be deemed advantageous to the
interest of the creditors and claimants of the closed
bank.(Sec.10 [c] [5]),supra)

COMMERCIAL LAW
BANKING LAWS
187

2009 BAR OPERATIONS
Hire or retain private counsel as may be necessary.
(Sec. 10 [c] [6], supra)
Borrow or obtain a loan, or mortgage, pledge or
encumber any asset of the closed bank, when
necessary to preserve or prevent dissipation of the
assets, or to redeem foreclosed assets of the closed
bank, or to minimize losses to the depositors and
creditors. (Sec.10 [c] [7],supra)
If the stipulated interest on deposit is unusually high
compared with the prevailing applicable interest rate,
the Receiver may exercise such powers which may
include a reduction of interest rate to a reasonable
rate: Provided, that any modification or reduction
shall apply only to unpaid interest.(Sec 10 [c] [8]),
supra)
Exercise such other powers as are inherent and
necessary for the effective discharge of the duties of
PDIC as receiver.(Sec.10 [c] [9])

Prohibitions during receivership period
- Receiver shall not pay or commit any act that will
involve the transfer of any assets of the bank.
(Sec.30,RA 7653)
- Exceptions:
Payment of administrative expenditures
(Sec.30,ibid)
Assets of bank may be placed in non-speculative
investments. (Sec.30,ibid)
Payment of accrued utilities, rentals and salaries
of personnel of the closed bank, for a period not
exceeding three (3) months, from the available
funds of the closed bank. (Sec.10 [c] [4], RA 3591,
as amended)

Possible Outcome of Receivership

O Receiver may determine that the bank could be
rehabilitated. . (Sec.30,RA 7653)

O Receiver may determine that the bank could not be
rehabilitated. . (Sec.30,RA 7653)

What if it is determined that the bank cannot be
rehabilitated?

Receiver shall notify the Monetary Board of its
findings.
The Monetary Board shall order the liquidation of the
bank
The Monetary Board shall appoint PDIC as liquidator
of the bank. . (Sec.30,RA 7653)

LIQUIDATION

Filing of Petition for Assistance in the Liquidation (PAL)

The receiver is mandated to file an ex parte Petition for
Assistance in the Liquidation (PAL) of closed bank in the
proper RTC pursuant to a liquidation plan adopted by
PDIC. . (Sec.30,RA 7653)

Giving due course to PAL

When the proper RTC gives due course to the PAL, it is
constituted as the Liquidation Court (LC) of the closed
bank. . (Sec.30,RA 7653)

Jurisdiction of Liquidation Court (LC)

The court shall adjudicate disputed claims against the
closed bank.
The court shall assist in the enforcement of individual
liabilities of the stockholders, directors and officers of
the bank.
The court shall decide on issues as may be material in
the implementation of the liquidation plan adopted. .
(Sec.30,RA 7653)
The Liquidation Court has exclusive jurisdiction over
disputed claims against the closed bank. (Star
Forwarders, Inc. v. Navarro, 191 SCRA 403;Hernandez
vs. RB Lucena, January 10,1978)
The exclusive jurisdiction of the liquidation court
pertains only to the adjudication of claims against the
bank. It does not cover the reverse situation where it
is the bank which files a claim against another person
or entity. (Domingo Manalo vs. PAIC Savings and
Mortgage Bank, Oct.8,2001)

Rationale
The judicial liquidation is intended to prevent
multiplicity of action against the insolvent bank.
The lawmaking body contemplated that for
convenience only one court, if possible, should pass
upon the claims against the insolvent bank and that
the liquidation court should assist the liquidator and
control his operations. (Hernandez,ibid.)

Concept of disputed claim

Disputed claims refer to all claims, whether they be
against the assets of the insolvent bank, for specific
performance, breach of contract, damages, or
whatever. (Ong vs. CA, Feb.1,1996)

To limit the jurisdiction of the Liquidation Court
against the assets of the bank is to remove
significantly and without basis the cases that may be
brought against a bank in case of insolvency.(Ibid.)

COMMERCIAL LAW
BANKING LAWS
188

2009 BAR OPERATIONS
Nature of Liquidation Proceedings

The PAL is in the nature of a special proceeding.
It resembles a proceeding for settlement of estate of
deceased person.
Multiple Appeal is allowed; period to file notice of
appeal is 30 days; record of appeal is required to
perfect appeal. (PaBCEO vs. CA, March 20,1995)

Filing of claims by creditors

All disputed claims must be filed with the LC.

Approval/disapproval of Claims

The disputed claims may be approved or disapproved
by the LC
All approved claims will be classified as to their legal
preference. (PaBCEO vs. CA,ibid.)
A liquidation proceeding is a single proceeding
which consists of a number of cases properly
classified as claims. . (PaBCEO vs. CA,ibid.)
Although the claims are litigated in the same
proceeding, the treatment is individual.
Each claim is heard separately. And, the Order issued
relative to a particular claim applies only to said
claim, leaving the other claims unaffected, as each
claim is considered separate and distinct from the
others. . (PaBCEO vs. CA,ibid.)

Preparation of Project of Distribution (POD)

The Liquidator is mandated to prepare a Project of
Distribution (POD) of the Assets of the bank among
its creditors.
- The POD specifies in detail the assets available
for distribution to creditors whose claims were
earlier allowed. (Pacific Bank v. PaBCEO)
The payment shall be in accordance with the rules on
concurrence and preference of credits as provided
under the Civil Code. (Sec.31, RA 7653)
Rule on concurrence and preference of credit
applicable only if the assets of the bank are not
enough to pay all creditors.
Trust funds are excluded from distributable assets of
a closed bank.

Property held by the insolvent debtor as a trustee of
an express or implied trust, shall be excluded from
the insolvency proceedings. (Art. 2240, Civil Code)

Receivership and Liquidation Fees and Expenses

Payment shall be made prior to the distribution of the
assets.
Aside from the cost of the liquidation proceedings,
liquidator is allowed to periodically charge
reasonable fees and expenses. (Sec.31, R.A. 7653; Sec.
12, PDIC Charter)
Shall include: salaries of such personnel whose
employment is rendered necessary in discharge of
the receivership/liquidation; other additional
expenses caused thereby. (Sec.31, R.A.7653)

Liquidating Dividends

Distribution of assets to the creditors shall be under
order of the duly constituted liquidation court and in
preference of credits under the Civil Code. (Sec.31,
R.A.7653)

Payment of insured deposit by PDIC partake of the
nature of public finds; are considered preferred credit
similar to taxes due to the National Government in
the order of preference under Art. 2244 of the Civil
Code. (Sec. 15, PDIC Charter)

Republic vs. Peralta [G.R. No. L- 56568. May 20,1987.]

It is thus important to begin by outlining the
scheme constituted by the provisions of the Civil
Code on this subject.
Those provisions may be seen to classify credits
against a particular insolvent into three general
categories, namely:
a) Special preferred credits listed in Articles 2241
and 2242,
b) Ordinary preferred credits listed in Article 2244;
and
c) Common credits under Article 2245.

Specially Preferred credits (Art.2241 & 2242, CC)

These credits constituted liens or encumbrances on
the specific movable or immovable property to which
they relate.
Considered as mortgages or pledges of real or
personal property, or liens within the purview of legal
provisions governing insolvency. (Art. 2243,CC)
Art.2241 and 2242 jointly with Arts. 2246 to 2249
establish a two-tier order of preference.
The first tier includes only taxes, duties and fees due
on specific movable or immovable property.
All other special preferred credits stand on the same
second tier to be satisfies, pari passu and pro rata, out
of any residual value of the specific property to which
such other credits relate.

Ordinary Preferred Credits, Article 2244 CC

Art. 2244 creates no liens on determinate property
which follow such property. What Article 2244
creates are simply rights in favor f certain creditors to
have the cash and other assets of the insolvent
applied in a certain sequence or order of priority.
Only in respect of the insolvents free property is an
order of priority established by Article 2244.

Central Bank vs. Morfe (March 12,1975)

Judgment for payment of time deposit rendered after
the declaration of insolvency, but prior to the institution

COMMERCIAL LAW
BANKING LAWS
189

2009 BAR OPERATIONS
of the liquidation proceedings, are not considered
preferred credits within the meaning of Art. 2244 of Civil
Code.

Rationale of Morfe ruling:
A general depositor of a bank is merely a general creditor,
and, as such, is not entitled to any preference or priority
over other general creditors.

+ The effect of a judgment obtained against it by a
creditor is only to fix the amount of debt. A
creditor can be acquire no lien which will give any
preference or advantage over other general
creditors.

Surplus dividends

If the assets of the bank are more than enough to pay its
liabilities, the creditors are entitled to surplus dividends.

Nature of Surplus Dividends

Interest in the form of damages or as compensation for
withholding of money. (3 Michie on Banks and Banking,
supra, p.531, citing Cooper vs, Parsons, 148 F. 2d 21, affg
Parsons vs. Barry, 59 F, Supp. 221.)

Surplus Dividends
Prior to PDIC Charter
Amendments
After PDIC Charter
Amendments
Legal basis:
Foreign Authorities Section 12, PDIC Charter
Distribution:
Pro Rata
According to legal
preference
Rate:
Legal Rate Legal Rate
Period of computation:
From date of closure to
date the claims were
approved by the LC.
In case of disputed claims,
surplus shall be computed
from the time it was
allowed by LC.

From date of takeover to
date of distribution

+ The surplus after paying all debts belongs to the
stockholders and should be ratable divided among
them. In determining whether there is surplus it has
been held that creditors, although their principal has
been returned in full, are entitled to interest thereon
at the legal rate from the date the bank closed, or
from the date of filing their claims, before any
distribution can be made to stockholders. (9 C.J.S.
Banks and Banking & 550)

+ After the payment of all liabilities and claims against
the closed bank, the Corporation shall pay any
surplus dividends at the legal rate of interest from
date of takeover to date of distribution, to creditors
and claimants of the closed bank in accordance with
legal priority before distribution to the shareholders
of the closed bank (Section 12 par. 2, PDIC Charter)

Filing of Motion for Approval of POD with the LC

The POD shall be presented to the LC, through a
motion for its approval.
The second phase [of the liquidation proceedings]
involves the approval by the Court of the distribution
plan prepared by the duly appointed liquidator. The
distribution plan specifies in detail the total amount
available for distribution to creditors whose claim
were earlier allowed. The Order finally disposes of
the issue of how much property is available for
disposal. Moreover, it ushers in the final phase of the
liquidation proceeding--- payment of all allowed
claims in accordance with the order of legal priority
and the approved distribution plan. (PaBCEO vs. CA,
ibid.)
The motion for approval of POD shall be submitted
for approval by the LC.

Payment of Claims in accordance to the POD

Upon approval of the POD by the LC, the liquidator shall
pay the creditors of the bank.

Termination of Liquidation Proceedings

The approval by the LC of the Final POD paves the
way to the termination of the liquidation
proceedings.
Upon approval of the Final POD, the Liquidator shall
hold as trustee the liquidating and/or surplus
dividends
Creditors shall have a period of three (3) years from
date of last notice within which to claim payment
therefore.
After the lapse of the 3-year period, unclaimed
payments shall be escheated to the Republic of the
Philippines in accordance with Rule 91 of the Rules of
Court.
In the absence of any controversy, the liquidator will
dispose pertinent bank records in accordance with
the applicable laws, rules and regulations after a
period of one (1) year from approval of the motion.

COMMERCIAL LAW
INSURANCE LAW
190

2009 BAR OPERATIONS

LAWS GOVERNING THE INSURANCE CONTRACTS

1. Insurance Code of 1978 (PD No. 1460), which
superseded PD No. 612 as amended and special laws.
2. Civil Code
a) Article 739 and 2012 on void donations
b) Article 2011 applicability of the Civil Code
c) Articles 2021-2027 Life annuity Contracts
d) Article 2186 Compulsory Motor Vehicle Liability
Insurance
e) Article 2207- insurers right of subrogation
3. Special laws- Article 2011 of the Civil Code
a) Insurance Code of 1978 PD1460
b) The Revised Government Service Insurance Act
of 1977 PD No. 1146 with respect to the
insurance of Government employees.
c) Social security act of 1954 RA No. 1161 with
respect to insurance of employees in private
employment.
d) Code of CommercE
4. Others
a) RA No. 656 as amended by PD No.245-Property
Insurance Law
b) RA No. 4898 as amended by RA No. 5756
providing life, disability and accident insurance
coverage to barangay officials.
c) Executive Order No. 250 (July 25, 1987) increase,
integrates and rationalizes the insurance benefits
of barangay officials under RA No. 4898 and
members of the Sanggunian under PD No. 1147
d) RA No. 3591 as amended-establish the Philippine
Deposit Insurance Corporation which insures the
deposits of all banks which are entitled to the
benefits of insurance under this act

Officer in charge with the implementation of laws of
the Insurance Code
The officer-in-charge is the Insurance Commissioner of
the Insurance Commission

Administrative functions of the Insurance
Commissioner
The Commissioner has the following functions:
A. Administrative function (CRISPFe)
1. To issue Certificate of authority to qualified
insurers
2. To Regulate the sale and issuance of variable
contracts, to license persons selling them
and to issue rules and regulations governing
the same
3. To Issue rulings, instructions circulars, orders
and decisions for the enforcement of the
provisions of the code subject to approval of
the Secretary of Finance.
4. To stop the operation of an insolvent
insurance company and determine within 30
days whether to rehabilitate or liquidate the
company.
5. To impose appropriate fines and Penalties
on insurance companies and on their officers
and agents for refusal to comply with any
order, instruction of the Commissioner , or
for mismanagement
6. To see that all insurance laws are Faithfully
executed
7.
B. Adjudicative function (Jurisdiction)
The Commissioner has the power to adjudicate
claims and complaints for amounts not exceeding
P100k per claim involving:
1. Loss, damage or liability of insurer under any
policy or insurance contract
2. Liability of a reinsurer
3. Liability under the contract of suretyship
4. Liability of a mutual benefit association to its
members
5. Counterclaims against the insured
6. Cross-claims against a co-party
7. Third party claims by the insurer against
another party.
- This authority is concurrent with the courts,
but filing of the complaint with the
Commissioner shall preclude the civil courts
from taking cognizance.
- The final order or decision of the
Commissioner shall have the force and
effect of a judgment, and may be appealed
to the Court of Appeals within 15 days from
notice of the award judgment, or of denial of
motion for reconsideration or new trial.
- The decision may be subject of a writ of
execution
- Claims in excess of P100k RTC
- Cause of action commences from the time
of the denial of his claim by the insurer,
express or implied (Sun vs. CA 195 SCRA
193)

Contract of Insurance
- an agreement
- whereby one undertakes for a consideration to
indemnify another
- against (1) loss, (2) damage or (3) liability
- arising from an (1) unknown or (2) contingent
event.

"Doing an insurance business" or "transacting an
insurance business" shall include (RISO)
(a) doing any kind of business, including a
Reinsurance business, specifically recognized as
constituting the doing of an insurance business
within the meaning of this Code;
(b) making or proposing to make, as insurer, any
Insurance contract;
(c) making or proposing to make, as surety, any
contract of Suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;

INSURANCE CODE
PD 1460

COMMERCIAL LAW
INSURANCE LAW
191

2009 BAR OPERATIONS
(d) Others - doing or proposing to do any business in
substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this
Code.
- The fact that no profit is derived from the
making of insurance contracts, agreements
or transactions or that no separate or direct
consideration is received therefor, shall not
be deemed conclusive to show that the
making thereof does not constitute the
doing or transacting of an insurance
business.

Characteristics of an Insurance Contract (C
3
UVAP
2
)
1. Consensual perfected by the meeting of minds
2. Conditional subject to conditions happening
of the event insured against and/or other
conditions like payment of premium
3. Contract of Indemnity promise of insurer to
make good a loss
4. Unilateral impose legal duties only on the
insurer who promises to indemnify in case of loss
5. Voluntary willingness of the parties
- Under the Motor Vehicle Insurance, Third
Party Liability Insurance is mandatory for
vehicle registration
6. Aleatory depends on some contingent event
7. Personal it binds only the parties to it and their
assignees
- Exception: When there is a Stipulations pour
autrui or a provision in favor of a third person
not a party to the contract. Under this
doctrine, a third person is allowed to avail
himself of a benefit granted to him by the
terms of the contract, provided that the
contracting parties have clearly and
deliberately conferred a favor upon such
person
8. Contract of perfect good faith for both parties
(uberrimae fidei)
9. It is not a wagering contract- the insurer does not
insure the happening or non-happening of an
unknown or contingent event.
10. It is a risk contributing device- to persons
similarly situated covering the same risk.
11. It is a contract of adhesion-interpreted strictly
against the maker of the contract.

Classes of Insurance
1. Life Insurance
2. Non-life Insurance
a. Fire Insurance
b. Marine Insurance
c. Casualty Insurance
d. Suretyship

Elements of Contract of Insurance
1. Insurable interest of the insured interest of
some kind susceptible of pecuniary or monetary
estimation
2. Insured subject to loss through the destruction
or impairment of that interest by the
happening of designated perils
3. Insurer assumes the risk of loss
-Such assumption is part of a general
scheme to distribute actual losses among a large
group of persons bearing somewhat similar risk
4. Payment of premium ratable contribution to a
general insurance fund as consideration to the
insurers promise

Requisites of contract of Insurance
1. Subject matter in which the Insured has an
insurable interest
2. Peril Insured against contingent or unknown
event, past or future and a duration for the risk
thereof
3. A promise to damnify in a fixed or ascertainable
amount
4. Payment of premium
5. Meeting of minds of the parties
Note: No policy of insurance shall be
issued or delivered unless in the form
previously approved by the Insurance
Commissioner.

What may be insured against
1. A Future Contingent Event resulting in loss or
damages
- e.g. destruction of a building from fire in Fire
Insurance or the death of the insured in a
Life Insurance policy
- Note that the word Loss embraces injury
or damage. A loss may be partial or total
2. A Past Unknown Event resulting in loss or
damage
- This is best exemplified in a Marine
Insurance where at the time the policy is
executed, the vessel subject of the insurance
may have already sunk, but that fact was
unknown to the parties at the time of the
execution of the policy
3. Contingent Liability
- This is best illustrated in Reinsurance where
the liability of the insurer is in turn insured
by him with a second insurer.

- Drawing of any lottery, or for/against any
chance or ticket in a lottery drawing a prize
may not be insured. A contract of insurance
is a contract of indemnity and not a
wagering or gambling contract

Parties to an Insurance Contract
1. Insurer
2. The Insured
3. Beneficiary

INSURER
- is the person, natural or juridical, who holds a
certificate of authority from the Insurance

COMMERCIAL LAW
INSURANCE LAW
192

2009 BAR OPERATIONS
Commissioner and who undertakes to indemnify
another by a contract of insurance
- Banks cannot be insurers
- Paid-up capital requirement for insurance companies
o P2M and a contributed surplus of
o P1M for life insurance
o P500k for non-life insurance
o P5M in case of reinsurance co.
- For Insurance Cooperative, recommendation from
the Cooperative Development Authority is required
- An Insurance agent should perform the function for a
compensation

INSURED
- Generally, any person with capacity to contract and
having an insurable interest in the life and property
insured may be the insured
- A married woman may take insurance on her life or
on that of her children without need of her husbands
consent
- A public enemy cannot be insured.
- Public enemy means any citizen or juridical entity of
the country with which the Philippines may be at war

Effects of War on Insurance Contracts
1. War prevents an insurance contract from being
entered into between citizens and juridical entities of
the warring states
2. For existing insurance contracts, the rules are:
a. Property Insurance war abrogates the contract
(Kentucky Rule)
b. Life Insurance war terminates the policy, but
the insured is entitled to the equitable value of
the policy arising from the premiums actually
paid, when commercial relations are resumed
(U.S. Rule)
BENEFICIARY
- The insurance proceeds shall be applied exclusively to
the proper interest of the person in whose name or
for whose benefit it is made unless otherwise
specified in the policy
- The beneficiary is the person designated to receive
the proceeds of the policy when the risk attaches.
- He may be the (1) insured himself in the property
insurance or (2) the insured or (3)a third person in life
insurance
- The father or mother of a minor who is an insured or
beneficiary of a life policy, may exercise, for said
minor, all rights under the policy up to P20k without
the need of a court authority or a bond (sec 180)

A. Beneficiary of one who insures his own life
- As a general rule, the insured who insures his own
life may designate any person, including his
estate as his beneficiary, whether or not the
beneficiary has an insurable interest in the life of
the insured
- The Insured has the right to change the
designation of the beneficiary, unless he has
expressly designated an irrevocable beneficiary
in his policy

Effects if the designation of beneficiary is irrevocable
The insured cannot
1. Assign the policy
2. Take the cash surrender value
3. Allow his creditors to attach or execute on the policy
4. Add a new beneficiary or
5. Change the irrevocable designation to revocable,
even though the change is just and reasonable
- Ratio: The irrevocability of the designated
beneficiary and his heirs have acquired from
the date of the policy vested rights over the
policy (Philam vs. Pineda 175 SCRA 201)

General rule:
- the proceeds of a life insurance policy belong to
the designated beneficiary to the exclusion of
the heirs of the insured (Picar vs GSIS 33 SCRA
324)
Exception: Persons Disqualified as Beneficiaries
- A beneficiary in life insurance is like a donee,
hence, the civil code provision on the
disqualifications of a donee shall apply.
Donations made between the following persons
are void
1. Donation between persons guilty of
adultery or concubinage
2. Donations between persons found
guilty of the same criminal offense, in
consideration thereof
3. Donations made to a public officer or
his wife, descendants and ascendants,
by reason of his office.

When interest of the beneficiary is forfeited
- The interest of the beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the
Principal, Accomplice, or accessory in willfully
bringing about the death of the insured
- In this event, he nearest relative of the insured shall
receive the proceeds of said insurance if not
otherwise disqualified
- The nearest relatives of the insured in the order of
enumeration are the following:
1. Legitimate children
2. Parents
3. Grandparents illegitimate children
4. Surviving spouse
5. Brothers and sisters of the full blood
6. Brothers and sisters of the half blood
7. Nephews and nieces.

NOTES:
(a) Where a specified person is beneficiary, the
proceeds will inure to the beneficiary.
Q: A took out a life insurance policy and
designated his wife, B, as the sole
beneficiary. All the premiums of the policy
were paid out from his salaries. A died
intestate leaving B and 3 children. Divide the
proceeds of the policy (1961 Bar)

COMMERCIAL LAW
INSURANCE LAW
193

2009 BAR OPERATIONS
A: All of the proceeds of the policy will go to
the designated policy, B. The source of the
premium here is immaterial (Miravite,
2002ed., p200)
(b) If the premiums are paid from (1) salaries of
the insured or (2) other conjugal properties
or funds, and the beneficiary is the estate of
the insured, the proceeds of the life
insurance policy is considered conjugal.

B. Beneficiary of Life Insurance on the life of another
person.
Where a policy is taken by a third person on the life
of the insured, and said third person designates
himself as the beneficiary, the third person must have
an insurable interest on the life of the insured, at the
time the policy became effective.

C. Beneficiary of Property Insurance
The beneficiary of the property insurance must have
an insurable interest over the subject matter of the
insurance existing at the time the policy was taken
and at the time the loss took place

INSURABLE INTEREST

- Insurable interest is a right or relationship
- In regard to the subject matter of the insurance
- Such that the insured will derive
1. pecuniary benefit or advantage from its
preservation and
2. will suffer pecuniary loss or damage from its
destruction or injury
- by the happening of the event insured against

A. Insurable Interest in Life

Insurable interest in life is the interest which a person has
1. In his life or
2. In the lives of other persons
a. Of his spouse and of his children
b. On whom he depends wholly or in part for
education or support (Wife insuring Husbands
life)
c. Under legal obligation to him to pay money, to
deliver property or to render service (Creditor
insuring the life of its Debtor)
d. Upon whose file any estate or interest vested
upon him. (Legatee of a usufruct insuring the life
of the usufructuary)

- A corporation has an insurable interest in the lives of
its officers when the death or illness of said officers
would materially and injuriously affect the
corporation.
- The corporation and the heirs of the manager can
insure the life of the manager-decedent in agreed
proportion, since both have insurable interest over
the life of the latter

When Insurable Interest should exist
It must exist at the time the insurance is taken.

B. Insurable Interest in property

Rule: No contract or policy of insurance on property shall
be enforceable except for the benefit of some person
having insurable interest in the property insured

Insurable interest
Life insurance Property Insurance
Insurable interest must
exist only at the time the
policy is taken
Insurable interest must exist
at the time the policy is
taken and at the time the
loss occurs
The beneficiary need
not have an insurable
interest on the insureds
life
The beneficiary must have
an insurable interest in the
property insured
There is no limit to the
amount of insurable
interest
Insurable interest is limited
to the actual value of the
interest in the property

What is considered as insurable interest in property
Insurable interest in property is every interest in property
whether real or personal, or any relation thereto, or
liability in respect thereof, of such a nature that the
contemplated peril might directly cause damage to the
insured

What insurable interest in property consists of
An insurable interest in property consist of
1. An existing interest
2. An inchoate interest founded on an existing
interest
3. An expectance coupled with an existing interest
in that out of which the expectance arises

Examples of an insurable inchoate right in the property
1. Contractors interest to the completed building
for unpaid construction cost
2. Lessors interest on the improvements made by
the lessee
3. Naked owners interest over the property which
another person has beneficial title

A mere contingent or expectant interest in anything, not
founded on an actual right to the thing, nor upon any
valid contract for it, is not insurable (e.g. property which
one expects to inherit or that of a general or unsecured
creditor insuring the property of his debtor who is alive
even though destruction of such property would render
worthless any judgment he might obtain note further in
the latter case, the creditor can insure the property of a
deceased debtor since all personal liability ceases with the
death of the debtor. The proceedings to subject the
estate to the payment of the debt of the deceased are
against all who have an interest in the property. Of
course, an unsecured creditor has an insurable interest in
the life of his debtor )

COMMERCIAL LAW
INSURANCE LAW
194

2009 BAR OPERATIONS

The vendee-consignee of goods in transit under a
perfected contract of sale is vested with an equitable title
to the goods even before receipt by him of the goods to
constitute an insurable interest in the property (Fil
Merchants vs CA 179 SCRA 638)

A carrier or depositary of any kind has an insurable
interest in a thing held by him as such, to the extent of his
liability but not exceed the value thereof.

Extent of insurable interest of a mortgagor/ee in a
mortgaged property
a. The mortgagor has an insurable interest on his
property as owner up to the full value of his
property, irrespective of any mortgage on said
property in general.
b. The insurable interest of a mortgagee is up to the
extent of his credit.

- Each may take separate insurances over the same
property up to the extent of their respective insurable
interests.

- Where the mortgagee independently of the
mortgagor insured his own interest in the mortgaged
property, he is entitled to the proceeds of the policy
in case of loss before payment of the mortgage. But
in such case, the mortgagee is not allowed to retain
his claim against the mortgagor but it passes by
subrogation to the insurer to the extent of the
insurance paid. In other words, the payment of the
insurance to the mortgagee does not relieve the
mortgagor from his principal obligation but only
changes the creditor.

When insurance is on the interest of the mortgagor
(loss payable clause/ standard mortgage clause) (Sec. 8)
- The insurance is on the mortgagors interest where
the mortgagor takes insurance on the property in his
own right making the loss payable to the mortgagee
- The mortgagor may:
i. Take insurance on the property, and assign
the same to the mortgagee (this operates
merely as an equitable transfer of the policy
so as to enable the assignee to recover the
proceeds)
ii. Constitute the mortgagee as beneficiary as
his interest may appear
iii.
- In case of fire, marine and casualty insurance, the
assignment must be with the consent of the
insurer because it is a personal contract. (Note
that life insurance may be freely assigned before
or after loss occurs to any person whether he has
an insurable interest or not)

Effects of insurance taken on the interest of the
mortgagor
a. Mortgagor continues to be a party to the contract
b. Any act by the mortgagor prior to the loss which
would avoid the policy, will thus avoid the policy,
even if the property is in the hands of the mortgagee
c. Any act which under the contract of insurance is to be
performed by the mortgagor (e.g. payment of
premium) may be performed by the mortgagee with
the same effect, as if performed by the mortgagor.
d. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit, consequently,
the debt is extinguished.

Effect if the mortgagor assigns the policy to the
mortgagee with the insurers consent, but the latter
imposes new conditions on the assignee (union
mortgage clause) (Sec. 9)
If at the time of the assent, the insurer imposes further
obligations on the assignee making a new contract with
him, the act of the mortgagor cannot affect the rights of
said assignee.

Take note of the distinctions between the
assignment or transfer of:
a. The Policy itself which transfers the fights to the
contract to another insured
b. The proceeds of the policy after the loss has
happened , which involves a money claim under,
or a right of action on the policy
c. The subject matter of the insurance, such as a
house insured under a fire policy which has the
effect of suspending the insurance (infra)

When insurable interest should exist
It must exist at the time the policy is taken and at the
time the loss incurred but it need not exist in the
meantime

Ratio: To prevent a person from taking out an
insurance policy on property upon which he has no
insurable interest and collecting the proceeds of said
policy in case of loss of the property. In such a case,
the contract of insurance is a mere wager which is
void. (Cha vs CA 277 SCRA 690)

Effect of a change of interest on the thing insured
- A change in the interest in any part of a thing insured
unaccompanied by a corresponding change of
interest in the insurance, suspends the insurance to
an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person.

- Mere transfer of a thing insured does not transfer
the policy but suspends it until the same person
becomes the owner of both the policy and the
thing insured. For a transferee to have an
insurable interest over a policy undertaken by
the transferor, the insurance policy should be
assigned to him, when he bought the property.

- A change of interest in a thing insured, after the
occurrence of an injury which results in a loss,

COMMERCIAL LAW
INSURANCE LAW
195

2009 BAR OPERATIONS
does not affect the right of the insured to
indemnity for the loss

- A change of interest, by will or succession, on the
death of the insured, does not avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured. Otherwise stated, the insurance
on property passes automatically, upon the
death of the insured , to the heir, legatee or
devisee who acquires interest in the thing
insured.

- A transfer of interest by one of several partners,
joint owners etc. who are jointly insured, will not
avoid the insurance even though it has been
agreed that the insurance shall cease upon an
alienation of the thing insured.

- A change of interest where there are several
things separately insured by one policy, does not
avoid the insurance as to the others
Example: A insured his car for P100k and
jeep for P85k under the single policy, the
sale of one will not affect the insurance of
the car.
BUT if the car and jeep were not
separately valued in the policy , the sale of
the jeep without the insurers consent
affects also the insurance of the car

Stipulations prohibited in an insurance policy
1. Stipulations for the payment of loss whether the
person insured has or has not any interest in the
subject matter of the insurance
2. Stipulation that the policy shall be received as proof
of insurable interest.

Amount of insurance
The measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or
injury thereof.

Rules to be followed in cases where the property is
insured for less than its true or market value
In case of total loss: The property owner is entitled
to receive the face value of the policy but in no case
exceeding the market value of the property.
In case of partial loss: The property owner is
entitled only the amount in proportion to his loss
and the market value of the property as against the
to face value of the policy. Ratio An owner of
property who insures the same for less that its true
value is co-insurer for the uninsured portion of the
property if the policy is a valued one.
HOWEVER if the policy is an open one, the owner
can collect the actual partial loss not exceeding the
face value of the policy

Example:
X has a property worth P10,000. He insures it against
fire for P8,000. How much shall he collect from
then insurance in case of total loss? If there is
Partial loss in the amount of P6,000?
In case of total loss P 8,000 face value of the
policy
In case of partial loss - open policy P6,000 the
actual partial loss not exceeding the face value of
the policy
In case of partial loss valued policy 6/10 of P8,000
or P4,800- the amount in proportion to his loss
and the market value of the property as against
the to face value of the policy.

CONCEALMENT
Concealment is a neglect to communicate that which a
party knows and ought to communicate to the other
party.

Requisites for concealment
For concealment to vitiate a contract of insurance, the
following must be present
1. the matter concealed must be material
2. there must be an obligation for the insured to
reveal the concealed matter to the insurer

Matters that must be communicated even in the
absence of inquiry
Each party to a contract of insurance must communicate
in good faith all facts within his knowledge only when:
1. They are material to the contract
2. The other has not the means of ascertaining the
said facts
3. As to which the party with the duty to
communicate makes no warranty.

Test of materiality
A fact is material if knowledge of it would have affected
the decision of the insurer to enter into the contract, in
estimating the risk, or in fixing the premium

- Matters relating to the health of the insured are
material and relevant to the approval and issuance of
the life insurance policy as they definitely affect the
insurers action on the application (Sunlife vs CA 245
SCRA 268)

- It is well-settled that the insured need not die of the
disease he had failed to disclose to the insurer, as it is
sufficient that his non-disclosure misled the insurer in
forming his estimates of the risk of proposed
insurance policy or in making inquiries (ibid)

- Lack of understanding by the illiterate insured of the
statements and her application as to her state of
good health does not negate the insurers right to
rescind (Tang vs CA 90 SCRA 236)

- Concealment exists where the assured had
knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and
intentionally withholds the same.

COMMERCIAL LAW
INSURANCE LAW
196

2009 BAR OPERATIONS

Matters which one has no duty to disclose
Neither party to a contract of insurance is bound to
communicate information of the matters following,
except in answer to the inquiries of the other:
1. Those which are already known to the insurer
2. Those which, in the exercise of ordinary care, are
ought to be known to the insurer or his agent,
3. Those undisclosed facts which are not material
4. Those which each party is bound to know:
- general causes eg. public events; and
- general usages of trade - eg. rules of navigation all
risks connected with navigation)
5. Information or the nature or amount of the interest
of one insured except if insured is a lessee or a
mortgagee (read sec 51)
6. Those of which the insurer waives communication
The right to information of material facts
may be waived, either:
a. Expressly by the terms of the
insurance
b. Impliedly by neglect to make inquiry
as to such facts, where they are
distinctly implied in other facts of which
information is communicated (Fact
disclosed that one was confined in the
hospital. The insurer did not inquire as
to the cause of confinement, the latter
is in estoppel)
7. Judgment upon the matters in question eg.
Opinion, speculation or expectation (How long will
you live?)

Consequences of concealment
- The rule is concealment whether intentional or
unintentional entitles the injured party to rescind a
contract of insurance.
- However, an intentional and fraudulent omission, on
the part of one insured, to communicate information
of matters proving or tending to prove the falsity of a
warranty is required to entitle the insurer to rescind
- Good faith is no defense in concealment (Sunlife vs
CA 245 SCRA 268)

Exceptions:
1. Incontestability clause:
In life insurance, after a policy has been in force for at
least two years, the insurer cannot rescind the policy
due to fraudulent concealment or misrepresentation
of the insured.

If the insured dies within two years from the
effectivity of the policy, rescission due to
concealment or misrepresentation of material
matters may still be invoked by the insurer, provided
done within two years from the effectivity of the
policy

2. Certain concealments in Marine Insurance
The following matters although concealed will not
vitiate the contract of marine insurance except when
they are caused the loss.
a. National character of insured
b. Liability of insured thing to capture or
detention
c. Liability to seizure from breach of foreign
laws
d. Want of necessary documents
e. Use of false or simulated papers

REPRESENTATION

A representation is an oral or written statement of a fact
or condition made by the insured at the time of or prior to
the issuance of the policy, affecting the risk made by the
insured to the insurer, tending to induce the insurer to
assume the risk

Misrepresentation vs. Concealment

Misrepresentation Concealment
Insured makes a statement
of fact which is untrue
Insured maintains silence
when he ought to speak

Kinds of representation
1. Oral
2. Written
3. Affirmative representation
4. Promissory representation

Affirmative representation
- It is any allegation as to the existence or non-
existence of a fact when the contract begins

Promissory representation
- It is any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance. A promissory representation is substantially
a condition or a warranty.

A promissory representation maybe:
1. Used to indicate a parole or oral promise made in
connection with the insurance, but not
incorporated in the policy.
- the non-performance of such a promise cannot
be shown by the insurer in defense of an action
on the policy, but proof that the promise was
made with fraudulent intent will serve to defeat
the insurance
2. As an undertaking by the insured, inserted in the
policy but not specifically made a warranty.

COMMERCIAL LAW
INSURANCE LAW
197

2009 BAR OPERATIONS
Warranty vs. Representation

When representation is made
- A representation may be made at the time of or
before issuance of the policy. It may be altered or
withdrawn before issuance of the policy, but not
afterwards.
- A representation must be presumed to refer to the
date on which the contract goes into effect
Hence:
1. There is NO FALSE representation if it is true
at the time the contract takes effect although
false at the time it was made.
2. There is FALSE representation if it is true at
the time it was made but false at the time the
contract takes effect in this case the insurer
is entitled to rescind

When representation is deemed false
- A representation is deemed to be false when the
facts fail to correspond with its assertions or
stipulations.

Misrepresentation
A misrepresentation in insurance is a statement:
1. As a fact of something which is untrue
2. Which the insured states with knowledge that it
is untrue and with intent to deceive, or which he
states positively as true without knowing it to be
true and which has the tendency to mislead
3. where such fact in either case is material to the
risk

- An insured who has no personal knowledge of a
fact may communicated such information which
he has, and believes it to be true, upon the
subject matter with the explanation that said
information was obtained from 3
rd
persons. In
this case he is not responsible if the information
turns out to be false.
- Except if the information proceeds from an
agent of the insured whose duty is to give
information to his principal. This is so because
knowledge of the agent is also knowledge of the
principal

Effect of false representation or misrepresentation
- If the representation is false on a material point, the
injured party is entitled to rescind from the time
when the representation becomes false.
- HOWEVER, the right to rescind given to the insurer is
waived by the acceptance of premium payments
despite knowledge of the ground of rescission

Test of materiality
- Materiality is determined by the probable and
reasonable influence of the facts on the party to
whom communication is due, in forming his estimate
of the contract, the risk and the premium

- When the original contract of insurance was modified
by reason of concealment or misrepresentation on
the part of the insured especially when modification
pertains to material points, upon discovery of such
concealment or misrepresentation, the insurer is
allowed to rescind said modification.

Right to rescind when available
- In order that the insurer may rescind a contract of
insurance, such right must be exercised prior to the
commencement of an action on the contract.
(Example, if the insured filed an action to collect
amount of the insurance, it can no longer rescind the
contract)

Incontestability clause
- Incontestability means that after the requisites are
shown to exist, the insurer shall be estopped from
contesting the policy or setting up any defense,
except when allowed on the ground of public policy.
- Requisites:
1. The policy is a life insurance policy
2. It is payable on the death of the insured
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 reinstatement
NOTE: The period of two years for contesting a
life insurance policy may be shortened but it
cannot be extended by stipulation

Effect when the policy becomes incontestable
- When the policy of life insurance becomes
incontestable, the insurer may not refuse to pay the
same by claiming that:
1. The policy is void ab initio (voidable)
2. It is rescissible by reason of the fraudulent
concealment of the insured or his agent or
3. It is rescissible by reason of the fraudulent
misrepresentations of the insured or by his agent

Defenses NOT barred by incontestability clause
- The incontestability of a policy under the law is not
absolute. The insurer may still contest the policy on
the following grounds:
1. That the person taking the insurance lacked
insurable interest as required by law;
2. The cause of the death of the insured is an
excepted risk;
Warranty Representation
It is part of contracts
It is mere collateral
inducement, but it may
qualify an implied
warranty
It is expressly set forth in
the policy itself or
incorporated therein by
reference
It may be oral or written
in another instrument
It is conclusively
presumed material
It must be proved to be
material
It must be strictly
complied with
It requires only
substantial truth or
compliance

COMMERCIAL LAW
INSURANCE LAW
198

2009 BAR OPERATIONS
3. That the premiums have not been paid
4. That the conditions of the policy relating to
military or naval service have been violated;
5. The fraud is of a particularly vicious type, as
when the policy was taken out in furtherance of a
scheme to murder the insured, or where the
insured substitutes another person for the
medical examination or where the beneficiary
feloniously killed the insured;
6. The beneficiary failed to furnish proof of death or
to comply with any condition imposed by the
policy after the loss has happened;
7. The action was not brought within the time
specified.

WARRANTIES

A warranty is a statement or promise stated in the policy
itself or incorporated therein by reference, whereby the
insured expressly contracts as to the present or future
existence or certain facts, circumstances or conditions,
the literal truth of which is essential to the validity of the
contract of insurance

What warranty relates to
- It may relate to the past, the present, the future or to
any or all of these.

Kinds of warranties
1. Affirmative warranty
- where the insured asserts the existence of a
matter at or before the issuance of the policy
2. Promissory warranty
- where the insured promise or undertakes
that certain matters shall exist or will be
done or omitted after the policy takes effect
3. Express warranty
- where the assertion or promise is clearly set
forth in the policy or incorporated therein by
reference
4. Implied warranty
- where the assertion or promise is not
expressly set forth in the policy, but because
of the general tenor of the terms of the
policy, or from the very nature of the
insurance contract, a warranty is necessarily
inferred or understood.

Required form to create a warranty
- There is no particular form or words necessary to
create a warranty. Whether a warranty is constituted
or not depends upon the intention of the parties, the
nature of the contract or the words used thereto. In
case of doubt, the statement is presumed to be a
mere representation and not a warranty.

When an express warranty should be made
- It should be made at or before the execution of a
policy

Where an express warranty should be contained
Express warranty may be contained either:
1. In the policy itself
2. In another instrument signed by the insured and
referred to in the policy as making part of it.
Mere reference is not sufficient to give warranty.

- A statement in a policy, of a matter relating to
the person or thing insured, or to the risk as a
fact is an express warranty. A statement which is
in the nature of an opinion or belief is not a
warranty

Promissory warranty
- It is a statement in a policy that a thing which is
material to the risk is intended to be done or not to
be done after the policy takes effect.
- As a general rule: the non-performance of a
promissory warranty entitles the other party to
rescind the contract:
- Exceptions to the rule are:
1. Loss occurs before the time arrives for the
performance of the promissory warranty
2. Performance becomes unlawful before the time
arrives for the performance of the promissory
warranty
3. Performance becomes impossible before the
time arrives for the performance of the
promissory warranty

What happens when there is violation of material warranty
or to other material provisions of the policy?

= All breaches of warranty give to the insurer the right
to rescind the contract. This rule is true even if the
violation of the material warranty did not contribute
to the loss.

= If fraud intervenes in the breach, the insurer is freed
from liability from the start, as the contract is fraud
ab initio. The insured is not entitled to the return of
the premiums paid.

= If there is no fraud in the breach, the insurer is freed
from the contract the moment the breach occurs, and
is entitled to retain the premiums corresponding to
the period up to the time of the breach. But if the
breach was done at the time of the inception of the
policy, the insured cannot recover for any loss arising
thereafter, but all premiums should be returned to
the insured

POLICY OF INSURANCE

- A policy of insurance is the written instrument in
which a contract of insurance is set forth. It is the
formal written instrument evidencing the contract of
insurance entered between the insured and the
insurer.

COMMERCIAL LAW
INSURANCE LAW
199

2009 BAR OPERATIONS
Form
- The policy shall be in printed form which may contain
blank spaces on which words, numbers and other
matters necessary to complete the contract of
insurance shall be written on. However, group
insurance and group-annuity policies may be
typewritten and need not be in printed form.

Rider in a contract of insurance
- A rider is a printed or typed stipulation contained on a
slip of paper attached to the policy and forming an
integral part of the policy.

Effect of a rider, clause, warranty or endorsement
purporting to be a part of the contract and pasted on
the policy
- As a general rule, these attached papers become part
of a contract of insurance. However it will not bind
the insured unless it is properly referred to therein in
the policy. If the rider, etc. is issued after the original
policy was in force, it shall not bind the insured unless
it is countersigned by the insured.

Cover notes or interim policies
- Cover notes or interim policies or binding slips may
be issued to bind the parties temporarily pending the
issue of the policy. It is intended to give temporary
protection pending the investigation of the risk by
the insurer or until the issue of formal policy.
- These notes are good for 60 days only, unless
renewed with the written approval of the Insurance
Commissioner

Contents of the policy
A policy contains, among others the following
1. The parties
2. Amount of insurance (except in open or running
policies)
3. Rate of premium
4. The property or life insured
5. The interest of the insured in the property if he is
not the owner
6. Risk insured against
7. Duration of the insurance

May an agent undertake a contract of insurance in favor of
its principal?
- Yes. The agent or trustee when making an insurance
contract for and in behalf of his principal should
indicate that he is merely acting in a representative
capacity by signing as such agent or trustee, or by
other general terms in the policy

May a partner in a partnership insure partnership property?
- Yes. Insurable interest in the property of a
partnership exists in both partnership and the
partners and a partner has an insurable interest in the
firms property which will support a policy taken out
thereof for his own benefit

What extent does the contract of insurance cover
undertaken by a partner?
- A partner who insures partnership property in his own
name limits the contract to his individual share unless
the terms of the policy clearly show that the
insurance was meant to cover also the shares of the
other partners.

How ambiguities in an insurance contract are construed
- Contract of insurance is a contract of adhesion, thus
any ambiguity therein should be resolved against the
insurer, otherwise stated, it should be construed
liberally in favor of the insured and against the insurer

- In Cebu vs William 306 SCRA 762 the Supreme Court
held: although in this jurisdiction, contracts of
adhesion have been consistently upheld as valid per
se as binding as an ordinary contract, the court
recognizes instances when reliance on such contracts
cannot be favored especially where the facts and
circumstances warrant that subject stipulations be
disregarded. The facts and circumstances vis--vis
the nature of the provision sought to be enforced
should be considered, bearing in mind the principles
of equity and fair play.

- In Rizal vs CA 336 SCRA 12, Supreme court said: it is
settled that the terms in an insurance policy, which
are ambiguous, equivocal, or uncertain are to be
construed strictly and most strongly against the
insurer, and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or
payment to the insured, especially where forfeiture is
involved, and the reason for this is that the insured
usually has no voice in the selection or arrangement
of the words employed and that the language of the
contract is selected with great care and deliberation
by experts and legal advisers employed by and acting
exclusively in the interest of the insurance company.

Kinds/classes of policies in non-life insurance
1. Open or unvalued policy is one in which the
value of the thing insured is not agreed upon, but
is left to be ascertained in case of loss. In other
words, it is one in which a certain agreed sum is
written on the face of the policy not as the value
of the property insured, but as the maximum
limit of recovery in case of destruction the peril
insured against.
2. Valued policy is one which expresses on its face
an agreement that the thing insured shall be
valued at a specified sum. In the absence of
fraud or mistake, such value will be paid in case
of total loss of the property, unless the insurance
is for a lower amount.
3. Running policy is one which contemplates
successive insurances and which provides that
the subject of the policy may from time to time
be defined

COMMERCIAL LAW
INSURANCE LAW
200

2009 BAR OPERATIONS
Requisites for a valid cancellation of non-life insurance
1. Written prior notice to the insured, stating the facts
and
2. For any of the following grounds
a. Non-payment of premium
b. Conviction of a crime arising out of acts
increasing the hazard insured against
c. Discovery of fraud or material misrepresentation
d. Discovery of willful or reckless acts or omissions
increasing the hazard insured against
e. Physical changes in the property insured which
result in the property becoming uninsurable
f. A determination by the commissioner that the
policy would violate the insurer

PREMIUM
- Premium is the consideration paid an insurer for
undertaking to indemnify the insured against a
specified peril

When is the insurer entitled to payment of the premium?
- As soon as the thing insured is exposed to the peril
insured against

Effect of the nonpayment of premium
- GR: The policy or contract of insurance is not valid
and binding.
- Exceptions:
1. Life and Industrial Life policy whenever the
grace period provision applies(sec 77)
2. Written acknowledgment of the receipt of
premium by insurer (sec 78)
3. Payment in installments of the premium and
partial payment made at the time of loss
4. Credit extension for the payment of premium
5. Estoppel reliance in good faith on the practice
of the insurance company

- Grace period:
a) Life insurance 30 days or 1 month within which
the payment of any premium after the first may
be made
b) Industrial life insurance 4 weeks and where the
premiums are payable monthly, either 30 days or
1 month

- Written acknowledgment in a policy or contract of
insurance of the receipt or premium is conclusive
evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that
it shall not be binding until the premium is actually
paid

Effect of nonpayment
1. Of First premium prevents the inception of the
policy
2. Of subsequent premiums- it does not affect the
validity of the contract unless, by express
stipulation, it is provided that the policy shall in
any event be suspended or shall lapse.

When the insured is entitled to recover premiums
The insured is entitled to a return of the whole premium:
1. If the thing insured was never exposed to the risk
insured against
2. When the contract is voidable due to the fraud or
misrepresentation of the insurer or his agent
3. When the contract is voidable because of the
existence of facts of which the insured is ignorant
without his fault
4. When the insurer never incurred any liability
under the policy because of the default of the
insured other than actual fraud
The insured is entitled to a ratable return of premium on
1. Where the insurance is made for a definite period
of time and the insured surrenders policy before
termination
2. Where there is over-insurance by several insurers

Where the insurance is for a definite period of time and
the insured cancels his policy by surrendering the policy,
the insured is entitled to recover the premiums already
paid equivalent to the unexpired term at a pro rata rate
Exception to this rule:
a. Where the insurance is not for a definite period
b. Where the policy is a life policy
c. Where a short period rate has been agreed
upon
- Short period rate is that percentage, as
agreed upon by the parties and appearing on
the face of the policy, which the insurer shall
retain from the premium in the event that
the policy is surrendered by the insured for
cancellation.

The premiums to be returned where there is over-
insurance by several insurers shall be proportioned to the
amount by which the aggregate sum insured in all the
policies exceeds the value of the thing

Example:
X insures his house which has an insurable value of
P1,500,000 as follows:
In this case, there is an over insurance of P300,000, the
amount by which the aggregate sum insured in the two
policies exceeds the insurable value of the house. The
proportion is P300k to P1800k or 1/6. Hence, 1/6 of P24k
or P4k is what A co must return; and 1/6 of P12k or P2k is
what B co must return
Insurer Amt of
Insurance
Premiums paid
A Co. P 1,200,000 P 24,000
B. Co 600,000 12,000
Aggregate sum P1,800,000.

COMMERCIAL LAW
INSURANCE LAW
201

2009 BAR OPERATIONS
DOUBLE INSURANCE
A double insurance exists where the same person is
insured by several insurers separately in respect to the
same subject and interest

Requisites
There is no double insurance unless the following
requisites exist:
1. The person insured is the same
2. Two or more insurers insuring separately
3. The subject matter is the same
4. The interest insured is also the same and
5. The risk or peril insured against is likewise the
same

Double Insurance vs Over-insurance

Binding effect of stipulation against double insurance
- A policy which contains no stipulation against
additional insurance is not invalidated by the
procuring of such insurance. However, a stipulation
that insurance shall be avoided if additional insurance
is procured without the insurers consent is valid and
reasonable, and any breach thereof will prevent a
recovery on the policy

Effects of Double insurance
a) The insured can insure with two or more companies
unless prohibited by prior policy
b) Where he is allowed, but over-insurance results, he
can claim in case of loss, only up to the agreed
valuation (in valued policy) or up to the full insurable
value (in open policy) from any, some or all insurers,
without prejudice to the insurers ratably apportioning
the payments
c) The insured can also claim a ratable return of the
premiums on the over-insured amount
d) Unrevealed other insurances, when required, is a
material concealment/misrepresentation and gives to
the insurer the right to rescind

REINSURANCE
Reinsurance is a contract by which an insurer procures a
third person to insure him against loss or liability by
reason of such original insurance

Nature of contract of reinsurance
- A reinsurance is presumed to be a contract of
indemnity against liability and not merely against
damage.
- The subject of the contract of reinsurance is the
insurers risk and not the property insured under the
original policy. The reinsurer agrees to indemnify the
insurer , not against the actual payment made but
against liabilities incurred

Distinguish Reinsurance vs. Double Insurance

Reinsurance Double Insurance
The insurer becomes the
insured in relation to the
reinsurer
The insurer remains as the
insurer
The subject of the
insurance is the original
insurers risk
The subject of the
insurance is the property
It is an insurance of
different interest
It involves the same
interest
The original insured has
no interest in the contract
of reinsurance which is
independent of the
original contract of
insurance
The insured is the party in
interest in all the
contracts

Reinsurance vs. Co-insurance
- Co-insurance is the percentage in the value of the
insured property which the insured himself assumes
or undertakes to act as insurer to the extent of the
deficiency in the insurance of the insured property. In
case of loss or damage, the insurer will be liable only
for such proportion of the loss or damage as the
amount of insurance bears to the designated
percentage of the value of the property insured.
- Reinsurance is where the insurer procures a third
party, called the reinsurer, to insure him against
liability by reason of such original insurance.
Basically, a reinsurance is an insurance against
liability which the original insurer may incur in favor
of the original insured

Distinguish Reinsurance vs Reinsurance Treaty

Reinsurance Reinsurance Treaty
A reinsurance policy is a
contract of indemnity one
insurer makes with
another to protect the
first insurer from a risk it
has already assumed
A reinsurance treaty is
merely an agreement
between two insurance
companies where one
agrees to cede and the
other to accept
reinsurance business
pursuant to provisions
specified in the treaty.
It is a Contract of
insurance
It is a contract for
insurance

Double Insurance Over-Insurance
In double insurance, there
may be no over-insurance
as when the sum total of
the amounts of the policies
issued does not exceed the
insurable interest of the
insured
There is over-insurance
when the amount of the
insurance is beyond the
value of the insureds
insurable interest
There are always several
insurers
There may be only one
insurer involved
THEREFORE, double insurance and over-insurance may
exist at the same time or neither may exist at all

COMMERCIAL LAW
INSURANCE LAW
202

2009 BAR OPERATIONS
Matters which the reinsured must communicate to the
reinsurer
- The insurer who obtains reinsurance, except under
automatic reinsurance treaties, must communicate
the following to the reinsurer:
a. All the representations of the original insured
b. All the knowledge and information he possesses,
whether previously or subsequently acquired,
which are material to the risk

Automatic reinsurance treaties
- This refers to a case when two or more insurance
companies agree in advance that each will reinsure a
part of any line of insurance taken by the other, such
contract is self executing and the obligation attaches
automatically on acceptance of a risk by the
reinsured. In this case, the obligation to
communicate is not necessary due to the self-
executing and automatic feature of such insurance.

Facultative reinsurance agreement
- A facultative reinsurance agreement is a contract
wherein the reinsurer may or may not accept
participation in the risk insured.
- The term facultative is used in reinsurance
contracts and it is so used in this particular case
merely to define the right of the reinsurer to accept
or not to accept participation in the risk insured. But
once the share is accepted, the obligation is absolute
and the liability assumed thereunder can be
discharged by the one and only way payment of the
share of losses. There is neither alternative nor
substitute prestation (Equitable Insurance vs Rural Insurance
4 SCRA 343)

Does the original insured have interest in a contract of
reinsurance?
- None. The original insured has no interest in a
contract of reinsurance.
- Reinsurance is a contract solely between the
reinsured and the reinsurer and creates no privity of
contract between the reinsurer and the original
insured. However, if the contract of reinsurance is
made directly for the benefit of the reinsureds
policyholders or if the reinsurer assumes and agrees
to perform the reinsureds contracts, the reinsurer
becomes directly liable to the policyholders. It is
necessary for the original insured to accept and
communicate acceptance of such benefit to the
reinsurer before revocation

- A reinsurer is entitled to avail of every defense which
the reinsured may avail of against the original insured
(Gibson vs Revilla 38 SCRA 219)

LOSS IN CONTRACT OF INSURANCE
- Loss is the injury or damage sustained by the insured
from the perils insured against

Proximate cause
Proximate cause is the active efficient cause which sets in
motion a train of events which in turn brings about a
result without the intervention of any force operating and
working actively from a new and independent force

Remote cause
Remote cause is a cause that does not necessarily or
immediately produce an event or injury

When the insurer becomes liable for losses
The insurer is liable for:
1. Loss the proximate cause of which is the peril
insured against although the peril not
contemplated by the contract may not have
been a remote cause of the loss
2. Loss the immediate cause of which is the peril
insured against except where the proximate
cause is an excepted peril
3. Loss through the negligence of the insured or of
the insureds agents or others, and
4. Loss in the course of efforts to rescue the thing
from the peril insured against although the cause
of loss is not a peril insured against.

Loss which incurs liability
1. Loss by the insureds willful act
2. Loss due to connivance of the insured; and
3. Loss where the excepted peril is the proximate
cause

Prerequisites for the recovery of loss in insurance
against fire
1. Notice of loss which must be immediately given
unless delay is waived expressly or impliedly by the
insurer
2. Proof of loss according to the best evidence
obtainable. Delay may also be waived expressly or
impliedly by the insurer

- All defects in a notice of loss, or in preliminary proof
thereof, which the insured might remedy, and which
the insurer omits to specify to him, within reasonable
time, as grounds of objection, are waived.

When the insurer of property against fire is exonerated
from liability
- When no notice is given by the insured or by any
other person entitled to the benefit of the insurance,
within a reasonable time.

Proof needed for preliminary proof of loss
When preliminary proof of loss is required in the policy, it
is sufficient that the insured gives the best evidence which
he has in his power and not evidence necessary in a court
of justice.

COMMERCIAL LAW
INSURANCE LAW
203

2009 BAR OPERATIONS
PAYMENT OF CLAIMS

A. Life Insurance
1. Where insured outlives maturity date, the
claim is payable immediately on maturity of
the policy. This is true in endowment
insurance
2. Where policy matures by Insureds death,
the claim is payable within 60 days after
presentation of the claim and filing of proof
of death of the insured. In case of
unreasonable delay, the insured is entitled to
(1) Attorneys fees (2) expenses incurred by
reason of the unreasonable withholding (3)
interest at the legal interest rate (6%) per
annum as fixed by the monetary board
(4)amount of the claim., (5) moral damages
if bad faith or fraud is present and (6)
exemplary damages if the act is wanton and
oppressive.
3. Please note that for cases involving loss or
injury, any person having any claim upon the
policy shall, without delay present a written
notice of claim within six (6) months from
date of accident to the insured, otherwise,
the claim shall be deemed waived. Action or
suit for recovery of damages due to loss or
injury must be brought, in proper cases, with
the Commissioner of the Courts within one
(1) year from denial of claim, otherwise, the
claimants right of action shall prescribe

B. Property Insurance
1. If amount of loss is determined by
agreement or by arbitration, the claim is
payable within 30 days after proof of loss is
received by the insurer.
2. If ascertainment of loss is not made within
60 days, the claim is payable within 90 days
from receipt of proof of loss by the insurer, if
not paid, unreasonable delay is presumed
(Cathay vs CA 174 SCRA 11)
3. Please note the 1 year prescriptive period to
file an action after denial of claim.
The prescriptive period is not suspended by
the filing of a request for reconsideration
after denial of claim (Sun vs CA 195 SCRA
193)

C. Compulsory Motor vehicle liability Insurance
1. The insurance company will indemnify any
authorized driver who is driving the motor
vehicle of the insured and in the event of
death of said driver, the company shall
likewise indemnify his personal
representatives and the company may at his
option make indemnity payable directly to
the claimants or heirs of claimants. In other
words, under the compulsory vehicle liability
insurance, direct payments may be made by
the insurer to an accident victim of an
insured vehicle
2. Pour autrui clauses inure to the benefit of
any person injured by the person insured as
if he were named in the policy

Article 2207 of the Civil Code makes it clear that the
insurance company that has paid the indemnity for the
injury or loss sustained by the property insured shall be
subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract.
The insurer who pays the insured is an assignee in equity
of the insured against the offender. (Malayan vs CA 165
SCRA 536)

As a general rule: Payment by the insurer to the insured
for loss under the policy entitles the insurer to be
subrogated to the rights of the insured against the
wrongdoer.
The exceptions are:
1. Where the insured releases the wrongdoer from
liability
2. Where the insurer pays without notifying the
carrier, which in good faith had already paid the
insured, and
3. Where the insurer pays the insured for a loss
which is not included in the risk insured against,
by the policy
(Pan Malayan vs. CA 184 SCRA 54)

Where the insured was paid by the insurer, the latter is
subrogated to all rights of the former against the
wrongdoer. If the insured after being paid by the insurer,
releases the wrongdoer without the insurers consent, the
insurer loses his right of subrogation against the
wrongdoer. The insurer will however be entitled to
recover from the insured what the insured originally
received from the insurer as the proceeds of the policy
(Manila vs. CA 154 SCRA 650)

CLASSES OF INSURANCE

MARINE INSURANCE
Insurance against risks connected with navigation, to
which a ship, cargo, freightage, profits or others insurable
interest in movable property, may be exposed during a
certain voyage or a fixed period of time.

Coverage of Marine Insurance
1. Loss or damage to aircraft
2. Loss or damage to goods & merchandise for
shipment
3. Persons in connection w/ marine insurance
4. Precious stones, jewels, jewelry, precious metals
5. Bridges, tunnels, & other instrumentalities of
navigation

Perils of Navigation
- perils in making landings in river navigation and
damage from rain in consequence of improper
stowage.

COMMERCIAL LAW
INSURANCE LAW
204

2009 BAR OPERATIONS
War risks
- perils due directly to some hostile action, military
maneuver, operational war danger

Builders risks
- damage to ways from launching as well as damage to
the ship.

Perils of the sea
- all kinds of marine casualties & damages done to the
ship or goods at sea by the violent action of the winds
or waves; not foreseen & not attributable to the fault
of anybody.

Perils of the ship
- losses or damages resulting from:
a) natural and inevitable action of the sea
b) ordinary wear and tear of ship
c) negligent failure of the ship's owner to provide the
vessel w/ proper equipment to convey the cargo
under ordinary conditions.

Inchmaree clause
- provision in the policy that the insurance shall cover
loss of, damage to, the hull or machinery through
negligence of the master, charterers, engineers, or
pilots, or through explosions, bursting of boilers,
breakage of shafts, or through any latent defect in
the machinery or hull not resulting from want of due
diligence.

Insurable Interest in Marine Insurance
1) Ship owner
- over the vessel, except that if chartered, the
insurance is only up to the amount not
recoverable from the charterer
- he also has an insurable on expected freightage;
no insurable interest if he will be compensated
by charterer in case of loss.

2) Cargo owner
- over the cargo & expected profits

3) Charterer
- over the amount he is liable to the ship owner, if
the ship is lost or damaged during the voyage.

Loan on Bottomry/Respondentia
- loan in which under any condition whatever, the
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of
the goods on which it is made, or of the price they
may receive in case of accident.

Insurable interest on vessel hypothecated by bottomry
1.Owner/debtor
-difference between the actual value of the vessel
and the loan on bottomry.
2.Creditor
-amount of the loan

Right of insurer & lender in case of loss
- value of what may be saved/salvaged shall be divided
between the lender & insurer, in proportion to the
legitimate interest of each one.

Freightage
- benefits derived by the owner, either from:
a) chartering of the ship
b) its employment for the carriage of his own
goods or those of others.

Time when Insurable Interest on Freightage exists
a) In case of a charter party, from the time the vessel
has broken ground on the chartered voyage
b) If no charter party & price is to be paid for the
carriage of goods, from the time said goods are
actually on board the vessel or from the time both
ship & goods are ready for specified voyage.

- In Marine Insurance, insured is required to reveal
all information which he possesses material to
the risk.

Concealment that does not vitiate the contract except
when they caused the loss
1. national character of the insured
2. liability of the thing insured to capture and detention
3. liability to seizure from beach of foreign laws of
trade.
4. want of necessary documents
5. use of false & simulated papers

Effect of concealment of matters
- exonerates the insurer from a loss

Effect if misrepresentation is intentionally false
- rescission of contract by insurer

Effect of falsity of representation as to expectation
- non-avoidance of a contract of insurance

Implied warranties in marine insurance
a) the ship is seaworthy
b) no improper deviation from the agreed voyage will
be made
c) vessel will not engage in illegal venture
d) where nationality or neutrality of a ship or cargo is
expressly warranted

Seaworthiness
- relative term depending of the NATURE of the ship,
the VOYAGE, & the SERVICE in which she is at the
time engaged.
- Reasonable fitness to perform the service & to
encounter the ordinary perils of the voyage
contemplated by the parties.

Effect of violation of implied warranty of seaworthiness
- insurer will not be liable for a loss

COMMERCIAL LAW
INSURANCE LAW
205

2009 BAR OPERATIONS
When requirement of seaworthiness satisfied
- General Rule:
Seaworthiness of the vessel is required only at the
commencement of the risk.
- Exceptions:
1. insurance is made for a specified length of time
2. insurance is upon the cargo required to be
transshipped at an immediate port

Course of the voyage insured
a) one agreed upon by the parties
b) in the absence of agreement, the course of sailing
fixed by mercantile usage
c) if the course of sailing is not fixed by mercantile
usage, one which to a master of ordinary skill and
direction, would seem the most natural, direct &
advantageous

Deviation
a) departure from the course of the voyage insured
b) unreasonable delay in pursuing the voyage
c) commencement of an entirely different voyage

When deviation is proper
a) when caused by circumstances over which neither
the master nor the owner of the ship has any control
b) when necessary to comply with warranty, or to avoid
a peril, whether or not the peril is insured against
c) when made in good faith, & upon reasonable grounds
of belief in its necessity to avoid a peril
d) when made in good faith, for the purpose of saving
human life, or relieving another vessel in distress.

Effect of improper deviation
- insurers become immediately absolved from further
liability

LOSS
A. TOTAL
1. Actual total loss ( exists when the subject matter
of the insurance is wholly destroyed or lost or
when it is so damaged as no longer to exist in its
original charter) is caused by:
a. total destruction of the thing insured
b. irretrievable loss of the thing by sinking, or
by leaving broken up
c. any damage to the thing which renders it
valueless
d. other event which effectively deprives the
owner of the possession
2. Constructive total loss ("technical total loss")
- one that gives to a person insured a right to
abandon
B. PARTIAL LOSS
- loss other than a total loss

- Presumption of actual loss: continued absence of a
ship without being heard.

Continuation of liability of insurer
- whenever the ship upon which the cargo insured was
loaded cannot continue the voyage due to the peril
insured against, & cargo is loaded on another vessel

- Abandonment - necessary only in constructive
total loss

Average
- extraordinary/accidental expense incurred during the
voyage for the preservation of the vessel, cargo, or
both and all damages to the vessel & cargo from the
time it is loaded and the voyage commenced until it
ends & the cargo unloaded.

Kinds of average:
1. GROSS/GENERAL AVERAGES
- include all the damages & expenses which are
deliberately caused in order to save the vessel, its
cargo, or both at the same time, from real &
known risk
- Requisites to the Right to claim general average
contribution:
a. common danger to the vessel/cargo
b. part of the vessel/ cargo was sacrificed
deliberately
c. sacrifice must be for common safety/benefit
of all
d. must be made by the master or upon his
authority
e. not be caused by any fault of the party
asking the contribution
f. must be successful
g. must be necessary

2. SIMPLE/PARTICULAR AVERAGE
- includes all the expenses & damages caused to
the vessel or to her cargo which have not inured
to the common benefit & profit of all the
persons interested in the vessel & her cargo.
- Partial loss caused by a peril insured against,
which is not a general average loss

FPA CLAUSE
- a situation wherein the insured & insurer stipulated in
the policy that the vessel/cargo insured shall be free
from particular average
- effects:
a. if damage to the thing insured is a
PARTICULAR average, the insurer shall not
be liable UNLESS the loss suffered is total
b. if damage to the thing insured is a
GENERAL average, insurer shall be liable
whether the loss is partial or total or for the
condition of the insured for his proportion of
all general average losses assessed upon the
thing insured which was saved.

- There is an ACTUAL TOTAL LOSS if the insured
is effectively deprived of the use & possession of
the property, whether by seizure/capture
followed by condemnation/theft.

COMMERCIAL LAW
INSURANCE LAW
206

2009 BAR OPERATIONS
Abandonment
- act of the insured by which, after a constructive total
loss, he declares the relinquishment to the insurer of
his interest in the thing insured
- effect: insured is surrendering to the insurer whatever
is left of the property insured, & resorting to the
policy for indemnity, insurer then becomes the owner
of whatever may remain of the insured thing & the
insured may recover a total loss.

Requisites for valid abandonment
1. actual relinquishment by the person insured of his
interest in the thing insured
2. constructive total loss
3. abandonment must be neither partial nor conditional
4. made within a reasonable time after receipt of
reliable information of the loss
5. factual
6. made by giving notice to the insurer which may be
done orally or in writing
7. notice of abandonment must be explicit & must
specify the particular cause of the abandonment

When abandonment may be made
1. if more than 3/4 of the value of the thing insured is
actually lost
2. if more than 3/4 of the value of the thing insured
would have to be expended to recover it from the
peril
3. if it is injured to such an extent as to reduce its value
by more than 3/4
4. if the thing is insured is a ship & the contemplated
voyage cannot be lawfully performed without
incurring an expense to be insured of more than 3/4
the value of the thing abandoned.
5. If the thing insured is a ship and the contemplated
voyage cannot be lawfully performed without
incurring risk which a prudent man would not take
under the circumstances
6. If the thing insured, being cargo or freightage, the
voyage cannot be performed nor another ship
procured by the master within reasonable time &
with reasonable diligence

Right of recovery
1. abandonment is made
- recovery of TOTAL LOSS, insurer acquires all
interest of the insured
2. no abandonment
- recovery only of ACTUAL LOSS

When abandonment becomes ineffectual
- information which formed the basis of abandonment
proved to be incorrect & there was in fact no total
loss

Form of Notice of Abandonment
- no particular form; may be made orally unless
required to be in writing, even notice by telegraph is
sufficient if it complies with requirements
- if done orally, insured must submit to the insurer
within 7 days from such oral notice, a written
notice of the abandonment.

Effects of acceptance of abandonment
1. becomes irrevocable UNLESS the ground upon which
it owes made proven to be unfounded
2. conclusive upon parties
3. admission of the loss & sufficiency of abandonment

How acceptance of abandonment made
a) express
b) implied from the acts of the insurer
- mere silence of the insurer for an unreasonable
length of time after notice shall be construed as
acceptance

Effect of valuation
- conclusive between the parties provided
a) the insured has some interest at the risk
b) there is no fraud on his part.

Co-insurance
- form of insurance in which the person who insures his
property for less than the entire value is understood
to be his own insurer for the difference which exists
between value of property and amount of insurance

Requisites for application
1. insured taken is less than the actual value of the thing
insured
2. loss is partial

Marine insurance vs fire insurance

MARINE INSURANCE FIRE INSURANCE
There is always co-
insurance
No co-insurance UNLESS
expressly stipulated in the
policy

Fire insurance
- a contract by which the insurer for a consideration
agrees to indemnify the insured against loss, or
damage to, property by fire, but may include loss by
lightning, windstorm, tornado & earthquake & other
allied risks, when such risks are covered by extension
to fire insurance policies/ under separate policies

Alteration
- alteration in the use or condition of thing insured will
entitle the insurer to rescind the contract provided
following requisites are present:
a) use or condition of the thing is specifically
limited/stipulated in the policy.
b) such case/condition as limited by the policy is
altered
c) the alteration is made without the consent of the
insurer
d) alteration is made by means within the control of
the insured

COMMERCIAL LAW
INSURANCE LAW
207

2009 BAR OPERATIONS
e) the alteration increases the risk
f) violation of a policy provision

Co-insurance clause
- clause requiring the insured to maintain insurance to
an amount equal to a specified percentage of the
value of the insured property under penalty of
becoming co-insurer to the extent of such deficiency

Fall-off Building Clause
- clause in fire insurance policy that if the building or any
part thereof falls, except as a result of fire, all
insurance by the policy shall immediately cease.

Option to Rebuild Clause
- option of insurer to repair, rebuild or replace
buildings/structures wholly or partially damaged or
destroyed, instead of the payment of the loss.
- Alternative obligation, either pay the amount of the
loss/ rebuild the building damaged

CASUALTY INSURANCE
- includes all forms of instrument against loss or
liability arising from accident/mishap other than
those within the scope of other types of insurance

General division of casualty insurance
1. insurance against specified hazards which may affect
the person/property of the insured
- e.g. personal accident, robbery/theft, damage to
or loss of motor vehicle

2. insurance against specified hazards which may give
rise to liability on the part of the insured for claims for
injuries to others/damages to their property
- e.g. workmen's compensation, motor vehicle
liability

Life Insurance vs Accident/ Health Insurance

LIFE INSURANCE
ACCIDENT/HEALTH
INSURANCE
Usual object is to
provide fund for the
benefit of the
estate/heirs
beneficiaries of insured
after the death of the
insured
Protect against not a loss
of life but a loss of time,
earning capacity and
expenses

Suretyship
- contract whereby a person binds himself solidarily
with principal debtor for the fulfillment of an
obligation

Nature of liability of surety
1. solidary
2. limited to the amount of the bond
3. determined by the terms of the contract of
suretyship in relation to the principal contract
between obligor and obligee

Surety vs guarantor

SURETY
GUARANTOR
insurer of debt
insurer of solvency of
debtor
Undertakes to pay if
principal does not pay
Binds himself to pay if
principal is unable to pay
primary Secondary
No such rights
Can not be compelled to
pay the creditor unless
the latter has exhausted
all the properties of the
debtor

Surety vs Property Insurance

SURETY
PROPERTY
INSURANCE
Accessory contract Principal contract
3 parties: surety, obligor
and obligee
2 parties: insurer and
insured
Credit accommodation Contract of Indemnity
Surety can recover from
principal
No such right, only right
of subrogation
Bond can be cancelled
only with consent of the
oblige, commissioner or
the court
May be cancelled
unilaterally either by
insured or insurer on
grounds provided by law
Risk-shifting device
premium paid being in
the nature of a service
fee
Risk-distributing device,
premium paid as a
ratable contribution to a
common fund
Requires acceptance of
the oblige to be valid
No need for acceptance
by any third party

When surety entitled to service fee only
a) when contract of suretyship/ bond is not accepted by
obligee
b) when contract of suretyship/ bond is not filed with
obligee

Types of surety bonds
1. Contract bonds
a. Performance bonds
b. Payment bonds
2. Official
3. Judicial

Life Insurance
- insurance payable on the death of a person or on his
surviving a specified period or otherwise contingently
on the continuance or cessation of life.
- Nature:
1. liability absolutely certain
2. amount of insurance generally no limit
3. direct pecuniary loss not required

COMMERCIAL LAW
INSURANCE LAW
208

2009 BAR OPERATIONS
KINDS OF LIFE INSURANCE
1. GENERAL, ordinary or old line life insurance
- fixed for a premium payable, without condition,
at stated intervals, a sum certain is to be paid on
death, without condition

2. limited payment life insurance
- specified premiums are to be paid for a specified
period or until the death of insured if it occurs
before the expiration of such period, and under
which insurer is obligated to pay a specified sum
on the death of the insured

3. ENDOWMENT INSURANCE
- contract to pay a certain sum to the insured if he
lives a certain length of time, or if he dies before
that time, to some other person indicated as
beneficiary

4. TERM LIFE INSURANCE
- insurance for a term of years only, or until
insured shall have arrived at a certain age

5. ADVANCE INSURANCE
- contract which provides for the payment to the
insured of a lump sum immediately, in
consideration of his agreement to make certain
periodical payments to the insurer for a specified
period, or for that end of the period, the
performance of insured's obligation being
secured by mortgage or deed of trust

6. TONTINE INSURANCE
- form of life insurance by which the policyholder
under the same plan, that no dividends, return
premium, or surrender value shall be received for
a term of years called the "tontine period," the
entire surplus from all sources being allowed to
accumulate to the end of that period, and then
divided among all who have maintained their
insurance in force and who have survived.

No-fault Clause
- any claim for death or injury shall be paid up to
p5,000 without necessity of proving negligence or
fault, provided the following proofs of loss under
oath are submitted:
1. police report of accident
2. death certificate and evidence sufficient to
establish proper payee
3. medical report and evidence of medical or
hospital disbursement

CLAIMS UNDER CMVLI
- a claim shall lie against the insurer of the vehicle in
which the occupant is riding, mounting or
dismounting from in any other case, against the
insurer of the directly offending vehicle

Authorized driver clause
- the clause means that it indemnifies the insured
owner against loss or damage to the car but limits the
use of the insured vehicle to the insured himself or
any person who drives on his order or with his
permission
- the requirement that the person driving the insured
vehicle is permitted in accordance with the licensing
laws or other laws or regulations to drive the motor
vehicle. It is applicable only if the person driving is
other than the insured
- where the car is unlawfully and wrongfully taken
without the owner's consent or knowledge, such
taking constitutes theft, and thus, it is the theft
clause and not the "authorized driver clause" that
should apply.

Cooperation Clause
- clause in an automobile insurance policy which
provides in essence that the insured shall give all such
information and assistance as the insurer may
require, usually requiring attendance at trials or
hearings

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

Jurisdiction of the insurance commissioner
- Original exclusive jurisdiction with the Insurance
Commissioner
- Notice of claim must be filed within six months from
the date of accident. Otherwise the claim shall be
deemed waived. Action or suit must be brought in
proper cases, with the Commission or the courts
within one year from the denial of the claim,
otherwise the claimant's right of action shall
prescribe

Functions of the commissioner
1. Adjudicatory functions
2. Administrative Functions
- includes suspension or revocation of license,
power to examine books and records

Effect of death of insured through suicide
- in life insurance contract, the insurer is liable in case
of suicide in the following cases:
1. if committed after two years from the date of the
policy's issue or its last reinstatement
2. if committed after a shorter period provided in
the policy

COMMERCIAL LAW
INSURANCE LAW
209

2009 BAR OPERATIONS
3. if committed in a state of insanity regardless of
the date of the commission unless suicide is an
excepted peril

- Any stipulation extending the 2-year period is
null and void

COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE (CMVLI)
- is a protection coverage that will answer for legal
liability for losses and damages for bodily injuries or
property damage that may be sustained by another
arising from the use and operation of motor vehicle
by its owner
- Purpose: to give immediate financial assistance to
victims of motor vehicle and/or their dependents,
especially if they are poor regardless of the financial
capability of motor vehicle owners or operators
responsible for the accident sustained.

COMMERCIAL LAW
LAW ON INTELLECTUAL PROPERTY
210

2009 BAR OPERATIONS

INTELLECTUAL PROPERY
-those property rights which results from the
physical manifestation of an original thought.
(Ballantines Law Dictionary)

COVERAGE Intellectual property rights consists of:
a) Copyrights and related rights;
b) Trademarks and service marks;
c) Geographic indications;
d) Industrial designs;
e) Patents;
f) Layout-designs (Topographies) of Integrated Circuits;
and
g) Protection of Undisclosed Information. (Sec. 4)

STATE POLICY IN RESPECT OF INTELLECTUAL
PROPERTY RIGHTS (IPR)
-There is a declaration of State Policy that,
among others, the State recognizes that an effective
intellectual and industrial property system is vital to the
development of domestic and creative activity, facilitates
transfer of technology, attracts foreign investments and
ensures market access for our products, hence it shall
protect and secure exclusive rights of scientists,
inventors, artists, and other gifted citizens to their
intellectual property and creations. (Sec. 2)

INTERNATIONAL CONVENTION AND RECIPROTICY
Any person who is a national or who is domiciled or
has a real and effective industrial establishment in a
country which
1) is a party to any convention, treaty, or agreement
relating to intellectual property rights or the
repression of unfair competition to which the
Philippines is also a party, or
2) extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to benefits to the
extent necessary to give effect to any provision of
such convention, treaty, or reciprocal law, in addition
to the rights to which any owner of an intellectual
property rights is otherwise provided by law. (Sec. 3)

REVERSE RECIPROCITY OF FOREIGN LAWS
Section 231 making enforceable on nationals
of a foreign state all conditions, restrictions, limitations,
diminutions, requirements or penalties that may be
imposed by such foreign state on a Filipino national
seeking intellectual property protection.

+ Reciprocal application is not automatic
Rather, the Phils. may apply to the foreign
national those restrictions that his country imposes on
Filipino applicants

TECHNOLOGY TRANSFER ARRANGEMENTS
-contracts or agreements involving the transfer
of systematic knowledge for the manufacture of a
product, the application of a process, or rendering of a
service including management contracts; and the
transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
computer software except computer software developed
for mass market. (Sec. 4)

PRESCRIPTIVE PERIOD OF ACTIONS FOR DAMAGES
UNDER THE IPC
-No damages may be recovered after four (4)
years from the time the cause of action arose (Sec. 226)

JURISDICTION OVER DISPUTES UNDER IPC
A. Original Jurisdiction
1) Director General (IPO)
-has original jurisdiction to resolve disputes
relating to the terms of a license involving the
authors right to public performance or other
communication of his work.

2) Bureau of Legal Affairs
-has jurisdiction over the ff:
i. Opposition to applications for
registration of marks;
ii. Cancellation of trademarks;
iii. Cancellation of patents, utility models
and industrial designs;
iv. Petition for compulsory licensing of
patents;
v. Administrative Complaints for violations
of laws involving IPR where the total
damages claimed is not less than
P200,000.00

3) Documentation, Information and Technology
Transfer Bureau
-has jurisdiction to settle disputes involving
technology transfer payments

B. Appellate Jurisdiction
1) Director General
-over all decisions rendered by the ff:
Dir. of Legal Affairs
Dir. of Patents
Dir. of Trademarks
Dir. of the Documentation, Information
and Technology Transfer

2) Court of Appeals
-over decisions of the Director General in the
exercise of his appellate jurisdiction over the
decisions of the:
Dir. of Legal Affairs
Dir. of Patents
Dir. of Trademarks

3) Secretary of Trade and Industry
-over decisions of the Director General on the
exercise of his appellate jurisdiction of the

INTELLECTUAL PROPERY CODE
(R.A. No. 8293, effective January 1, 1998)

COMMERCIAL LAW
211

2009 BAR OPERATIONS
Director of Documentation, Information and
Technology Transfer; AND
-over decisions of the Director General in the
exercise of his original jurisdiction relating to the
terms of license involving the authors right.

ADMINISTRATIVE PENALTIES IMPOSED FOR
VIOLATIONS OF LAWS INVOLVING IPR
-The Director for Legal Affairs may impose the ff:
a) Issuance of a cease and desist order (CDO);
b) Acceptance of voluntary assurance compliance (VAC)
or voluntary assurance of discontinuance (VAD);
c) Condemnation or seizure of products subject of the
offense;
d) Forfeiture of properties used in the commission of
the offense;
e) Imposition of administrative fines;
f) Cancellation of permit, license, authority or
registration;
g) Withholding of permit, license, authority or
registration;
h) Assessment of damages;
i) Censure;
j) Analogous penalties or sanctions (Sec. 10.2 [b])

LAW ON PATENTS

PATENT an exclusive right acquired over an invention,
to sell, use, and make the same whether for commerce or
industry.

PATENTABLE INVENTIONS
-any technical solution of a problem in any field
of human activity which is NEW, involves an INVENTIVE
STEP and is INDUSTRIALLY APPLICABLE shall be
patentable. The patentable invention may be, or may
relate to, a product, or process, or an improvement of any
of the foregoing. (Sec. 21)

Requirements:
1) Technical solution of a problem in any field of
human activity
2) Novelty that which does not form part of a prior art
consists of:
a) that which has been made available to the public
anywhere in the world before the filing date or
the priority date of the application
b) that which forms part of an application whether
for patent, utility or industrial design, effective in
the Philippines, provided that:
i. the inventors or applicants are not the
same
ii. the contents of the application are
published in accordance with the
requirements of patent application
rules.
iii. the filing date of the prior art is earlier.
3) Inventiveness/Inventive Step
-an invention involves an inventive step if, having
regard to prior art, it is not obvious to a person skilled in
the art of the time of the filing date or priority date of the
application claiming the invention. (Sec. 26)

4) Industrial Applicability
-an invention that can be produced and used in
any industry. (Sec. 27)

NON-PATENTABLE INVENTIONS
The following shall be excluded from patent
protection:
a) Discoveries, Scientific Theories and Mathematical
Methods;
b) Schemes, rules and methods of performing mental
acts, playing games or doing business, and
programs for computer;
c) Methods for treatment of the human or animal
body by surgery or therapy and diagnostic
methods practiced on the human or animal body;
d) Plant varieties or animal breeds of essentially
biological process for the production of plants or
animals;
e) Aesthetic creations;
f) Anything which is contrary to public order or
morality (Sec. 22)

RIGHT TO A PATENT
The right to a patent belongs:
a) to the inventor, his heirs, or assigns
b) when 2 or more persons have made the invention
separately and independently to them jointly
c) if two (2) or more persons have made the invention
separately and independently of each other to the
person who filed an application for such invention
(FIRST TO FILE RULE)
d) where 2 or more applications are filed for the same
invention to the applicant who has the earliest filing
date or the earliest priority date (FIRST TO FILE
RULE) (Sec. 29)
e) in case of inventions created pursuant to a
commission to the person who commissions the
work UNLESS agreed otherwise.
f) in case an employee made the invention in the course
of his employment, the patent shall belong to:
the employee if invention not part of his
regular duties even if he uses the time, facilities
and materials of the employer; OR
the employer if the invention is the result of the
performance of his regularly assigned duties
unless agreed otherwise.

RIGHTS ACQUIRED BY THE PATENTEE
The patentee acquires the following rights under
his patent
a) Where the subject matter of a patent is a product, to
restrain, prohibit and prevent any unauthorized
person or entity from making, using, offering for sale,
selling or importing that product;
b) Where the subject matter of a patent is a process, to
restrain, prevent or prohibit any unauthorized person
or entity from using the process, and from
manufacturing, dealing in, using or offering for sale,

COMMERCIAL LAW
212

2009 BAR OPERATIONS
or importing any product obtained directly or
indirectly from such process;
c) to assign, or transfer by succession the patent, and to
conclude licensing contracts for the same (Sec. 71)

CONTENTS OF PATENT APPLICATION
A patent application shall contain:
1) a request for the grant of patent;
2) a description of the invention;
-the disclosure of the invention must be in a manner
sufficiently clear and complete for it to be carried out
by a skilled in the art.
3) Drawings necessary for the understanding of the
invention;
4) One or more claims
5) An abstract (Sec. 32)

+ must contain relevant information as to the
identity of the person (no anonymous person)
+ if the applicant is not the inventor; he must show
proof of authority to seek application for
registration

UNITY OF INVENTION
-every application for patent registration must
contain an application over a simple invention or several
inventions but must form part of a single general
inventive concept

PROCEDURE FOR THE GRANT OF PARENT
a) According a filing date to the application (Sec. 41);
b) Examination of compliance by applicant with the
formal requirements specified in Sec. 32, i.e.,
contents of application (Sec. 42);
c) Classification of application and search for prior art
(Sec. 43)
d) Publication of patent application in the IPO Gazette
(Sec. 44);
e) Inspection of the application documents by any
interested party and written observations by any
third party concerning the patentability of the
invention (Secs. 44.2 and 47);
f) Written request by the applicant, within 6 months
from the date of publication of his patent application,
for the substantive examination by the IPO of his
application. (Sec 48);
g) Grant of the patent (Sec. 50), or refusal of the
examiner to grant the patent (Sec. 51); in the latter
case, the refusal may be appealed to the Director of
the Bureau of Patents;
h) Publication of the grant of patent in the IPO Gazette
(Sec. 52)

TERM OF A PATENT, UTILITY MODEL, INDUSTRIAL
DESIGN
a) Patent 20 yrs from the filing date of application,
without renewal
b) Utility model 7 yrs, w/out renewal
c) Industrial design 5 yrs, renewable twice

UTILITY MODELS
-models of implement or tools of any industrial
product even if not possessed of the quality of invention
but which is of practical utility

INDUSTRIAL DESIGN
-any composition of lines or colors or any three-
dimensional form, whether or not associated with lines or
colors provided that such composition or form gives a
special appearance to and can serve as pattern for an
industrial product or handicraft.

CANCELLATION OF PATENTS
Who may file?
any person
IPO motu proprio

Grounds:
a) That the patent is invalid (Sec. 81);
b) That what is claimed as the invention is not new or
patentable;
c) That the patent does not disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
d) That the patent is contrary to public order or
morality. (Sec. 61)
e) failure to make payments of annual fees or dues

Where to file?
BLA if in violation of IPC (administrative)
RTC otherwise

INFRINGEMENT
-the making, using, offering for sale, selling or
importing a patented product or a product obtained
directly or indirectly from a patented process or the use of
a patented process without the authorization of the
patentee. (Sec. 76)

TEST OF PATENT INFRINGEMENT
1) Literal Infringement resort is had to the words of
the claim.
2) Doctrine of Equivalents if two devices do the same
work in substantially the same way, the same result,
and produce substantially the same result, they are
the same even though they differ in name, form, or
shape.

REMEDIES IN CASE OF INFRINGEMENT
A) File civil case for the following purposes:
1) To recover from the infringer such damages as
the court may award considering the
circumstances of the case provided it shall not
exceed 3 times the amount of the actual
damages sustained plus attorneys fees and
other expenses of litigation;
2) To secure an injunction for the protection of his
rights;
3) To receive a reasonable royalty, if the damages
are inadequate or cannot be readily ascertained
with reasonable certainty;

COMMERCIAL LAW
213

2009 BAR OPERATIONS
4) To have the infringing goods, materials and
implements predominantly used in the
infringement disposed of outside the channels of
commerce, or destroyed without compensation;
5) To hold the contributory infringer jointly and
severally liable with the infringer.

B) File criminal case within 3 years from date of
commission of the crime for repetition of
infringement (Sec. 84)

LAW ON TRADEMARKS

TRADEMARK anything which is adopted and used to
identify the source of origin of goods, and which is
capable of distinguishing them from goods emanating
from a competitor

SERVICE MARK distinguishes the services of an
enterprise from the service of other enterprises. It
performs for services what a trademark does for goods.

COLLECTIVE MARK - any visible sign designated as such
in the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods and services
of different enterprises which use the sign under the
control of the registered owner of the collective mark
(Sec. 121.2)

TRADE NAMES the person (whether natural or
juridical) who does business and produces the goods or
the services is designated by a trade name.
-Under the law, there is no need to register trade
names in order to secure protection for them.

TRADE DRESS involves the total image of a product,
including such features as size, shape, color or color
combinations, texture, and/or graphics.

HOW MARKS ARE ACQUIRED
-Under RA 8293, the rights in a mark shall be
acquired through registration made validly in accordance
with its provisions. (Sec. 122)
-This proposition of law, however, may not be
converted for it is not true that where there is no
registration, there is no protection.
Acquisition through use
-Whether or not a registered trademark is
employed, when a person has identified in the
mind of the public the goods he manufactures or
deals in his business or services from those of
others, such a person has a property right in the
goodwill of said goods or services which will be
protected in the same manner as other property
rights (Sec. 168.1)

RIGHTS CONFERRED
-the owner of a registered mark shall have the
exclusive right to prevent all third parties not having the
owners consent from using in the course of trade
identical or similar signs or containers for goods or
services which are identical or similar to those in respect
of which the trademark is registered where such use
would result in a likelihood of confusion. (Sec. 147)

DURATION
-the certificate of registration of a trademark
shall be ten (10) years from the filing date of application
provided the registrant shall file a declaration of actual
use within a year from the 5
th
anniversary of registration
date (Sec. 145)
-renewable for another 10 yrs. (Sec. 146)

NON-REGISTRABLE TRADEMARKS, TRADE NAMES
AND SERVICE MARK

A mark cannot be registered if it:
a) Consists of immoral, deceptive or
scandalous matter, or matter which may disparage or
falsely suggest a connection with persons, living or dead,
institutions, beliefs, or national symbols, or bring them
into contempt or disrepute;
b) Consists of the flag or coat of arms or other
insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any simulation
thereof;
c) Consists of a name, portrait or signature
identifying a particular living individual except by his
written consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life of
his widow, if any, except by written consent of the
window;
d) Is identical with a registered mark
belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
(i) The same gods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
e) Is identical with, or confusingly similar to, or
constitutes a translation of a mark which is considered by
the competent authority of the Philippines to be well-
known internationally and in the Philippines, whether or
not it is registered here, as being already the mark of a
person other than the applicant for registration, and used
for identical or similar goods or services: provided, that in
determining whether a mark is well-known, account shall
be taken of the knowledge of the relevant sector of the
public, rather than of the public at large, including
knowledge in the Philippines which has been obtained as
a result of the promotion of the mark;
f) Is identical with, or confusingly similar to, or
constitutes a translation of a mark considered well-known
in accordance with the preceding paragraph, which is
registered in the Philippines with respect to goods or
services which are not similar to those with respect to
which registration is applied for: provided, that use of the
mark in relation to those goods or services would indicate
a connection between those goods or services, and the
owner of the registered trademark: Provided further that
the interests of the owner of the registered mark are
likely to be damaged by such use;

COMMERCIAL LAW
214

2009 BAR OPERATIONS
g) Is likely to mislead the public, particularly as
to the nature, quality, characteristics or geographical
origin of the goods or services;
h) Consists exclusively of signs that are generic
for the goods or services that they seek to identify;
i) Consists exclusively of signs or of
indications that have become customary or usual to
designate the goods or services in everyday language or
in a bonafide and established trade practice;
j) Consists exclusively of signs or indications
that may serve in trade to designate the kind, quality,
quantity, intended purpose, value, geographical origin,
time or production of the goods or rendering of the
services, or other characteristics of the goods or services;
k) Consists of shapes that may be necessitated
by technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value;
l) Consists of color alone, unless defined by a
given form; or
m) Is contrary to public order or morality (Sec.
123)

FILING DATE OF AN APPLICATION
-The filing date of an application shall be the
date on which the office received the following
indications and elements in English or Filipino:
a) An express or implicit indication that the registration
of a mark is sought;
b) Indications sufficient to contact the applicant or his
representative, if any;
c) Indications sufficient to contact the applicant or his
representative, if any;
d) A reproduction of the mark where registration is
sought; and
e) The list of the goods or services for which the
registration is sought. (Sec. 127.1)

+ NO filing date shall be accorded until the
required fee is paid (Sec. 127.2)

PROCEDURE FOR REGISTRATION
a) Examination to determine whether the application
satisfies the requirements for the grant of a filing
date.
b) Examination to determine whether the application
meets the requirements of Sec. 124 and the mark is
registrable under Sec. 123.
c) Denial of the application or amendment thereof or
publication of the application;
d) Opposition to the application; notice; hearing;
decision by examiner; appeal to the Director of
Bureau of Trademarks; appeal to the IPO Director
General; appeal to the CA;
e) Issuance of Certificate of registration
f) Publication in the IPO Gazette of the fact of
registration

CANCELLATION OF TRADEMARK OR TRADENAME
Who may file?
any person who believes that he is and will
be damaged by the registration of a mark

Where to file?
BLA
Grounds:
a) Mark becomes generic for goods for which it is
registered;
b) Abandonment of the mark;
c) Registration obtained fraudulently or contrary to
provisions of RA 8293;
d) Mark used by, or with permission, or, registrant;
e) Failure to use the mark within the Philippines for 3
uninterrupted years or longer.

EFFECTS OF NON-USE
may be excused if caused by circumstances arising
independently of the will of the trademark owner,
such as military coup, or political changes that
impede commerce
Registration is an administrative act declaratory of a
pre-existing right that does not, of itself, perfect a
trademark, for what does is actual use
Non-use is a ground for removing a mark from the
register

DOCTRINE OF SECONDARY MEANING
-While a generic, indicative or descriptive mark
will, as a general rule, be denied registration, there is a
circumstance that will allow it to be registered. Under the
doctrine of secondary meaning, when a mark has become
distinctive of the applicants gods in commerce and, in the
mind of the public, indicates a single source of consumers,
it may be registered.

WHAT CONSTITUTES AN INFRINGEMENT
-Under RA 8293, any person shall, without the
consent of the owner of the registered mark:
1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of a
registered mark or the same container or a
dominant feature thereof in connection with
the sale, offering for sale, distribution,
advertising any goods or services including
other preparatory steps necessary to carry
out the sale of any goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive; or
2) Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such
reproduction, counterfeit, copy, or colorable
imitation to labels, signs, prints, packages,
wrappers, receptacles, or advertisements
intended to be used in commerce upon or in
connection with the sale, offering for sale,
distribution, or advertising of goods or
services on, or in connection with which
such use is likely to cause confusion, or to
cause mistake, or to deceive, shall be liable
for infringement. (Sec. 155)

TEST OF TRADEMARK INFRINGEMENT

COMMERCIAL LAW
215

2009 BAR OPERATIONS
1) Dominancy Test consists in seeking out the main,
essential or dominant features of a mark.
2) Holistic Test takes stock of the other features of a
mark, taking into consideration the entirety of the
marks.

DIFFERENTIATED FROM UNFAIR COMPETITION
1) Cause of action: in infringement, the cause of action is
the unauthorized use of a registered trademark; in
unfair competition, it is the passing off of ones goods
as those of another merchant.
2) Fraudulent intent is not necessary in infringement,
but necessary in UC.
3) Registration of trademarks: in infringement, it is a pre-
requisite; in UC, it is not required.
4) Class of goods involved: in infringement, the goods
must be of similar class; in UC, the goods need not be
of the same class.

+ infringement is a form of unfair competition

REMEDIES AVAILABLE IN CASE OF INFRINGEMENT
OF A REGISTERED MARK
a) Sue for damages (Sec. 156.1);
b) Have the infringing goods impounded (Sec. 156.2);
c) Ask for double damages (Sec. 156.3)
d) Ask for injunction (156.4)
e) Have the infringing goods disposed of outside the
channels of commerce (Sec. 157.1)
f) Have the infringing goods destroyed (Sec. 157.1)
g) File criminal action (Sec. 170);
h) Administrative Sanctions

UNFAIR COMPETITION
-any person who shall employ deception or any
other means contrary to good faith by which he shall pass
off the goods manufactured by him or in which he deals,
or his business, or services for those of the one having
established such goodwill, or who shall commit any acts
calculated to produce said result, shall be guilty of unfair
competition.

How Committed
a) Making ones goods appear as the goods of another;
b) Use of artifice or device to induce the false belief that
ones goods are those of another;
c) False statements in the course of trade; or
d) Any act contrary to good faith calculated to discredit
anothers goods

TEST OF UNFAIR COMPETITION
-The test is whether certain goods have been
clothed with an appearance likely to deceive the ordinary
purchaser exercising ordinary care.

REMEDIES AGAINST UNFAIR COMPETITION
a) Damages which may either be:
reasonable profit which would have realized, or
actual profits collected by the defendant, or
a certain percentage over the gross sales of
defendant in case of the measure of damages
cannot be readily ascertained;
b) Damages may be doubled in cases where actual
intent to mislead the public or to defraud the
complaint is shown;
c) Impounding of sales invoices and other documents
evidencing sales;
d) Injunction
e) Destruction of goods found to be infringing, and all
paraphernalia.

LAW ON COPYRIGHT

COPYRIGHT system of legal protection an author
enjoys in the form of expression of ideas

BASIC PRINCIPLES
Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as
well as their content, quality or purpose (Sec. 172.2)
Protection extends only to the expression of the idea,
not to the idea itself or to any procedure, system,
method or operation, concept or principle, discovery
or mere data.

CREATION OF A WORK
A copyright work is created when the two(2)
requirements are met:
1) Originality does not mean novelty or ingenuity,
neither uniqueness nor creativity. It simply means
that the work owes its origin to the author
2) Expression there must be fixation To be fixed, a
work must be embodied in a medium sufficiently:
permanent; or
stable
to permit it to be perceived, reproduced, or otherwise
communicated for a period of more than transitory
duration.
-if it is not required that the medium be visible as
long as there is a possibility of retrieval, then there is
fixation
-it is fixation that defines the time from when
copyright subsists. Before fixation, there can be no
infringement.

WORKS PROTECTED BY COPYRIGHT
A. Original Work - Literary and artistic works are
original intellectual creations in the literary and
artistic domain protected from the moment of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality and
purpose, and shall include in particular:
a) Books, pamphlets, articles and other writings
b) Periodicals and newspapers
c) Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form
d) Letters

COMMERCIAL LAW
216

2009 BAR OPERATIONS
e) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb
shows
f) Musical compositions, with or without words
g) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other works
of art; models or designs for works of art
h) Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art.
i) Illustrations, maps, plans, sketches, charts and
three-dimensional works relative to geography,
topography, architecture or science
j) Drawings or plastic works of a scientific or
technical character
k) Photographic works including works produced
by a process analogous to photography; lantern
slides
l) Audiovisual works and cinematographic or any
process for making audio-visual recordings
m) Pictorial illustrations and advertisements
n) Computer programs
o) Other literary, scholarly, scientific and artistic
works (Sec. 172)

B. Derivative Works the following derivative works
shall also be protected:
a) Dramatizations, translations, adaptations,
abridgments, arrangements, and other alterations
of literary works
b) Collections of literary, scholarly or artistic works,
and compilations of data and other materials which
are original by reason of the selection or
coordination or arrangement of their contents.
(Sec. 173)

WORKS NOT PROTECTED
-The following works are not protected:
1) Any idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such,
even if expressed, explained, illustrated, or
embodied in a work;
2) News of the day and other facts having the character
of mere items of press information;
3) Any official text of a legislative, administrative or
legal nature, as well as any official translation
thereof. (Sec. 175)
4) Any work of the Government of the Philippines. (Sec.
176)
-however, prior approval of the government
agency or office wherein the work is created shall be
necessary for exploitation of such work for profit. Such
agency or office, may, among other things, impose as a
condition the payment of royalties
5) Pleadings;
6) Decisions of courts and tribunals.
-This pertains to the original decisions not to the
SCRA published in volumes since these are protected
under derivative works.

RIGHTS OF AN AUTHOR
(Author a natural person who has created the
work.)

A. Economic Rights (Sec. 177)
1) Right to reproduce;
2) Right to create derivative works;
3) Right to first public distribution or first sale;
4) Right to rent out the original or a cop of an
audiovisual or cinematographic work;
5) Right to public performance;
6) Right to other communication of the work to the
public.

B. Moral Rights (Sec. 193)
1) Right of attribution or paternity right;
2) Right of alteration or non-publication;
3) Right to preservation of integrity
4) Right not to be identified with work of others or
with distorted work.
Term of moral right
-lifetime of the author and 50 years after his
death
Waiver of moral right
1) by a written instrument (Sec. 195)
2) by contribution to a collective work unless
expressly reserved (Sec. 196)

PRINCIPLE OF AUTOMATIC PROTECTION
Under the Berne Convention, the enjoyment and
exercise of copyright, including moral rights, shall not be
the subject of any formality.

OWNERSHIP OF COPYRIGHT
1. Single creator copyright belongs to the author of
the work, his heirs or assigns.
2. Joint creation copyright belongs to the co-authors
jointly as co-owners. But if the work consists of
identifiable parts, the author of each part owns the
part that he has created.
3. Employees creation copyright belongs to the
employee if the creation is not part of his regular
duties even if he uses the time, facilities and
materials of the employer; otherwise it belongs to
the employer
4. Commissioned work the work belongs to the person
commissioning but the copyright remains with the
creator unless there is a written stipulation to the
contrary.
5. Cinematographic works the producer has copyright
for purposes of exhibition; for all other purposes, the
producer, the author of the scenario, the composer,
the film director, the author of the work are the
creators.
6. Anonymous and pseudonymous works the publishers
shall be deemed the representative of the author
unless:
a. the contrary appears
b. the pseudonyms or adopted name leaves no
doubt as to the authors identity or
c. if the author discloses his identity (Sec. 179).

COMMERCIAL LAW
217

2009 BAR OPERATIONS
7. Collective works the contributor is deemed to have
waived his right unless he expressly reserves it. (Sec.
196)
Collective work a work created by two or more
persons at the initiative and under the direction of
another with the understanding that it will be
disclosed by the latter under his own name and that
the contributions of natural persons will not be
identified. (Sec. 171.2)
8. In case of transfers, the transferee shall own one or
more or all the economic rights transferred provided:
a. the assignment, if inter vivos, be in writing (Sec.
180.2)
b. the assignment be filed with the National Library
upon payment of the prescribed fee. (Sec. 182)

DURATION OF COPYRIGHT
Literary artistic works and derivative works of a
SINGLE CREATOR - lifetime of the creator and for 50
years after his death
Joint creation lifetime of last surviving co-creator
and for 50 years after his death.
Anonymous or a work under a pseudonym not
identifiable with the true name of the creator 50
years after the date of their first publication.
+ Except where, before the expiration of said
period, the author's identity is revealed or is no
longer in doubt, the rule for single and joint
creation shall apply
Photographic works 50 years from the publication of
the work, or from making the same term is given to
audiovisual works produced by photography or
analogous processes.
Work of Applied Art 25 years from the date of
making
Newspaper Article lifetime of the author and 50
years after his death
+ A pure news report will no longer find protection
under he new law, BUT a column or published
comment will

The work of performers not incorporated in
RECORDING, PRODUCTS OF SOUND IMAGE
RECORDINGS, and BROADCASTS, are protected for
periods of 50 years, 50 years, and 20 years,
respectively, counted from the end of the year of
performance, recording, or broadcasts, respectively.

The term of protection shall be counted from the
first day of January of the year following the death or of last
publication (Sec. 214)

LIMITATIONS TO THE RIGHTS ON COPYRIGHT
1) Private performance, private and personal use
applicable only when a work has been lawfully made
accessible to the public.

Personal Use
-making a single reproduction, adaptation,
arrangement or other transformation of anothers
work exclusively for ones own individual use in such
cases as personal research, learning or amusement

Private Use
-making a reproduction, adaptation or other
transformation of it, in a single person as in the case
of personal use but also for a common purpose by a
specific circle of persons only.

2) Fair Use of a Copyrighted Work
Fair Use - A privilege in persons other than the
owner of the copyright to use the copyrighted
material in a reasonable manner without its consent,
notwithstanding the monopoly granted to the owner
by the copyright.
-the doctrine of fair use is meant to balance the
monopolies enjoyed by the copyright owner with
interests of the public and of society.

CRITERIA TO DETERMINE WHETHER USE IS FAIR OR
NOT:
a) Purpose and the character of the use
b) Nature of the copyrighted work
c) Amount and substantially of the portions used
d) Effect of the use upon the potential market of the
copyrighted work (Sec. 185)

THE FAIR-USES OF PROTECTED MATERIAL ARE:
a) Criticizing, commenting, and news reporting;
b) Using for instructional purposes including producing
multiple copies of classroom use, for scholarship,
research and similar purposes (Sec. 185)

3) WORKING OF ARCHITECTURE (Sec. 186)
-include the right to control the erection of any
building which reproduces the whole or a substantial part
of the work either in its original or in any form
recognizably derived from the original; Provided, that the
copyright in any such work shall not include the right to
control the reconstruction, or rehabilitation in the same
style as the original of a building to which that copyright
relates

4) REPRODUCTION OF PUBLISHED WORK
-exclusively for research and private study.

5) REPROGRAPHIC REPRODUCTION BY LIBRARIES
-any library or archive whose activities are not for
profit may, without the authorization of the author of
copyright owner, make a single copy of the work by
reprographic reproduction.

6) REPRODUCTION OF COMPUTER PROGRAMS
-allowed on the ff. conditions:
a) only one copy is made;
b) lawful owner made the copy;
c) purpose of which the reproduction is made is
legal like:
use to which the program is made and for
which it was purchased demand the
reproduction of a copy; or

COMMERCIAL LAW
218

2009 BAR OPERATIONS
the reproduction of a copy is necessary to
guarantee against loss or destruction (Sec.
189.1)

7) IMPORTATION FOR PERSONAL PURPOSES
-The importation of a copy of a work by an individual
for his personal purposes shall be permitted without
the authorization of the author of, or other owner of
copyright in, the work under the following
circumstances:
a) Copies of the work are not available in the
Philippines and:
i. not more than one copy at one time is
imported for strict individual use;
ii. importation is by authority and for the
use of Philippine Government; or
iii. Religious, charitable, or educational
society imported not more than 3 copies
per title provided they are not for sale.
b) Copies form part of libraries and personal
baggage belonging to persons or families
arriving from foreign countries and are not
intended for sale: Provided, that such copies do
not exceed three (3). (Sec. 190)

REMEDIES IN CASE OF INFRINGEMENT:
1) Injunction to prevent infringement
2) Damages assessed on the basis of the proof alleged
by the plaintiff of sales made by the defendant of the
infringing work minus whatever costs the defendant
may be able to prove and appreciated by the court.
3) Delivery under oath of all implements employed in the
production of the infringing products themselves and
the infringing items, for impounding or destruction as
the court may order.
4) Payment of moral and exemplary damages in the
discretion of court.
5) Criminal Action

DIFFERENCE BETWEEN COPYRIGHT, PATENT AND
TRADEMARK
1) Subject Matter of the Right:
Copyright literary, scientific or artistic work;
Patent new, useful, and industrially applicable
inventions;
Trademark goods manufactured or produced

2) Where Right Registered:
Copyright National Library
Patent and Trademark IPO

3) Duration of Right:
Patent 20 years from filing or priority date
Trademark 10 years
Copyright Generally up to 50 years after the death
of the author.

COMMERCIAL LAW
TRANSPORTATION LAWS
219

2009 BAR OPERATIONS

COMMON CARRIERS (ARTICLES 1732-1766)
- are persons, corporation, firms, or associations
engaged in carrying or transporting passengers or
goods or both, by land, water, or air for
compensation of offering their services to the public.

Extraordinary diligence is required to common carriers
in transporting goods and passengers
Reasons:
1. nature of the business
2. public policy

Registered owner primarily and solidarily with driver
under the KABIT SYSTEM. Kabit system is contrary to
public policy; therefore, void and inexistent.

CIRCUMSTANCES UNDER WHICH COMMON
CARRIERES CANNOT BE HELD LIABLE FOR THE
LOSS/DESTRUCTION OF GOODS:
1. flood, storm, earthquake, or other natural calamities
2. act of public enemy in war, either international or
local
3. act or omission of the shipper or owner of the goods
4. character of the goods or defects of the packing
5. order of competent authority

Extraordinary diligence lasts from the time the cargoes
are loaded in the vessel until they are discharged and
delivered to the consignee.

Air carriers can terminate services of pilots for serious
misconduct and drunkenness because of its extraordinary
diligence.

INSTANCES WHICH ARE NOT CASO FORTUITO:
1. hijacking
2. acts of strangers like thieves or robbers acted with
grave or violence
3. accidents due to defects of carrier
4. where tie blow-out

- Fire is not a natural disaster
- Notice of arrival of goods amounts to constructive
delivery
- Shipper bound to observe all diligence in obtaining
delivery of goods
- Common Carriers may be exempted from
responsibility PROVIDED that natural disaster is the
proximate and only cause of the loss.

STIPULATIONS LIMITING LIABILITY IS VALID
PROVIDED THAT:
1. the stipulation be in writing signed by both parties
2. the stipulation be supported by a valuable
consideration other than the service rendered by
common carrier
3. the stipulation be reasonable, just and not contrary to
public policy

SOME VALID STIPULATIONS LIMITING CARRIER'S
LIABILITY:
1. account as strikes or riot
2. value of the goods appearing in bill of lading UNLESS
shipper declares a greater value
3. contract fixing the sum that may be recovered

VOID STIPULATIONS LIMITING CARRIER'S LIABILITY:
1. the goods are transported at the risk of the shipper
2. that the shipper is not liable for any loss or
destruction of the goods
3. that the common carrier need not observed any
diligence and less than that of good father of a family
4. that the common carrier shall not be responsible for
any acts of its employee

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

The act of the thief or robbers who entered the common
carrier's vehicle is not deemed force majeure UNLESS it is
done with the use of arms or through irresistible force.

A common carrier is bound to carry the passengers safely
as far as human care and foresight can provide using the
utmost diligence of a very cautious person with a regard
of circumstances.

In case of death or injuries to passengers, common
carriers are presumed to be at fault UNLESS proved that
they observe extra ordinary diligence.

LAST CLEAR CHANCE
- this principle applies only in a suit between owners
and drivers of two colliding vehicles. This is not
applicable to Contract of Carriage.

Carrier not ordinarily liable for injuries to passengers due
to fires, and explosions caused by articles brought into
conveyance by other passengers.

Ticket is a complete written contract by and between
the shipper and passenger for it contains:
1. consent of the contracting parties
2. cause or consideration which is the fare paid by the
3. passengers
4. object which is the transportation of the passenger
from
5. the place of departure to the place of destination.

Reduction of fare does not justify any limitation of the
common carrier's liability.

Passenger bound notwithstanding his failure to sign plane
ticket containing stipulation limiting liability known as
contract of adhesion.

TRANSPORTATION LAWS

COMMERCIAL LAW
TRANSPORTATION LAWS
220

2009 BAR OPERATIONS
The extraordinary diligence required for carriage of
passengers cannot be dispensed with:
1. by stipulation
2. by posting of notices
3. by statement of tickets
4. otherwise however as an exception, parties may
stipulate limiting carrier's liability where the
passenger is carried gratuitously

Common Carrier is liable for damages for defects of its
equipment.
Common Carrier is liable for the misconduct of its
employees done in their own interest.
Reason: the servant is clothed with the delegated
authority and charged with duty by the carrier to execute
his undertakings to carry the passenger safely.

Carrier exempt from acts of employees not done in line of
duty.

The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid injury to
himself.

EFFECTS OF NEGLIGENCE- where the proximate cause
of the death/ injury to the passenger is his own
negligence, common carrier is exempted from liability.

EFFECT OF PASSENGER'S CONTRIBUTORY
NEGLIGENCE- passenger's contributory negligence does
not justify carrier's exemption from liability. However, the
damages will be equitably reduced.

A common carrier is responsible for injuries suffered by a
passenger on account of the lawful acts/negligence of
other passengers or of strangers provided that the
employees could have prevented the act or omission
through the exercise of a good father of a family.
Degree of diligence required of carriers employees-
merely that of the good father of a family or ordinary
diligence.

Liability of air carrier under Warsaw Convention of
October 12,1929, article 17, the carrier shall be liable for
damages sustained in the event of death or injury of a
passenger if accident took place on board the aircraft or in
the course of embarking or disembarking.

Article 18(1), the carrier shall be liable for damages
sustained in the event of destruction or loss of or of
damage to any checked baggage or any goods in the
course of transportation.
(2), the transportation of air shall comprise the period
during which the baggage or goods are in the charge of
the carrier whether an airport or on board an aircraft or in
case of landing outside an airport.
(3), the period of transportation by air shall not extend to
any transportation by land, sea, or river outside an
airport.

Article 19, the carrier shall be liable for damages
occasioned by delay in transportation by air of
passengers, baggage, or goods.

DAMAGES RECOVERABLE WHEN DEATH OCCURS
DUE TO COMMISSION OF A CRIME:
1. indemnity for death of a victim
2. indemnity for loss of earning
3. moral damages
4. exemplary damages
5. attorney's fees and expenses of litigation,
6. interest and properties

FACTORS TO BE CONSIDERED IN AWARDING
DAMAGES ARISING FROM DEATH:
1. number of years on the basis of which the damages
shall be computed
2. rate at which the losses sustained should be fixed

For fixed indemnity for death, there is no need to
interrogate witness.

Common carrier not liable for moral damages to
passenger s injured due to negligence of driver.

Carrier is liable when it issues to passenger a confirmed
ticket for a particular ticket if he is not put in that flight.

Carrier liable only for damages that are natural and
probable consequence and breach of contract which
includes medical, hospital and other expenses.

ITEMS INCLUDED IN ACTUAL DAMAGES:
1. income to be earned upon completion of studies
2. the sum being carried by deceased passenger which
was lost
3. amount spend to her funeral
4. attorney's fees and court expenses
5. loss of the merchandise carried by the deceased
6. loss of baggage containing medicine, boxes, and
suitcases of personal belongings

EXCEPTIONS TO RULE THAT CARRIER NOT LIABLE
FOR MORAL DAMAGES IN BREACH OF CONTRACT:
1. where the mishap results in the death of passenger
2. where it is proved that the carrier is guilty of fraud or
bad faith even if death does not result
3. where the passenger suffers social humiliation,
wounded feelings, anxiety and mental anguish

Surviving passenger is not entitled to moral damages.
Mere carelessness of the carrier does not per se constitute
an inference of malice or bad faith on its part.

Carrier subsidiary liable for moral damages in actions ex
delicto.

Exemplary damages cannot be recovered as a matter of
right.

COMMERCIAL LAW
TRANSPORTATION LAWS
221

2009 BAR OPERATIONS
Nominal and exemplary damages awarded for willful
breach of contract committed through agent or
employee.

Carrier incurring only delay not liable for moral and
exemplary damages but only to the limited amount
printed in the plane ticket.

Exemplary damages is allowable under Kabit System.

Common Carrier in Nominal Damages for failure of carrier
to bring passenger to his destination but mere violation of
a Contract of Carriage does not warrant recovery for
moral damages.

In case of breach of the carrier's contractual obligation to
carry his passenger safely to their destination, the carrier
is solidarily liable for his driver's negligence. Exercise of
due diligence in selecting driver is not a defense.

Preponderance of evidence sufficient to prove civil
liability arising from negligence.

OVER LAND TRASPORTATION
(arts. 349379, Code of Commerce)

Effect of Civil Code on the provisions of the Code of
Commerce on Overland Transportation
- The NCC does not expressly repeal the provisions of
the Code of Commerce on overland transportation.
Instead, it makes such provision suppletory to the
provisions of the NCC on common carriers

Bill of Lading, Defined
- Written acknowledgement of receipt of goods and
agreement to transport them to a specific place to a
person named or to his order or bearer.
- Ambiguity is construed against the carrier, the
contract being one of adhesion.
- Not essential to contract.

Kinds of Bills of Lading
(1). Negotiable bill of Lading one in which it is
stated that the goods referred to therein will be delivered
to the bearer, or to the order of any person named in such
document.
(2). NonNegotiable bill of Lading the goods
referred to therein will be delivered to a specified person.
(3). Clean bill of Lading One which does not
indicate any defect in the goods
(4). Foul bill of Lading Contains a notation
indicating that the goods are in bad Condition.
(5). Spent bill of Lading Covers goods that have
already been delivered by the carrier without a surrender
of a signed copy of the Lading.
(6). Through bill of Lading Issued by a carrier
who is obliged to use the facilities of other carriers.
(7). On Board bill of lading one in which it is
stated that the goods have been received on board the
vessel which is to carry the goods.
(8). Received for Shipment bill of lading it is
stated that the goods have been received for shipment
with or without specifying the vessel by which the goods
are to be shipped.
(9). Custody bill of Lading issued by the carrier
to the whom the goods have been delivered for shipment
but the vessel indicated in the bill of leading which is to
carry the goods has not yet reached the port where the
goods are held for shipment.
(10). Port bill of Lading one which is issued by
the carrier to whom the goods have been delivered, and
the vessel to carry the goods is already in the port where
the goods are held for shipment.

ThreeFold nature of bills of Lading
(1). A contract in itself and the parties are bound by its
terms;
(2). A receipt; and
(3). A symbol of the covered by it
+ They are also documents of title, and if
negotiable in form they can constitute
negotiable documents of title.

Legal effect of the Issuance of Bill of Lading
Bill of lading constitute the legal evidence of the contract
between the shipper and the carrier by the contents of
which the disputes which may arise regarding their
execution and performance shall be decided, no
exception being admissible other than those of falsity and
material error in the drafting.

Effect of absence of a bill of lading
It does not preclude liability on a contract of
transportation. The disputes shall be determines by the
legal proofs which the parties may present in support of
their respective claims, according to the general
provisions established in the Code for commercial
contracts.

When responsibility of carrier begins
The responsibility of carrier commences from the moment
he receives the merchandise. The Delivery to him must be
made either to him personally, or through his duly
authorized agent.

Right to refuse packages
Gen. Rule: a common carrier cannot ordinarily refuse to
carry a particular class of gods to the prejudice of the
traffic in those goods.
Exception: However, under Art. 365, carrier are
authorized to refuse packages if they are unfit for
transportation.

Time for delivery of goods
Where no period fixed
The carrier shall be bound to forward them
in the first shipment of the same or similar
goods, which he makes to the points where
he must deliver them. Should he not do so,

COMMERCIAL LAW
TRANSPORTATION LAWS
222

2009 BAR OPERATIONS
the damages caused by the delay shall be for
his account.
Where for delivery of goods
The carrier must deliver the goods within the
time fixed. For failure to do so, the carriers
shall pay the indemnity stipulated in the bill
of lading. Also, damages shall be paid if the
carrier refuses to pay the stipulated
indemnity or is quality of fraud in the
fulfillment of his obligation.

Limitation as to carriers liability
(1). No Liability
The carrier will not be liable at all for the
negligent acts of its crew and employees.
This is NULL and VOID for being contrary to
public policy
(2). Limited Liability
Regardless of the value of the cargo, the
maximum liability of the carrier will be, for
example, P500. This id VOID for being
contrary to public policy.
(3). Qualified Liability
A stipulation in the bill of lading limiting
the liability of the carrier to a valuation
unless the shipper declares a higher value
and pays a higher rate of freight is valid.
+ However, the carrier cannot
limit its liability for injury to, or loss of,
good shipped where such injury or lose
was caused by its own negligences.

Recovery of Damages from carriers for carriage of
goods:
(1) Inter-island if gods arrived in damaged condition:
If damage is apparent, the shipper must
file a claim immediately.
If damage is Not apparent he should file
a claim within 24 hours from delivery.
+ The filing of claim is a condition
precedent for recovery.
+ If the claim is filed, but the carrier
refuses to pay:
Enforce carriers liability in court by
filing a case:
Within 6 years, if no bill of
lading has been issued, or
Within 10 years, if a bill lading
has been issued.
(2) Overseas Where goods arrived in a
damaged condition from a foreign port to a Philippines
Port of Entry:
Upon discharge of goods, if the damage
is apparent claim should be filed
immediately;
If damage is not apparent, claim should
be filed within 3 days from delivery.

When may a consignee of goods abandon the goods
and recover the value thereof from the carrier?
In any of the following cases:
(1) Under Art. 363, in case of partial non-delivery,
where the consignee proves that he cannot make
use of the goods capable of delivery
independently of those not delivered.
(2) Under Art. 365, where the goods are rendered
useless for sale and consumption for the purpose
for which they are properly destined; or
(3) Under Art. 371, where there is delay through the
fault of the carrier.

Two special sanctions for the enforcement by the
carrier of the payment of expenses and transportation
charges.
They Are:
(1). Under Art. 374, judicial sale of the goods
transported; and
(2). Under Art. 375, by creating a lien in favor of
the carrier on the goods transported.

Exemption from liability of the common carrier
A common carrier may be freed from liability for
loss or damage if it proves any of the following:
(a) Natural disaster
(b) Act of the Public enemy in war
Act or omission of the shipper
(d) Defect in the packing and character of the
goods
(e) Order of competent public authority

MARITIME COMMERCE

I. VESSELS (in general)
-extends to everything floating in and on the
water, built in the form of vessel and used for
navigation regardless of form, right or motive
power.

MERCHANT VESSELS- engaged in the transportation of
passengers and freight from one port to another or from
one place to another.

*Are vessels real or personal property?
PERSONAL- but they partake to a certain extent, of the
nature and conditions of real property, on account of their
value and importance of the world of commerce.

CHARACTERISTICS OF MARITIME TRANSACTIONS:
1. Real- similar to transactions over real property with
respects too effectively against third persons, which
is done through registration. The evidence of real
nature is shown by (1) the limitation of the liability of
the agents to the actual value of the vessel and the
freight money and (2) the right to retain the cargo
and embargo and detention of the vessel.
2. Hypothecary- the liability of the owner of the value of
the vessel is limited to the vessel itself.
3. Preference of credits- Mortgage of a vessel properly
registered becomes of preferred mortgage lien which
shall have priority over all claims against the vessel in
an extrajudicial foreclosure for:

COMMERCIAL LAW
TRANSPORTATION LAWS
223

2009 BAR OPERATIONS
a. credit in favor of the public treasury
b. judicial cost of the proceedings;
c. pilotage and tonnage charges and other sea and
port changes;
d. salaries of depositories and keepers of the vessel
e. captain and crew's wages;
f. general average
g. salvage including contract salvage;
h. maritime liens arising prior in time to the
recording of the preferred mortgage;
i. damages arising out of tort; and
j. Preferred mortgage registered prior in time.

DOCTRINE OF LIMITED LIABILITY:
General Rule: The liability of ship owners is limited to the
amount of interest in said vessel such that where vessel is
entirely lost, the obligation is extinguished. The interest
extends to (1) the vessel itself, (2) equipment, (30
freightage and (4) insurance proceeds.
Exceptions:
1. claims under Workmen's Compensation
2. injury or damage due to ship owners fault
3. the vessel is insured
4. expenses for repair on vessel before loss;
5. the vessel is not abandoned

PHILIPPINE COAST GUARD (PCG)
-vested with exclusive authority over the registration and
documentation of Philippine vessels, issuance of all
certificates, licenses or documents, necessary or incident
to registration.

VESSELS REQUIRED TO BE REGISTERED:
1. All vessels used in Philippine water.
2. Vessels of 3 tons gross shall not be registered
UNLESS the owner shall so desire.
3. All undocumented vessels.

Where Registration to be effected?
- at its home port (when a coast guard district or
station is on the same port); if none, at the nearest
COAST GUARD DISTRICT OR STATION).

OPTIONS AS TO SMALL BOATS:
1.) If vessel is of domestic ownership and 15 tons gross or
less certificate of Philippine registry is optional.
Purpose: declare nationality of a vessel
2.) Vessel (5 tons gross or less) & no certificate of
Philippine registry certificate of ownership is
optional.
Privileges: right to engage in Phil. Coastwise trade
and protection of the authorities and the flag is also
subject to the same privileges.
3.) Vessel (3 tons gross or less) not be registered
unless the owner shall so desire.

PURPOSE OF REGISTRATION:
- Purchaser's rights maybe maintained against a claim
filed by the THIRD PERSON.

*Who shall be entitled to the freightage and who shall be
obliged to pay the crew and other persons who make up
the compliment of the vessel?
A: It depends upon the time of the sale.
If made while it is on a voyage, freightage shall pertain
entirely to PURCHASER and payment of the crew and
other persons who make up its compliment for same
voyage shall be for his account.
If made after the vessel has arrived at the port of its
destination, freightage shall pertain to the VENDOR and
other individuals who make up its complement shall be
for his account, UNLESS the contrary is stipulated in
either case.

FORMALITIES FOR VOLUNTARY SALE ABROAD:
1. Execution of the bill of sale before consul of the
Philippines at the port where it terminates its voyage.
2. Inscription in the registry of the consulate
3. Forwarding by the consul of a true copy of the
instrument of purchase and sale to the registry of
vessel.
4. Statement whether the vendor receives its price in
whole or in part.

FORMALITIES FOR SALE WHEN VESSEL RENDERED
USELESS:
1. application for examination
2. notification of the consignee/ insurer
3. proof of damage and impossibility of the repair of the
vessel
4. order for the sale of vessel at public auction

RULES FOR THE SALE OF VESSEL AT PUBLIC
AUCTION:
1. articles of the vessel shall be appraised after making
an inventory
2. posting of the order of the auction
3. announcement
4. auction shall be held on the day fixed
5. Observance of special provisions, governing the sale
of the vessel while it is on the foreign country.

2 METHODS OF SALE:
1. judicial
2. voluntary

EFFECT OF REGISTRATION OF JUDICIAL SALE
- extinguish all other liabilities of the vessel
*Effect of Registration of Voluntary Sale
- if it take place while the vessels is on a voyage, the
preferred & hypotyhecary nature of the credit
subsists against the vessel until after its return to the
port of registry and 3 months after the inscription of
the sale in the registry of vessels or after the return,
so as to prevent the possibility of fraud upon
creditors through voluntary sale.

PARTICIPANTS IN MARITIME COMMERCE:
a. shipowners and ship agents
b. captains and masters of the vessel
c. officers and crew of the vessel

COMMERCIAL LAW
TRANSPORTATION LAWS
224

2009 BAR OPERATIONS
c.1 sailing (1
st
mate)
c.2 quartermaster (2
nd
mate)
c.3 engineer
d. seamen
e. supercargoes

A. SHIPOWNERS AND SHIP AGENTS
Ship owner- person who has possession control in
management of the vessel and the consequent right to
direct her navigation and receive freight earned and paid,
while his possession continues.
Ship agent-person entrusted with provisioning and
representing the vessel in the port in which it may be
found; also includes the ship owner

LIABILITY OF SHIPOWNER AND SHIPAGENT:
1. for the acts of the captain
2. contracts entered into by the captain to repair, equip,
and provision the vessel PROVIDED that the amount
claimed was invested for the benefit of the vessel
3. Indemnities in favor of third person that may arise
from the conduct of the captain in the care of goods
and safety of passengers transported.
4. Tort or quasi-delict committed by captain EXCEPT
collision with another vessel.
5. Damages in case of collision due to the fault,
negligence or want of skill of captain, sailing mate or
by other member of the complement.

SHIPAGENT'S AND OWNERS LIABILITY LIMITED:
- By abandoning the vessel with all her equipment and
the freight it may have earned during the voyage(by
NECESSARY IMPLICATION); limited to the value of
the vessel or its insurance in view of the so-called
REAL AND HYPOTHECARY nature of maritime law.
- Effect: cessation of the responsibility of the owner

POWER AND FUNCTIONS AND LIABILITIES OF SHIP
AGENT:
1. capacity to trade;
2. discharge duties of the captain in case of the latter's
absence;
3. contract in the name of the owners with respect to
repairs, details of equipment, armament, and all that
relate to the requirements of navigation;
4. order of new voyage and make a new charter or
insure the vessel after obtaining authorization from
the ship owners.

DUTY OF SHIPAGENT TO DISCHARGE THE CAPTAIN
AND MEMBERS OF THE CREW:
- If the seamen contract is not for a definite period or
voyage, he mat discharge them at his discretion
- If for a definite period, he may not discharge them
until after the fulfillment of their contracts EXCEPT
on the ff. Grounds:
a. insubordination in serious matters
b. robbery
c. theft
d. habitual drunkenness
e. damage caused to the vessel or to its cargo
through malice, manifest or proven negligence

EFFECT/LOSS/DESTRUCTION OF VESSEL:
1. extinguishes liability arising from the conduct of the
captain in the vigilance of the goods and for the
safety of the passengers and for any liability arising
from negligent acts of the captain
2. extinguishes liability for the wages for the captain
and the crew and for advances made by the ship
agent if the vessel is lost by shipwreck or capture
3. liability for collision

B. CAPTAINS AND MASTERS OF THE VESSEL
Captain- who govern vessels that navigate the high seas
or ships of large dimensions and importance, although
engaged in the coastwise trade
Masters- who command smaller ships engaged
exclusively in the coastwise trade

NATURE OF POSITION:
1. General agent of the ship owner
2. Technical Director of the vessel
3. Representative of the Government of the country
under whose flag he navigates

QUALIFICATIONS:
1. Filipino citizen
2. Legal capacity to contract
3. Must have passed the required physical, mental
examination required for licensing him as such

INHERENT POWERS OF THE CAPTAIN:
1. appoint crew in the absence of ship agent
2. command and direct crew
3. impose correctional punishment on those who while
on board vessel fail to comply with his orders or are
wanting in discipline
4. make contracts for the charter of vessel in the
absence of ship agent
5. supply, equip, and provision the vessel
6. order repair of vessel to enable it to continue its
voyage

SOURCES OF FUNDS TO COMPLY WITH THE
INHERENT POWERS OF THE CAPTAIN:
1. from the consignee of the vessel
2. from the consignee of the cargo
3. by drawing on the ship agent
4. by a loan on bottomry
5. by sale of part of the cargo

DUTIES OF THE CAPTAIN:
1. bring on board the proper certificate and document
and a copy of the Code of Commerce
2. keep a logbook, accounting book and freight book
3. examine before the voyage
4. stay on board during the loading and unloading of
the cargo
5. be on deck while leaving or entering the port
6. seeks protest, arrival under stress and in case of
shipwreck

COMMERCIAL LAW
TRANSPORTATION LAWS
225

2009 BAR OPERATIONS
7. follow instruction of and render accounting to the
ship agent
8. save the vessel lost in case of wreck
9. hold in custody properties left by deceased by
passengers and crew members
10. comply with the requirements of customs, health,
etc. at the port of arrival

LIABILITIES OF THE SHIPAGENT/SHIPOWNER FOR
ACTS DONE BY THE CAPTAIN TOWARDS
PASSENGERS AND CARGOES MAKING THEM
SOLIDARILY LIABLE TO THE LATTER:
1. damages to vessel and to cargo due to lack of skill
and negligence
2. theft and robbery of the crew
3. losses and fines in violation of laws
4. damages due to mutinies
5. damages due to misuse of power
6. deviations
7. arrival under stress
8. damages due to non-observance of marine
regulations

NO LIABILTY FOR THE FOLLOWING:
1. damages caused to the vessel by force majeure
2. obligations contracted for the repair, equipment and
provisioning of the vessel UNLESS he has expressly
bound himself personally or has signed a bill of exchange
or promissory note in his name

CARGO- which includes all goods, wares and
merchandise aboard a ship which do not from part of the
ship's stores.

REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY:
1. act of public enemy in war was the proximate and
only cause of the loss
2. common carrier exercise due diligence to prevent,
minimize loss before, during, and after occurrence of the
act of the public enemy in war

FORMALITIES REQUIRED WHERE VESSEL HAS GONE
THROUGH HURRICANE
1. Captain must make a protest before competent
authority at the first port he touches
2. Such a protest must be made within 24 hours
following his arrival
3. captain must ratify it within some period when he
arrives at his destination
4. he must immediately proceed with the proof of the
facts

FORMALITIES REQUIRED WHERE VESSEL
SHIPWRECKED:
1. captain must make a protest before the nearest
competent authority
2. protest be made within 24 hours following his arrival
3. make sworn statement of the facts
4. authority/consul abroad shall verify said facts
5. such authority shall take other steps in carrying at the
facts
6. such authority shall also make statements of what
may be the result of the proceeding in the logbook
and in that of the sailing mate
7. he shall deliver the original records to the captain
8. captain must ratify the protest

C. OFFICERS AND CREW

1. Sailing mate/First mate
- second chief of the vessel who takes the place of the
captain in case of absence, sickness, or death and
shall assume all of his duties, powers, and
responsibilities

DUTIES:
1. provide himself with maps, and charts with
astronomical tables necessary for the discharge
of his duties
2. keep the Binnacle book
3. Change the course of the voyage on consultation
with captain and the officers of the boat,
following the decision of the captain in case of
disagreements.
4. Responsible for all the damages caused to the
vessel or to the cargo by reason of his negligence

2. Second mate
- takes command of the vessel in case of the inability
or disqualification of the captain and the sailing mate,
assuming in such case their powers and
responsibilities and duties

DUTIES:
1. preserve the hull and rigging of the vessel
2. arrange well the cargo
3. discipline the crew
4. assign work to crew members
5. Inventory the rigging and equipment of the
vessel, if laid up.

3. Engineers
- Officers of the vessel but have no authority EXCEPT
in matters to motor apparatus. When 2 or more are
hired, one of them should be the Chief Engineer

DUTIES:
1. in charge of motor apparatus, spare parts, and
other instruments pertaining to the engines
2. keep the engines and boilers in good condition
3. not to change or repair the engine without
authority of the captain
4. inform the captain of any damage to the motor
apparatus
5. keep an Engine book
6. supervise all personnel maintaining the engine

4. Members of the Crew
- hired by the ship agent. Where he is present and in
his absence, the captain hires them preferring
Filipinos, and in their absence, he ,ay take in
foreigners but not exceeding 1/5 of the crew.

COMMERCIAL LAW
TRANSPORTATION LAWS
226

2009 BAR OPERATIONS
CLASSES OF SEAMAN'S CONTRACT:
1. by the voyage
2. by the month
3. by share of profits or freightage

JUST CAUSES FOR THE DISCHARGE OF SEAMAN
WHILE CONTRACT SUBSISTS:
1. perpetration of a crime
2. repeated insubordination, want of discipline
3. repeated incapacity and negligence
4. habitual drunkenness
5. physical incapacity
6. desertion

CAUSES OF REVOCATION OF VOYAGE:
1. war
2. blockade
3. prohibition to receive cargo at destination
4. embargo
5. inability of the vessel to navigate

RULES IN CASE OF DEATH OF A SEAMAN:
- The seaman's heirs are entitled to the payment as
follows:
1. if death is natural:
a. compensation up to time of death if
engaged on voyage
b. if by voyage- half of amount if death occurs
on voyage out; and full if on voyage in
c. if by shares- none if before departure; full if
after departure
2. if death is due to defense of vessel- full payment
3. if captured in defense of vessel- full payment
4. if captured due to carelessness- wages up to the date
of the capture

NO LIABILY UNDER THE FOLLOWING
CIRCUMSTANCES:
1. If before beginning voyage, captain attempts to
change it or a naval war with the power to which was
destined occurs
2. If a disease breaks out and be officially declared an
epidemic in the port of destination
3. If the vessel change owner or captain

COMPLEMENT OF THE VESSEL
- All persons on board, from the captain to the cabin
boy, necessary for the management, maneuvers, and
service, thus including the crew, the sailing mates,
engineers, stalkers and other employees on board
not having specific designations
- It does not include the passengers or the person
whom the vessel is transported

FORMALITIES REQUIRED FOR SEAMAN'S
AGREEMENT:
1. reduced to writing in Accounting Book
2. signed by parties
3. visaed by marine authority if executed in Philippine
territory/consul or consular agents if executed abroad
4. read to the seaman concerned and such fact must be
stated in the agreement

Interdiction of Commerce
- a governmental prohibition of commercial
intercourse intended to bring about an entire
cessation for the time being of all trade

Embargo
- a proclamation or order of the State usually issued in
time of war/ threatened hostilities prohibiting the
departure ships/ goods from some or all the ports of
such State until further order

Blockade
- a sort of circumvallation of place by all foreign
connections and correspondence is as far as human
power can affect it to be cut-off

D. SUPERCARGOES
- person who discharge administrative duties assigned
to him by ship agent or shippers, keeping an account
and record of transaction as required in the
accounting book of the captain

CHARTER PARTY
- contract by virtue of which the owner or agent binds
himself to transport merchandise or persons of a
fixed price

CLASSES OF CHARTER PARTY
1. As to extent of vessel hired
a. total- whole of the vessel is chartered
b. partial- only part of the vessel is chartered

2. As to time
a. until a fixed day/ for a determined number of
days and months
b. for a voyage(outgoing/return/roundtrip)

3. As to freightage
a. for a fixed amount for the whole cargo
b. for a fixed amount per ton
c. for an amount per month

FORMAILITIES REQUIRED FOR A CHARTER PARTY:
1. in writing
2. drawn in duplicate
3. signed by the parties
4. contain stipulation
not all requisites are essential for the validity of
charter party

Primage
- belongs to owner/ freighters;
- increase of the freight rate
- considered gratuity to master if is stipulated

COMMERCIAL LAW
TRANSPORTATION LAWS
227

2009 BAR OPERATIONS
Demurrage
- sum which is fixed by the contract of carriage, or
which is allowed, as remuneration to the owner of a
ship for the detention of his vessel beyond the
number of days allowed by the charter party for
loading/unloading/sailing.

"Lay days"
- days allowed to charter parties for loading and
unlading

"Extra Lay Days"
- days which followed after lay days have elapsed

GOODS TRANSFERRED MAY BE:
1. sold by captain to necessary repairs
2. jettisoned for the common safety
3. loss by reason of shipwreck/stranding
4. seized by pirates/enemies
5. suffer deterioration/diminutions
6. increase by natural cause and weight or size

RIGHTS AND OBLIGATIONS OF CHARTER PARTY:
A. Of the ship owner or ship agent
1. If the vessel chartered wholly not to accept cargo
from others
2. To observe represented capacity
3. To unload cargo clandestinely placed
4. To substitute another vessel if load is less than
3/5 of capacity
5. To leave the port if the charter does not bring the
cargo within the lay days and extra lay days
allowed.
6. To place in a vessel in a good condition to
navigate
7. To bring cargo to nearest neutral port in case of
war or blockade

B. Of the charterer
1. to pay the agreed charter price
2. to pay freightage or unboarded cargoes
3. to pay losses to others for loading uncontracted
cargo and illicit cargo
4. to wait if the vessel needs repair
5. to pay expenses for deviation

RESCISSION OF CHARTER PARTY
A. At charterer's request
1. by abandoning the charter and paying half of the
freightage
2. error in tonnage or flag
3. failure to place the vessel at the charterer's
disposal
4. return of the vessel due to pirates, enemies or
bad weather
5. arrival at the port for repairs

B. At ship owners request
1. If the extra lay days terminate without cargo
being placed alongside the vessel
2. Sale by the owner of the vessel before loading

C. Fortuitous causes
1. war
2. blockade
3. prohibition to receive cargo
4. embargo
5. inability of the vessel to navigate

Loan on Bottomry
- loan made by ship owner or ship agent guaranteed by
vessel itself and repayable upon arrival of vessel at
destination

Loan on Respondentia
- loan , taken on security of the cargo laden on the
vessel, and repayable upon safe arrival of cargo at
safe designation

COMMON ELEMENTS OF LOANS ON BOTTOMRY
AND RESPONDENTIA
1. exposure of security or marine peril
2. obligation of the debtor conditioned only upon safe
arrival of security at the point of destination

EXCEPTIONS TO THE HYPOTHECARY NATURE OF
BOTTOMRY AND RESPONDENTIS:
1. loss due to inherent defect
2. loss due to the barratry on the part of the captain
3. loss due to the fault or malice of the borrower
4. that the vessel is engaged in contraband
5. that the cargo loaded on the vessel be different from
that agreed upon

ACCIDENTS IN MARITIME COMMERCE:
1. AVERAGES
2. ARRIVAL UNDER STRESS
3. COLLISION
4. SHIPWRECK

I. Averages
- an extraordinary or accidental expense incurred
during the voyage in order to preserve the cargo,
vessel or both and all damages or deterioration
suffered by the vessel from departure to the port of
destination and to the cargo from the port of loading
to the port of consignment

CLASSES:
1. Particular/Simple
- damage / expenses caused to the vessel or cargo that
did not inured to the common benefit and borne by
respective owner
- the owner of the goods which give rise to expense or
suffer damage shall bear this average

2. Gross/ General
- damage/ expenses deliberately caused in order to
save the vessel, its cargo or both from real or known
risk

COMMERCIAL LAW
TRANSPORTATION LAWS
228

2009 BAR OPERATIONS

-REQUISITES:
a. common danger
b. deliberate sacrifice
c. success
d. proper formalities and legal steps

ORDER OF GOODS TO BE CAST OVERBOARD IN CASE
OF JETTISON:
1. those which are on the deck, preferring the heaviest
one with the least utility of value
2. those which are below the upper deck beginning with
the one with greatest weight and smallest value

II. Arrival Under stress
- arrival of a vessel at a port of destination on account
of lack of provision, well-founded fear of seizure,
pirates, or accidents in sea disabling navigation
- when unlawful:
1. lack of provisions due to negligence to carry
according to usage and customs
2. risk of enemies not well-known or manifest
3. defect due to improper repair
4. malice, negligence, lack of foresight, lack of skill

III. COLLISION
- impact of two vessels both of which are moving

ALLISION
- impact between a moving vessel and stationary one

ZONES OF TIME IN COLLISION OF VESSELS:
1. First zone- all time up to the moment when risk of
collision begins
2. Second Zone- time between moment when risk of
collision begins and moment it becomes a practical
certainty
3. Third Zone- time when collision is certain and time of
impact

CASES COVERED BY COLLISION AND ALLISION:
1. one vessel at fault- such vessel is liable for damage
caused to innocent vessel as well as damages
suffered by owners of cargo of both vessels
2. both vessels at fault- each vessel must bear its own
loss but the shippers of both vessel may go against
the ship owner who will be solidarily liable
3. vessel at fault not known- same as rule 2
4. third vessel at fault- same rule 1
5. fortuitous event- no liability, each bear its own loss

IV. SHIPWRECK
- loss of the vessel at sea as a consequence of its
grounding or running against an object in sea or on
the coast
- if the wreck was due to malice, negligence or lack of
skill of the captain, the owner of the vessel may
demand indemnity from said captain.

COMMON CARRIERS
( ARTICLES 1732-1766)

Common Carriers
- are PERSONS, CORPORATION, FIRMS, or
ASSOCIATIONS engaged in CARRYING or
TRANSPORTING PASSENGERS or GOODS or BOTH,
by LAND, WATER, or AIR for COMPENSATION OF
OFFERING THEIR SERVICES TO THE PUBLIC.

Extraordinary diligence is required to common carriers in
transporting goods and passengers
Reasons:
1. nature of the business
2. public policy

Registered owner primarily and solidarily with driver
under the KABIT SYSTEM. Kabit system is contrary to
public policy; therefore, void and inexistent.

CIRCUMSTANCES UNDER WHICH COMMON
CARRIERES CANNOT BE HELD LIABLE FOR THE
LOSS/DESTRUCTION OF GOODS:
1. flood, storm, earthquake, or other natural calamities
2. act of public enemy in war, either international or
local
3. act or omission of the shipper or owner of the goods
4. character of the goods or defects of the packing
5. order of competent authority

Extraordinary diligence lasts from the time the cargoes
are loaded in the vessel until they are discharged and
delivered to the consignee.

Air carriers can terminate services of pilots for serious
misconduct and drunkenness because of its extraordinary
diligence.

INSTANCES WHICH ARE NOT CASO FORTUITO:
1. hijacking
2. acts of strangers like thieves or robbers acted
with grave or violence
3. accidents due to defects of carrier
4. where tie blow-out

Fire is not a natural disaster

Notice of arrival of goods amounts to constructive
delivery

Shipper bound to observe all diligence in obtaining
delivery of goods

Common Carriers may be exempted from responsibility
PROVIDED that natural disaster is the proximate and only
cause of the loss.

STIPULATIONS LIMITING LIABILITY IS VALID
PROVIDED THAT:
1. the stipulation be in writing signed by both
parties

COMMERCIAL LAW
TRANSPORTATION LAWS
229

2009 BAR OPERATIONS
2. the stipulation be supported by a valuable
consideration other than the service rendered by
common carrier
3. the stipulation be reasonable, just and not
contrary to public policy

SOME VALID STIPULATIONS LIMITING CARRIER'S
LIABILITY:
1. account of strikes or riot
2. value of the goods appearing in bill of lading
UNLESS shipper declares a greater value
3. contract fixing the sum that may be recovered

VOID STIPULATIONS LIMITING CARRIER'S Liability:
1. the goods are transported at the risk of the
shipper
2. that the shipper is not liable for any loss or
destruction of the goods
3. that the common carrier need not observed any
diligence and less than that of good father of a
family
4. that the common carrier shall not be responsible
for any acts of its employee

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

The act of the thief or robbers who entered the common
carrier's vehicle is not deemed force majeure UNLESS it is
done with the use of arms or through irresistible force.

A common carrier is bound to carry the passengers safely
as far as human care and foresight can provide using the
utmost diligence of a very cautious person with a regard
of circumstances.

In case of death or injuries to passengers, common
carriers are presumed to be at fault UNLESS proved that
they observe extra ordinary diligence.

LAST CLEAR CHANCE
- this principle applies only in a suit between owners
and drivers of two colliding vehicles. This is not
applicable to Contract of Carriage.

Carrier not ordinarily liable for injuries to passengers due
to fires, and explosions caused by articles brought into
conveyance by other passengers.

Ticket is a complete written contract by and between
the shipper and passenger for it contains:
1. consent of the contracting parties
2. cause or consideration which is the fare paid by
the passengers
3. object which is the transportation of the
passenger from the place of departure to the
place of destination.

Reduction of fare does not justify any limitation of the
common carrier's liability.

Passenger bound notwithstanding his failure to sign plane
ticket containing stipulation limiting liability known as
contract of adhesion.

The extraordinary diligence required for carriage of
passengers cannot be dispensed with:
1. by stipulation
2. by posting of notices
3. by statement of tickets
4. otherwise however as an exception, parties may
stipulate limiting carrier's liability where the
passenger is carried gratuitously

Common Carrier is liable for damages for defects of its
equipment.

Common Carrier is liable for the misconduct of its
employees done in their own interest.
Reason: the servant is clothed with the delegated
authority and charged with duty by the carrier to execute
his undertakings to carry the passenger safely.

Carrier exempt from acts of employees not done in line of
duty.

The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid injury to
himself.

EFFECTS OF NEGLIGENCE- where the proximate cause
of the death/ injury to the passenger is his own
negligence, common carrier is exempted from liability.

EFFECT OF PASSENGER'S CONTRIBUTORY
NEGLIGENCE- passenger's contributory negligence does
not justify carrier's exemption from liability. However, the
damages will be equitably reduced.

A common carrier is responsible for injuries suffered by a
passenger on account of the lawful acts/negligence of
other passengers or of strangers provided that the
employees could have prevented the act or omission
through the exercise of a good father of a family.

Degree of diligence required of carriers employees-
merely that of the good father of a family or ordinary
diligence.

Liability of air carrier under Warsaw Convention of
October 12,1929, article 17, the carrier shall be liable for
damages sustained in the event of death or injury of a
passenger if accident took place on board the aircraft or in
the course of embarking or disembarking.

Article 18(1), the carrier shall be liable for damages
sustained in the event of destruction or loss of or of
damage to any checked baggage or any goods in the
course of transportation.
(2), the transportation of air shall comprise the period
during which the baggage or goods are in the charge of

COMMERCIAL LAW
TRANSPORTATION LAWS
230

2009 BAR OPERATIONS
the carrier whether an airport or on board an aircraft or in
case of landing outside an airport.
(3), the period of transportation by air shall not extend to
any transportation by land, sea, or river outside an
airport.

Article 19, the carrier shall be liable for damages
occasioned by delay in transportation by air of
passengers, baggage, or goods.

DAMAGES RECOVERABLE WHEN DEATH OCCURS
DUE TO COMMISSION OF A CRIME:
1. indemnity for death of a victim
2. indemnity for loss of earning
3. moral damages
4. exemplary damages
5. attorney's fees and expenses of litigation,
6. interest and properties

FACTORS TO BE CONSIDERED IN AWARDING
DAMAGES ARISING FROM DEATH:
1. number of years on the basis of which the
damages shall be computed
2. rate at which the losses sustained should be fixed

For fixed indemnity for death, there is no need to
interrogate witness.

Common carrier not liable for moral damages to
passenger s injured due to negligence of driver.

Carrier is liable when it issues to passenger a confirmed
ticket for a particular ticket if he is not put in that flight.

Carrier liable only for damages that are natural and
probable consequence and breach of contract which
includes medical, hospital and other expenses.

ITEMS INCLUDE IN ACTUAL DAMAGES:
1. income to be earned upon completion of studies
2. the sum being carried by deceased passenger
which was lost
3. amount spend to her funeral
4. attorney's fees and court expenses
5. loss of the merchandise carried by the deceased
6. loss of baggage containing medicine, boxes, and
suitcases of personal belongings

EXCEPTIONS TO RULE THAT CARRIER NOT LIABLE
FOR MORAL DAMAGES IN BREACH OF CONTRACT:
1. where the mishap results in the death of
passenger
2. where it is proved that the carrier is guilty of
fraud or bad faith even if death does not result
3. where the passenger suffers social humiliation,
wounded feelings, anxiety and mental anguish

Surviving passenger is not entitled to moral damages.
Mere carelessness of the carrier does not per se constitute
an inference of malice or bad faith on its part.

Carrier subsidiarily liable for moral damages in actions ex
delicto.

Exemplary damages cannot be recovered as a matter of
right.

Nominal and exemplary damages awarded for willful
breach of contract committed through agent or
employee.

Carrier incurring only delay not liable for moral and
exemplary damages but only to the limited amount
printed in the plane ticket.

Exemplary damages is allowable under Kabit System.

Common Carrier in Nominal Damages for failure of carrier
to bring passenger to his destination but mere violation of
a Contract of Carriage does not warrant recovery for
moral damages.

In case of breach of the carrier's contractual obligation to
carry his passenger safely to their destination, the carrier
is solidarily liable for his driver's negligence. Exercise of
due diligence in selecting driver is not a defense.

Preponderance of evidence sufficient to prove civil
liability arising from negligence.
-
-

P PU UB BL LI IC C S SE ER RV VI IC CE E L LA AW W

(C.A. No. 146 as amended and modified by
PD No. 1 Integrated Reorganization Plan and E.O.546)

INTRODUCTION:

PUBLIC SERVICE OR PUBLIC UTILITY DEFINED

P Pu ub bl li ic c S Se er rv vi ic ce e- includes every person that now
or hereafter may own, operate, manage or
control in the Philippines for hire or
compensation, with general or limited clientele,
whether permanent, occasional or accidental,
and done for general business purposes, any
common carrier, shipyard, ice plant, electric
light, heat and power or any other utility, (Sec. 13
b, C.A. 146 as amended).

P Pu ub bl li ic c U Ut ti il li it ty y- a business or service engaged in
supplying the public with some commodity or
service of public consequence. (Albano v. Reyes,
175 SCRA 264)

COMMERCIAL LAW
TRANSPORTATION LAWS
231

2009 BAR OPERATIONS
ORDINARY AND PRIMARY PURPOSE OF THE PUBLIC
SERVICE LAW
ORDINARY PURPOSE:
To subject public services to state control and
regulation.

SPECIFIC PURPOSES:

1. To secure adequate, sustained service
for the public at the least possible cost,
and protect the public against
unreasonable charges and poor
inefficient service.
2. To protect and conserve investments
which have already been made for
public service, and prevent ruinous
competition.

BASIS OF THE LEGISLATIVE POWER TO REGULATE
PUBLIC SERVICES:

POLICE POWER, for the protection of the public
as well as the utilities themselves. (Pantranco v.
P.S.C., 70 Phil 221)

C CO ON NS ST TI IT TU UT TI IO ON NA AL L B BA AS SI IS S: :
1. ARTICLE XII, SECTION 11:
> A franchise, certificate, or any other
form of authorization for the operation of
public utility shall be granted to:

- Filipino Citizens
- Corporations or associations
organized under Philippine
Laws where at least 60% of the
capital is owned by Filipino
Citizens.
- 100% Filipino Management

> Mass media and commercial
telecommunications shall be:
- 100% Filipino Capital, and
- 100% Filipino management

2. ARTICLE XII, SEC 17:
In times of national emergency, when the public
interest so requires, the State may during the
emergency and under reasonable terms,
temporarily take over or direct the operation of
any private owned public utility or business
affected with public interests.

3. ARTICLE XII, SECTION 18
The state may, in the interest of national welfare
or defense, establish and operate vital industries
and upon payment of just compensation,
transfer to public ownership utilities and other
private enterprises to be operated by the
government.

4. ARTICLE XII, SECTION 19
The state shall regulate or prohibit monopolies
when the public interest so requires; no
combination in restraint of trade or unfair
competition shall be allowed

OFFICES NOW CHARGED WITH ENFORCEMENT OF
PUBLIC SERVICE LAW

The Public Service Commission has been abolished. The
following replaced it:

1. LAND TRANSPORTATION- Department of
Transportation and Communication (DOTC) and
the Land Transportation Franchising and
Regulatory Board (LTFRB)
2. WATER TRANSPORTATION- Maritime Industry
Authority (MARINA)
3. AIR TRANSPORTATION- Air Transportation
Office (ATO) headed by an assistant secretary
and the Civil Aeronautics Board, which has been
placed under the DOTC as an attached agency.
4. TELECOMMUNICATIONS- National
Telecommunications Commission, which has
been placed under the DOTC as an attached
agency.
5. ENERGY- Board of Energy but transferred to the
Energy Regulatory Board (ERB)
6. WATERWORKS- National Water Resources
Council

The DOTC shall be the primary entity in
Transportation and Communication

LIMITATIONS ON THE POWERS OF THE
REGULATORY BOARDS, COMMISSIONS AND
COUNCILS:
1. General: Powers are limited from those granted in
the legislation creating the body.
2. Constitutional:
Regulations imposed must not have the effect of
depriving an owner of his property without due
process of lawnor confiscating or appropriating
private property without just compensation.
3. Judicial:
Boards, commissions are not judicial tribunals and
therefore cannot determine judicial questions such as
validity of contract.
4. Jurisdiction: Extends only to persons engaged in
public utilities, or over a public utility, which holds a
Certificate of Public Convenience.
B. JURISDICTION

+ General Rule: Over persons engaged in public
utilities, or over a public utility, which holds a
Certificate of Public Convenience.

COMMERCIAL LAW
TRANSPORTATION LAWS
232

2009 BAR OPERATIONS
+ Exemption: violators of a valid regulation
promulgated under the law

C. GENERAL POWERS OF THE COMMISSION

a) ISSUE CERTIFICATES
+ CERTIFICATE OF PUBLIC CONVENIENCE (CPC)
An authorization issued by the commission for the
operation of public services for which no franchise either
municipal or legislative is required by law.
+ CERTIFICATE OF PUBLIC CONVENIENCE &
NECESSITY (CPCN)
An authorization issued by the commission for
the operation of public services for which a franchise
is required by law.

1. NATURE OF A CERTIFICATE OF PUBLIC
CONVENIENCE
It constitutes neither a FRANCHISE
nor a CONTRACT. It confers no property
rights and is a mere license or privilege.
2. GENERAL RULE: NECESSITY OF
CERTIFICATE OF PUBLIC CONVENIENCE or
CERTIFICATE OF PUBLIC CONVENIENCE &
NECESSITY
Unless otherwise exempt, no public
service shall operate without having been
issued a certificate of public convenience (no
franchise is required by law) or a certificate
of public convenience and necessity (a prior
franchise is required by law).

3. EXCEPTIONS (Section 14, Public Service
Law)

Certificate of public convenience, not necessary in the
following:
a. Warehouses
b. Animal drawn vehicles, bancas powered by oar or
sail; tugboats, lighters or pedal driven vehicles
c. Airships except as to fixing of rates
d. Radio Companies, except as to fixing of rates
e. Public utilities operated by the National Government
f. Government or political subdivisions except as to
rates
g. Iceplants
h. Public Markets

4. REQUISITES BEFORE A CERTIFICATE OF
PUBLIC CONVENIENCE MAY BE GRANTED:

a. CITIZENSHIP Filipino Citizen;
Filipino Corporations/ Associations
b. FINANCIAL CAPACITY
c. PUBLIC NECESSITY
d. PUBLIC CONVENIENCE

Considerations:
a) FINANCIAL RESPONSIBILITY OF APPLICANTS
a) RELIABILITY OF THE APPLICATION
b) PRIORITY OF FILING THE APPLICATION
c) PRIORITY OF OPERATION

PRIOR APPLICANT RULE
Priority in the filing of application for a CPC is,
other conditions being equal, an important factor in
determining the rights of the public service companies,
and in the granting or refusal of a certificate. (Batangas
Trans Co. v Orlanes, 52 Phil 455)

PRIOR OPERATOR RULE
The law contemplates that the first licensee will
be protected in his investment and will not be subjected
to a ruinous competition. It is not therefore the policy of
the law to issue a CPC to a second operator to cover the
same field and in competition with a first operator who is
rendering sufficient, adequate and satisfactory service,
and who in all things and respects is complying with the
rules and regulations of the commission. The old operator
must be given the opportunity to improve and extend his
lines. (Batangas Trans Co. v Orlanes, 52 Phil 455)
BASIS OF THE PRIOR OPERATOR RULE
Prevent ruinous and wasteful competition and
interest of public will be preserved.

EXCEPTIONS TO THE PRIOR OPERATOR RULE:
1. Operator fails/ neglects to make improvement or
effect the increase in service when given the
opportunity.
2. When Prior operator offers to meet increases in
demand only when another operator offered to
render additional service
3. Abandonment of operation
4. Prior operators did not oppose application
5. Prior operator cannot satisfy needs of the public
6. When opportunity to improve service is raised by
prior operator only on appeal.
7. CPC granted to the applicant is a maiden franchise
covering a new route, albeit overlapping with that
of the old operator
8. Expiration of corporate existence of prior operator.
9. Monopoly
10. Passage through private subdivision which granted
permit to another

COMMERCIAL LAW
TRANSPORTATION LAWS
233

2009 BAR OPERATIONS
b.) TO APPROVE ANY FRANCHISE OR
PRIVILEGE GRANTED BY ANY POLITICAL SUBDIVISION
OF THE PHILIPPINES WHEN IN ITS JUDGMENT SUCH
FRANCHISE OR PRIVILEGE WILL PROPERLY CONSERVE
THE PUBLIC INTEREST.

Requirement of previous notice and hearing.

The exercise of the said power is it discretionary as it
is - subject to conditions, equipment, maintenance,
service and operation;

In the exercise of the above-mentioned power it is
also necessary to determine whether the exercise of
the rights or privileges granted by the franchise are
necessary and adequate for the public convenience.

NATURE OF FRANCHISE:
Franchise is NOT exclusive in nature.
Section 11, Article XII, 1987 Philippine
Constitution No franchise, certificate, or any other
form of authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines at least
sixty per centum of whose capital is owned by such
citizens, nor shall such franchise, certificate, or
authorization be exclusive in character or for a
longer period than fifty years.

Franchise subject to amendment and repeal.
Section 11, Article XII, 1987 Philippine
Constitution - Neither shall such franchise or right be
granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the
Congress when the common good so requires.

General Rule:
Exclusivity of franchise is not favored that
is why in all grants by the government to private
corporations the interpretation of rights privileges
or franchises is taken against the grantee.

HOWEVER if exclusivity is given by law it
should be with the understanding that the
company enjoying it is self sufficient and capable
of supplying the needed service or product at
moderate or reasonable prices.

In reality a franchise is a contract between
the State and the grantee.

Question: Since a franchise is a contract is
this governed by the non-impairment clause
of the Constitution?

Answer: No, while it is true that a franchise
is in the nature of a contract, which the
parties to it must respect it is not a
contract such as is protected from
impairment by the Constitution.

N.B.
The holder of a legislative franchise has
preference over the holder of a municipal
franchise granted more than a year later.

If the holder of a municipal franchise
was subsequently granted with a legislative
franchise the former will be repealed by the
latter.

A municipality does not have the legal
right to nullify a legislative franchise by
arbitrarily refusing to approve plans of the
company receiving the legislative franchise made
pursuant to a provision therein.

Note however that the Commission may
disapprove a municipal franchise and it may deny
an application without infringing the legislative
prerogative of the municipal council, because the
Commission merely exercises a power granted
by law.
PSC has power to regulate manner of
disconnecting services by MERALCO to
delinquent customer. It can compel MERALCO
that before it can effect disconnection of it
services to a delinquent customer it is required
that it must first give a written notice of
disconnection 48 hours in advance.

c.) THE COMMISSION HAS ALSO THE POWER TO
FIX AND DETERMINE INDIVIDUAL AND JOINT RATES,
TOLLS, CHARGES, CLASSIFICATIONS OR SCHEDULES
THEREOF, KILOMETRAGE, AND OTHER SPECIAL
RATES. (Section 16 (c) (PBQ Bar 2000)

That before the Commission can fix rates there
must first be a notice and hearing.

HOWEVER, the Commission in its discretion
can PROVISSIONALY approve rates proposed
by public services WITHOUT NOTICE AND
HEARING PROVIDED that WITHIN THIRTY
(30) DAYS THEREAFTER A HEARING MUST BE
HELD UPON PREVIOUS PUBLICATION AND
NOTICE TO THE CONCERNS OPERATING IN
THE TERRITORY AFFECTED.

E.g. ERB has authority to issue an order
granting provisional increase of prices even
without notice and hearing.

EXTENT OF THE POWER OF THE
COMMISSION TO FIX RATES.
1. Rates are submitted by the public carriers but are
subject to approval by the PSC which is NOT
limited in the selection of the old or the new
rates but could NOT establish such rates as are
proper under the evidence presented.

COMMERCIAL LAW
TRANSPORTATION LAWS
234

2009 BAR OPERATIONS
2. The maximum rate fixed in a franchise, which its
holder is authorized to collect, is always subject
to a revision and regulation by the PSC.
3. The PSC has also the power to order the refund
of overcharges. The requirement is not in the
nature of a penalty but is merely a measure by
which the public services concerned are asked to
return what they did not have the right to collect.
4. In another case, the Court also said that when
the Commission is empowered by law to fix the
rates of freight which vessels may charge, it is
implied that the vessels may not legally demand
more than those rates.
5. The Commission has the power to alter the
established rates in a certificate of public
convenience, especially where the order fixing
the rates is in the nature of an experiment for a
period of four months.\
6. Where it appears that a proposed joint fate
system with transfers in relation to a point of
contract between two transportation lines would
serve the convenience of the public, the PSC has
authority to find a public need and thereafter to
approve such joint fare system.
7. But the PSC cannot delegate to a public service
its power to fix and determine the rates.

DETERMINATION OF JUST AND
REASONABLE RATES.

The fixing of rates is a legislative and
governmental power over which the government
has complete control. BUT it has no power to fix
rates which are unreasonable or to regulate them
arbitrarily, and that as to whether a given rate is
fair and reasonable is a judicial question over
which the courts have complete control.

N.B. There is a legal presumption that
the rates are reasonable and it must be conceded
that the fixing of rates by the government
through its authorized agent, involves the
exercise of reasonable discretion and unless
there is an abuse of that discretion

REQUIREMENTS FOR A JUST AND
REASONABLE RATE

1. One which yields to the carrier a fair return upon
the value of the property employed in
performing the service;
2. One which is fair to the public for the services
rendered.

E.g. of circumstances justifying increase of
rates exigencies of the present and the future
viewed in the light of recent developments and the
experience gained in connection with the operation
of another public utility analogously situated

d.) TO FIX JUST AND REASONABLE
STANDARDS, CLASSIFICATIONS, REGULATIONS,
PRACTICES, MEASUREMENTS, OR SERVICE TO BE
FURNISHED, IMPOSED, OBSERVED, AND FOLLOWED
THEREAFTER BY ANY PUBLIC SERVICE. (SECTION 16
(D))

e.) TO ASCERTAIN
AND FIX ADEQUATE AND SERVICEABLE STANDARDS
FOR THE MEASUREMENT OF QUANTITY, QUALITY,
PRESSURE, INITIAL OR SERVICE RENDERED BY ANY
PUBLIC SERVICE AND TO PRESCRIBE REASONABLE
REGULATIONS FOR THE EXAMINATION AND TEST
OF SUCH PRODUCT OR SERVICE, AND TO PRESCRIBE
REASONABLE REGULATIONS FOR THE
EXAMINATION AND TEST OF SUCH PRODUCT OR
SERVICE AND FOR THE MEASUREMENT THEREOF.
(SECTION 16 (E))

f.) TO ESTABLISH REASONABLE RULES AND
REGULATIONS, INSTRUCTIONS, SPECIFICATIONS,
AND STANDARDS, TO SECURE THE ACCURACY OF
ALL METERS AND APPLIANCES FOR
MEASUREMENTS. (SECTION 16 (F))

g.) TO COMPEL ANY PUBLIC SERVICE TO
FURNISH SAFE, ADEQUATE, AND PROPER SERVICE
AS REGARDS THE MANNER OF FURNISHING THE
SAME AS WELL AS THE MAINTENANCE OF THE
NECESSARY MATERIAL AND EQUIPMENT. (SECTION
16 (G))

NOTES:
The Commission has no power to
change procedure relative to inspection and
repair of water meters.

The PSC is in duty bound to see to it
that persons or companies, holding certificates
of public convenience, render within a
reasonable time the public service that they have
been authorized to render for the benefit of the
public.

The PSC shall see to it that the
companies holding Certificates of Pubic
Convenience render their service with in a
REASONABLE TIME.

h.) TO REQUIRE ANY PUBLIC SERVICE TO
ESTABLISH, CONSTRUCT, MAINTAIN AND OPERATE
ANY REASONABLE EXTENSION OF ITS EXISTING
FACILITIES SUCH EXTENSION IS REASONABLE AND
PRACTICABLE AND WILL FURNISH SUFFICIENT
BUSINESS TO JUSTIFY THE CONSTRUCTION OF THE
SAID PUBLIC SERVICE REASONABLE WARRANTS
THE ORIGINAL EXPENDITURE REQUIRED IN MAKING
AND OPERATING SUCH EXTENSION. (SECTION 16
(H))

NOTES:

COMMERCIAL LAW
TRANSPORTATION LAWS
235

2009 BAR OPERATIONS
Before the PSC can exercise the
above-mentioned duty there must first be
notice and hearing.

Thus, the PSC has ample powers to
require and authorize public services which
certificates of public convenience to extend their
service when the necessity of the public so
demands.

PSC may grant extension to applicant
whose certificate is subject to condition of non-
extension if the Commission is satisfied that
public service or convenience requires or
demands that the line of such extension be run,
operated and served and that the applicant is
financially capable of operating it, the
Commission has the power to grant a certificate
of public convenience to the applicant for the
operation of such extension line.

The PSC has also the power to compel a
public service auto-bus operator to change its
route in view of the fact that whatever rights the
operator has to the utilization of the streets of a
locality is only by virtue of the Certificate granted
by the Commission.

PSC can permit applicant to operate
shorter route than that applied by him when the
circumstances so demand and it is NOT for the
oppositor to insist that he Commission should
have conceded the applicant a longer route.

i.) TO DIRECT ANY RAILROAD, STREET RAILWAY OR
TRACTION COMPANY TO ESTABLISH AND MAINTAIN
AT ANY JUNCTION OR POINT OF CONNECTION OR
INTERSECTION WITH ANY OTHER LINE OF SAID
ROAD OR TRACK, OR WITH ANY OTHER LINE OF ANY
OTHER RAILROAD, STREET, RAILWAY OR TRACTION
TO PROMOTE THE CONVENIENCE OF SHIPPERS OF
PROPERTY, OR PASSANGERS. SECTION 16 (I)

j.) TO AUTHORIZE, IN ITS DISCRETION, ANY
RAILROAD, STREET RAILWAY OR TRACTION
COMPANY TO LAY ITS TRACKS ACROSS THE TRACKS
OF ANY RAILROAD, STREET RAILWAY OR TRACTION
COMPANY OR ACROSS ANY PUBLIC HIGHWAY.
SECTION 16 (J)

k.) TO DIRECT ANY RAILROAD OR STREET RAILWAY
COMPANY TO INSTALL SUCH SAFETY DEVICES OR
ABOUT SUCH OTHER REASONABLE MEASURES AS
MAY IN THE JUDGMENT OF THE COMMISSION BE
NECESSARY FOR THE PROTECTION OF THE PUBLIC
AT PASSING GRADE CROSSING OF

(1) public highways and railroads;
(2) public highways and street railway; or
(3) railway and street railways.

l.) TO FIX AND DETERMINE PROPER AND ADEQUATE
RATES OF DEPRECIATION OF THE PROPERTY OF
ANY PUBLIC SERVICE WHICH WILL BE OBSERVED IN
A PROPER AND ADEQUATE DEPRECIATION
ACCOUNT TO BE CARRIED FOR THE PROTECTION OF
STOCKHOLDERS, BONDHOLDERS OR CREDITORS.

THE INCOME FROM INVESTMENTS OF MONEY
IN SUCH FUND SHALL LIKEWISE BE CARRIED IN SUCH
FUND. THIS FUND SHALL NOT BE EXPENDED
OTHERWISE THAN FOR DEPRECIATION,
IMPROVEMENTS, NEW CONSTRUCTION, EXTENSIONS
OR CONDITIONS TO THE PROPERTY OF SUCH PUBLIC
SERVICE. SECTION 16 (L)

NOTES:
The rate base is PRESENT VALUE, and
it would be wholly illogical to adopt a different
rule for depreciation.

If the rate base is present fair value,
then the depreciation base as to depreciable
property is the same thing.

m.) TO AMEND, MODIFY OR REVOKE AT ANY
TIME CERTIFICATE ISSUED WHENEVER THE FACTS
AND CIRCUMSTANCES ON THE STRENGTH OF
WHICH SAID CERTIFICATE WAS ISSUED HAVE BEEN
MISREPRESENTED OR MATERIALLY CHANGED.
SECTION 16 (M)

n.) TO SUSPEND OR REVOKE ANY CERTIFICATE
ISSUED WHENEVER THE HOLDER THEREOF HAS
VIOLATED OR WILLFULLY AND CONTUMACIOUSLY
REFUSED TO COMPLY WITH ANY ORDER, RULE OR
REGULATION OF THE COMMISSION. SECTION 16 (N)

PROVIDED THAT THE COMMISSION FOR
GOOD CAUSE MAY PRIOR TO THE HEARING
SUSPEND FOR A PERIOD NOT TO EXCEED THIRTY
(30) DAYS ANY CERTIFICATE OR THE EXERCISE OF
ANY RIGHT OR AUTHORITY ISSUED OR GRANTED BY
IT.

o.) TO FIX, DETERMINE, AND REGULATE, AS
THE CONVENIENCE OF THE STATE MAY REQUIRE, A
SPECIAL TYPE OF AUTO-BUSSES, TRUCKS, AND
MOTOR TRUCKS TO BE HEREAFTER CONSTRUCTED,
PURCHASED, AND OPERATED BY OPERATORS
AFTER THE APPROVAL OF THIS ACT;

TO FIX AND THE DETERMINE THE SPECIAL
REGISTRATION FEE FOR AUTO-BUSSES, TRUCKS,
AND MOTOR TRUCKS SO CONSTRUCTED AND
OPERATED.

PROVIDED: THAT SAID FEES SHALL BE
SMALLER THAN THOSE CHARGED FOR AUTO-
BUSSES, TRUCKS, AND MOTOR TRUCKS OF TYPES

COMMERCIAL LAW
TRANSPORTATION LAWS
236

2009 BAR OPERATIONS
NOT MADE REGULATION UNDER THIS SUBSECTION.
SECTION 16 (O)

LIMITATIONS ON THE POWER TO AMEND

a. That before a modification, amendment, or
revocation shall be allowed, it must be shown that
the conditions from which the certificate was granted
no longer exist or have altered, or that the certificate
holder has violated or deliberately refused to comply
with the orders, rules and regulations of the
Commission.
b. There must be notice and hearing before the
revocation can be effected.

- Without notice and hearing? The Order canceling
the Certificate is void.

E.g. A single hold-up incident is not a ground for
revoking a certificate of public convenience.

N.B.
The grant of authority regarding unfranchised
operation requires notice and hearing.

Instances when NO NOTICE AND HEARING are
necessary.

1. Where the order is a mere order of investigation
preparatory to the final hearing and decision of the
application.
2. Where the modification of the certificate is only in
form and not in substance, such as, an order granting
an application for substitution.
3. Where the order is merely to give additional time to
register vehicles.
4. An order for good cause suspending for a period not
to exceed thirty days any certificate or the exercise or
authority to issued or granted.
5. Where the authorized line of the oppositor are
different from those for the applicant, the former
cannot be considered to have substantial interest in
the application so as to require his personal
notification of the hearing.

NOTE: That lack of notice is deemed cured
where the petitioners were able to timely
oppose petitions. They are deemed to have
been given due process of law which simply
means the opportunity to be heard.

Where the Commission entered its
order without notice and hearing, the defect, if
any, is cured by a hearing on the petitioners
motion to reconsider the order. However, the
defect is waived where the applicant petitions for
another extension of sixty (60) days in which to
install its franchise.

PSC has the power to re-open case,
under its power to revoke and modify.

+ GROUNDS FOR SUSPENSION OR REVOCATION
OF CERTIFICATE

The right to operate a public utility is a privilege
granted by the state. Thus it can be revoked
when the holder:

1. Violates contumaciously refuses to comply with any
rule, order or regulation of the commission
2. Is a mere dummy
3. Ceases operation by placing his bus in storage
4. Abandons the service

+ NO REVIVAL OF THE CPC DUE TO THE
FOREGOING.

The right to a certificate of public
convenience which has been forfeited by the holders
voluntary and unauthorized abandonment of his
service and failure to register his equipment should
not be revived simply because the government
would not be able to collect his tax liabilities.

The mere failure of the Government to collect the tax
liabilities of a holder of a certificate of public
convenience is not a sufficient ground for revoking
the Commissions decision to cancel his certificate
where the reasons therefore are that the holder has
completely and voluntarily abandoned, without
authority, the services required by his certificate.

Stoppage of operations sufficient ground for
cancellation of certificate. But the mere failure in
good faith to operate temporarily is NOT a ground
for cancellation of the CPC.

D. PROCEEDINGS OF COMMISSION WITHOUT
PREVIOUS HEARING.
The Commission shall have power,
without previous hearing, subject to
established limitations and exceptions and
saving provisions to the contrary:

a. To investigate, upon its own initiative, or upon
complaint in writing, any matter, concerning any
public service as regards matters under its
jurisdiction;
b. To require any public service to pay the actual
expenses incurred by the Commission in any
investigation if it shall be found in the same that any
rate, toll, charge, schedule, regulation, practice, act
or service thereof is in violation of any provision of
this act or service thereof, is in violation of any
provision of this Act or of any certificate, order, rule,
regulation or requirement issued or established by
the Commission;
c. From time to time apprise and value the property of
any public service, whenever in the judgment of the
Commission it shall be necessary so to do, for the

COMMERCIAL LAW
TRANSPORTATION LAWS
237

2009 BAR OPERATIONS
purpose of carrying out any of the provisions of this
Act, and in making such valuation the Commission
may have access to and use any books, documents,
or records in the possession of any department,
bureau, office, or board of the government of the
Philippines or any political subdivision thereof;
d. To provide, on motion by or at the request of any
consumer or user of a public service, for the
examination and test of any appliance used for
measuring of any product or service of a public
service;
e. To permit any street railway or traction company to
change its existing gauge to standard steam railroad
gauge, upon such terms and conditions as the
Commission shall prescribe.
f. To grant to any public service special permits to make
extra or special trips within the territory covered by
its certificate of public convenience, and make special
excursion trips outside of its own territory if the
public interest or special circumstances required it:
Provided, however, that in case a public service
cannot render such extra service on its own line or in
its own territory, a special permit for such extra
service may be granted to any other public service;
g. To require any public service to keep its books,
records, and accounts so as to afford an intelligent
understanding of the conduct of its business and to
that end to require every public service of the same
class to adopt a uniform system of accounting;
h. To require any pubic service to furnish annual reports
of finances and operations.
i. To require every public service to file with the
Commission a statement in writing, verified by the
oaths of the owner of the president and the secretary
thereof, if a corporation, setting forth the name, title
of office or position, and post office address and the
authority, power and duties of every officer, member
of the board of directors, trustees executive
committee, superintendent, chief or head of
construction and operation thereof;
j. To require any public service to comply with the laws
of the Philippines and with any provincial resolution
or municipal ordinance relating thereto and to
conform to the duties imposed upon it thereby or by
the provisions of its own character, whether obtained
under any general or special law of the Philippines;
k. To investigate any or all accidents that may occur on
the property of any public service or directly or
indirectly arising from or connected with its
maintenance or operation in the Philippines; to
require any public service to give the Commission
immediate and effective notice of all or any such
accidents, and to make such order or
recommendation with respect thereto as the public
interest may warrant or require;
l. To require every public service as herein defined to
file with it complete schedules of every classification
employed and of every individual or joint rate, toll
fare or charge made, charged or exacted by it for any
product supplied or rendered within the Philippines
and, in the case of public carriers, to file with it a
statement showing the itineraries or routes served as
specified in such requirement.

NOTES:
The Commission not only has the
general supervision over all public utilities and
the power to investigate, upon its own initiative
or a complaint in writing, any just causes or
grievances against any of them, to make and
enforce reasonable rules and regulations, and
grant relief in all proper cases and that it not
only has the power to make and enforce all
reasonable rules and regulations for the
operation of any public utility, including water
crafts, vessels and steamships.

The Commission can appoint members
of the PNP stationed in the provinces, as officials
in charge with enforcing its regulations.

The Commission has also the express
power to charge the expense of an investigation
against the operators found guilty of violation of
the conditions of his certificate or of a law or
ordinance, as it has power, for the same cause, to
suspend or revoke a certificate of public
convenience.

POWER TO GRANT COMMISSION TO GRANT
PERMITS WITHOUT HEARING.
General Rule:
The Commission has no power to grant
special permits to operate a public service
without NOTICE AND HEARING.

Exceptions:
a. Permit to make extra or special trips within
the territory covered by the certificate of
public convenience; and
b. Special excursion trips outside of the
territory of the public service if public
interest or special circumstances require it.
c. It is a well settled doctrine that for a
provisional permit an ex parte hearing
suffices. The decisive consideration is the
existence of a public need.

OPERATIONS OF PUBLIC SERVICE
REGULATIONS AND PROHIBITIONS

SECTION 18.
It shall be unlawful to engage in any public service
business without having first secured from the
commission a certificate of public convenience or
certificate of public convenience and necessity as
provided for in this act, except grantees of legislative
franchises expressly exempting such grantees from the

COMMERCIAL LAW
TRANSPORTATION LAWS
238

2009 BAR OPERATIONS
requirement of securing a certificate from this
commission as well as concerns at present existing
expressly exempted from the jurisdiction of the
commission, either totally or in part, by the provisions of
section 13 of this act.

SECTION 19.
It shall be unlawful for any public service:
a. To provide or maintain any service that is
unsafe, improper or inadequate, or withhold or
refuse any service which can be reasonably
demanded and furnished;
b. To make or give directly or indirectly, by itself
or through its agents, attorneys or brokers, or
any of them, discounts or rebates on
authorized rates or grant credit for the
payment of freight charges;
c. To refuse or neglect, when requested by the
director of posts or his authorized
representative, to carry public mail in the
regular trips of any public land transportation
service maintained or operated by any such
public service, upon such terms and conditions
and for a consideration in such amount as may
be agreed upon between the director of posts
and the carrier.

NOTES:
The law does not require that the same
charge be made for carrying passengers or
property, unless all the conditions are alike and
contemporaneous. It does not prohibit the
charging of a different rate for carrying
passengers or property when the actual cost of
handling and transporting the same is different.
It is when the prove charged is for the purpose
of favoring persons or localities or particular
kinds of merchandise that the law intervenes
and prohibits. It is favoritism and discrimination
which the law prohibits.

SECTION 20.
The following are the acts which requires approval of
the commission:

a. To adopt, establish, fix, impose, maintain, collect or
carry into effect any individual or joint rates,
communication, mileage or other special rate, toll,
fare, charge, classification or itinerary.
b. To establish, construct, maintain, or operate new
units or extend existing facilities or make any other
addition to or general extension of the service;
c. To abandon any railroad station or stop the sale of
passenger tickets, or cease to maintain an agent to
receive and discharge freight at any station now or
hereafter established at which passenger tickets are
now or may hereafter be regularly sold, or at which
such agent is now or may hereafter be maintained, or
make any permanent change in its time tables or
itineraries on any railroad or in its service;
d. To lay any railroad or street railway across any
highway;
e. Hereafter to issue any stock or stock certificates
representing an increase of capital; or issue any share
of stock without par value; or issue bonds or other
evidence of indebtedness payable in more than one
year from the issuance thereof;
f. To capitalize franchise in excess of the amount,
inclusive of any tax or annual charge actually paid to
the government of the Philippines or any other
political subdivision thereof as the consideration of
the said franchise;
g. To sell alienate, mortgage, encumber or lease its
property, franchises, certificates privileges or rights,
or any part thereof, with those of any public service.

When may the public Service Commission or
Regulatory Board approve sale or mortgage of
public service property?

The approval may be given before or after the
consummation of the sale or mortgage. If the
approval takes place after the transfer, the effect
thereof is or may be retroactive. (Zamboanga
Trans Co v Bachrach Motor Co, 52 Phil 244)

Criterion for approval of a sale or encumbrance
of a certificate of public convenience

Under Sec. 20(g), the Commission (now
regulatory boards, commissions and councils)
has the power and authority to approve a sale or
transfer of a CPC if:
1. There are just and reasonable
grounds for making the
transfer
2. The sale or transfer is not
detrimental to the public
interest.
This provision, it is believed is applicable to all
regulatory boards, commissions and councils, as
a result of the transfer of powers and functions.
The jurisdiction and supervision and control over
all public services originally vested in the Public
Service Commission have been distributed
among the various regulatory boards,
commissions and councils.

The effect of a sale of public service property
without the approval of the pertinent public
service regulatory body

Such transfer is not binding against said
commission and against third persons, and the
original grantee continues to be responsible
upon the franchise. Such approval is not
however a condition precedent to the validity
of the contract. The approval is only necessary
to protect public interest. And as between the
parties, the contract is valid and binding even

COMMERCIAL LAW
TRANSPORTATION LAWS
239

2009 BAR OPERATIONS
without such approval. (Darang v Belizar,
January 31, 1967)
The transferor continues to be regarded as
operator where the transfer is without
PSCs approval.
In a transfer NOT APPROVED by the PSC,
for damage caused a passenger the
REGISTERED OWNER is DIRECTLY LIABLE to
the passenger, BUT the TRNSFEREE is liable to
the TRANSFEROR

h. To sell or register in its books the transfer or sale
of shares of its capital stock, if the result of that sale
in itself or in connection with another previous sale,
shall be to vest in the transferee more than forty
percentum of the subscribed capital of said public
service.

i. To sell, alienate or in any manner transfer shares
of its capital stock to any alien if the result of that
sale, alienation, or transfer in itself in itself or in
connection with another previous sale shall be the
reduction to less that 60% of the capital stock
belonging to Philippine citizens.

j. To issue, give or tender directly or indirectly, any
free ticket, free pass or free or reduced rate of
transportation for passengers, except to the
following persons:
(1) officers, agents employees,
attorneys, physicians and surgeons
of said public service, and members
of their families;
(2) inmates of hospitals or charity
institutions and persons engaged in
charitable work;
(3) indigent, destitute and homeless
persons when transported by
charitable societies or hospitals, and
the necessary agents employed in
such transportation;
(4) the necessary caretakers, going and
returning, of livestock, poultry, fruit
and other freight under uniform and
non-discriminatory regulation;
(5) employees of sleeping car
corporations and telegraph and
telephone corporations, railway and
marine mail service employees
when traveling in their official duty;
(6) post office inspectors, custom
officers and inspectors, and
immigration inspectors when
engaged in inspection;
(7) witnesses attending any legal
investigation in which public service
is an interested party;
(8) persons injured in accidents or
wrecks, and physicians and nurses
attending such persons;
(9) peace officers and men of regularly
constituted fire departments.

NOTES:
Rules relative to the extent of the power
of the PSC with regard to approval of the sale,
alienation, or mortgage of public service property:

1. The approval by the Commission is discretionary.
2. The approval by the Commission may be given
before or after the consummation of the
alienation in question. If the approval takes place
after the transfer, the effect thereof is or may be
retroactive.
3. The PSC has also jurisdiction to approve the sale
of Certificate of Public Convenience under
receivership as well as the assigned made by the
purchaser of his rights to such certificates to
authorize an appellee to operate the
transportation lines covered thereby.
4. Certificates of Public Convenience are included in
the term property- thus- it is liable to execution.
5. In case of sale of CPC the approval of the PSC is
NOT a mere formality that could be dispensed
with or taken for granted.

Since a franchise is personal in nature,
any transfer or lease thereof should be
notified to the PSC so that the latter
may take proper safeguards to protect
the interest of the public.
PSC not the courts, proper place to
obtain conveyance of certificate and
thresh out rights of parties in sale
thereof.
Pendency in court pf validity of transfer
of franchise does not deprive PSC of
power to approve transfer thereof.
PSC has power to approve or disapprove
sale even of Certificates under judicial
attachment.
PSC has power to approve or disapprove
sale even of certificate subject of
pending cancellation proceedings in
PSC.

Court rulings as to the procedure for
obtaining approval.
1. Under par g of Section 20, the approval
required shall be given after notice to the
public and after hearing the persons
interested at a public hearing;
2. As to notice, it has been held that notice of
sale by publication is sufficient.
3. As to persons who may oppose the approval,
it has been held that a party not affected by
the sale cannot legally oppose it.
4. The requirement regarding publication of
the sale of the certificate of public
convenience only refers to an application for
the final approval of a deed of sale and to an
ex parte petition for provisional approval,

COMMERCIAL LAW
TRANSPORTATION LAWS
240

2009 BAR OPERATIONS
and the memorandum order of the
Commission only refers to the ale of
temporary certificates of 5 to 10 years life
and not to those issued for a normal life of
25 years;
5. Moreover, the requirement regarding
publication contained in the memorandum
order is merely directory which can be
waived by the Commission if it finds good
reasons for doing as to promote public
interest.

PENALTIES FOR VIOLATIONS

Section 21.
The Commission has the power to impose FINES
not exceeding P200.00 per day for every day during which
such default or violation continues which fine can be
impose only AFTER DUE NOTICE AND HEARING.

Effect if fine is not paid?
FAILURE to pay the FINE shall be DEEMED
GOOD AND SUFFICIENT REASON FOR THE
SUSPENSION OF THE CERTIFICATE OF SAID PUBLIC
SERVICE UNTIL PAYMENT SHALL BE MADE.

NOTES:
Where the PSC is empowered by
franchise of operator only to fix the
rates it has no authority to impose
fines on said holder of franchise.
In order that a respondent public
service may be held criminally liable
the act committed by it must be
expressly prohibited. In the absence of
said express prohibition the holder of
the franchise cannot be held criminally
liable.

Section 22.
Observance of the orders, decisions, and
regulations of the Commission and of the terms and
conditions of any certificate may also be enforced by
mandamus or injunction in appropriate cases. PROVIDED,
that the Commission may compromise any case that may
arise under this Act in such manner and for such amount
as it may deem just and reasonable.

NOTES:
1. The RTC has concurrent jurisdiction with
the Commission over cases of an operator
violating his or its certificate.
2. However, the filing of the case before the
Commission must not be premature.
3. RTC may grant an injunction against public
service operators;
4. RTC may grant the injunction against a
public service without authority to
operate.
5. The disobedience to an order of a court
forbidding a pubic service company to
collect a fare less than that authorized by
the PSC constitutes criminal contempt.
6. RTC may issue mandatory injunction to
compel an operator to furnish service.

Cases where the RTC cannot grant injunctions:
1. The RTC cannot issue injunctions against the
orders of the Commission.
2. The RTC cannot enjoin an operator from doing
what the Commission has authorized.

Section 23.
Any public service corporation that shall:
a. perform, commit, or do any act or
thing forbidden or prohibited; or
b. shall neglect fail or omit to do or
perform any act or thing herein to
be done or performed
SHALL BE PUNISHED:
a. a fine NOT exceeding P25,000.00;
or
b. Imprisonment NOT exceeding 5
years; or
c. BOTH in the discretion of the court.

Section 24.
Any public service person shall:
a. perform, commit, or do any act or
thing forbidden or prohibited; or
c. shall neglect fail or omit to do or
perform any act or thing herein to
be done or performed SHALL BE
PUNISHED by

a. a fine NOT exceeding P2,000.00; or
years; or

PROVIDED:
That for operating a private passenger
automobile as a public service without having a
certificate of public convenience for the same
the offender shall be subject to the penalties
provided for in Section 67 (j) of Act 3992.
NOTE:
A person permitting his privately owned
and registered car to be used for hire is
punishable under this Section.
Section 25.
Any person who shall knowingly and willfully
neglect, fail or omit to do or perform or who shall
knowingly and willfully cause or join or participate with
others in causing any public service corporation or
company to neglect, fail or omit to do or perform xxx shall
be PUNISHED

COMMERCIAL LAW
TRANSPORTATION LAWS
241

2009 BAR OPERATIONS
years; or

Section 26.
Any person who shall destroy, injure, or interfere
with any apparatus or appliance owned or operated by or
in charge of the Commission or its agents, shall be
deemed guilty of a misdemeanor and upon conviction
shall be PUNISHED
months; or

Section 27.
The Act shall NOT have the effect to release or
waive any right of action by the Commission or by any
person xxx.

Section 28.
Violations of the orders, decisions, and
regulations of the Commission and of the terms and
conditions of any certificate issued by the Commission
shall prescribe after 60 days and violations of the
provisions of this Act shall prescribed after 180 days.

NOTES:
* *P Pr re es sc cr ri ip pt ti io on n o of f c cr ri im me e. .
The period of prescription commences to run
from the day on which the crime is discovered by the
offended party, the authorities or their agents. The
commencement of a criminal action interrupts the
running of the period of prescription.
The 60 day prescription period under Section 26
of the Public Service Law is available defense only in
criminal or penal proceedings.
PROCEDURE AND REVIEW
Section 29.
All hearings and investigations before the
Commission shall be governed by rules adopted by the
Commission and in the conduct thereof the Commission
shall not be bound by the technical rules of legal evidence:
PROVIDED: That the Public Service
Commissioner may summarily punish any person who is
guilty of misconduct in the presence of the presence of
the Commissioner for CONTEMPT:
PENALTY: FINE not exceeding P200.00 or for
IMPRISONMENT not exceeding 10 days or BOTH.
To enforce the provisions of this Section, the
Commission may, if necessary request the assistance of
the MUNICIPAL POLICE for the execution of any order
made for said purpose.
NOTES:
The Rules of Court is suppletory to the rules of
the Commission.

COURT RULINGS AS TO PARTIES.
1. While the Commission is authorized to make rules for
the conduct of their business, it could not seat at
naught the fundamental rule of all proceedings that
only parties having a real interest will be heard.
2. A party NOT affected or prejudiced cannot file an
opposition.
3. One public service corporation cannot assume the
name and be substituted in the place of another
public service corporation.
4. A legal representative of the estate of the deceased
applicant may be substituted for the latter.
5. One who has been granted a legislative franchise to
operate an ice plant, although not yet an operator of
such public utility.
6. The fact that a party is the lessee of a line does not
bar him from applying for a certificate of its own in
the same line.
7. A case involving the grant of Certificate of Public
Convenience to the respondent becomes moot and
academic where the respondent ceases to be a bus
operator, and it should be dismissed.
8. The PSC has no authority to authorize one
corporation to assume the name of another.

COURT RULINGS AS TO NOTICE.
1. A public service is entitled to notice as to the charges
against it, and to have an opportunity to answer such
charge and to defend itself against it.
2. A party affected by an order amending a certificate is
entitled to a notice.
3. An interested party who is not given notice is not
bound by the decision.
4. In certain cases, a defect in the order of a publication
for a certificate of public convenience will not vitiate
the certificate.
5. Notice of hearing may however be waived.

COMMERCIAL LAW
TRANSPORTATION LAWS
242

2009 BAR OPERATIONS
6. Where personal notice is required by the notice of
hearing by the notice of hearing itself, failure to do so
vitiates decision not withstanding publication of
notice.

COURT RULINGS AS TO RECEPTION OF EVIDENCE.
1. The Commission cannot dismiss a case provisionally
without receiving evidence.
2. The report of an inspector of the Commission must
be made before the Court and subjected to cross
examination.
3. The Commission in the exercise of its quasi-judicial
and administrative functions.
4. Reception of evidence may be delegated to the Chief
Attorney of the Commission or an assistant to a
Commissioner.
5. The parties must be given opportunity to present
their evidence.
6. The Commission may also bake notice of certain
facts.

Court rulings as to requirements of publication of
application for hearing.
1. Among the rules adopted by the PSC is that which
requires that the order setting an application for
hearing be published in two newspapers of general
circulation at least 10 days prior to the date of the
hearing.
2. But where the corresponding notice of the
application was published and served upon the
parties and the application was amended by reducing
the same line applied for, the failure to publish notice
of the amendment cannot possibly impair the rights
of any operator or affect the jurisdiction of the PSC to
entertain the petition as amended and to grant the
same.
3. The rules of procedure in the Commission require an
applicant for a certificate to operate a bus or TPU
auto-truck service to publish in two newspapers of
general circulation the order setting his application
for hearing and in addition to sent by registered mail
copy of the application and the order of hearing to all
operators who may be affected thereby as appearing
in the list furnished by the Commission.
Court rulings as to PSC decision.
1. A decision of the Commission must have some
evidence to support it.
2. But a finding of fact is not necessary for the validity of
the Commissions decisions.
3. A decision of the Commission must be based on
conditions at the time of hearing or decision.
4. A decision of the Commission cannot include in a
certificate a line excluded during the hearing.
5. There is no time fixed for the Commission within
which to render its decisions.
6. And the fact that the decision was rendered before
the filing of the memorandum of the parties is no
ground for its reversal.
7. Unless actually without basis, the interpretation
based upon its orders by the PSC should not be
disturbed by the Supreme Court.
8. PSC is empowered to approve provisional rates of
utilities without prior hearing.
9. Law confines in administrative office questions of
facts, jurisdictions of such office over the Courts.
Contempt Proceedings
Under Section 29 the Commission may summarily
punish a person for direct contempt but not for indirect
contempt at least insofar as their jurisdiction over
public services is concerned.
Direct Contempt
- Direct contempt may consists in:
1. misconduct in the presence of the Commissioners or
so near them as to interrupt the hearing or session or
any proceedings before them;
2. refusal to be sworn as a witness or to answer as such
when lawfully required to do so.
Indirect Contempt
- Indirect contempt may consists of:
1. failure to obey a subpoena issued by the Commission
requiring the attendance and testimony of a witness
of the production of necessary books, papers and
documents,
2. refusal to comply with any order or decision lawfully
entered by the Commission.
Section 30.
1. The Commission may issue subpoena and
subpoena duces tecum, for witnesses in any
manner or inquiry pending before the
Commission and require the production of
books, papers, tariffs, contracts, agreements,

COMMERCIAL LAW
TRANSPORTATION LAWS
243

2009 BAR OPERATIONS
and all other documents which the Commission
may deem necessary in any proceeding.
2. Any person who shall neglect or refuse to answer
lawful inquiry or produce before the Commission
books, papers, tariffs, contracts, agreements,
and all other documents; or to answer any lawful
inquiry shall be punished by a fine not exceeding
P5,000.00 or by imprisonment not exceeding 1
year, or both, in the discretion of the court.
3. The Commissioner and associate commissioners,
the chiefs of divisions, the attorneys of the
Commission, and the deputy secretaries shall
have the power to administer oaths in all matters
under the jurisdiction of the Commission.
4. Any person who shall testify falsely or make any
false affidavit or oath before the Commission or
before any of its members shall be guilty of
perjury, and upon conviction thereof in a court of
competent jurisdiction, shall be punished as
provided by law.
5. Witnesses appearing before the Commission in
obedience to subpoena or subpoena duces
tecum, shall be entitled to receive the same fees
and mileage allowance as witnesses attending
RTC civil cases.
6. Any person who shall obstruct the Commission
or either of the Commissioners while engaged in
the discharge of official duties or who shall
conduct himself in a rude, disorderly or
disrespectful manner before the Commission
upon conviction of the same shall be punished
for EACH offense by a FINE not exceeding
P1,000.00 or by IMPRISONMENT not exceeding
6 months, or BOTH in the discretion of the court.
Section 31.
No person shall be excused from a subpoena or
subpoena duces tecum issued by the Commission
EXCEPT when the testimony or evidence required of him
may tend to incriminate him.
Without the consent of the interested party NO
member or employee of the Commission shall be
compelled or permitted to give testimony in any civil suit
to which the Commission is not a party, with regard to
secrets obtained by him in the discharge of his official
duty.
Section 32.
The Commission is also allowed to take
deposition of witnesses who are residing within or
without the Philippines to be taken in the manner
prescribed by the Rules of Court.
(See: Deposition of Witnesses - Rules 23 to 29 1997
Rules on Civil Procedure).
Section 33.
Every order made by the Commission shall be
served upon the person or public service affected thereby,
within 10 days from the time said order is filed by
personal delivery or by ordinary mail, upon the attorney
of record or in case there be no attorney of record, upon
the party interested; and in case such certified copy is
sent by registered mail, the registry mail receipt shall be
the prima facie evidence of the receipt of such order by
the public service in due course of mail.
Section 34.
Any interested party may request the
reconsideration of any order, ruling, or decision of the
Commission by means of a petition filed not later than 15
days after the date of the notice of the order, ruling, or
decision in question.
NOTES:
Limitation on Commissions power to order
rehearing.
A rehearing cannot be granted by the
PSC for the reconsideration of a question which
has been decided by the SC on appeal to that
tribunal.
While the Commission is given wide
power to grant rehearing, a distinction must be
made between those orders that remain entirely
within the powers of the Commission and those
orders which are brought to the SC for review
and final decision.
Motion must be based on facts.
The right to be heard and present
evidence in support of the allegations, contained
in his motion of intervention, naturally follows,
provided the motion for intervention or
reconsideration state facts sufficient to justify a
reconsideration of the questioned order and the
granting of a new hearing.
Section 35.
The Supreme Court is hereby given jurisdiction
to review any order, ruling or decision of the Commission
and to modify or set aside such order, ruling or decision
when it clearly appears that there is no evidence before
the Commission to support reasonably such order, ruling,
or decision, or that the same is contrary to law, or that it
was without jurisdiction of the Commission.
NOTES:

COMMERCIAL LAW
TRANSPORTATION LAWS
244

2009 BAR OPERATIONS
An unverified Motion for
Reconsideration containing generalities cannot
justify setting aside of a decision handed down in
response to a clear public need, where there is
evidence that the buses operated by the movant
cannot accommodate all the passengers on
those lines.
Remedies to set aside order of Commission.
There are only two remedies available in the Supreme
Court to set aside an order of the Public Service
Commission.
1. Petition for review see Rule 45, Rules of
Court
2. Petition for Certiorari see Rule 65, Rules of
Court
N.B.
RTC not the CA has jurisdiction over actions to annul
orders of the Commission because even the above
mentioned remedies was indicated to be available only
to the SC still you need to follow the Rules on
Hierarchy of Courts which provides that Petition for
Review or on Certiorari shall first be filed before the
RTC, to CA and then to SC.
As a rule, Court does not interfere with
administrative action prior to its
completion and finality.
Construction given by an
administrative agency possessed of
the necessary special knowledge,
expertise and experience deserves
great weight and respect, term
radiotelephony includes cellular
phones. (PLDT v. NTC, 190 SCRA
717).
Section 36.
Any order, ruling, or decision of the Commission
may be reviewed on the application of any person or
public service may be reviewed on the application of any
person or public service affected thereby, by certiorari in
appropriate cases, or by petition to be known as petition
for review, which shall be filed within 30 days from the
notification of such order, ruling or decision.
NOTES:
The rule on the 15 day and 30 day
period is the same in the Energy Regulatory
Period. But as to the LTFRB and the NTC the
period within which appeal may be made is
within 30 days from notice.
As to the National Water Resources
Council now Board- appeals to the RTC must
be made within 15 days from the date the
party appealing receives a copy of the decision.
As to the Maritime Industry Authority appeal
may be made within 30 days from notice.
Petition for review filed seven (7) months
after receipt of notice of denial is
considered to have been filed out of time.
Objections not raised in the Commission
cannot be raised on appeal.
Compromise agreement of parties bars
certiorari or review.
Motion for reconsideration not a
condition precedent for appeal.
If the petitioner shows lack of interest in
the case the petitioner has no standing
in the Court, and his petition for review of
an order of the PSC must be dismissed
with costs.
Section 37.
The institution of a writ of certiorari or other
special remedies in the Supreme Court shall in no case
supersede the Supreme Court shall so direct, and the
appellant may be required by the Supreme Court to give
bond in such form and of such amount as may be deemed
proper.
Section 38.
The Chief of the legal division or any other
attorneys of the Commission shall represent the same in
all judicial proceedings. It shall be the duty of the Sol Gen
to represent the Commission in any judicial proceedings
if, for special reason, the Commissioner shall request his
intervention.
Section 39.
Any proceeding in any court of the Philippines
directly affecting an order of the Commission or to which
the Commission is a party, shall have preference over all
other civil proceedings pending in such court, EXCEPT
election case.

COMMERCIAL LAW
TRANSPORTATION LAWS
245

2009 BAR OPERATIONS

CONVENTION FOR HE UNIFICATION OF CERTAIN
RULES RELATING TO INTERNATIONAL CARRIAGE BY
AIR, SIGNED AT WARSAW ON OCT. 12 1929
(WARSAW CONVENTION)

I) Scope

This Convention applies to all international
carriage of persons, luggage, or goods performed by
aircraft for reward. It applies equally to gratuitous
carriage by aircraft performed by an air transport
undertaking.

>This also applies to carriage performed by the State or
by legally constituted public bodies provided it complies
with the condition of the above stated.

>This does not apply however to carriage performed
under the terms of any international postal convention.

International carriage: means any carriage in which
according to the contract made by the parties, the place
of departure and the place of destination, whether or not
situated either within he territories of two High
Contracting parties, or within the territory of a single High
Contracting party, if there in agreed stopping place within
the territory subject to the to the laws of the state.

>A carriage without such agreed stopping place between
territories subject to he law of the contracting parties is
not deemed to be international for the purposes of this
act.

A carriage to be performed by several successive
air carriers is deemed, for the purpose of this act to be one
undivided carriage, if it has been regarded by the parties
as a single operation, whether it had been agreed upon
under the form of a single contract or of a series of
contract.

II) Documents of carriage

A) Passenger ticket
For the carriage of passenger the carrier must deliver
a passenger ticket which shall include the place and date
of issue, destination and date of departure, agreed
stopping place, and the liability or the carrier under
international law.

>The absence, irregularity, or loss of the passenger ticket
does not affect the existence and the validity of the
contract.
>Should the carrier accept passenger without ticket, the
carrier cannot avail of the provision of this Convention to
exclude or limit his liability.

B) Luggage ticket
For the carriage of luggage, other than small personal
objects of which the passenger takes charge himself, the
carrier must issue a luggage ticket. which shall be in
duplicate, one part for the passenger and the other for
the carrier.
>The absence, irregularity, or loss of the luggage
ticket does not affect the validity of the contract unless in
case the carrier did not deliver a ticket, or the ticket did
not contain the statement of the number and weight of
the luggage and the statement that the carriage is subject
to the rules relating to liability established by this
convention, the carrier cannot avail of the provision of the
convention limiting his liability.

C) Air consignment note

Every carrier of goods has the right to require the
consignor to make out and deliver to him an Air
consignment note And every consignor has the right
to require the carrier to accept this document.

>The absence or irregularity or loss of this note shall
not affect the validity and existence of the contract.
Provided that if the carrier accepts goods without the
air consignment note or the particulars such as the
place of destination, name and address of the
consignee, apparent condition of the goods quantity
and volume of the goods, the carrier cannot avail of
the provision limiting his liability in case of a loss or
damage top the goods.

> The air consignment note is prima pacie evidence of
the conclusion of the contract, of the receipt of the
goods and of the condition of carriage.

D) Rights of the consignor

1) Consignor is responsible for the correctness of
the particulars of the goods
2) Liable for damage suffered by the carrier or any
other person by reason of the irregularity,
incorrectness, or incompleteness of the said
particulars and statements.
3) Right of stoppage or to withdraw the goods at
the aerodrome of departure or destination or to
be delivered to other person other than the
consignee.

>If it is impossible to carry out the orders of the consignor
the carrier must inform him of such impossibility.

> If it involves the disposition of the goods the carrier
must demand the consignment note, otherwise the
carrier is liable to the consignee or to anyone in
possession of the goods in case of damage to the goods.

>The right of the consignor ceases at the moment the
consignee received the goods.

E) Right of the consignee
1) To deliver to him the goods upon arrival at the place
of the destination.
2) To deliver to him the consignment note
3) To be given notice of the arrival of the goods.

COMMERCIAL LAW
TRANSPORTATION LAWS
246

2009 BAR OPERATIONS
4) Right to enforce liability against the carrier in case of
loss.

F) Liability of the carrier
1) Liable for damage in the event of death or wounding
of passenger or any other bodily injury if the injury or
damage take place on board or in the course of the
operation of embarking or disembarking.
2) To damages if the goods were damaged during the
carriage by air.
>The period of carriage does not extend to carriage by
land or by sea except if the carriage by land is for the
purpose of loading, delivery, transshipment, any damage
is presumed to have been the result of an event which
took place during the carriage by air.
3) Liable for damage in case of delay in the carriage of
the goods or luggage.

F) Carrier is not liable.
1) If the carrier act with necessary measure to avoid the
damage
2) If the carrier proves that the damage loss was due to
negligence in the handling of the aircraft or pilotage.
3) May be exonerated wholly or partially if carrier
proves contributory negligence on the part of the
injured person.

The carrier cannot avail of the provision of this
convention in limiting or excluding him from any
liability if the damage was caused by the willful
misconduct on his part.
Carrier is not entitled to the provision limiting his
liability if the damage was caused by the agent of the
carrier acting within the scope of his employment.

G) Venue of action.
1) RTC where the business of the carrier is located
2) RTC of the place where the contract was made
3) Court of the place of destination
4) Court of the place of departure
5) Court where the place has stopped over

H) Presciption of action.
Within two (2) years from the date of arrival at
the destination, or from the time the aircraft ought to
have arrived, or from the time the carrier was stopped.

COMMERCIAL LAW
ELECTRONIC COMMERCE LAW
247

2009 BAR OPERATIONS

AN ACT PROVIDING FOR THE RECOGNITION AND
USE OF ELECTRONIC COMMERCIAL AND NON-
COMMERCIAL TRANSACTIONS AND DOCUMENTS,
PENALTIES FOR UNLAWFUL USE THEREOF AND FOR
OTHER PURPOSES

Otherwise known as
ELECTRONIC COMMERCE ACT

PART I
A. INTRODUCTION

History of the Electronic Commerce Act.

The Electronic Commerce Act (Republic Act
No. 8792; the Act) is the merged version of the
House Bill No. 9971 (HB 9971) and Senate Bill No,.
1902 (SB 1902), primarily authored and sponsored by
Senator Ramon Magsaysay, Jr. and Representatives
Leandro Verceles, Jr. and Marcial Punzalan, Jr.

The Inter-Agency Task Force.

The Electronic Commerce Act (Republic Act
No. 8792; the Act) was signed into law on June 14,
2000. On that day, an inter-agency task force
convened for the purpose of drafting the Acts
Implementing Rules and Regulations (IRR). The
task force was co-chaired by the Department of
Trade and Industry (DTI), Department of Budget and
Management (DBP) and the Bangko Sentral ng
Pilipinas (BSP).

The IRR was digitally signed on July 14, 2000
by Secretaries Mar Roxas II (DTI), Benjamin Diokno
(DBM) and Governor Rafael Buenaventura (BSP)
during the plenary session of the Global Information
Infrastructure Commissions (GIIC) Asia Regional
Conference held in Makati City, Manila.

Necessity of the Act.

To fill in some gaps in Philippine Law
requiring certain contracts be in writing (e.g.
statute of frauds) or that some documents be
signed (e.g. negotiable instruments). Since the law
already recognizes verbal or oral agreements, there
should be no reason why electronic contracts would
be denied validity.
Before the advent of the Electronic Commerce
Act, Philippine statutory law did not categorically validate
electronic evidence. To make matters worse, it was
universally acknowledged that the resolution of legal
issues respecting the validity of electronic contracts and
the admissibility of electronic evidence would take years
or even decades if left in the hands of Philippine judiciary.
The only solution to the conundrum therefore,
was to pass the Electronic Commerce Act and expressly
recognize, in no uncertain terms, that doing business
electronically is legal, valid and enforceable in a court of
law.

Guiding Principles of the Act.

1. Functional Equivalent Approach
Under this approach, the functions of a
document or a signature is analyzed, and, if an equivalent
exists in electronic form, then the latter will be adopted.

2. Technology-neutrality
It does not favor any particular technology. The
Act was written with an overriding concern to embrace
the full range of electronic technology without bias or
prejudice.
3. Principle of media neutrality
In sum, the Act recognizes electronic documents
and signatures in whatever media they may be found.
Media neutrality ensures no discrimination in the
legal treatment of the electronic document from the time
of its creation or delivery to the time of its receipt or
acceptance.

Role of the Act vis--vis Philippine Law.

The Act is not intended or designed to supplant
any substantive law, particularly the law on contracts. In
other words, Philippine substantive law will continue to
apply to all e-commerce transactions.

B. DECLARATION OF PRINCIPLES
FOR ELECTRONIC COMMERCE POLICIES

Authority of DTI to Set Forth Policies.
Section 2 of the IRR above was lifted from
the Act itself was placed in the earlier portion of the
IRR to establish the legal authority of the DTI, DBM
and BSP to lay down the policies for the promotion of
electronic commerce set forth in Section 3 of the IRR.

Source of the Policies.
The policies in Section 3 were based on the
Global Action Plan for Electronic Commerce
published in the Alliance for Global Business (AGB).

Role of the Private Sector.
The development of electronic commerce
should be driven by market forces with minimal
government intervention. Governments role is
nonetheless important insofar as it must provide and
sustain a secure legal environment and a competitive
business climate for electronic commerce.

ELECTRONIC COMMERCE ACT
REPUBLIC ACT NO. 8792

COMMERCIAL LAW
248

2009 BAR OPERATIONS
Harmonization of Laws.
Electronic commerce, especially when
conducted over the Internet, is necessarily global in
nature. This means the companies engaged in
electronic commerce may be required to comply with
the laws of each country where they consummate
transactions.

Hence, countries with less stringent rules or
weak enforcement measures may find themselves
used as safe harbors for e-businesses performing
acts or rendering services illegal or immoral in their
home countries.

Jurisdiction.
As of NOW, there is NO EXISTING LAW TO
DETERMINE THE JURISDICTION OF ELECTRONIC
COMMERCE TRANSACTIONS IN THE PHILIPPINES.

Taxation of Electronic Commerce.
There are to sate, no explicit Philippine tax
laws on electronic commerce and it appears that no
law will be passed on this matter in the near future.
However, it is undeniable that may of the activities
involving electronic commerce are subject to existing
tax laws.

Internet Consumer Trust Issues.
Lack of faith in Internet Sites is undeniably a
clear threat to electronic commerce.

Alternative Modes of Dispute Resolution.
E-commerce players would be better served
by privately-run dispute resolution centers with the
expertise and infrastructure to handle complex
disputes in a virtual environment. Such centers would
have arbiters with the necessary technical and legal
expertise to dispense justice in an even-handles
manner.

E-Commerce Policy Formulation.
The Philippine Government formulates
policies respecting electronic commerce through the
Information Technology Electronic Commerce
Council (ITECC), which was created through
Executive Order No. 264 signed by President Estrada.
The ITECC is the merger of the National Information
Technology Council (NITC) and the Electronic
Commerce Promotion Council (ECPC).
With the merger, the ITECC is the highest
planning and policy advisory body on Information
and Communications Technology in the Philippines.
The membership of the ITECC reflects the vision that
a strong partnership between government and the
private sector is needed to achieve sustained growth
in the ITC sector.

ITECC Clusters.
a. Infrastructure
b. Business Development
c. Financial Services
d. Human Resources Development, and
e. Legal

ITECC Legal Cluster.
a. Taxation - To address issues concerning the taxation
of electronic commerce, by providing assistance to
the taxing authority, the BIR.
b. Trade - To review import and export procedures with
the end in view of expediting the flow of trade
documents trough electronic facilities.
c. Government Re-engineering - To provide a venue for
coordinating ICT projects affecting multiple
government agencies.
d. Consumer Protection - To review consumer related
laws such as the Consumer Act of the Philippines in
order to determine if the rights of on-line consumers
would fall within their protective mantle.
e. Intellectual Property Rights - To address the
multifarious policy issues facing intellectual property
protection in the Digital Age.
f. Security

PART II

A. ELECTRONIC COMMERCE IN GENERAL

Objective.
To provide a secure legal framework and
environment for electronic commerce.

Applications.
The Act applies equally to commercial and
non-commercial activities unlike the Model Law and
similar legislation in other countries where the
enacted statutes govern only commercial
transactions.
By expanding the scope of the Act,
electronic documents and signatures may now be
used in all types of transactions and acts. More
importantly, electronic evidence is now admissible in
all types of civil, criminal and administrative
proceedings. Non-commercial activities include,
among others, acts, transactions and documents
relating to national security, criminal offenses,
marriage, paternity and filiation, adoption, parental
authority donations, quasi-delicts, labor and
employment labor relations, elections, suffrage,
agrarian reform, immigration, and protection of the
environment.

What is the Unique Feature of the Act?
It applies to both commercial and non-
commercial transactions because substantial portion
of Internet, mobile and electronic-commerce traffic
in the Philippines is not business related.
If the Act were made to apply only to
commercial transactions, the provisions thereof
would be static and inflexible to adapt to the rapid
pace of technology. Inevitably, electronic documents
and signatures will find widespread application in

COMMERCIAL LAW
249

2009 BAR OPERATIONS
both commercial as well as non-commercial
transactions. It is with this measure of foresight that
the Philippine Congress decided to adopt a universal
application for the Act.

Definition of Terms. (Sec 6 Implementing Rules
& Regulations)

(a) Addressee refers to a person who is
intended by the originator to receive the electronic
data message or electronic document, but does not
include a person acting as an intermediary with
respect to that electronic data message or electronic
document.
(b) Commercial Activities shall be given a
wide interpretation so as to cover matters arising
from all relationships of a commercial nature,
whether contractual or not. The term shall likewise
refer to acts, events, transactions, or dealings
occurring between or among parties including, but
not limited to, factoring, investments, leasing,
consulting, insurance, and all other services, as well
as the manufacture, processing, purchase, sale,
supply, distribution or transacting in any manner, of
tangible and intangible property of all kinds such as
commodities, goods, merchandise, financial and
banking products, patents, participations, shares of
stock, software, books, works of art and other
intellectual property.
(c) Computer refers to any device or
apparatus singly or interconnected which, by
electronic, electro-mechanical, optical and/or
magnetic impulse, or other means with the same
function, can receive, record, transmit, store,
process, correlate, analyze, project, retrieve and/or
produce information, data, text, graphics, figures,
voice, video, symbols or other modes of expression
or perform any one or more of these functions.
(d) Convergence refers to technologies
moving together towards a common point and
elimination of differences between the provisioning
of video, voice and data, using digital and other
emerging technologies; the coming together of two
or more disparate disciplines or technologies; the
ability of different network platforms to carry any
kind of service; and the coming together of
consumer devices such as, but not limited to, the
telephone, television and personal computer.
(e) Electronic data message refers to
information generated, sent, received or stored by
electronic, optical or similar means, but not limited
to, electronic data interchange (EDI), electronic mail,
telegram, telex or telecopy. Throughout these
Rules, the term electronic data message shall be
equivalent to and be used interchangeably with
electronic document.
(f) Information and Communications
System refers to a system for generating, sending,
receiving, storing or otherwise processing electronic
data messages or electronic documents and includes
the computer system or other similar device by or in
which data is recorded or stored and any procedures
related to the recording or storage of electronic data
message or electronic document.
(g) Electronic signature refers to any
distinctive mark, characteristic and/or sound in
electronic form, representing the identity of a
person and attached to or logically associated with
the electronic data message or electronic document
or any methodology or procedures employed or
adopted by a person and executed or adopted by
such person with the intention of authenticating or
approving an electronic data message or electronic
document.
(h) Electronic document refers to
information or the representation of information,
data, figures, symbols or other modes of written
expression, described or however represented, by
which a right is established or an obligation
extinguished, or by which a fact may be proved and
affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced
electronically. Throughout these Rules, the term
electronic document shall be equivalent to and be
used interchangeably with electronic data
message.
(i) Electronic key refers to a secret code,
which secures and defends sensitive information
that crosses over public channels into a form
decipherable only by itself or with a matching
electronic key. This term shall include, but not be
limited to, keys produced by single key
cryptosystems, public key cryptosystems or any
other similar method or process, which may
hereafter, be developed.
(j) Intermediary refers to a person who in
behalf of another person and with respect to a
particular electronic data message or electronic
document sends, receives and/or stores or provides
other services in respect of that electronic data
message or electronic document.
(k) Non-Commercial Activities are those not
falling under commercial activities.
(l) Originator refers to a person by whom,
or on whose behalf, the electronic data message or
electronic document purports to have been created,
generated and/or sent. The term does not include a
person acting as an intermediary with respect to that
electronic data message or electronic document.
(m) Person means any natural or juridical
person including, but not limited to, an individual,
corporation, partnership, joint venture,
unincorporated association, trust or other juridical
entity, or any governmental authority.
(n) Service provider refers to a provider of

i. Online services or network access, or
the operator of facilities therefor,
including entities offering the
transmission, routing, or providing of
connections for online communications,
digital or otherwise, between or among
points specified by a user, of electronic

COMMERCIAL LAW
250

2009 BAR OPERATIONS
data message or electronic documents
of the users choosing; or

ii. The necessary technical means by which
electronic data message or electronic
documents of an originator may be
stored and made accessible to a
designated or undesignated third party.

Can a computer be an addressee?

Under letter (a) of Section 6 of the Act, an
addressee must always be a natural or juridical
person, since under the law, they are the only
entities with the capacity to act with the legal
consequences.
Networks and computers are merely
conduits or tools by which transactions are
facilitated. As such, persons who employ these tools
should be responsible for the results obtained by
their use since the tools themselves cannot act
independently from their users. Hence, a computer
is no less a party to contract as a fax machine, telex,
or other office tools.

Convergence.
Convergence under the Act refers to
partial convergence because it is limited to the
convergence of hardware or infrastructure only and
does not include content such as software, movies,
music and books.

Electronic Data Message.
Generally, the term electronic data
messages is understood to mean any electronic file.
The Act provides that such information must either
be generated, sent, received or stored by
electronic, optical or similar means.

Electronic Data Messages generated by
electronic means includes word
processing and other computer files,
electronic mail, SMS (short message
service or text messages), and other
documents which are created through
electronic devices.
Electronic Data Messages sent or received
by electronic means Here, only the
MODE OF TRANSMISSION is RELEVANT
so that the output generated can be
considered an electronic data message. In
other words, a fax, telegram or telex
messages would be included because
there were transmitted through
telecommunication networks as would
transaction receipts for credit cards, debit
card, ATM card and other similar point of
sale transactions.
Electronic Data Messages stored by
electronic means It includes computer
files which are not intended for
transmission but merely for storage. Such
electronic files therefore enjoy the same
protection under the Act. It also refers to
paper documents that are transformed
into paperless form by digital imaging or
scanning as a result of which the paper
document is transformed into an
electronic data message even though its
final destination is an optical CD-ROM
disk.

Understanding the nature of an Electronic
document
One should not think of an electronic
document merely as a computer file but the
information contained therein. Even if it is printed
out on paper, it retains its character as an electronic
data message so long as the information has not
been altered.

Are the output of devices directly connected
to computers such as Print Outs from printers
which are already paper documents excluded
from the definition of Electronic Data
Message?
The output devices directly connected to
computers such as printouts from laser, inkjet and
dot-matrix printers are undeniably paper documents
and would seem to be excluded from the definition
of electronic data messages. Although the printouts
encompass the image appearing on a computer
monitor, the electronic data messages printed
thereby are generated or stored by electronic
means. They are therefore, electronic documents.
Note that under the New Rules on Electronic
Evidence, printouts are also originals for purposes of
the Best Evidence Rule.

Electronic Signatures.
a. Anything in electronic form which
identifies the user can be said to be his
signature if it is logically attached to an
electronic data message. For example, if
Juan de la Cruz identifies himself in his e-
mail messages as follows: juan dlc, then
the latter should be considered an electronic
signature. Another example of an electronic
signature is the name of a person appearing
in the From field on the e-mail, since the
same identifies a particular person and is
logically affixed on an electronic data
message.
b. A signature can also be used to indicate
the persons consent to the contents of a
document or authenticate the same. For
example, if Juan de la Cruz wanted to
approve an e-mail proposal, he might write a
reply e-mail with nothing but the word
accepted plus the usual mark juan dlc.
The entire reply e-mail would constitute the
electronic signature.
c. Method employed by the signer to
authenticate a data message. An example

COMMERCIAL LAW
251

2009 BAR OPERATIONS
is person signifying his consent to an online
contract by filing up a registration form and
clicking on the I Accept button. (i.e., the
contents of the form plus the fact of clicking)
will be considered as the electronic signature
of the person. This is true also in case of
digital signatures where the signature is not
merely the persons public key or his digital
certificate but the entire authentication
method utilized. In other words, an
electronic signature may be proven by
multiple documents provided that take as a
whole, they fulfill the functions of a
handwritten signature.

Note however, that while electronic
signatures are defined in the Act, only those
which comply with the stringent requirements
of Section 8 of the Act or Section 13 of the
IRR, rise to the level of and are given the same
legal protection as handwritten signatures.

Can a computer be a party to a contract if it is
programmed to accept electronic offers
automatically?
The party to the agreement is the person in
whose behalf the electronic acceptance was sent.
Hence, a computer can never be a party to an
electronic contract.
Note that as with the Model Law, the
originator and the addressee area always persons,
i.e. natural persons or juridical entities, which is
consistent with the concept that only persons (not
the tools they utilize) can perform acts or enter into
transactions with legal effect.
Note finally that an originator also includes
one who creates an electronic document not for
transmission but only for storage.

B. LEGAL RECOGNITION OF ELECTRONIC DATA
MESSAGES AND ELECTRONIC DOCUMENTS

The Principle of Non-Discrimination.

The fundamental principle that electronic
documents should not be discriminated against but
should be given the same legal status as their paper
based counterparts. THE MEDIUM IN WHICH THE
INFORMATION IS CONTAINED SHALL NOT
EFFECT ITS LEGAL CONSEQUENCE.

Incorporation by Reference.

Even now, many of the electronic
documents and data messages used in electronic
commerce no longer contain all relevant information
but merely make references thereto. Additionally,
much of electronic commerce occurs through coded
messages that become intelligible only when related
to information extraneous to the said message.
Under the law, the coded messages may be
considered an integral part of the data message
because the extraneous information is deemed
incorporated into the same.

Freedom to Opt Out

The objective of the law is to facilitate
electronic contracting while leaving the parties free
to determine whether or not to use electronic
records and signatures. Hence, if a person receives
an e-mail offer to enter into an electronic contract,
such person is free to ignore the same and request
the counter-party to conduct the transaction off-
line. The reverse of the rule is likewise true that
parties may not compel others to conduct business
in a paper-based environment.
In addition, the mere fact that a person
transacts his business largely through electronic
means does not deprive him of the right to enter into
other transactions by non-electronic means. Verily,
the Act was not intended to restrict the freedom to
designate the manner or mode of contracting but
merely to facilitate electronic transactions.
As an exception to this rule, however, the
conduct of a person may be used as evidence of his
consent to enter into an electronic contract.

Electronic Documents under the Model Law
Under the Model Law, there are two (2)
major classes of electronic documents writings
and originals.

a. Writings.
Model Law states that an electronic
data message that qualifies as an electronic
writing will suffice. Specifically, all electronic
data messages are considered writings so long
as they are accessible so as to be usable for
subsequent reference.
Writings are not required to conform
to any other requirement such as that relating to
integrity, inalterability or reliability. This is
consistent with the idea that since not all paper-
based documents are free from unauthorized
alteration and forgery, the same should not be
imposed upon electronic documents. In other
words, forges or fraudulent electronic
documents should enjoy the same evidentiary
benefits of admissibility and legal effects as their
paper-based counterparts.

b. Originals.
Applying the functional equivalent
approach, the Model Law requires electronic
originals to possess a reliable assurance as to
the integrity of the information and the ability to
be displayed to the person to whom it is to be
presented.

Original electronic documents are
pertinent especially where the uniqueness of the
documents is particularly relevant (i.e. bills of

COMMERCIAL LAW
252

2009 BAR OPERATIONS
landing, certificates of deposits and negotiable
instruments).
Evidently, reliability and integrity are
essential to originals while, in contrast, these
attributes are dispensable for writings.

Documents which are required to be in
writing.
(i) Those falling under the Statute of
Frauds.
(ii) Negotiable Instruments (Section 1,
NIL);
(iii) Donations of personal property with
value in excess of P5,000.00, (Article
748, Civil Code);
(iv) Contract of Antichresis where the
amount of the principal and interest
must be in writing (Article 2134, Civil
Code);
(v) Stipulation to pay interest on loans
(Article 1956, Civil Code);
(vi) Power of Attorney to sell land or any
interest therein (Article 1874, Civil
Code);
(vii) Assignment of copyright in whole or
in part during the lifetime of the
author (Section 180.2, Intellectual
Property Code);
(viii) Marriage Settlements (Article 77,
Family Code); and
(ix) Stipulations limiting a common
carriers liability to less than
extraordinary diligence. (Article 1744,
Civil Code).

c. Generic Electronic documents
They are neither writings nor
originals, but are mere documentary
evidence of the information contained
therein.

Best Evidence Rule.
The Best Evidence Rule states that when a
document is the subject of inquiry, no evidence shall
be admissible other than the original document
itself. Section 7 (c) originals are not the originals
referred to in the Best Evidence Rule.
Electronic data messages and electronic
documents by themselves are considered original
documents for purposes of complying with the Best
Evidence Rule. In this regard, since the electronic
document is considered the functional equivalent of
a written document, the procedure of its
presentation as evidence in court shall follow the
same rules governing paper-based documentary
evidence, and its integrity and reliability need not be
proved for this purpose.
Consistent with the foregoing, the new
Rules on Electronic Evidence provide that mere
printouts are originals for purposes of the Best
Evidence Rule.

Note that while an electronic data message is
by itself the original for purposes of the Best Evidence
Rule, if a party wishes to prove that the electronic
document is a writing or an original as defined
under Act, the proponent must still independently
present evidence of its reliability and integrity.

What are Solemn Contracts?
Solemn contracts are those which are valid
only if the form prescribed by law is observed. Note
that the Act applies not only to contracts or
agreement but to other kinds of documents as well.

Notarized Documents.
In some instances, Philippine law requires
that documents be acknowledged before a notary
public for its validity.
Notarized documents enjoy a higher degree
of acceptability largely because the Rules of Court
consider them public documents which are easier to
present in evidence.

C. LEGAL RECOGNITION OF ELECTRONIC
SIGNATURES (SEC 13 IRR)

An electronic signature relating to an electronic
document or electronic data message shall be
equivalent to the signature of a person on a
written document if the signature:
(a) is an electronic signature as defined in
Section 6(g) of these Rules; and
(b) is proved by showing that a prescribed
procedure, not alterable by the parties interested in
the electronic document or electronic data message,
existed.
Presumption Relating to Electronic
Signatures. - In any proceeding involving an
electronic signature, the proof of the electronic
signature shall give rise to the rebuttable
presumption that:
(a) The electronic signature is the signature of
the person to whom it correlates; and
(b) The electronic signature was affixed by that
person with the intention of signing or
approving the electronic data message or
electronic document unless the person
relying on the electronically signed
electronic data message or electronic
document knows or has notice of defects in
or unreliability of the signature or reliance on
the electronic signature is not reasonable
under the circumstances.

COMMERCIAL LAW
253

2009 BAR OPERATIONS
Method of Authenticating Electronic
Documents, Electronic Data Messages, and
Electronic Signatures.
Electronic documents, electronic data
messages and electronic signatures, shall be
authenticated by demonstrating, substantiating
and validating a claimed identity of a user,
device, or another entity in an information or
communication system.
Until the Supreme Court, by appropriate rules,
shall have so provided, electronic documents,
electronic data messages and electronic
signatures, shall be authenticated, among other
ways, in the following manner:
(a) The electronic signature shall be
authenticated by proof that a letter,
character, number or other symbol in
electronic form representing the
persons named in and attached to or
logically associated with an electronic
data message, electronic document,
or that the appropriate methodology
or security procedures, when
applicable, were employed or
adopted by a person and executed or
adopted by such person, with the
intention of authenticating or
approving an electronic data message
or electronic document;
(b) The electronic data message or
electronic document shall be
authenticated by proof that an
appropriate security procedure, when
applicable was adopted and
employed for the purpose of verifying
the originator of an electronic data
message or electronic document, or
detecting error or alteration in the
communication, content or storage of
an electronic document or electronic
data message from a specific point,
which, using algorithm or codes,
identifying words or numbers,
encryptions, answers back or
acknowledgement procedures, or
similar security devices.

Authenticating Electronic Documents or
Electronic Data Messages Burden of.
The person seeking to introduce an
electronic document or electronic data message
in any legal proceeding has the burden of
proving its authenticity by evidence capable of
supporting a finding that the electronic data
message or electronic document is what the
person claims it to be.

Modes for Establishing Integrity
In the absence of evidence to the
contrary, the integrity of the information and
communication system in which an electronic
data message or electronic document is recorded
or stored may be established in any legal
proceeding, among other methods:
(a) By evidence that at all material
times the information and communication
system or other similar device was operating in a
manner that did not affect the integrity of the
electronic document or electronic data message,
and there are no other reasonable grounds to
doubt the integrity of the information and
communication system;
(b) By showing that the electronic
document or electronic data message was
recorded or stored by a party to the proceedings
who is adverse in interest to the party using it; or
(c) By showing that the electronic
document or electronic data message was
recorded or stored in the usual and ordinary
course of business by a person who is not a party
to the proceedings and who did not act under the
control of the party using the record.

Admissibility and Evidential Weight
For evidentiary purposes, an electronic
document or electronic data message shall be
the functional equivalent of a written document
under existing laws. In any legal proceeding,
nothing in the application of the rules on
evidence shall deny the admissibility of an
electronic data message or electronic document
in evidence:
(a) On the sole ground that it is in electronic
form; or
(b) On the ground that it is not in the standard
written form.

What is the recommended mode of
presenting evidence?
Proof by affidavit and cross examination

C. COMMUNICATION OF ELECTRIC DATA MESSAGES
OR ELECTRONIC EVIDENCE

ELECTRONIC CONTRACTS

Philippine Contract Law/ Spiritual System

COMMERCIAL LAW
254

2009 BAR OPERATIONS
The Civil Code adheres to the
spiritual system where contracts are valid if
made in any way that indicates that the
party wished to be bound. (See Article 1356
of the NCC) On the basis of the foregoing,
the SC as repeatedly upheld the validity of
contracts proven solely by testimonial
evidence. Hence, as a general rule, a
contract under Philippine Law will be valid in
whatever form it may be found whether it be
oral, paper based or for that matter,
electronic.

Recognition of Electronic Contracts -
Philippine law recognized electronic
contracts even before the passage of this
act.
Basis: Article 17 of the NCC. By
express codal provision therefore, the
Philippines follows the lex loci contractus
rule. In this regard, the Supreme Court has
had occasion to rule that a power of attorney
executed in Germany, must be tested as to
its formal validity by the laws of that country
and not the Civil Code.
Thus, if the law were the electronic
contract was entered into recognizes such
form of agreements, those electronic
agreements are extrinsically valid in the
Philippines. Assuming further that such
agreements are also intrinsically valid under
the law of the place where it was entered
into, then those electronic contracts would
be valid in all respects under Philippine law.

Validity of Electronic Contracts (Sec 16 E-
Commerce Act/ Sec 21 Implementing Rules
& Regulations)
The Act does not amend the law on
contracts but merely allows the
requisite elements of offer and
acceptance or its external
manifestations, to be expressed in
electronic form.

Does the Act cover only the cases
in which both the offer and the
acceptance are communicated
electronically?
No. The Act also covers
cases where only the offer or only
the acceptance is electronically
communicated. In other words, an e-
mail acceptance to a handwritten
offer can be used as the basis to
prove the existence of a contract.
The Act intends only to amend the
law with respect to the form of
documents and transactions, not
their intrinsic validity.

Consummation of Electronic Transactions
with Banks
Realizing that Sec 16(2) of the E-
Commerce Act may be used to facilitate
fraud with the unwitting and involuntary
participation of banks, The BSP moved to
insert the amendments into the IRR which
now appears in Sec 22. They limited the
application of the provision only to ATM
networks and stressed the BSPs authority
vis a vis banks and other financial
institutions leaving open the possibility
that the BSP will issue circulars to prevent
the potential abuse of Sec 16(2) of the Act.

ELECTRONIC DATA MESSAGE

General Rule:
If the originator himself sends an
electronic data message, then its authorship
will be attributed to him, and e will be bound
by the legal consequences arising from the
sending of the electronic data message.
These include civil and criminal liability for
the contents of such messages.

Expanded meaning of the word
Sent
It is not limited to situations where the electronic
data message is transmitted, but should also apply to
situations where the electronic data message is
transmitted, but should also apply to situations
where it is merely generated or stored. This is
consistent with the definition of originator as being
the person who purports to have created, generated
and/or sent the electronic data message. Hence, if
the originator personally stored the electronic
document without sending it to a third party, then it
will still be attributed to him.

Exception: When the Data Message is not
Sent by the Originator
The Act recognizes that originators do
not always sent their electronic
Data messages personally.

ERRORS IN THE ELECTRONIC DATA MESSAGE

Two Types of Errors Referred to in the
Provision:
Errors in the Electronic Data
Message
Errors in the transmission of the
Electronic Data Message

Purpose for determining Error
To assign fault or liability upon
either the originator or addressee for an
electronic data message when an error has
occurred. If the addressee knew or should

COMMERCIAL LAW
255

2009 BAR OPERATIONS
have known the error, then he is not entitled
to rely upon the assumption that the
electronic document was sent by the
originator. He is therefore solely liable for his
actions taken upon that assumption. In the
opposite case, of course, the liability rests
with the originator.

AGREEMENT ON ACKNOWLEDGMENT OF RECEIPT
OF ELECTRONIC DATA MESSAGES OR ELECTRONIC
DOCUMENTS

Application of the Provision (Sec 20 E-
Commerce Act; Sec 30 IRR)
1. Previous Agreement or Request where
the parties either agreed or the
originator has requested an
acknowledgment of receipt. Such form
must be followed or the service of the
same is invalid
2. No agreement as to form of
Acknowledgment in such case, the
acknowledgment may be given through
any means of communication or even by
the conduct of the addressee.

TIME OF DISPATCH OF ELECTRONIC DATA
MESSAGE OR ELECTRONIC DOCUMENT (Sec 21
E-Commerce Act; Sec 31 IRR)

Dispatch
For purposes of the Act, an
electronic data message enters an
information system at the time when it
becomes available for processing within that
information system.

TIME OF RECEIPT OF ELECTRONIC DATA
MESSAGE OR ELECTRONIC DOCUMENT (Sec
22, E-Commerce Act; Sec 32 IRR)

Designated Information System
The mere indication of an electronic
mail or telecopy address on a letterhead or
other document should not be regarded as
express designation of one or more
information systems. The designation by the
addressee must be specific and unequivocal.

Non-Designated Information System
The addressee had designated an
information system but the message was
not sent to the system. In this case, the
message is deemed received only upon the
addressees retrieval thereof.

PLACE OF DISPATCH AND RECEIPT OF
ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT (Sec 23, E-Commerce Act; Sec 33
IRR)

Presumption as to the Place of Receipt and
Dispatch Partys place of business or his
habitual residence. However, the parties
may agree upon the place.

Relevance of the Provision
The provision is important in the
context of existing legal requirements
respecting the service or presentation of
documents at a particular location.

Private International Law
Under the IRR, the provision does
not intend to determine which law will apply
to a particular electronic data message. This
arises from the simple fact that the
application of the rule usually reveals two (2)
locations the place of dispatch and the
place of receipt.

CHOICE OF SECURITY METHODS (Sec 24 E-
Commerce Act; Sec 34 IRR)

Freedom of Choice
This provision allows parties to
utilize any security or authentication
method appropriate to suit their needs.

Government Regulation
This serves as a basis for the DTI or
other government agency to issue rules and
regulations over the use of encryption
technologies, particularly public key
encryption technologies.

Limitation
The freedom given to the parties
under the provision is subject to the rules
and regulations of government agencies.

PART III
ELECTRONIC COMMERCE IN CARRIAGE OF GOODS
(Sections 25 & 26, E-Commerce Act; Sections 35 & 36,
IRR)

Actions Related to Contracts of Carriage of
Goods.
The Rules applies to any action in
connection with, or in pursuance of, a contract of
carriage of goods, including but not limited to:

COMMERCIAL LAW
256

2009 BAR OPERATIONS
(a) (i) furnishing the marks, number, quantity
or weight of goods;(ii) stating or
declaring the nature or value of goods;
(iii) issuing a receipt for goods; (iv)
confirming that goods have been
loaded;
(b) (i) notifying a person of terms and
conditions of the contract;(ii) giving
instructions to a carrier;
(c) (i) claiming delivery of goods;(ii)
authorizing release of goods;(iii) giving
notices of loss of, or damage to goods;
(d) giving any other notice or statement in
connection with the performance of the
contract;
(e) undertaking to deliver goods to a named
person or a person authorized to claim
delivery;
(f) granting, acquiring, renouncing,
surrendering, transferring or
negotiating rights in goods;
(g) acquiring or transferring rights and
obligations under the contract.
Transport Documents.
The law requires that any action
referred to be carried out in writing or by using a
paper document, that requirement is met if the
action is carried out by using one or more
electronic data messages or electronic
documents.

PART IV
ELECTRONIC TRANSACTIONS IN GOVERNMENT

A. Government Use of Data Messages, Electronic
Documents and Electronic Signatures
(Section 27 E-Commerce Act; Section 37 IRR)

Philippine Government Vision:
If said provisions are strictly complied
with, the Phil. Government shall be able to
perform all its functions electronically within 2
years.

Supplemental Regulation
Despite the Two years deadline, private
Citizens cannot force the Government to
transact business electronically until such time
tat appropriate agencies have the opportunity to
determine the means, methods and regulations
respecting the same.
Principles Governing E- Commerce
Regulation -shall be mandatory upon all
departments, bureaus, offices and agencies
of the government, as well as all
government-owned and-controlled
corporations:
(a) Technology Neutrality. - All solutions
implemented shall neither favor a particular
technology over another nor discriminate
against or in favor of particular vendors of
technology.
(b) Interoperability. - All implementation
of technological solutions shall ensure the
interoperability of systems forming part of the
government network.
(c) Elimination of Red Tape. -
Government processes shall be re-examined and
if appropriate, simplified or re-engineered to
maximize the functionality of technology and to
eliminate unnecessary delays in the delivery of
governmental services.
(d) Security Measures. - Government
shall implement appropriate security measures
to guard against unauthorized access, unlawful
disclosure of information, and to ensure the
integrity of stored information.
(e) Auditability. - All systems installed
shall provide for an audit trail.
Government Information System Plan
(GISP). The blue print for introducing
information technology to every aspect of
its operations. It is also referred to as the
Philippine Government On-Line.

B. RPWEB
(Section 28 E-Commerce Act; Section 40 IRR.)
RPWEB
RPWEB is a strategy requiring all agencies
and offices of the Philippine Government to connect to
the internet to Promote the Use Of Electronic Documents
and Electronic Data Messages In Government and to the
General Public.
Implementation
1. Implementing Agencies: DOTC, NTC,
NCC
2. Mass Media medium of
communication limited to Filipino
Citizens or Filipino owned Corporations
or Associations.

COMMERCIAL LAW
257

2009 BAR OPERATIONS
3. Lead Agency DTI- The law vests the
DTI with the authority to direct the
promotion and development of
Electronic Commerce in the country as
well as empowered to issue rules and
regulations necessary to implement the
Act.
4. The Department of Budget and
Management shall identify the fund
source for the implementation of
Sections 37, 39 and 40 of the Rules.

PART V
FINAL PROVISIONS

Liability
The liability of the service provider
herein is limited not only to that arising from
copyright infringement but to a whole range of
offenses against third parties. It includes libel,
defamation, threats, pornography, as well as the
illegal conduct of its clients.

Lawful Access
Apart from persons authorized by the
individual having possession of the electronic
document or signature, the appropriate
government agency or entity including police
officers may have access to the same, provided
they comply with the constitutional protection
against unreasonable searches and seizures. Law
enforcement agencies must therefore procure a
search warrant before conducting a search of a
computer containing electronic evidence.

Obligation of Confidentiality.
Except for the purposes authorized
under the 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 the Act,
shall not convey to or share the same with any
other person.
Penal Provisions
1. Hacking. - Hacking or cracking which
refers to unauthorized access into or
interference in a computer
system/server or information and
communication system; or any access in
order to corrupt, alter, steal, or destroy
using a computer or other similar
information and communication
devices, without the knowledge and
consent of the owner of the computer or
information and communications
system, including the introduction of
computer viruses and the like, resulting
in the corruption, destruction,
alteration, theft or loss of electronic
data messages or electronic document
shall be punished by a minimum fine of
one hundred thousand pesos
(P100,000.00) and a maximum
commensurate to the damage incurred
and a mandatory imprisonment of six
(6) months to three (3) years.
Love Bug
The provision specifying the
crime of hacking gained media
attention before the Act was
signed into law because of the
I love you Virus incident
which caused billions of dollars
worth of damage to
information networks of
several companies.
2. Piracy. - Piracy or the unauthorized
copying, reproduction, dissemination,
distribution, importation, use, removal,
alteration, substitution, modification,
storage, uploading, downloading,
communication, making available to the
public, or broadcasting of protected
material, electronic signature or
copyrighted works including legally
protected sound recordings or
phonograms or information material on
protected works, through the use of
telecommunication networks, such as,
but not limited to, the internet, in a
manner that infringes intellectual
property rights shall be punished by a
minimum fine of one hundred thousand
pesos (P100,000.00) and a maximum
commensurate to the damage incurred
and a mandatory imprisonment of six
(6) months to three (3) years. The
foregoing shall be without prejudice to
the rights, liabilities and remedies under
Republic Act No. 8293 or Intellectual
Property Code of the Philippines and
other applicable laws.
3. Other Penal Offenses. - Violations of the
Consumer Act or Republic Act No. 7394
and other relevant or pertinent laws
through transactions covered by or
using electronic data messages or
electronic documents, shall be

COMMERCIAL LAW
258

2009 BAR OPERATIONS
penalized with the same penalties as
provided in those laws.
4. Other Violations of the Act.- Other
violations of the provisions of the Act,
shall be penalized with a maximum
penalty of one million pesos
(P1,000,000.00) or six-(6) years
imprisonment.
Miscellaneous Provisions
1. Statutory Interpretation. - Unless
otherwise expressly provided for, the
interpretation of these Rules and the
Act shall give due regard to the Acts
international origin - the UNCITRAL
Model Law on Electronic Commerce -
and the need to promote uniformity in
its application and the observance of
good faith in international trade
relations. The generally accepted
principles of international law and
convention on electronic commerce
shall likewise be considered.
2. Variation by Agreement. - Any provision
of the Act may be varied by agreement
between and among parties; Provided
that such agreement involves only the
generation, sending, receiving, storing
or otherwise processing of an electronic
data message or electronic document.
Nothing shall authorize contracting
parties to agree upon stipulations or
covenants, which defeat the legal
recognition, validity and admissibility of
electronic data messages, electronic
documents, or electronic signatures.
3. Reciprocity. - All benefits, privileges,
advantages or statutory rules
established under this Act, including
those involving practice of profession,
shall be enjoyed only by parties whose
country of origin grants the same
benefits and privileges or advantages to
Filipino citizens. Inasmuch as the Act
merely contemplates the legal
recognition of electronic forms of
documents and signatures and does not
amend any law governing the
underlying substantive validity of acts or
transactions, this provision shall be
subject to existing Constitutional and
statutory restrictions relative to
activities which are reserved to
Philippine citizens or juridical entities
partially or wholly-owned by Philippine
citizens.
4. Oversight Committee. - There shall be a
Congressional Oversight Committee
composed of the Committees on Trade
and Industry/Commerce, Science and
Technology, Finance and
Appropriations of both the Senate and
House of Representatives, which shall
meet at least every quarter of the first
two years and every semester for the
third year after the approval of this Act
to oversee its implementation. The DTI,
DBM, Bangko Sentral ng Pilipinas, and
other government agencies as may be
determined by the Congressional
Committee shall provide a quarterly
performance report of their actions
taken in the implementation of this Act
for the first three (3) years.
5. DTIs Continuing Authority to Implement
the Act and Issue Implementing Rules. -
Among others, the DTI is empowered to
promulgate rules and regulations, as
well as provide quality standards or
issue certifications, as the case may be,
and perform such other functions as
may be necessary for the
implementation of this Act in the area of
electronic commerce.
6. Separability. - If any provision in these
Rules or application of such provision to
any circumstance is held invalid, the
remainder of these Rules shall not be
affected thereby.
7. Effectivity. - These Rules shall take
effect fifteen (15) days from the
complete publication thereof in a
newspaper of general circulation.

COMMERCIAL LAW
REAL ESTATE MORTGAGE LAW
259

2009 BAR OPERATIONS

Real Estate Mortgage, defined
A contract whereby the debtor guarantees the
performance of the principal obligation by subjecting real
property or real rights as security in case of non-
performance of such obligation within the period agreed
upon.

Essential Requisites of Real Estate Mortgage
(1) It must be constituted to secure the performance of
the principal obligation.
(2) The mortgagor must be the absolute owner of the
property mortgaged.
(3) The mortgagor should have the free disposal of the
property mortgaged, and in the absence thereof, he
should be legally authorized for the purpose.
(4) When the principal obligation becomes due, the
property mortgaged may be alienated for the
payment of such obligation.
(5) The subject matter of the contract must be
immovable property or alienable real rights upon
immovables.

Subject Matter of Mortgage
They are:
(1) immovables; and
(2) alienable real rights imposed upon immovables.

Characteristics of Mortgage
(1) real contract;
(2) accessory contract;
(3) subsidiary contract; and
(4) unilateral contract because it creates only an
obligation on the part of the creditor who must free
the property from the encumbrance once the
obligation is fulfilled.

Kinds of Mortgages
A mortgage may be:
(1) Voluntary one which is agreed to be between the
parties or constituted by the will of the owner of the
property on which it is created.
(2) Legal one required by law to be executed in favor of
certain persons.
(3) Equitable one which, although it lacks the proper
formalities of mortgage, shows the intention of the
parties to make the property as a security for a debt.

Effects of Mortgage
(1) Creates real right A mortgage creates a real right; a
lien inseparable from the property mortgaged, which
is enforceable against the whole word. Until
discharged, it follows the property wherever it goes
and subsists notwithstanding changes of ownership.
(2) Creates merely on encumbrance A mortgage does
not involve a transfer, cession or conveyance of
property but only constitutes a lien thereon. It gives
the mortgagee no right or claim to the possession of
the property, and, therefore, a mere mortgagee has
no right to eject an occupant of the property
mortgaged.

Extent of Mortgage
A real estate mortgage constituted on
immovable property is not limited to the property itself
but also extends to all its accessions, improvements,
growing fruits and rents or income, as well as to the
proceeds of insurance should the property be destroyed,
or the expropriation value of the property should it be
expropriated.

Foreclosure, defined
Foreclosure is the remedy available to the
mortgagee by which he subjects the mortgaged property
to the satisfaction of the obligation to secure which the
mortgage was given.

Validity and Effects of Foreclosure
(1) In a real estate mortgage, when the principal
obligation is not paid when due, the mortgage has the
right to foreclose the mortgage and to have the property
seized and sold with a view of applying the proceeds to
the payment of the principal obligation.
Foreclosure is valid where the debtor is in default
of his obligation.

(2) The essence of a contract of mortgage indebtedness is
that a property has been identified or set apart from the
mass of the property of the debtor-mortgagor as security
for the payment of money or the fulfillment of an
obligation to answer the amount of indebtedness in case
of default of payment.
The power to foreclose a mortgage or not resides
in the mortgagee.
(3) Once the proceeds have been applied to the payment
of obligation, the debtor cannot anymore be required
to pay, unless, of course, there is a deficiency
between the amount of the loan and the foreclosure
sale price, because the obligation has already been
extinguished.
(4) The rule is that statutory provisions governing public
notice of foreclosure sales must be strictly complied
with, and even slight deviations there from will
invalidate the sale or render it at least voidable.

Kinds of Foreclosure
(1) Judicial foreclosure it is an ordinary action; governed
by Rule 68 of the rules of Court

REAL ESTATE MORTGAGE
(Articles 2124 2131, NCC)

COMMERCIAL LAW
260

2009 BAR OPERATIONS
(2) Extrajudicial foreclosure foreclosure under power of
sale contained in the mortgage; governed by Act No.
3135, as amended

Judicial Foreclosure under the Rules of Court (Rule 68)
Judicial action for the Purpose
A mortgage may be foreclosed judicially by
bringing an action for that purpose, in the proper court
which has jurisdiction over the area wherein the real
property involved or a portion thereof, is situated.
Order of Mortgagor to pay Mortgage debt
If the court finds the complaint to be well-
founded, it shall order the mortgagor to pay the amount
due upon the mortgage debt or obligation with interest
and other charges within a period of not less than 90 days
or more than 120 days from entry of judgment (Sec. 2,
Rule 68)
Sale to the highest bidder
If the mortgagor fails to pay at the time directed
in the order, the court, upon motion, shall order the
property to be sold to the highest bidder at public auction
(Sec. 3, Ibid.)
Confirmation of Sale
The sale when confirmed by an order of the
court, also upon motion, shall operate to divest the rights
of all parties to the action and to vest their rights in the
purchaser subject to such right of redemption as may be
allowed by law.
Execution of Judgment
No judgment rendered in an action for
foreclosure or mortgage can be executed otherwise than
in the manner prescribed by law on mortgages, because
parties to an action are not authorized to change the
procedure which it prescribed.
Application of proceeds of sale
The proceeds of the sale shall be applied to the
payment of the:
(a) costs of sale;
(b) the amount due the mortgagee;
(c) claims of junior emcumbrances or
persons holding subsequent
mortgages in the order of their
priority; and
(d) the balance, if any.
Execution of sheriffs certificate
In judicial foreclosure, the foreclosure is not
complete until the sheriffs certificate is executed
acknowledged and recorded. In the absence of a
certificate of sale, no title passes by the foreclosure
proceedings to the vendee.

Purpose of the law (Sec. 1)
To regulate the manner in which the extrajudicial
foreclosure and redemption of real estate mortgages may
be made.

Where to conduct the sale of the mortgaged real estate
The sale must be made within the province in
which the property sold is situated.
In case the place within said province in w3hich
the sale is to be made is the subject of stipulation, such
the sale in said place in the municipal building of the
municipality in which the property or part thereof is
situated.

Notice Requirement
Notice shall be given by posting notices of the
sale for not less than twenty (20) days in at least three
public places of the municipality or city where the
property is situated.
If the property is worth more than four hundred
pesos, such notice shall also be published once a week for
at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.
personal notice to the mortgagee is not
required
to be a newspaper of general circulation]
- it is enough that it is
published for the dissemination
of local news and general
information: that is has a
bonafide subscription list of
paying subscribers; that it is
published at regular intervals.

How the sale should be made
The sale must be made:
(1) at public auction;
(2) between 9 oclock in the morning and 4 oclock in the
afternoon; and
(3) shall be under the direction of then sheriff of the
province, the justice or auxiliary justice of the place of
the municipality in which such sale has to be made, or
of a notary public of said municipality, who shall be
entitled to collect the fee foe each day of actual work
performed, in addition to his expenses.

Persons who may participate in the bidding
At any sale, the creditor, trustee, or other
person, authorized to act for the creditor, may participate
in the bidding, and purchase under the same conditions as
any other bidder, unless the contrary has been expressly
provided in the mortgage or trust deed under which the
sale is made

EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE
MORTGAGE
(Act No. 3135, as amended by Act No. 4118)

COMMERCIAL LAW
261

2009 BAR OPERATIONS

Who may redeem the foreclosed property
(1) the debtor;
(2) his successors in interest, or
(3) any judicial creditor or judgment creditor of said
debtor, or
(4) any person having a lien on the property or deed
of trust under which the property is sold.

Period of Redemption
At any time within the term of one (10 year from
the date when the certificate of sale issued by the Sheriff
is registered in the Office of Register of Deeds.

Right to Recover the deficiency
In extrajudicial foreclosure of mortgage, the
mortgagee has the right to recover the deficiency from
the debtor where the proceeds of the sale are insufficient
to pay the debt.
Procedure to be followed in Extra judicial Foreclosure of
mortgage (Supreme Court Administrative Order No.3
dated October 19, 1984)
(1) Application must be filed before the Executive Judge
through the clerk of court who is also the Ex-Office
Sheriff;
(2) In case of real estate mortgage, before the auction
sale is conducted, the clerk of court must examine
whether the requirements of the law have been
complied with, that is, whether the notice of sale has
been posted for not less than 20 days in at least three
(3) public places of the municipality or city where the
property is situated, and if such property is worth
more than P400.00, that such notice has been
published once a week for at least three (30
consecutive weeks in a newspaper of general
circulation in the municipality or city
(3) The certificate of sale must be approved by the
Executive Judge or in his absence, by the Vice
Executive Judge;
(4) Where the application concerns the extrajudicial
foreclosure of mortgages of real estate and/or
chattels in different locations covering one
indebtedness, only one filing fee corresponding to
such indebtedness shall be collected
(5) The clerk of court, apart from the official receipt of
the fees, shall issue a certificate of payment
indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the
description of the real estate and/or chattels
mortgaged and their respective locations, which
certificate shall serve the purpose of having the
application docketed with the Clerk of Court of the
places where other properties are located and of
allowing the extrajudicial foreclosure to proceed
thereat.
(6) The notice of sale shall be published in a newspaper
of general circulation pursuant to Section 1 of PD
1079 and non-compliance therewith shall constitute a
violation of Section 6 thereof.
(7) The application shall be raffled among all sheriffs,
including those assigned to the Office of the Clerk of
Court and Sheriffs assigned in the branches.
(8) After the redemption period has expired, the Clerk of
Court shall archive the records.
(9) No auction sale shall be held unless there arte at least
two (2) participating bidders, otherwise, the sale shall
be postponed to another date. If on the new date set
forth for the sale there shall not be at least two (2)
bidders, the sale shall then proceed. The names of
the bidders shall be reported to the Sheriff of the
Notary Public, who conducted the sale to the Clerk
of Court before the issuance of the certificate of sale.

Redemption (of foreclosed property), defined
Redemption may be defined as a transaction by
which the mortgagor reacquires or buys the property
which may have passed under the mortgage or divests
the property of the lien which the mortgage may have
created.

Kinds of Redemption
They are:
(1) Equity of Redemption the right of the mortgager to
redeem the mortgaged property after his default in
the performance of the conditions of the mortgage
but before the sale of the mortgaged property. In
judicial foreclosure, the mortgagor may exercise his
equity of redemption before but not after the sale is
confirmed by the court.
(2) Right of Redemption the right of the mortgagor to
redeem the mortgaged property within a certain
period after it was sold for the satisfaction of the
mortgage debt. In all cases of extrajudicial sale, the
mortgagor may redeem the property at any time
within the term of one (1) year from and after the
date of registration of the sale. In judicial
foreclosure, the general rule is that the mortgagor
cannot exercise his right of redemption after the sale
is confirmed by the court.

Effect of Exercise of the right of redemption
The redemption defeats the inchoate right of the
purchaser and restores the property to the same
condition as if no sale had been made. It does not give to
the mortgagor a new title, but merely restores to him the
title freed of the encumbrance of the lien foreclosed.

Effect of failure to exercise the right of redemption
If no redemption is made within the prescribed
period, the purchaser has the absolute right to a writ of
possession which is the final process to carry out or
consummate the extrajudicial foreclosure. Henceforth,
the mortgagor loses his right over the property.

COMMERCIAL LAW
CHATTEL MORTGAGE LAW
262

2009 BAR OPERATIONS

Chattel Mortgage, defined
Chattel mortgage is a contract by virtue of which
personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an
obligation. (Art. 2140).

Characteristics of chattel mortgage
It is:
(1) an accessory contract because it is for the purpose of
securing the performance of a principal obligation;
(2) a formal contract because of its validity, registration
in the Chattel Mortgage Register is indispensable;
and
(3) a unilateral contract because it produces only
obligations on the part of the creditor to free the
thing from the encumbrance on fulfillment of the
obligation.

Laws principally governing chattel mortgages
They are:
(1) the Chattel Mortgage Law, Act No. 1508, as
amended;
(2) the Civil Code;
(3) the Revised Administrative Code; and
(4) the Revised Penal Code

Essential requisites of chattel mortgage
(1) constituted to secure the fulfillment of a principal
obligation;
(2) that the mortgagor be the absolute owner of the
thing mortgage;
(3) the persons constituting the mortgage have the free
disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.
(Art.2085)
- It is also of the essence that when the principal
obligation becomes due, the thing in which mortgage
consists may be alienated for the payment to the
creditor (Art. 2087).
- Mortgagor may be a third person. It is not necessary
that the principal debtor should always be the
mortgagor. (Art. 2085, par. 2).

Subject matter of chattel mortgage
Only movable or personal properties (certain
deviations, however, have been allowed) such as:
(1) shares of stock ( the mortgage to be registered both
in the Chattel Mortgage Registries of the province
where the mortgagor resides, and the province where
the corporation has its principal business);
(2) interest in business;
(3) growing crops;
(4) large cattles;
(5) machinery treated by the parties as personal
property subsequently installed on leased land;
(6) motor vehicles (the mortgage to be registered also
with the Land Transportation Office)
- with respect to vehicles used for public
services, the mortgage must also carry the
approval of LTFRB.
(7) house built on rented land but as between the parties
only under the doctrine of estoppel; and
(8) house to be demolished and portable nipa huts for
what are really mortgaged in this case are the
materials thereof and they are, therefore, personal
property.

Growing crops and large cattle are considered personal
property under the Chattel Mortgage Law. They cannot,
however, be the object of a contract of pledge because
they are considered immovable under the Civil Code
which principally governs pledge

Similarities between Pledge and Chattel mortgage
They are:
(1) Both are executed to secure performance of a
principal obligation;
(2) Both are constituted only on personal property;
(3) Both are indivisible;
(4) Both constitute lien on the property;
(5) In both cases, when the debtor defaults, the property
must be sold for the payment of the creditor; and
(6) Both are extinguished by the fulfillment of the
principal obligation and by the destruction of the
property pledged or mortgaged.

Distinctions between Chattel mortgage and Pledge
(1) In chattel mortgage, the delivery of the personal
property to the mortgagee is not necessary, while in
pledge, such delivery is necessary;
(2) In chattel mortgage, the registration of the same in
the Chattel Mortgage Register is necessary for its
validity, while in pledge, registration in the Registry
of Property is not necessary;
(3) The procedure for the sale of the thing given as
security is different. In chattel mortgage, the
procedure is found in Section 14 of Act No. 1508, as
amended, while in pledge, it is found in Article 2112
of the NCC;
(4) In chattel mortgage, the excess over the amount due
after foreclosure, goes to the debtor, while in pledge,
if the property is sold, the debtor is not entitled to the
excess unless it is otherwise agreed upon or except in
the case of legal pledge; and
(5) In chattel mortgage, the creditor is entitled to
recover any deficiency except if the chattel mortgage
is a security for the purchase of personal property in
installments (see Art. 1484), while in pledge, the
creditor is not entitled to recover the deficiency
notwithstanding any stipulation to the contrary.(Art.
2115).

Chattel mortgage and Real Estate mortgage
distinguished
(1) In chattel mortgage, the thing mortgaged must be
personal or movable property; in real estate

(Act No. 1508, in relation to Articles 1484, 1485,
2140 and 2141, NCC)

COMMERCIAL LAW
263

2009 BAR OPERATIONS
mortgage, the thing mortgaged must be real or
immovable property;
(2) An affidavit of good faith is required to be executed
in a chattel mortgage but not in a real estate
mortgage;
(3) In chattel mortgage, the mortgagor cannot alienate
the thing mortgaged without the written consent of
the mortgagee annotated on the back of the
mortgage instrument; in real estate mortgage, the
mortgagor can alienate the thing mortgaged without
the written consent of the mortgagee and any
stipulation prohibiting such alienation is void.
(4) In chattel mortgage, redemption of the thing
mortgaged may be made only before the sale
thereof; in real estate mortgage, the thing
mortgaged may be redeemed after it is judicially sold
but before judicial confirmation of the sale, or if extra
judicially sold, within 1 year from and after the date
of sale.

Extent of chattel mortgage
It covers only property in the contract, and
excludes like or substituted property thereafter acquired
by the mortgagor, notwithstanding any thing in the
contract to the contrary.

Exception: In the case of stock or merchandise contained
in drugstores, grocery stores, etc., which are constantly
sold and substituted with new stock.
A stipulation in the chattel mortgage extending
its scope and effect to after-acquired property is valid and
binding where the after-acquired property is in renewal
or, in substitution for, goods on hand when the mortgage
was executed, or is purchased with the proceeds of the
sale of such goods.

Ruling: Acme Shoe, et al. v. CA, et al,. August 22, 1996.
While a pledge, real estate mortgage,
or antichresis may exceptionally secure after-
incurred obligations so long as these future
debts are accurately described, a chattel
mortgage, however, can only cover obligations
existing at the time the mortgage is
constituted. Although a promise expressed in
a chattel mortgage to include debts that are
yet to be contracted can be a binding
commitment that can be compelled upon, the
security itself, however, does not come into
existence or arise until after a chattel
mortgage agreement covering the newly
contracted debt is executed either by
concluding a fresh chattel mortgage or by
amending the old contract conformably with
the form prescribed by the Chattel Mortgage
Law.

Affidavit of Good Faith, defined
An oath in a contract of chattel mortgage
wherein the parties severally swear that the mortgage is
made for the purpose of securing the obligation specified
in the conditions thereof and for no other purpose and
that the same is just and valid obligation and one not
entered into for the purpose of fraud.

The absence of the affidavit vitiates a mortgage only as
against third persons without notice, like creditors and
subsequent encumbrancers

Creation of a chattel mortgage
The law as it now stands provides for only one
way for executing a valid chattel mortgage, i.e., the
registration of the personal property in the Chattel
Mortgage Register as security for the performance of an
obligation.

When to register
The law does not provide any specific time within
which a chattel mortgage should be recorded in the
Chattel Mortgage Register.

Duty of Register of Deeds
The duties of a register of deeds in respect to the
registration of chattel mortgages are of purely ministerial
character.

Right of redemption
(1) When the condition of a chattel mortgage is broken,
the following may redeem:
(a) the mortgagor;
(b) a person holding a subsequent mortgage; or
(c) a subsequent attaching creditor
(2) An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same
manner that the mortgagee could foreclose it.
(3) The redemption is made by paying or delivering to the
mortgagee the amount due on such mortgage and
the costs and expenses incurred by such breach of
condition before the sale thereof. (Sec. 13, Act No.
1508).

Right acquired by second mortgagee and subsequent
purchaser
(1) Before payment of debt After a chattel mortgage
is executed, there remains in the mortgagor a mere
right of redemption and only this right passes to the
second mortgagee in case of a second mortgage. As
between the first and second mortgages, therefore,
the latter can only recover the property from the
former by paying him the mortgage debt.
(2) After payment of debt If the only leviable or
attachable interest of a chattel mortgagor in a
mortgaged property is his right of redemption, it
follows that the judgment or attaching creditor who
purchased the property at the execution sale could
not acquire anything except such right of
redemption. He is not entitled to the actual
possession and delivery of the property without first
paying the mortgaged debt.

COMMERCIAL LAW
264

2009 BAR OPERATIONS

Kinds of Foreclosure of chattel mortgage
(1) Judicial foreclosure the mortgagee institutes an
action in court; and
(2) Extrajudicial foreclosure the sale is made by the
mortgagee himself when authorized by the chattel
mortgage contract or by special law.

Period to foreclose
The mortgagee may, after 30 days from the time
of the condition broken, caused the mortgaged property
to be sold at a public auction by a public officer.
The 30-day period to foreclose a chattel
mortgage is the minimum period after violation of the
mortgage condition for the mortgage creditor to cause
the sale at public auction of the mortgaged chattel with at
least ten (10) days notice to the mortgagor and posting of
public notice of time, place, and purpose of such sale, and
is a period of grace for the mortgagor, to discharge the
mortgage obligation.

Application of proceeds of sale
The proceeds of the sale are to be applied in the
following order:
(1) Costs and expenses of keeping and sale;
(2) Payment of the obligation secured by the mortgage;
(3) Claims of persons holding subsequent mortgages in
their order; and
(4) Balance, if any, shall be paid to the mortgagor, or
person holding under him. (Sec. 14, Act No.1508).

Right of mortgagee to recover deficiency
(1) Where mortgaged foreclosed the creditor may
maintain an action for the deficiency although the
Chattel Mortgage Law is silent on this point. The
reason is that a chattel mortgage is only given as a
security and not as payment for the debt in case of
failure of payment. The action must be brought
within 10 years from the cause of action accrues.
(2) Where mortgage constituted as security for
purchase of personal property payable in
installments no deficiency can be asked and any
agreement to the contrary shall be void. (Art. 1484).
(3) Where mortgaged property subsequently attached
and sold the chattel mortgagee is entitled to
deficiency judgment in action for specific
performance (Art. 1484[1]) where the mortgaged
property is subsequently attached and sold. The
execution sale in such a case is not a foreclosure sale.

Recto Law (Articles 1484-1485, NCC)
It is the law, now reflected in Articles 1484 and
1485 of the NCC, which provides that in a contract of sale
of personal property the price of which is payable in
installments, the vendor may exercise any of the
following remedies:
(1) Exact fulfillment of the obligation, should the vendee
fail to pay (specific performance);
(2) Cancel the sale, should the vendees failure to pay
cover two or more installments (not the same as
rescission because here the vendor gets back the
object of the sale and retains the installments paid;
however, this is not available in the absence of
stipulation in the contract);
(3) Foreclose the chattel mortgage on the thing sold, if
one has been constituted, should the vendees failure
to pay cover two or more installments. In this case,
he shall have no further action against the purchaser
to recover any unpaid balance of the price. Any
agreement to the contrary is void.

COMMERCIAL LAW
FINANCING COMPANY ACT
265

2009 BAR OPERATIONS

FINANCING COMPANIES
Corporations or partnerships, except those
regulated by the Central Bank of the Philippines, the
Insurance commissioner and the Cooperative
Administration Office. Which are primarily organized for
the purpose of extending credit facilities to consumers
and to industrial, commercial or agricultural enterprises,
either by discounting or factoring commercial pares or
accounts receivable, or by buying and selling contracts,
leases, chattel mortgages or other evidence of
indebtedness, or by leasing of motor vehicles, heavy
equipment and industrial machinery, business and office
machines and equipment, appliances and other movable
property.

POLICIES:

1. To regulates and promote activities of financing and
leasing company to place their operations on a
sound, competitive, stable and efficient basis
2. To recognize and strengthen their critical role in
providing medium and long term credit for
investment in capital goods and equipments for small
and medium enterprises.
3. To curtail and prevent practices prejudicial to public
interest / to have a better position and efficient
service in a fair manner to the general public,
industry, commerce, agriculture and thereby more
fully contribute to sound development of the national
economy

Financing Companies are Corporations EXCEPT:
1. Banks
2. Investment houses
3. Saving and loam associations,
4. Insurance companies
5. Cooperatives
6. Other financial institutions organized under other
special laws

SECURITY OF EXCHANGE COMMISSION (SEC)
Empowered to enforce provisions implementing
regulation EXCEPT as the BSP have supervisory authority
under RA No. 7653

THE MONETARY BOARD OF THE BSP
Empowered to prescribe the maximum rate of
rental fees, services and other changes of financing
company in consultation with financing companies and
the SEC.

REQUIREMENT FOR REGISTRATION
Aside from requiring compliance with the
provisions of the corporation code.

1. All the requirements of existing laws to engage in the
business should be complied with the applicant
2. The organization, integrity and responsibility of the
organizers should assure the protection of the
interest of the general public.
3. All the requirements of this Act have been complied
with. Provided: financing companies registered prior
to the approval of this Act shall fill an information
sheet with the SEC with 60 days after notice.

RIGHTS AND POWER OF FINANCING COMPANY
1. Engage in quasi banking and money market
operations with prior approval of the BSP
2. Engage in trust operations subjects to the General
banking Act upon prior approval of the BSP
3. Issue bonds and other capital instruments subject to
rules and regulations of the BSP.
4. Rediscount their paper with government financial
institutions
5. Participate in special loan or credit programs
6. Provide foreign currency loans and leases to
ente4rprises who lain foreign currency by exports:

REGISTRY OF FINANCIAL LEASE
The Registry of Deeds shall open and maintain a
register of financial leases, adjunct to the chattel
mortgage registry

LEASE REGISTER SHALL CONTAIN:
1. Name/ Description of property including
a. Brand name/ name of manufacturer
b. Name of model; if any
c. Year of model; if available
d. Serial number; if any

2. Acquisition cost
3. Name of owner / finance company lessee
4. Name of lessee
5. Date of lease agreement/ schedule
6. Date of expiry of lease
7. Date of entry in lease registry

PENALTY/IES
1. A fine of not less than P 10,000 and not more than P
100,000.00
2. Imprisonment for not more than 6 mos. Or both at
the discretion of the court, shall be imposed upon:

a. Persons, associations, partnerships or
corporation, managing officer that shall:
i. Engage in business without
authority from the SEC
ii. Hold themselves out to be financing
companies
iii. Violate provisions of this Act

RA 8556

COMMERCIAL LAW
266

2009 BAR OPERATIONS
b. Any officer, employee, or agent of a
financing company who shall:
1. Knowingly and willingly make any
false statement or misleading with
respect to any material
2. Overvalues on aid in overvaluing
any securities to influence action of
the company on any loan or
discounting line
3. Any officer, employee or examiner
of the SEC who shall commit,
connive, aid or assist in the
commission of acts enumerated in
the preceding section

COMMERCIAL LAW
THE INSOLVENCY LAW
267

2009 BAR OPERATIONS

Insolvency, Defined
- the state of a person whose liabilities are more than
his assets. It is that relative condition of mans assets
and liabilities that the former if all made immediately
available, would not be sufficient to discharge the
latter (balance sheet test).
- the inability of a person to pay his debts as they
become due in the ordinary course of business (equity
test).
- Insolvency law (IL) is subsidiary to the Civil Code.
- For the (IL) to be applicable: there must be a
proceeding in insolvency in the proper RTC.
Purposes of IL
(1) To effect an equitable distribution of the bankrupts
property among his creditors.
(2) To benefit the debtor in discharging him from his
liabilities and enabling him to start afresh with the
property set apart to him as exempt.
(3) To have a uniform procedure in asserting the claims
against an entity threatened by insolvency in a manner
which would prevent creditors from obtaining any
preference by paying one or some ahead of the others.

Nature of the Proceedings Under the IL
The proceedings are considered in rem, hence
binding upon the whole world. All persons having an
interest on the subject matter involved, whether notified
or not are equally bound.

Remedies open to an insolvent debtor
Under the law, the insolvent debtor may be
permitted to:
1. to petition the court to suspend payments of
his debts; OR
2. to be discharged from his debts and
liabilities by voluntary or involuntary
insolvency proceedings. (Sec. 1).

Suspension of payments, Defined
It is the postponement by court order, of the
payments of debts of one who, while possessing sufficient
property to cover his debts, foresees the impossibility of
meeting them when they respectively fall due. (Sec. 2,
par. 1).

Purpose of Suspension
- to suspend or delay payments.

Basis of Suspension
- the probability of the debtors inability to
meet his obligations when they respectively
fall due.

Procedural Requirements
The petition should be filed by a debtor
1. possessing sufficient property to cover all his debts;
2. foreseeing the impossibility of meeting them when
they respectively fall due; and
3. petitioning that he be declared in the state of
suspension of payments. The petition need not be
verified.
The petition should be accompanied by
1. a verified schedule containing a full and true
statement of the debts and liabilities of the petitioner
with a list of creditors, residence, sum due, nature of
liability, consideration, existing pledge, lien or
security. (Sec. 15);
2. a verified inventory containing a list of creditors,
description of all the property including those exempt
from execution and statement as to value of each
item of property, location and encumbrances
thereon. (Sec. 16);
3. a statement of assets and liabilities;
4. proposed agreements he requests of his creditors.

Effects of Filing of Petition
The following are the effects:
1. No disposition in any manner of his property may be
made by the petitioner except insofar as concerns the
ordinary operations of commerce or of industry in
which he is engaged. (Sec. 3, par. 2).
2. No payments may be made by the petitioner except
in the ordinary course of his business or industry.
(ibid.);
3. Upon request to the court, all pending executions
against the debtor shall be suspended except
execution against property especially mortgaged.
(Sec. 6).

Creditors affected by the filing of petition
Only those creditors included in the schedules
filed by the debtor shall be cited to appear and take part
in the meeting.(Sec. 5).

Creditors NOT affected by order of suspension of
payments
They are the following:
1. Persons having claims for personal labor,
maintenance, expenses of last illness or funeral of the
wife or children of the debtor incurred in sixty (60)
days immediately preceding the filing of the petition;
and
2. Persons having legal or contractual mortgages. (Sec.
9).

Steps in Suspension
1. Filing of petition by the debtor. (Sec. 2);
2. Issuance by the court of an order calling a
meeting of creditors. (Sec. 3);
3. Publication of the order and service of summons.
(Sec. 4);

THE INSOLVENCY LAW
(Act No. 1956, as amended)

COMMERCIAL LAW
THE INSOLVENCY LAW
268

2009 BAR OPERATIONS
4. Meeting of creditors for the consideration of
debtors proposition. (Sec. 4);
5. Approval by creditors of the debtors
proposition. (Sec. 8);
6. Objections, if any, made w/in 10 days following
the meeting. (Sec. 11); and
7. Issuance by the court of an order directing that
the argument be carried out in case the decision
is declared valid. (Sec. 11)

Rule of DOUBLE MAJORITY in the meeting of creditors
The majority shall be 2/3 of the creditors voting
upon same proposition, which 2/3 represent at least 3/5 of
the total liabilities of the debtor. (Sec. 8[e]).
When proposed agreement deemed rejected
If the number of the creditors required for
holding a meeting does not attend thereat.
The two majorities mentioned in Sec. 8[e] are
not in favor of the proposed agreement. (Sec.
10).

Causes for Objection to Decisions of Creditors
They are:
1. Defects in the call for the meeting, in the holding
thereof, and in the deliberation had thereat
which prejudice the rights of the creditors;
2. Fraudulent connivance between one or more
creditors and the debtor to vote in favor of the
proposed agreement; and
3. Fraudulent conveyance of claims for the purpose
of obtaining a majority. (Sec. 12).

Corporate Suspension of Payments
Section 5(d) of PD 902-A has transferred original
and exclusive jurisdiction over petitions for suspensions of
payments by corporation to the SEC, and in addition, it
increased the coverage of suspension of payments for
corporation to include a situation when the assets of the
debtor-corporation are less than its liabilities, when it is
under a management committee or a rehabilitation
receiver.

- Pursuant to the Subsection 5.2 of the Securities
Regulation Code, the jurisdiction of the SEC over
corporate suspension of payments proceedings
is transferred to the RTCs. Consequently, the
existing jurisprudence on corporate suspension
of payments proceedings under Section 5(d) of
PD 902-A should now apply to the RTC.

Power to Appoint Management Committee under PD
902-A
Under Section 6(c) and (d) of PD 902-A, in order
to effectively exercise its jurisdiction, the RTC is
empowered:
1. To appoint one or more receivers of the property, real
or personal, which is the subject of action pending
before the RTC in accordance with the pertinent
provisions of the Rules of Court;
2. In appropriate cases, appoint a rehabilitation receiver
of corporations not supervised or regulated by other
government agencies who shall have, in addition to
the powers of a regular receiver under the provisions
of the Rules of Court, such functions and powers as
provided in the Decree; and
3. Upon petition or motu proprio, to appoint a
management committee, board, or body to
undertake the management of corporations not
supervised or regulated by other government
agencies in appropriate cases when there is imminent
danger of dissipation, loss wastage or destruction of
assets of other properties or paralyzation of business
operations of such corporations which may be
prejudicial to the interest of minority stockholders,
parties-litigants or the general public.

Legal effect of Appointment of Management
Committee/Rehabilitation Receiver
Section 6(c) of PD 902-A provides that upon
appointment of a management committee, rehabilitation
receiver, board or body. . . all actions for claims against
the corporation. . . under management or receivership
pending before any court, tribunal, board or body shall be
suspended accordingly.

Differences between Suspension of Payments
Proceedings under the Insolvency Law (IL) and under
PD 902-A
1. The appointment of a management committee or a
rehabilitation receiver automatically takes the case
out of the provisions of IL and would make the
provisions of PD 902-A exclusively applicable;
2. Under the IL, the suspensive effect of the order
issued pursuant to the petition for suspension of
payment does not cover secured creditors, while the
suspensive effect under PD 902-A upon appointment
of the management committee or rehabilitation
receiver, would cover all corporate creditors, both
secured and unsecured;
3. Under the IL, in the absence of any agreement
among the corporate creditors, the suspension would
expire after 3 months; whereas, under PD 902-A, the
suspensive effect has no time limit and would prevail
for so long as the corporate debtor is under a
management committee or rehabilitation receiver
and there is no directive to have its assets liquidated;
4. The effectiveness of final agreement on the manner
of payment of the obligations of the corporate debtor
is subject to the qualifying majority votes required
under the IL; whereas, under PD 902-A, the
management committee or the rehabilitation
receiver is granted sufficient powers to take such
measures as are necessary to bring back to financial
health the distressed company without need to
obtain approval of the corporate creditors.

Corporate Rehabilitation, defined
Corporate rehabilitation as a process to try to
conserve and administer the corporations assets in the
hope that it may eventually be able to return from
financial stress to solvency. It contemplates of the
continuation of corporate life and activities so that it may

COMMERCIAL LAW
THE INSOLVENCY LAW
269

2009 BAR OPERATIONS
be able to return to its former condition of successful
operations and financial stability.

Preference of secured creditors retained
Secured creditors retain their preference over
unsecured creditors, but enforcement of such preference is
equally suspended upon the appointment of a management
committee, rehabilitation receiver board or body. This
suspension shall not prejudice or render ineffective the
status of a secured creditor as compared to a totally
unsecured creditor. PD 902-A does not state anything to
this effect. What it merely provides is that all actions for
claims against the corporation, partnership or association
shall be suspended .This should give the receiver a chance
to rehabilitate the corporation if there should still be a
possibility for doing so. The key phrase is equality in equity
However, in the event that the rehabilitation is
no longer feasible and claims against the distressed
corporation would eventually have to be settled, the
secured creditors shall enjoy preference over the
unsecured creditors, subject only to the provisions of the
NCC on Concurrence and Preference of Credit.

Power to Liquidate Corporate Debtor
Under Sec. 6(d), the RTC may, on the basis of the
findings and recommendation of the management
committee, or rehabilitation receiver, board or body, or in
its own findings, determine that the continuance in
business or such corporation or entity would not be
feasible or profitable nor work to the best interest of the
stockholders, parties-litigants, creditors, or the general
public, and order the dissolution of such corporation or
entity and its remaining assets liquidated accordingly.

VOLUNTARY INSOLVENCY
Concept of Voluntary Insolvency
A voluntary insolvency proceeding is exactly
what its name implies and the debtor is under no
obligation, and cannot be forced, to bring such
proceeding; nor with his default, through failure to appeal
in an involuntary proceeding, convert the proceedings to
a voluntary ones.

Nature of Voluntary Insolvency
An insolvent debtor, owing debts exceeding in
amount the sum of P1,000.00 may apply to be discharged
from his debts and liabilities by petition to the RTC of the
province or city in which he has resided for six (6) months
next preceding the filing of such petition.

Distinctions between Suspension of Payments and
Insolvency
1. In the former, the purpose is to suspend or delay the
payment of debts, while in the latter, to discharge the
debtor from the payment of debts;
2. In the former, the debtor has sufficient property to
pay his debts, while in the latter, the debtor does not
have sufficient property to pay all his debts;
3. In the former, the amount of indebtedness is not
affected, while in the latter, the creditors receive less
than their credits, and in case where there are
preferences, some creditors may not receive any
amount at all; and
4. In the former, the number of the creditors is
immaterial, while in the case of involuntary
insolvency, three or more creditors are required.

Steps in Voluntary Insolvency
Procedure in general for voluntary insolvency:
1. Filing of the petition by the debtor praying for the
declaration of insolvency (Sec. 14);
2. Issuance of an order of adjudication declaring the
petitioner insolvent (Sec. 18);
3. Publication and service of the order declaring a state
of insolvency (Sec. 19);
4. Meeting of creditors to elect the assignee in
insolvency (Sec. 30);
5. Conveyance of the debtors property by the clerk of
court to the assignee (Sec. 32);
6. Liquidation of the debtors assets and payment of his
debts (Sec. 33);
7. Composition, if agreed upon (Sec. 63);
8. Discharge of the debtor on his application (Sec. 64),
except a corporation (Sec. 52);
9. Objection to the discharge, if any (Sec. 66); and
10. Appeal in certain cases (Sec. 62)
Requisites of Petition for Voluntary Insolvency
The petition, which must be verified, is to be filed
1. by an insolvent debtor,
2. owing debts exceeding in amount the sum of
P1,000.00,
3. in the RTC of the province or city in which he has
resided for six (6) months next preceding the filing of
such petition, and
4. setting forth in his petition the following:
(a) his place of residence;
(b) the period of his residence therein
immediately prior to the filing of petition;
(c) his inability to pay all his debts in full;
(d) his willingness to surrender all his property,
estate, and effects not exempt from
execution for the benefit of the creditors;
and
(e) an application to be adjudged insolvent (Sec.
14).

Documents to accompany the Petition
1. A verified schedule which must contain
(a) a full and true statement of all debts and
liabilities of the insolvent debtor; and
(b) an outline of the facts giving rise or which
might give rise to a cause of action against
such insolvent debtor (Sec. 15); and
2. A verified inventory which must contain
(a) an accurate description of all the personal
and real property of the insolvent exempt or
not from execution including a statement as
to its value, location, and encumbrances
thereon; and

COMMERCIAL LAW
THE INSOLVENCY LAW
270

2009 BAR OPERATIONS
(b) an outline of the facts giving rise or which
might give rise to a right of action in favor of
the insolvent debtor (Sec. 16).

Effect of errors in description or omission of property in
inventory
1. That the property is erroneously or ambiguously
described in the insolvents inventory will not
affect the title of purchasers in the insolvency
proceedings. All the property of the insolvent
passes to his assignee and is administered in the
insolvency proceedings regardless of the errors
in the inventory.
2. If the insolvent omits property from his
inventory, through either mistake or fraud, it is
the duty of the assignee to have the inventory
amended so as to include it and to take
possession and administer it.
3. Even property exempt from execution must be
included in order to preclude possible fraudulent
omissions under the pretext that such property is
exempt. But where the petitioner did not attach
an inventory to its petition for insolvency,
alleging under oath that it had no property to
inventory, the lack of inventory was held not
fatal to the petition because it must be assumed,
until proven otherwise, that the petitioner was
stating the truth.

Effect of the Filing of Petition
Once the petition is filed, it ipso facto takes away
and deprives the debtor-petitioner of the right to do or
commit any act of preference as to creditors, pending the
final adjudication.

Effect of court order declaring the debtor insolvent
Upon the filing of the petition, the court, as a
matter of course, shall issue an order declaring the
petitioning debtor insolvent (Sec. 19). The effects of such
order are the following:
1. All the assets of the debtor not exempt from
execution are taken possession of by the sheriff until
the appointment of a receiver or assignee (Ibid.);
2. The payment to the debtor of any debts due to him
and the delivery to the debtor or to any person for
him of any property belonging to him, and the
transfer of any property by him are forbidden (Ibid.);
3. All civil proceedings pending against the insolvent
debtor shall be stayed (Ibid.); and
4. Mortgages or pledges, attachments or executions on
property of the debtor duly recorded and not
dissolved are not, however, affected by the order
(Sec. 59).

Prohibited Acts of an Insolvent
The following are forbidden:
1. The payment to the debtor of any debts due him.
2. The delivery to the debtor or to any person for him of
any property for him of any property belonging to
said debtor.
3. The transfer of any property by the debtor.
All civil proceedings pending against the
insolvent are stayed, either by forbidding the
maintenance of such
actions, or by authorizing the insolvency court to grant
such stay.

INVOLUNTARY INSOLVENCY

Nature of Involuntary Insolvency Proceedings
It is not a mere personal action against the
insolvent for the collection of debts; but its purpose is to
impound all of his non-exempt property, to distribute it
equitably among his creditors, and to release him from
further liability. It is accordingly a proceeding in rem as
well as in personam.

Steps in Involuntary Insolvency
1. Filing of the petition by three or more creditors, who
are residents of the Philippines, with an aggregate
credit of not less than P1,000.00, none of whom
become a creditor by assignment within thirty (30)
days prior to the filing of the petition;
2. Issuance of the order requiring the debtor to show
cause why he should not be adjudged insolvent;
3. Service of order to show cause;
4. Filing of answer or motion to dismiss;
5. Hearing of the case;
6. Issuance of order or decision adjudging the debtor
insolvent;
7. Publication and service of order;
8. Meeting of creditors for election of an assignee in
insolvency;
9. Conveyance of the debtors property by clerk of court
to the assignee;
10. Liquidation of assets and payment of debts;
11. Composition, if agreed upon;
12. Discharge of the debtor on his application, except a
corporation;
13. Objection to the discharge, if any; and
14. Appeal in certain cases.

Requisites of Petition for Involuntary Insolvency
The petition is to be filed by
1. Three or more creditors,
2. None of whom has become such a creditor by
assignment, within 30 days prior to the filing of said
petition,
3. Whose credits accrued in the Philippines,
4. The total amount of which credits is not less than
P1,000.00, and
5. In the RTC of the province or city in which the debtor
resides or has his principal place of business.

The petition
1. Must be verified by at least three of the petitioning
creditors,
2. Must set forth one or more acts of insolvency
mentioned in the law, and

COMMERCIAL LAW
THE INSOLVENCY LAW
271

2009 BAR OPERATIONS
3. Must be accompanied by a bond, approved by the
court with at least two sureties, in such a penal sum
as the court shall direct.

Acts of Insolvency
The following are acts of insolvency when a
creditor can invoke in filing a petition to declare a debtor
in a state of involuntary insolvency:
1. Intention to depart or departure from the Philippines
to defraud creditors;
2. Absence from the Philippines to defraud creditors;
3. Concealment of debtor to avoid legal process;
4. Concealment or removal of his property to avoid
legal process;
5. Confession of judgment in favor of a creditor to
defraud other creditors;
6. Allowing default judgment in favor of a creditor to
defraud other creditors;
7. Allowing his property to be taken under legal process
in preference of a particular creditor to defraud other
creditors;
8. Making conveyance, assignment or transfer of his
property to defraud his creditors;
9. Making conveyance, assignment or transfer of his
property in contemplation of insolvency;
10. Default of a merchant or a tradesman to pay his
current obligations for a period of 30 days;
11. Failure to pay money on deposit or received in a
fiduciary capacity for a period of 30 days after
demand; and
12. Insufficiency of property to satisfy an execution
issued against him.

Adjudication of Insolvency
Where the debtor fails to appear or admits the
allegations of the petition, or the evidence of the
petitioner is sufficient, an adjudication of insolvency shall
be made. The declaration of insolvency retroacts to the
date of the filing of the petition for insolvency.

Distinctions between voluntary insolvency and
involuntary insolvency
1. In the former, one creditor is sufficient, while in the
latter, three or more creditors are required;
2. In the former, it is filed by the insolvent debtor, while
in the latter, it is filed by three or more creditors who
possess the qualifications required by law;
3. In the former, the debtor must not be guilty of any of
the acts of insolvency enumerated in Section 20,
while in the latter, the debtor must have committed
one or more of such acts of insolvency;
4. In the former, the amount of indebtedness must
exceed P1,000.00, while in the latter, it must not be
less than P1,000.00;
5. In the former, a bond is not required, while in the
latter, the petition must be accompanied by a bond;
6. In the former, an order of adjudication of insolvency
may be granted ex parte, while in the latter, it is
granted only after hearing;
7. In the former, the petition is filed in the RTC of the
province or the city in which the debtor has resided
for 6 months, while in the latter, the length of
residence is immaterial; and
8. In the former, the court issues the order of
adjudication declaring the petitioner insolvent upon
the filing of the voluntary petition, while in the latter,
the debtor is not adjudicated insolvent until after the
hearing of the case.

ASSIGNEES

Assignee, Defined
A person elected by the creditors or appointed
by the court to whom an insolvent debtor makes an
assignment of all his property for the benefit of his
creditors.

Creditors not entitled to vote in the election of
assignee
1. Those who did not file their claims at least two days
prior to the time appointed for such election (Sec.
29);
2. Those whose claims are barred by the statute of
limitations (Ibid.);
3. Secured creditors unless they surrender their security
or lien to the sheriff or receiver or unless they shall
first have the value of such security fixed as provided
in Section 59; and
4. Holders of claims for unliquidated damages arising
out of pure tort.

Bond of Assignee
After his election, the assignee is required to give
a bond for the faithful performance of his duties. To
establish his official character and his right to sue in that
capacity, it is incumbent on the assignee to show that the
bond required has been given.
Properties if insolvent that pass to the assignee
They are:
1. All real and personal property, estate and effects of
the debtor including all deeds, books and papers in
relation thereto;
2. Properties fraudulently conveyed;
3. Right of action for damages to real property; and
4. The undivided share or interest of the insolvent
debtor in property held under co-ownership

Properties of insolvent that do not pass to the assignee
They are:
1. Property exempt from execution;
2. Property held in trust;
3. Property of the conjugal partnership or absolute
community so long as said partnership or community
exists insofar as the insolvent debtors obligations
have redounded to the benefit of the former;
4. Property over which a mortgage or pledge exists
unless the creditor surrenders his security or lien;

COMMERCIAL LAW
THE INSOLVENCY LAW
272

2009 BAR OPERATIONS
5. After-acquired property except fruits and income of
property owned by the debtor and which had passed
to the assignee in insolvency;
6. Non-leviable assets like a life insurance policy which
does not have any cash surrender value; and
7. Right of action for tort which is purely personal in
nature.

Effects of assignment
They are:
1. The assignee takes the property in the plight and
conditions that the insolvent held it;
2. Upon appointment, the legal title to all the property
of the insolvent is vested in the assignee, and the
control of the property is vested in court;
3. All actions to recover all the estate, debts and effects
of the insolvent shall be brought by the assignee and
not by the creditors; and
4. The assignment shall
- dissolve any attachment levied within one
month next preceding the commencement
of insolvency proceedings;
- vacate and set aside judgment entered in
any action commenced within 30 days
immediately prior to the commencement of
insolvency proceedings; and
- vacate and set aside any execution issued
thereon; and
- vacate and set aside any judgment entered
by default or consent of the debtor within 30
days prior to the commencement of
insolvency proceedings.

Powers of the assignee
The assignee shall have the power:
1. To sue and recover all the estate, debts and claims
belonging to or due to the creditors;
2. To take into possession all the estate of the debtor
except property exempt from execution;
3. In case of a non-resident or absconding or concealed
debtor, to demand and receive of every sheriff all the
property and moneys in his possession belonging to
the debtor;
4. To sell, upon court order, any estate of the debtor
which has come into his possession;
5. To redeem all mortgages and pledges and to satisfy
any judgment which may be an encumbrance on any
property sold by him;
6. To settle all accounts between the debtor and his
debtors, subject to the approval of the court;
7. To compound, under the order of the court, with any
person indebted to such debtor; and
8. To recover any property fraudulently by the debtor.

Duties of the assignee
The assignee shall have the following duties:
1. To register the assignment to him of the real estate
of the debtor;
2. To file the schedule and the inventory of the property
of the debtor;
3. To convert, as speedily as possible, the estate, real
and personal, into money;
4. To keep a regular account of all moneys received by
him as assignee;
5. To petition the court to allow the private sale of the
debtors property if it appears that it is for the best
interest of the estate;
6. To file a just and true accounts of all receipts and
payments;
7. To file accounts upon order of the court on motion of
two or more creditors;
8. To distribute such dividends as he may be required;
and
9. To file his final account within one (1) year from the
date of order of adjudication.

Sale of assets
1. Generally - The law provided for the reduction of the
insolvents assets into cash by means of public sales.
Proceedings for the sale of assets are proceedings in
rem. The only question of jurisdiction is the power of
the court over the subject matter without regard to
the parties who may have interest in it. There are no
adversary parties to the proceedings.
2. Persons competent to purchase - On the sale in
insolvency proceedings, the insolvent will not
generally be permitted to purchase the assets, either
in his own name or acting through a dummy. If he
does so, the property purchased becomes subject to
the claims of his creditors. But otherwise, any person
legally qualified to contract may purchase at a judicial
sale unless he has a duty to perform in reference
thereto which is inconsistent with the character of a
purchaser or is so connected with the transaction
that his individual interest as a purchaser may be
inconsistent with his duty.
3. Title acquired - As a general rule, the purchaser at a
judicial sale takes by virtue of his purchase all the
right, title, and interest of the interest of the parties
to the proceedings in and to the property conveyed
to him. The circumstances that an insolvent schedule
contain an erroneous or ambiguous description of
certain property does not affect the title of the
purchaser. All the property passes to the assignee
and is sold regardless of its description in the
schedules

Dividends in insolvency, Defined
A parcel of the fund arising from the assets of the
estate, rightfully allotted to a creditor entitled to share in
the fund, whether in the same proportion with other
creditors or in a different proportion.
It is paid by the assignee only upon the order of
the court.

COMMERCIAL LAW
THE INSOLVENCY LAW
273

2009 BAR OPERATIONS

CLASSIFICATION AND PREFERENCE OF CREDITS

Preference of credit, defined
A legal situation whereby one person is given a
superior right or claim over another. For this reason, the
law as to preference shall be strictly construed.

Concurrence of credits, defined
Implies the possession by two or more creditors
of equal rights or privileges over the same property or all
of the property of the debtor.

Classification of Credits
(Arts. 2241, 2242, 2244, & 2245)
I. Preferred and concurring with respect to specific
movable property of the debtor (Art. 2241), which are --
(1) Duties, taxes, and fees due thereon to the State or
any subdivision thereof;
(2) Claims arising from misappropriation, breach of trust,
or malfeasance by public officials committed in the
performance of their duties, on the movables, money
or securities obtained by them;
(3) Claims for the unpaid price of movable sold, as long
as they are in the possession of the debtor, up to the
value of the same; and if the movable has been resold
by the debtor and the price is still unpaid, the lien
may be enforced on the price; this right is not lost by
the immobilization of the thing by destination,
provided it has not lost its form, substance and
identity; neither is the right lost by the sale of the
thing together with other property for a lump sum,
when the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so long as the thing
pledge are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon the things
pledged or mortgaged, up to the value thereof;
(5) Credits for the making, repairs, safekeeping or
preservation of personal property, on the movable
thus made, repaired, kept or possessed;
(6) Claims for laborers wages, on the goods
manufactured or the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising
from the agricultural leasehold contract, on the share
of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried,
for the price of the contract and incidental expenses,
until their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished to
travelers by hotel-keepers, on the movables
belonging to the guest, as long as such movables are
in the hotel, but not for the money loaned to the
guests;
(11) Credits for seeds and expenses for cultivation and
harvest advanced to the debtor, upon the fruits
harvested;
(12) Credits for rent for one (1) year, upon the personal
property of the lessee existing on the immovable
leased and on the fruits of the same, but not on the
money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has
wrongfully sold the thing deposited, upon the price of
the sale.
In the foregoing cases, if the movables to which the
lien or preference attaches have been wrongfully
taken, the creditor may demand them from any
possessor, within 30 days from the unlawful seizure.

II. Preferred and concurring with respect to specific
immovable and real rights of the debtor (Art. 2242),
which are
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the
immovable sold;
(3) Claims of laborers, masons, mechanic and other
workmen, as well as of architects, engineers and
contractors, engaged in the construction,
reconstruction or repair of buildings, canals, or other
work, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of buildings,
canals, and other works, upon aid buildings, canals or
other works;
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement,
upon the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments or
executions, upon the property affected, and only as
to later credits;
(8) Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus
divided;
(9) Claims of donors of real property for pecuniary
charges or other conditions imposed upon the donee,
upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the
insurance premium for two (2) years.

Those credits which enjoy preference in relation
to specific real property or real rights, exclude all
other to the extent of the value of the immovable or
real right to which the preference refers. (Art. 2248,
NCC).

If there are two or more credits with respect to
the same specific real property or real rights, they
shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property
or real right. (Art. 2249).

III. Preferred insofar as to other real and personal
properties of the debtor (Art. 2244). Order of
preference is observed. These are
(1) Credits for services rendered the insolvent by
employees, laborers, or household helpers preceding
the commencement of the proceedings in insolvency;

COMMERCIAL LAW
THE INSOLVENCY LAW
274

2009 BAR OPERATIONS
(2) Proper funeral expenses for the debtor, or children
under his or her parental authority who have no
property of their own, when approved by the court;
(3) Expenses during the last illness of the debtor or of his
or her spouse and children under his or her parental
authority, if they have no property of their own;
(4) Compensation due to the laborers or their
dependents under laws providing for indemnity for
damages in cases of labor accident, or illness
resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for
the support of himself or herself, and family, during
the last year preceding the insolvency;
(6) Support during the insolvency proceedings, and for 3
months thereafter;
(7) Fines and civil indemnification arising from a criminal
offense;
(8) Legal expenses, and expenses incurred in the
administration of the insolvents estate for the
common interest of the creditors, when properly
authorized and approved by the court;
(9) Taxes and assessments due the national government,
other than those mentioned in Articles 2241, No. 1,
and 2242, No. 1;
(10) Taxes and assessments due any province other than
those referred to in Articles 2241, No. 1, and 2242,
No. 1;
(11) Taxes and assessments due any city or municipality,
other than those mentioned in Articles 2241, No. 1
and 2242, No. 1;
(12) Damages for death or personal injuries caused by a
quasi-delict;
(13) Gifts due to public and private institutions of charity
or beneficence;
(14) Credits which, without special privilege, appear in (a)
a public instrument; or (b) in the final judgment, if
they had been the subject of litigation. These credits
shall have preference among themselves in the order
of priority of the dates of the instruments and of the
judgments, respectively

The credits enumerated in Articles 2241 and 2242,
although preferred as against other credits in respect to
specific property of the insolvent, do not have preference
as among themselves, and shall be satisfied pro rata from
the specific property, after the payment of the duties,
taxes and fees due the state or any subdivision thereof.
On the other hand, the credits enumerated in Article 2244
not only are preferred as against other credits, but they
are preferred as against each other, in the order of
enumeration.

PARTNERSHIPS AND CORPORATIONS

When partnership may be declared insolvent
A partnership may be adjudged insolvent during
the continuation of the partnership business or after its
dissolution but before the final settlement thereof.

Properties included in the insolvency proceedings
Upon order of the court, the following property
shall be taken:
(1) All the property of the partnership; and
(2) All the separate property of each of the
partners, except
(a) separate properties of limited
partners; and
(b) properties which are exempt by
law.

PROOF OF DEBTS

Provable Debts
The debts which may be proved against the
estate of the debtor in insolvency proceedings are the
following:
1. All debts due and payable from the debtor at the
time of the adjudication of insolvency.
2. All debts existing at the time of the adjudication of
insolvency but not payable until a future time, a
discount being made if no interest is payable by the
terms of the contract;
3. Any debt of the insolvent arising from his liability as
indorser, surety, bail or guarantor, where such
liability became absolute after the adjudication of
insolvency but before the final dividend shall have
been declared;
4. Other contingent debts and contingent liabilities
contracted by the insolvent if the contingency shall
happen before the order of final dividend; and
5. Any debt of the insolvent arising from his liability to
any person liable as bail, surety, or guarantor or
otherwise, for the insolvent, who shall have paid the
debt in full or in part.

Contingent claim, defined
A claim in which liability depends on some future
event that may or may not happen and which makes it
uncertain whether there will be any liability.

Debts that may NOT be proved
The following debts are not provable or allowed
in insolvency proceedings:
1. Claims barred by the statute of limitations;
2. Claims of secured creditors with a mortgage or
pledge in their favor unless they surrender their
security;
3. Claims of creditors who hold an attachment or
execution on the property of the debtor duly
recorded and not dissolved;
4. Claims on account of which a fraudulent preference
was made or given;
5. Support, as it does not arise from any business
transaction but from the relation of marriage; and
6. A claim for unliquidated damages arising out of a
pure tort which neither constitutes a breach of an
express contract nor results in any unjust enrichment
of the tortfeasor that may form the basis of an
implied contract.

COMMERCIAL LAW
THE INSOLVENCY LAW
275

2009 BAR OPERATIONS
Alternative rights of secured creditor
1. To maintain his right under the security or lien and
ignore the insolvency proceedings, in which case it is
the duty of the assignee to surrender to him the
property encumbered; or
2. To waive his right under the security or lien and
thereby share in the distribution of the assets of the
debtor, or
3. To have the value of the encumbered property
appraised and then share in the distribution of the
assets of the debtor with respect to the balance of his
credit.

COMPOSITION

Composition defined
It is an agreement, made upon a sufficient
consideration, between an insolvent or embarrassed
debtor and his creditors, whereby the latter for the sake
of immediate or sooner payment, agree to accept a
dividend less than the whole amount of their claims, to be
distributed pro rata, in discharge and satisfaction of the
whole debt.

Requirements for a Valid Offer of Composition
They are as follows:
1. The offer of the terms of composition must be made
after the filing in court of the schedule of property
and submission of the list of creditors;
2. The offer must be accepted in writing by a majority of
the creditors representing a majority of the claims
which have been allowed;
3. It must be made after depositing in such place
designated by the court, the consideration to be paid
and the costs of the proceedings; and
4. The terms of the composition must be approved or
confirmed by the court.
When court may confirm composition
The court shall confirm a composition on the
application of the debtor if satisfied that:
1. It is for the best interest of the creditors;
2. The debtor has not been guilty of any of the acts, or
of a failure to perform any of the duties which would
create a bar to his discharge; and
3. The offer and its acceptance are in good faith and
have not been made or procured in a manner
forbidden by the Act.
Effects of the Confirmation of Composition
The following are the effects:
1. The consideration shall be distributed as the judge
shall direct;
2. The insolvency proceeding shall be dismissed;
3. The title to the insolvents property shall revest in
him; and
4. The insolvent shall be released from his debts.

When confirmation may be set aside
The court may, upon application of a party in
interest, filed at any time within 6 months after the
composition has been confirmed, set the same aside and
reinstate the case if it shall be made to appear upon trial:
(1) That fraud was practiced in the procuring of such
composition; and
(2) That the knowledge thereof has come to the
petitioner since the confirmation of such
composition.

- the effect of lawful composition is equivalent to
discharge.
- the corporation will not be discharged by a lawful
composition. It is only for natural person.

DISCHARGE

Discharge defined
A discharge is the formal and judicial release of
an insolvent debtor from all his debts contracted prior to
the insolvency proceedings, with the exception of those
expressly named by law.

By discharge, the debtor is released from the
obligation of all his debts which were or might be proved
in the proceedings, so that they are no longer a charge
upon him and so that he may thereafter engage in
business and acquire property without its being liable for
the satisfaction of such former debts

When to Apply for Discharge
A debtor may apply
to the RTC for a discharge,
at any time after the expiration of 3 months from
the adjudication of insolvency,
BUT not later than 1 year from such adjudication
of insolvency,
UNLESS the property of the insolvent has not
been converted into money without his fault,
thereby delaying the distribution of dividends
among the creditors in which case the court may
extend the period.

Circumstances which bar Discharge
No discharge shall be granted, or if granted, shall
be invalid, in the following cases:
(1) False swearing;
(2) Concealment of any part of his estate or effects;
(3) Fraud or willful neglect in the care of his property or
in the delivery thereof to the assignee;
(4) Procuring his property to be attached or seized on
execution within 1 month before the commencement
of insolvency proceedings;
(5) Destruction, mutilation, alteration or falsification of
his books, documents or papers;
(6) Giving fraudulent preference to a creditor;
(7) Non-disclosure to the assignee of a proven false or
fictitious debt within 1 month after acquiring
knowledge;

COMMERCIAL LAW
THE INSOLVENCY LAW
276

2009 BAR OPERATIONS
(8) Being a merchant, failure to keep proper books of
accounts;
(9) Influencing the action of any creditor, at any state of
the proceedings, by any pecuniary consideration;
(10) Effecting any transfer, conveyance or mortgage in
contemplation of insolvency;
(11) Conviction of any misdemeanor under the Insolvency
Law;
(12) In case of voluntary insolvency, he has received the
benefit of insolvency within 6 years next preceding
his application for discharge; and
(13) If insolvency proceedings in which he could have
applied for a discharge are pending by or against him
in the RTC of any other province or city.

Legal effects of discharge
(1) It releases the debtor from all claims, debts, liabilities
and demand set forth in the schedule or which were
or might have been proved against his estate in
insolvency. Hence, non-provable debts are not
affected whether or not they were properly
scheduled.
(2) It operates as a discharge of the insolvent and future
acquisitions, but permits mortgages and other lien
creditors to have their satisfaction out of the
mortgage or subject of the lien;
(3) It is a special defense which may be pleaded and be a
complete bar to all suits brought on any such debts,
claims, liabilities or demands;
(4) It does not operate to release any person liable for
the same debt, for or with the debtor, either as
partner, joint contractor, indorser, surety, or
otherwise; and
(5) The certificate of discharge is prima facie evidence of
the fact of release, and the regularity of such
discharge.

Where a debtor is judicially declared insolvent,
the remedy of the guarantor or surety would be to file a
contingent claim in the insolvency proceeding, if his rights
as such guarantor or surety are not to be barred by the
subsequent discharge of the insolvent debtor from all his
liabilities.

Debts released by discharge
(1) All claims, debts, and liabilities, and demands set
forth in the schedule; and
(2) All claims, debts, liabilities and demands which were
or might have been proved against the estate in
insolvency.

Debts not released by discharge
(1) Taxes or assessments due the Government, whether
national or local;
(2) Any debt created by the fraud or embezzlement of
the debtor;
(3) Any debt created by the defalcation of the debtor as
a public officer or while acting in a fiduciary capacity;
(4) Debt of any person liable for the same debt, for or
with the insolvent debtor, either as partner, joint
contractor, indorser, surety or otherwise.
(5) Debts of a corporation because is not granted a
discharge;
(6) Claim for support; otherwise it will make the law a
means of avoiding the enforcement of the obligation,
moral and legal, devolving upon the husband to
support his family;
(7) Discharged debt but revived by a subsequent new
promise to pay because the discharge does not put to
an end the moral obligation to pay;
(8) Claims for unliquidated damages arising out of a pure
tort;
(9) Claims of secured creditors;
(10) Claims not in existence or not mature at the time of
the discharge are generally unaffected thereby; and
(11) Claims that are contingent at the time of the
discharge are not barred thereby, and consequently,
an action may be maintained against the debtor for
collection thereof.

When discharged may be revoked
A discharge in insolvency may be revoked by the
court which granted it on petition of any creditor
1. Whose debt was proved or provable against the
estate in insolvency, on the ground that the discharge
was fraudulently obtained;
2. Who has discovered facts constituting the fraud
subsequent to the discharged; and provided,
3. The petition is filed within one year after the date of
the discharge.

FRAUDULENT PREFERENCES AND TRANSFERS

Meaning of transfer
A transfer within the meaning of the Insolvency
Law, includes the sale and every other and different
modes of disposing of or parting with property, or the
possession of property, absolutely or conditionally, as a
payment, pledge, mortgage, gift, or security.
A deposit of money is not a transfer.
When preferential transfer exists
To constitute a preferential transfer, there must
be a parting with the insolvents property for the benefit
of the creditor and a consequent diminution of the
insolvents estate with the result that such creditor
receives a greater proportion of his claim than other
creditors of the same class.

A deposit of money to ones credit in a bank does not
create any preference. The estate of the depositor is not
diminished for there is an obligation on the part of the
bank to pay the amount of the deposit as soon as the
depositor may see fit to draw a check against it.

When fraudulent preference exists
A fraudulent preference is committed when the
debtor procures any part of his property to be attached,
sequestered, or seized on execution or makes any
payment, pledge, mortgage, assignment, transfer, sale or
conveyance of any part of his property, whether directly

COMMERCIAL LAW
THE INSOLVENCY LAW
277

2009 BAR OPERATIONS
or indirectly, absolutely or conditionally, to any one under
the following circumstances:
1. The debtor is insolvent or in contemplation of
insolvency;
2. The transaction in question is made within 30 days
before the filing of a petition by or against the
debtor;
3. It is made with a view to giving preference to any
creditor or person having a claim against him; and
4. The person receiving a benefit thereby has
reasonable cause to believe:
a. that the debtor is insolvent; and
b. that the transfer is made with a view to
prevent his property from coming to his
assignee in insolvency, or to prevent the
same from being distributed ratably
among his creditors, or to defeat the
object of or any way hinder the
operation of or evade the provisions of
the Insolvency Law.

When presumption of fraud exists
If such payment, pledge, mortgage, conveyance,
sale, assignment, or transfer is not made in the usual and
ordinary course of business of the debtor, or if such
seizure is made under a judgment which the debtor has
confessed or offered to allow, that fact shall be prima
facie evidence of fraud.

When fraudulent transfer exists
A fraudulent transfer is any payment, pledge,
mortgage, conveyance, sale, assignment, or transfer of
property of whatever character made by the insolvent
within 1 month before the filing of a petition in insolvency
by or against him, except for a valuable pecuniary
consideration in good faith. Such a transfer is void.

Effect of fraudulent transfer
As against the creditors of the insolvent
- any conveyance or assignment fraudulently
made is void. Hence, no title is acquired by
the transferee

PENAL PROVISIONS

Acts criminally punishable under this Act
A debtor who commits any of the following acts
shall, upon conviction thereof, be punished by
imprisonment, for not less 3 months nor more than 5
years for each offense:

I. After the commencement of insolvency proceedings --
(1) Concealing any part of his estate;
(2) Destroying, altering, mutilating or falsifying
any book, deed, document, or writing
relating thereto;
(3) Removing the same with the intent to
prevent or delay its recovery by the
assignee;
(4) Making any payment, gift, sale, assignment,
transfer or conveyance of property
belonging to his estate with like intent;
(5) Spending any part thereof in gaming;
(6) Concealing from his assignee or omitting
from the schedule any part of his property
with intent to defraud;
(7) Failing to disclose to his assignee the fact
that a person has proved a false or fictitious
claim against his estate within 1 month after
coming to the knowledge or belief thereof;
or
(8) Attempting to account for any of his
property by fictitious losses or expenses;

II. Within 3 months before commencement of
insolvency proceedings
1. Obtaining on credit from any person any goods or
chattels with intent to defraud, under the false
pretense of carrying an ordinary course of business;
2. Making any pledge or disposition of, otherwise than
by bona fide transactions in the ordinary course of his
trade, with intent to defraud, any of his goods or
chattels which have been obtained on credit and
remained unpaid for;
3. Suffering loss in any kind of gaming when such loss is
one of the causes determining the commencement of
insolvency proceedings;
4. Selling at a loss or for less than the current price any
goods brought on credit and still unpaid for; or
5. Advancing payment to the prejudice of his creditors.

III. During proceedings for suspension of payments
1. Concealing or destroying any property belonging to
his estate;
2. Destroying, altering, mutilating or falsifying any
book, deed, document, or writing relating thereto;
3. Making any payment, sale, assignment, transfer, or
conveyance of any property belonging to his estate;
4. Spending any part thereof in gaming;
5. Falsely swearing to the schedule and inventory with
intent to defraud his creditors; or
6. Violating in any manner whatsoever the injunction
issued by the court under Section 3.

MISCELLANEOUS PROVISIONS

Effect of death of insolvent debtor pending insolvency
proceedings
It depends
1. If the debtor shall die after the order of adjudication,
the proceedings shall be continued and concluded in
like manner and with like validity, and effect as if he
had lived.
2. If the death occurs before the order of adjudication,
the proceedings shall be discontinued. The claims
must be filed in the proper testate or intestate

COMMERCIAL LAW
THE INSOLVENCY LAW
278

2009 BAR OPERATIONS
proceedings as provided by the Rules of Court on the
settlement of a decedents estate.

Duty of court where property exempt from execution
It shall be the duty of the court having
jurisdiction of the proceedings, upon petition and after
hearing held upon due notice, to exempt and set apart,
for the use and benefit of the insolvent, such real and
personal property as is by law exempt from execution.

When insolvency proceedings deemed to commence
The filing of a petition by or against a debtor
upon which, or upon an amendment of which, an order of
adjudication in insolvency may be made, shall be deemed
to be the commencement of proceedings in insolvency
under the Act.

When petition may be dismissed
The court, upon giving due notice, may dismiss
the petition and discontinue the proceedings at any time
before the appointment of an assignee:
1. If it be a voluntary petition, upon the application of
the debtor, if no creditor files written objections;
2. If a creditors petition, upon the application of the
petitioning creditors; or
3. By written consent of all creditors filed in court, in
which case, the proceedings may be dismissed at any
time.
After the appointment of an assignee, dismissal
is not allowed without the consent of all parties
interested in or affected thereby.

When appeal may be taken to the Supreme Court
An appeal may be taken to the Supreme Court in
(1) From an order granting or refusing an adjudication in
insolvency and in the latter case, from the order
fixing the amount of costs, expenses, damages, and
attorneys fees allowed the debtor;
(2) From an order allowing or rejecting a creditors claim
when the amount in dispute exceeds P300.00;
(3) From an order allowing or denying a claim for
property not belonging to the insolvent, presented
under Section 48;
(4) From an order settling an account of an assignee;
(5) From an order against or in favor of setting apart
homestead or other property claimed as exempt
from execution; and
(6) From an order granting or refusing a discharge to the
debtor.

COMMERCIAL LAW
THE TRUTH IN LENDING ACT
279

2009 BAR OPERATIONS

A LAW SUPPLEMENTING OR COMPLIMENTING THE
ANTI-USURY LAW CIRCUMVENTED EVEN BY BANKS

PURPOSE
To protect citizens from a lack of awareness of
the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national
economy.

REQUIREMENT OF DISCLOSURE
The creditor shall furnish the debtor prior to the
consummation a loan or sale , a clear statement in writing
containing the ff:
1. Cash price or delivered price of the property or
service
2. Amounts to be credited as down payment and trade-
in
3. The difference the amounts of cash price and as
down payment
4. The charges, individuality itemized
5. Total amount to be financed
6. The percentage that the finance charges bears to the
total amount to be finance as a simple annual rate.

Simple Annual Rate
Is the uniform percentage, which represents the ratio,
on annual basis, between the finance charges and the
amount to be financed?

In case of Simple Payment upon maturity:
R = 2 x finance charge x 12 x 100 %
Amount to be financed maturity rate in months

In the case of normal installment type of credit of at
least 1 yr. In deviation

R = 2x finance charge x no. of payments in a year
Amount to be financed total number of
payment + 1

In cases where the credit matures in less than a
yr, the same formula will apply except that the number of
payments in a year would refer to the number of
installment periods.
In cases where credit terms provides for
premium or penalty charges depending on for example,
the timeliness of the debtors payment, the annual rate to
be disclosed in writing shall be the rate for regular
payments.

EFFECT OF NON-DISCLOSURE
1. The creditor is liable to the debtor for P100 or
amount equal to twice the finance charge, whichever
is greater provided liability shall not exceed P2,000
on any credit transaction. Action to recover penalty
must be brought within 1 year from date of violation.

2. The creditor can be held criminally liable.
3. The transaction is still valid.

SCOPE OF REQUIREMENTS
The regulations shall apply the ff. types of credit
transactions:

1. Any loans, mortgages, deeds of trust, advances and
discounts
2. Any conditional sale
3. Any rental-purchase contract
4. Any contract for hire, bailment or leasing of property
5. Any option, demand, loan, ledge
6. Any transaction or series of transactions having a
similar purpose

THE FF. CATEGORIES OF CREDIT TRANSACTION ARE
OUTSIDE THE SCOPE OF THE SAID REGULATIONS
1. Credit transactions which to not involve the payment
of finance which to not involve the payment of
finance charge by the debtor
2. Credit transactions in which the debtor specifies a
definite and fixed set of terms such as bank deposits,
insurance contracts, etc.

Phil. Government
- No punishment or penalty shall apply

Any Person
1. Fined by not less P 1,000 nor more than P 5, 000
2. Imprisonment for not less than 6 mos. Nor more than
1 year
3. Both

OFFICES AUTHORIZED TO ENFORCE RULES AND
REGULATIONS
1. Department of Commercial and Savings
Bank
2. Department of rural bank and Savings and
Loan Association
3. Office of Non-bank Financial Intermediaries

The respective heads of the 3 departments have the
authority to examine all books, documents, papers or
records of creditors

Creditor
Shall include but shall not be limited to banks
and banking institutions, insurance and bonding co.,
savings and loan associations, credit unions, financing
companies, etc.

THE TRUTH IN LENDING ACT
R.A. 3765

COMMERCIAL LAW
RANDOM Q & A
280

2009 BAR OPERATIONS

CODE OF COMMERCE

Question:
Who are merchants?

A - Merchants are natural and juridical persons,
who, having legal capacity to engage in
commerce, habitually devote themselves thereto
(Art. 1, Code of Commerce). Habituality is
determined by the intent, and not by the number
of transaction involved.


Question:
What is an order instrument?

A- It is an instrument which, on its face, is
payable to order of a specified person, or to him
or his order.

Question:
What is a bearer instrument?

A- It is an instrument which, on its face, is
payable to bearer.

Question:
X issued and delivered to Y the following
instrument:

Pay to Y or bearer the sum of P 10,000.00,
thirty (30) days from sight.

To: Z
(Sgd) X

Y indorsed the instrument by writing on its back
the words: Pay to A or order, after which he
signed it, and delivered the instrument to A, who
delivered the same to B who paid value therefore
in good faith. Is B entitled to payment fro m Z?
Explain briefly.

A- Yes. B became a holder of the
instrument when A negotiated it by delivery to
him. A bearer instrument is always negotiable by
mere delivery despite the fact that the only or
last indorsement thereon is a special
indorsement. Unless it is restrictively indorsed
for deposit only the bearer instrument continues
to be negotiable by mere delivery.

Question:
X needs money to pay an obligation to pay Y
who is not satisfied with a check issued by X as Y
does not believe in the credit of X. So X asks his
rich friend, Z, to issue a check payable to the
order of X in the amount of P100,000.00. X gave
Z the sum of P500.00 as gratification for the
letters act of issuing such check. X indorsed and
delivered the check to Y who, in turn, negotiated
it to A who knows that there was no
consideration between X and Z, except the sum
of P500.00. A presented the check for payment
to the drawee bank which dishonored the same
for insufficient funds. The requisite notices of
dishonor were given to all parties concerned.
1.) When A demanded payment from Z,
can the latter put up the defense of lack of
consideration?
2.) Assuming that Z pays A the amount of
the check, is the instrument discharged?

A- 1.) No. Z cannot put up the
defense of lack of consideration because the
check was issued by Z as an accommodation
party, and absence of consideration is in the
nature of an accommodation. Despite his
knowledge of such fact, A is still a holder in due
course.

2.) The instrument is not discharged by the
payment of the check by Z to A. Being an
accommodation party, Z still needs the
instrument in order to secure payment thereof
from the debtor or the party, X. Z is not the
principal debtor or the party ultimately liable.
Hence, it is the payment by X , at or after
maturity, which discharges the instrument.

Question:
X bought goods from Y on a 30-day credit at the
price of P10, 000.00. In payment of the price, X
drew or issued a check, drawn on Ace Bank, in
the sum of P10, 000.00, payable to the order of
Y. X sent the check by mail to Y. The check fell
into the hands of Z who forged the signature of
Y, making it appear that Y indorsed the check to
Z. Thereof, Z deposited the check in his account
with Super Bank which stamped thereon the
words ALL INDORSEMENT AND/OR LACK OF
INDORSEMENT GUARANTEED, before sending
the check for clearing. After the expiration of
three (3) days, and without hearing anything
from Ace Bank, Super Bank allowed Z to
withdraw the amount of the check. When Y
complained about not having been paid for the
price of the goods, it was then that X discovered
that something went wrong with the check.
When X demanded that Ace Bank pay, the latter
demanded reimbursement from Super Bank.
What are the rights and obligations, if any, of the
parties? Discuss briefly.

RANDOM QUESTIONS AND ANSWERS
in
MERCANTILE LAW

By Atty. Maria Lulu G. Reyes

COMMERCIAL LAW
RANDOM Q & A
281

2009 BAR OPERATIONS

A- 1.) Y has the right to recover from
X the sum of P10, 000.00 for the price of the
goods under the contract of sale. Y cannot
recover under the check, which is not in his
possession, and, therefore, he is not a holder
thereof.

2.) X has the right to demand that Ace
Bank, the drawee bank, credit back the sum of
P10, 000.00 to his account. The contract of
deposit between X and Ace Bank authorizes the
latter to debit Xs account only in payment of the
checks as ordered by X.

The exception to this general rule will be a case
where the negligence of X in sending the check
to Y by mail constitutes the proximate cause of
the loss. In such a case, Xs negligence will
prevent his recovery of the amount involved
from the drawee bank, Ace Bank.

3.) Z, being the culprit is liable for the
amount of the check to Super Bank if the latter is
held liable in favor of Ace Bank, or to X in case
the latter cannot recover from the Ace Bank, or
to X in case the latter cannot recover from the
Ace Bank under the exception to the general rule
in Answer no.2.

4.) Super Bank is liable to Ace Bank under
the indorsement made on the check before it
was sent for clearing, namely, ALL PRIOR
INDORSEMENT AND/OR LACK OF
INDORSEMENT GUARANTEED. Under such
indorsement/ guarantee, Super Bank, the
collecting bank, warranted the validity of all
indorsements on the back of the check, including
the indorsement made by the culprit, Z, is the
forger. (Philippine National Bank vs. Bank of
Philippine Island, G.R. No. 27838, August 4,
1986.)

Note: Answer No.4 is a departure
from the ruling that as between the
drawee bank and the collecting bank,
the former should bear the loss, which
ruling did not give weight to the
collecting banks indorsement ALL
INDORSEMENT AND/OR LACK OF IT
GUARANTEED (Philippine National
Bank vs. Court of Appeals and Philippine
Commercial and Industrial Bank, L-
26001, Banking Corporation vs. Peoples
Bank & Trust Company, L-28226.
September 30, 1970, 34 SCRA 146.)

Note further: In Republic Bank vs. Court
of Appeals, G.R, No. L-42725, April 22,
1991, it was ruled that the unqualified
endorsement of the collecting bank of
the check should be read together with
the 24-hour regulation for clearing
house operation (Metropolitan Bank &
Trust Company vs. First National City
Bank, 118 SCRA 537). Thus when the
drawee bank fails to return a forged or
altered check to the collecting bank
within the 24-hour clearing period, the
collecting bank is absolved from
liability.

Question:
Pedro Santos drew or issued the following
instruments:

Pay to Juan Cruz or whoever is in possession
hereof, the sum of P10,000.00, or, as he prefers,
deliver to him one thousand piculs of sugars,
within sixty (60) days from sight, with attorneys
fee equivalent to 10% in case of a collecting suit.

(Sgd.) Pedro Santos

To: Jose Bustos
No. 13 Quezon Avenue
Quezon City, Metro Manila

Is the above instrument negotiable? Explain
briefly

A- Yes, it is negotiable. First, it is in writing
and signed by the drawer.

Second, it contains an unconditional order to pay
the sum of P10, 000.00. The delivery of 1,000
piculs of sugar is at the option of the payee or
holder.

Third, it is payable within sixty (60) days from
sight. This is a determinable future time namely,
sixty (60) days from the date of presentment for
acceptance.

Fourth, it is payable to bearer, namely, Juan
Cruz, or whoever is in possession of the
instrument.

Fifth, it is addressed to a drawee, Jose Bustos,
who is named therein.

All the requirements of Section 1 of the
Negotiable Instruments Law are complained with

Question:
Preparing to leave for a family vacation, X signed
a PNB check and placed the same in his filing
cabinet in his study room. He left instruction to
Y, his housekeeper to fill it up in case there is a
need for payment of water, electric and/or
telephone bill/s while he was away. After X and
his family left for vacation, Y filled up the check
by making herself the payee and P50,000.00 as
the amount thereof, antedating the date as the

COMMERCIAL LAW
RANDOM Q & A
282

2009 BAR OPERATIONS
day when X left for vacation. Y indorsed the
check by signing his name on the back thereof,
and delivered the check to Z who paid value
therefore in good faith. In turn, Z delivered the
check to A who, at that time, already knew about
the surrounding facts and circumstances. When
A deposited the check with Ace Bank, his
depositary bank, said bank credited the amount
of P50,000.00 to As account. Upon his return, X
discovered what happened to the check copy
through clearing and had debited Zs account to
his account. What are the rights and obligations,
if any, of the parties? Explain briefly.

A- 1) X has the right to recover the amount of
P50,000.00 from Y his housekeeper, who
violated his instruction and who unduly
benefited himself.
2) Z is a holder in due course as he took the
check in good faith and for value. He was not
aware of the breach of trust committed by Y
against X.
3) A was not a holder in due course
because at the time he took the check, he had
already knowledge of the breach at trust
committed by Y. However, since he took the
check from Z, a holder in due course, A has all
the rights of a holder in due course. Therefore,
he is entitled to payment under the check and
the personal defense of breach of trust by Y
cannot be set up against him by X or5 any other
party.
4) X has no right to demand that PNB
credit back the amount of P50,000.00 to his
account. As between X and PNB, it was the
negligence of X which was the culprit, is Xs
employee or agent and X should answer for the
loss caused by his own employees.

Question:
What is the language of negotiability which
characterizes a negotiable paper as a credit
instrument?

A- It is freedom to circulate as a substitute
for money.

Question:
Since knowledge involves a state of mind
difficult to establish, what prima facie
presumption has been created by B.P. Blg. 22?

A- That the drawer has knowledge of the
insufficiency of his funds in or credit with the
bank at the time of the issuance and on the
checks presentment for payment.

Question:
Is lack of involvement in the negotiation for the
transaction a defense to a treasurer of the
corporation who signed the check in his capacity
as an officer of the corporation?

A- No. It is not a defense. What the law
punishes is the issuance of a bouncing check an
not the purpose for which it was issued nor the
terms and conditions relating to its issuance. The
mere act of issuing a worthless check is malum
prohibitum. The person or persons who actually
sign the check in behalf of a corporation,
company or entity are liable under Batas
Pambansa Blg. 22.

Question:
Does the Novation Theory apply to B.P. 22?

A- It does not apply where the offer to pay
by the debtor, which was accepted by the
creditor, turned out to be only am empty
promise which effectively delayed the aggrieved
partys filing of a case for violation of Batas
Pambansa Blg. 22

Question:
What are the elements of the offense penalized
under Batas Pambansa Blg. 22?

A The elements are: (1) the making, drawing
and issuance of any check to apply to account or
for value; (2) the knowledge of the maker,
drawer or issuer that at the time of issue he does
not have sufficient funds in or credit with the
drawee bank for the payment of such check in
full upon presentment; and (3) subsequent
dishonor of the check by the drawee bank for
insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any
valid cause, ordered the bank to stop payment.

Question:
What is the nature of the violation of the Batas
Pambansa Blg. 22?

A It is in the nature of a continuing crime.

Question:
What is the nature of a cashiers check?
A- A cashiers check is a primary obligation
of the issuing bank and accepted in advance by
its mere issuance and by its peculiar character
and general use in the commercial world is
regarded substantially to be as good as the
money which it represents. (Based on Tan v. CA,
239 SCRA 310)

CORPORATION LAW

Question:
X entered into a contract with an association
which represented itself to be a corporation.
When X sued the association under the contract,
the latter set up the defense that it has no
capacity to be sued. Will the defense prosper?

COMMERCIAL LAW
RANDOM Q & A
283

2009 BAR OPERATIONS

A- No. The association is estopped from
denying its corporate capacity in the suit. It
cannot allege lack of capacity to be sued to
evade responsibility on a contract it has entered
into and by virtues of which it received
advantage and benefits. (Christian Childrens
Fund vs. National Labor Relations Commission.
G.R. No. 84502, June 30, 1989)

Question:
How do you determine whether a corporation
can perform an act or thing necessary to carry
out the purpose on its business?

A- You have to determine whether or not a
logical and necessary relation exists between the
act questioned and the corporate purpose
expressed in the charter. For if the act is one
which is lawful in itself and not otherwise
prohibited, and is done for the purpose of serving
corporate ends, and reasonably contributes to
the promotion of those ends in a substantial and
not in a remote and fanciful sense, it may be
fairly considered the charter power of the
corporate. A corporation is not restricted to the
exercise of powers expressly conferred upon it by
its charter, but has the power to do what is
reasonably necessary or proper to promote the
interest or welfare of the corporation.

Question:
When are unpaid subscriptions due and payable?

A- Unpaid subscriptions are not due and
payable until a call is made by the corporation for
payment. Where the corporation has not
presented a resolution of the board of directors
calling for the payment of the unpaid
subscription and no notice of such call has been
sent to the stockholder, the corporation has no
basis to set off the amount due the stockholder,
from the amount receivable from him for the
unpaid subscription. (Apodaca v. NLRC, G.R. No.
80039 April, 1989)

Question:
When is piercing the veil of corporate fiction
proper?

A- Where it appears that two business
enterprises are owned, conducted and controlled
by the same parties, both law and equity will,
when necessary to protect the rights of third
persons, disregard the legal fiction that two
corporations are distinct entities, and treat them
as identical.

Question:
Is a general manager of a corporation personally
liable for the backwages of an employee of the
corporation?

A- No. A corporation is invested by law
with a personality separate and distinct from
those of the persons composing it as well as from
those of the persons composing it as well as from
that of ant other entity to which it may be
related. More ownership by a single stockholder
or any another corporation of all or nearly all of
the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate
personality. The general manager of a
corporation therefore should not be made
personally answerable for the payment of the
employees backwages unless he had acted
maliciously or in bad faith in terminating the
services of the employee. (Lim vs. NLRC, G.R.
No. 79975, March 16, 1989)

Question:
Can the vice-president be held jointly and
severally liable with the corporation for the
unpaid wages of the companys former
president?

A- The responsible officer of an employer
corporation can be held personally, not say even
criminally, liable for non-payment of backwages.
(Gudes v. NLRC, G.R. No. 83023, March 22, 1990)

Question:
Are questions of policy of the corporate board
subject to judicial review.

A- No. They are left solely to the honest
decision of the officers and directors of the
corporation. The court is without authority to
substitute its judgment for the judgment of the
Board of Directors. The Board is the business
manager of the corporation, and so long a sits
acts in good faith its orders are not reviewable by
the courts. (Sales v. SEC, G.R. No. 54330, January
13,1988)

Question:
It is enough to say that foreign corporations not
doing business in the Philippines do not need a
license in order to sue in the Philippine Courts?

A- No. The proposition refers to the right
to sue; the question here refers to pleading and
procedure. Insofar as the allegations in the
complaint have a bearing on the parties capacity
to sue, all that is averred is that they are both
foreign corporations existing under the laws of
another state. This averment conjures two
alternative possibilities: either they are engaged
in business in the Philippines or they are not so
engaged. If the first, they must have been duly
licensed in order to maintain this suit. If the
second, and the action sued upon is singular and
isolated, no such license is required. In either
case, the qualifying circumstances are an

COMMERCIAL LAW
RANDOM Q & A
284

2009 BAR OPERATIONS
essential part of the element of plaintiffs
capacity to sue and must be affirmatively
pleaded. (Commissioner of Customs vs. K.M.K.
Gani, Indrapal & Co., G.R. 73722, February 26,
1990)

Question:
What restrictions may be imposed on the right of
a stockholder to sell or alienate his shares?

A. Restrictions cannot be imposed upon
stockholders by a by-law without statutory or
charter authority. The owner of a corporate stock
has the same uncontrollable right to sell or
alienate, which attaches to the ownership of any
other species of property. (Go Soc & Sons vs.
IAC, G.R. No. 72342, February 19, 1987)

Question:
Apex Smelting Corporation has an authorized
capital stock of P1, 000, 000.00, P5, 000, 000.00
of which has been subscribed and paid up. A year
after its corporatio, the company made profits,
and P250, 000.00 worth of unsubscribe shares of
the authorized capital stock were used as stock
dividends. Now the company needs additional
capital of P1, 000, 000.00, which can be raised
from the present stockholders, what step or
steps can be taken to meet this need? Explain
briefly.

A- The Articles of Incorporation should be
amended to increase the authorized capital stock
in order to accommodate an infusion of
P1,000,000.00 additional capital for the
operation of the company.

The amendment should be approved by at least
2/3 of the outstanding capital stock entitled to
vote and by at least a majority of the members of
the board of directors showing such approval of
the Securities and Exchange Commission. Other
requirements, such as the submission of the long
form, must be complied within certain cases as in
the case where the amendment involves
financial matters like the present one.

Question:
X is one of the five (5) stockholders of a record of
Acme Trading Corporation. Since he does not
belong to the majority of the stockholders
controlling the corporation. He was not included
in the list of stockholders, to whom the treasury
shares were sold. What right, if any, does X have?
Explain briefly you answer.

A- He has the right it invoke his preemptive
right to subscribe to the corresponding portion
of the reissuance of the treasury shares. In
relation to the ratio, which his stockholding on
record has to the amount of the reissued
treasury shares, taking into account the shares of
the other stockholders of record

Question:
Jose is a stockholder of a corporation with a term
expiring on August 31, 199. The majority of the
members of the board of directors of the
company approved and the adopted a resolution
extending the term of the corporation for
another twenty five (25) years. A similar
resolution was previously adopted by the
stockholders representing two third (2/3) of the
outstanding capital stock. If consulted by Jose
who objects to such extension, what advice will
you give him? Explain briefly.

A- Jose can exercise his right of appraisal
within thirty (30) days from the date when the
voting took place, approving such extension.
Within ten (10) days from the date of his demand
for the payment of his shares, he should
surrender his certificate of stock for annotation
that the shares covered thereby are dissenting
shares; otherwise his right of appraisal
terminates. After the appraisal of the value of his
shares, the payment shall be made from
unrestricted retained earnings of the
corporation.

Question:
Achievers, Inc. made profits last five year,
resulting in a substantial unrestricted retained
earnings very much beyond its paid-up capital.
The company decided to declare stock dividends
out of the unissued shares of its authorized
capital stock. If consulted by the management as
to the steps taken, what advice will you give?
Discuss briefly.

A- All the subscription must first be fully
paid. When this is done, a letter should be sent to
the SEC requesting for exemption from
registration of the authorized capital stock. The
letter must be accompanied by the minutes of
the stockholders meeting and also that of the
meeting of the board of directors approving the
additional issuance of the unissued as stock
dividend as declared by the stockholders
representing at least 2/3 of the outstanding
shares of stock and by a majority of the members
of the board of directors.

Question:
A stockholder of Glory Marketing Corporation,
Pedro sold his shares to Santos. The transaction
is covered by a duly notarized deed of
sale/assignment. When Santos presented the
document, duly signed and executed by Pedro,
together with the certificate of stock covering
the shares in question, to the corporate secretary
for recording and the issuance of a new
certificate of stock in the same of Santos, the

COMMERCIAL LAW
RANDOM Q & A
285

2009 BAR OPERATIONS
corporate secretary refused. If consulted by
Santos as what remedy is available to him under
the circumstances, what advice will you give
him? Explain briefly.

A- Assuming that the certificate of stock
has been duly indorsed by Pedro, Santos can be
considered as a stockholder of the corporation.
In such a case, actual knowledge of the transfer
from Pedro to Santos, on the part of the
corporate secretary, is equivalent to registration.
The knowledge of the corporate secretary is
binding upon the corporation. Being a
stockholder of the corporation, Santos can
institute an action in the RTC vested with special
jurisdiction under RA 8799 in order to compel the
corporation and the corporate secretary to
record the transfer and to issue a new certificate
of stock of his name. This is example of
intracorporate controversy since the action is
between the stockholder, Santos, and the
corporation, and the dispute concerns and/or
arises out of the relationship between such
stockholder and the corporation.

If the certificate of stock has not been duly
indorsed by Pedro, Santos should first secure
such indorsement before presenting the
document of transfer, together with the
certificate of stock duly indorsed, to the
corporate secretary for recording. Otherwise, he
will not be considered a stockholder of the
corporation and the action will not be considered
an intracorporate controversy. (Rivera vs.
Florendo, L-57586, October 8, 1986, 144 SCRA
643.)

Question:
How do you characterize the determination of
the rights of the person and the concomitant
liability of a corporation arising from the formers
ouster as a medical director and/or hospital
administrator, which are corporate offices.

A It is an extra controversy subject to the
jurisdiction of the Special Commercial Court
under RA 8799.

Where the medical director and/or hospital
administrator was appointed by the
corporations Board of Directors/Trustees, he is
deemed an officer of the corporation. A
corporate officers dismissal is always a
corporate act, or a intra-corporate controversy,
and the nature is not altered by the reason or
wisdom with which the Board of Directors may
have in taking such action.

The question on remuneration, involving as it
does, a person who is not a mere employee but a
stockholder and officer, an integral part of the
corporation, is not a simple labor problem but a
matter that comes within the area of corporate
affairs and management and is in fact a
corporate controversy in contemplation of the
Corporation Code.

Question:
Distinguish between office and employee.

A An office is created by the charter of the
corporation and the officer is elected by the
directors or stockholders. An employee usually
occupies no office and generally is employed not
by the action of the directors or stockholders but
by managing officer of the corporation who also
determines the compensation to be paid to such
employee.

Question:
What is needed for the purpose of serving
summons on a foreign corporation?

A For purposes of having summons served on a
foreign corporation in accordance with Rule 14,
Section 14, it is sufficient that it be alleged in the
complaint that the foreign corporation is doing
business in the Philippines.

Question:
Is a foreign corporation without a license ipso
facto incapacitated from bringing an action?

A No. A license is necessary only if it is
transacting or doing business in the country.

Question:
What is the test to determine whether a foreign
corporation is doing business in the country.

A The test seems to be whether a foreign
corporation is continuing the body or substance
of the business or enterprise for which it was
organized or whether it has substantially retired
from it and turned it over to another.

The purpose of the law is not to prevent the
foreign corporation from performing single or
isolated acts, but to bar it from acquiring a
domicile for the purpose of business without first
taking the steps necessary to render it amenable
to suits in the local courts.

By securing a license, a foreign entity would be
giving assurance that it will abide the decisions of
our courts, even if adverse to it.

The primary purpose of the license requirement
is to compel a foreign corporation desiring to do
business within the state to submit itself to the
jurisdiction of the courts of the state.

COMMERCIAL LAW
RANDOM Q & A
286

2009 BAR OPERATIONS
Question:
What is determinative of doing business?

A It is not really the number of quantity of the
transactions, but more importantly, the
intension of an entity to continue the body of its
business in the country. The grant and extension
of 90-day credit terms by a foreign corporation
to a domestic corporation for every purchase
made unarguably shows an intention to continue
transacting with the latter since in the usual
course of commercial transactions, credit is
extended only to customers in good standing or
to those on whom there is an intention to
maintain long-term relationship.

Question:
What is meant by the phrase isolated
transaction?

A The phrase isolated transaction has a
definite and fixed meaning, i.e., a transaction or
series of transactions set apart from the common
business of a foreign enterprise in the sense that
there is no intention to engage in a progressive
pursuit of the purpose and object of the business
organization.

Question:
What is the extent of the authority of a resident
agent, as representative of the foreign insurance
company?

A A resident agent, as a representative of the
foreign insurance company, is tasked only to
receive legal processes on behalf of its principal
and not to answer personally for any claim
against the foreign corporation.

Question:
What is the preferred share of stock?

A A preferred share of stock is one which
entitles the holder thereof to a certain
preferences over the holder of common stock.
Preferences granted to preferred stockholders
do not give them a lien upon the property of the
corporation nor make them creditors of the
corporation, the right of the former being always
subordinate to the latter.

Question:
What are the redeemable shares?

A Redeemable shares are shares usually
preferred, which by their terms are redeemable
at a fixed date, or at the option of either the
issuing corporation, or the stockholder, or both
at a certain redemption price. Redemption may
not be made there the corporation is insolvent or
if such redemption will cause insolvency or
inability of the corporation to meet its debts as
they mature.

Question:
Are the shareholders risk takers?

A Yes. Shareholders, both common and
preferred, are considered risk takers who invest
capital in the business and who can look only to
what is left after corporate debts and liabilities
are fully paid.

Question:
When is interest bearing stock legal?

A Interest bearing stocks, on which the
corporation agrees absolutely to pay interest
before dividends are paid to common
stockholders, is legal only when construed as
requiring payment of interest as dividends from
net earnings or surplus only.

Question:
What is required of the court in piercing the veil
of corporate entity?

A Piercing the veil of corporate entity requires
the court to see through the protective shroud
which exempts its stockholders from liabilities
that ordinarily they could be subject to, or
distinguishes one corporation from a seemingly
separate one, were it not for the existing
corporate fiction.

Question:
Is mere ownership by a single stockholder or by
another corporation of all or nearly all of the
stock of the corporation itself a sufficient reason
for disregarding the fiction of separate corporate
personalities?

A No.

Question:
What is a certificate of indebtedness?

A A certificate of indebtedness pertains to
certificate for the creation and maintenance of a
permanent improvement revolving fund, similar
to a bond.

Question:
What is the concept of unpaid claims in
Section 63 of the Corporation Code?

A It refers to any unpaid claim arising from
unpaid subscription, and not to any
indebtedness which a subscriber or stockholder
may owe the corporation arising from any other
transaction, such as monthly dues.

COMMERCIAL LAW
RANDOM Q & A
287

2009 BAR OPERATIONS
Question:
Is dismissal or non-appointment of a corporate
officer an intra-corporate matter?

A Yes. Sec. 5(c ) of P.D. NO. 902-A, in rel. to
Sec. 5 of RA 8799, covers both election and
appointment of corporate directors, trustees,
officers and managers.

A superintendent/Administrator who is included
in the by-laws of an association in its roster of
corporate officers is an officer of said corporation
and not a mere employee.

Such dismissal or non-appointment of a
corporate officer is clearly an intra-corporate
matter and jurisdiction properly belongs to the
Securities and Exchange Commission.

Jurisdiction pertains to the Special Commercial
Court (no longer the Securities and Exchange
Commission) even if the complaint by a
corporate officer includes money claims since
such claims are actually part of the perquisites of
his position, and therefore interlinked with his
relations with the corporation.

Question:
In unauthorized corporate contracts, who can
make ratification in behalf of a corporation?

A Ratification cannot be made on the part of
the corporation by the same persons who
wrongfully assume the power to make the
contract, but ratification must be by an officer or
governing body having authority to make such
contract.

Question:
What is the liability of persons who assume to act
as a corporation knowing it to be without
authority to do so?

A They shall be liable as general partners for all
the debts, liabilities and damages incurred or
arising as a result thereof.

Question:
What is the effect of the purchase of shares of
stock or membership certificate at public auction
and the issuance to the purchaser of the
corresponding Certificate of Sale?

A Such purchase transfers ownership of the
same to the purchaser and thus entitles him to
have the share registered in his name as
member.

Question:
What is necessary for the validity of the sale of all
or substantially all of the property of the
corporation?

A For the sale of the only property of a
corporation to be valid, the majority vote of the
legitimate board, concurred in by the vote of at
least 2/3 of the bona fide members of the
corporation should be obtained. The Securities
and Exchange Commision has the
unquestionable authority to pass upon the issue
as to who among the different contending
groups is the legitimate governing board of a
corporate body.

Question:
What is the general rule concerning obligations,
incurred by the corporation, acting through its
directors, officers and employees?
A Such obligations are the sole liabilities of the
corporation.

Question:
In labor cases, when are directors and officers
solidarity liable with the corporation for the
termination of employment of corporate
employees?

A They are solidarily liable with the corporation
for such termination of employment of corporate
employees when done with malice or bad faith.

Question:
What is the nature of corporation bv estoppel?

Corporation by estoppel is founded on principles
of equity and is designed to prevent injustice and
unfairness, and where there is no third party
involved and the conflict arises only among those
assuming the form of a corporation, who know
that it has not been registered, there is no
corporation by estoppel.

Question:
What determines the jurisdiction of the Special
Commercial Court in intra-corporate
controversies under R.A. 8799?

The jurisdiction of the Special Commercial Court
is determined by the concurrence of two
elements, namely: (1) the status or relationship
of the parties; and (2) the nature of the question
that is the subject of their controversy.

Question:
Is there intra-corporate or partnership relation
between two jeepney drivers and operators
associations whose plan to consolidate into a
single common association is still a proposal?

A No. Consolidation becomes effective not
upon mere agreement of the members but only
upon issuance of the certificate of consolidation
by the Securities and Exchange Commission.

COMMERCIAL LAW
RANDOM Q & A
288

2009 BAR OPERATIONS
Question:
What debars the foreign corporation from access
to out courts?

A it is not the absence of the prescribed license
but doing business implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to or in progressive
prosecution of the purpose and subject of its
organization.

A foreign corporation will not be regarded as
doing business in the State simply because it
enters into contracts with residents of the State,
where such contracts are consummated outside
the State. Sales made to customers in the State
by an independent dealer who has purchased
and obtained title from the corporation to the
products sold are not a doing business by the
corporation.

The ground for barring recourse to our courts by
an unlicensed foreign corporation doing or
transacting business in the Philippines should
properly be lack of capacity to sue and not
lack of personality to sue.

Question:
What are the instances where personal liability of
a corporate officer, director or trustee along with
the corporation validly attach?

A These instances are when: 1) He assents: (a)
to a patently unlawful act of the corporation, or
(b) for bad faith or gross negligence in directing
its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders
or other persons; 2) He consents to the issuance
of watered stocks, or who, having knowledge
thereof, does not forthwith file with the
corporate secretary any written objection
thereto; 3) He agrees to hold himself personally
and solidarily liable with the corporation; 4) He is
made by specific provision of law, to personally
answer for his corporate action.

Question:
What is the status of a foreign corporation
within the state in which is foreign?

A Such foreign corporation has no legal
existence within the state in which it is foreign.
This proceeds from the principle that judicial
existence of a corporation is confined within the
territory of the state under whose laws it was
incorporated and organized, and it has no legal
status beyond such territory.

Question:
What is the purpose of the law in requiring that
foreign corporations doing business in the
Philippines licensed to do so and that they
appoint an agent for service of process?

A It is to subject the foreign corporation doing
business in the Philippines to the jurisdiction of
its courts.

Question:
Is the party estopped to challenge the
personality of a corporation after having
acknowledged the same by entering into a
contract with it?

A Yes. Moreover, where the parties are equally
guilty of violating the law, they are in pari delicto,
in which case it follows as a consequence that
such party is not entitled to the relief prayed for.

Question:
Being an artificial being and having existence
only in legal contemplation, has a corporation
feelings, emotions or senses?

A No. It cannot therefore experience physical
suffering and mental anguish as to entitle it to an
award of moral damages.

Question:
What is the purpose of the fiction of separate
distinct personality of a corporation?

A It is merely a fiction created by law for
convenience and to promote justice. When the
notion of separate judicial personality is used to
defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality
of a corporation may be disregarded or the veil
of corporate fiction pierced.

Question:
What are some probative factors of identity that
will justify the application of the doctrine of
piercing the corporate veil?

A They are: (1) Stock ownership by one or
common ownership of both corporations, (2)
Identity of directors and officers, (3) The manner
of keeping corporate books and records, (4)
Methods of conducting the business.

Question:
What is the rest in determining the applicability
of the doctrine of piercing the veil of corporate
fiction?

A The test is as follows: (1) Control, not merely
majority or complete stock control, but complete
domination, not only of finances but of policy

COMMERCIAL LAW
RANDOM Q & A
289

2009 BAR OPERATIONS
and business practice in respect to the
transaction attacked so that the corporate entity
as to this transaction had at the time no separate
mind, will or existence of its own; (2) Such
control must have been used to defendant to
commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal
duty, or dishonest and unjust act in
contravention of plaintiffs legal right; and (3)
The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of. The absence of any one of these
elements prevents piercing the corporate veil.

Question:
What is the so-called Instrumentality Rule or
doctrine?

A It is otherwise known as alter ego doctrine.

Question:
What are the powers which may not be exercised by
the EC?
A- The Executive Committee
cannot exercise the following:
1. approval of any action for which
shareholders/ stockholders action is
required;
2. filling of vacancies in the board;
3. amendment or repeal of by-laws or
adoption of new by-laws;
4. amendment or repeal of any resolution
of the board, which by its express terms
is not so amendable or repealable;
5. distribution of cash dividends to the
shareholders.

TRANSPORTATION
Question:
What does a contract of air carriage generate?

A It generates a relation attended with a public
duty and any discourteous conduct on the part of
a carriers employee toward a passenger gives
the latter an action for damages and, more so,
where there is bad faith. In attention to and lack
of care for the interests of its passengers who are
entitled to its utmost consideration, particularly
as to their convenience, amount to bad faith
which entitles the passengers to an amount of
moral damages.

Question:
Does the Warsaw Convention operate as an
exclusive enumeration of the instances or
declaring a carrier liable for breach of contract of
carriage or as an absolute limit of the extent of
that liability?

A No. It must not be construed to preclude the
operation of the Civil Code and pertinent laws.

Question:
As a rule, what does general or gross average
include?

A It includes all damages and expenses which
are deliberately caused in order to save the
vessel, its cargo, or both at the same time, from
real and known risk.

Question:
What is the necessary to enable the carrier to
claim contribution from the consignees for
additional freight and salvage changes?

A The carrier must comply with the formalities
prescribed under Articles 813 and 814 of the
Code of Commerce in order to incur the
expenses and cause the damage corresponding
to gross average.

The formalities are: (1) There must be a
resolution of the captain, adopted after
deliberation with the sailing mate and the other
officers of the vessel, and after hearing the
persons interested in the cargo who may be
present; (2) The resolution adopted to cause the
damages which constitute general average must
necessarily be entered in the log book, stating
the reason for the dissent, if any, and the urgent
reasons or causes which impelled the captain of
he acted of his own accord; (3) In the minutes
and the resolution should be slated in detail the
goods jettisoned; and (4) The captain shall
deliver one copy of the first part he may make,
within twenty four hours after his arrival, and to
ratify it immediately under oath.

Question:
What is the assumption of the doctrine of last
clear chance?

A It assumes that the negligence of the
defendant was subsequent to the negligence of
the plaintiff and the same must be the proximate
cause of the injury.

Question:
What is franchise?

A Franchise is a legislative grant, whether
made directly by the legislature itself, or by
anyone of its properly constituted
instrumentalities. The grant, when made, binds
the public, and is, directly or indirectly, the act of
the state.

Question:
What is a charter-party?

A A charter-party is defined as a contract by
which an entire ship, or some principal part

COMMERCIAL LAW
RANDOM Q & A
290

2009 BAR OPERATIONS
thereof, is let by the owner to another person for
a specified time or use; a contract of
affreightment by which the owner of a ship or
other vessel lets the whole or a part of her to a
merchant or other person for the conveyance of
goods, on a particular voyage, in consideration of
the payment of the freight.
Question:
What makes out a prima facie case against the
common carrier?

A Mere proof of delivery of goods in good order
to a common carrier, and of their arrival at the
place of destination in bad order, makes out
prima facie case against the common carrier.

Question:
What is the nature of the liability of the
registered owner of a public service vehicle for
damages arising from the tortuous act of the
driver?
A Such liability is primary, direct and solidary
with the driver.

Question:
What presumption arises from carrying a deck
cargo?

A It is settled that carrying a deck cargo raises
the presumption of unseaworthiness unless it
can be shown that the deck cargo will not
interfere with the proper management of the
ship.

Question:
When does the right of abandonment of vessels
not apply?

A The internal rule is to the effect that the right
of abandonment of vessels, as a legal limitation
of a shipowners liability, does not apply to cases
where the injury or average was occasioned by
the shipowners own fault. Where the shipowner
is likewise to be blamed, Article 587 of the Code
of Commerce will not apply, and such situation
will be covered by the provision of the Civil Code
on common carriers.

Question:
Under Section 3(6) of the Carriage of Goods by
Sea Act, what is extinguished if no suit is brought
within one year?

A Only the carriers liability is extinguished.
The ruling in Filipino Merchants (145 SCRA 42)
should apply only to suits against the carrier filed
either by the supplier, the consignee or the
insurer, not to suits by the insured against the
insurer.

Question:
May Article 1745 and other Civil Code provisions
on common carriers apply to private carrier?

A No, unless expressly stipulated by the parties
in their charter party. In a contract of private
carriage, the parties may freely stipulate their
duties and obligations which perforce would be
binding on them. Unlike in a contract involving
common carrier, private carriage does not
involve the general public. As a private carrier, a
stipulation exempting the owner from liability for
the negligence of its agent is not against public
policy and is deemed valid.

A charterer, in exchange for convenience and
economy, may opt to set aside the protection of
the law on common carriers. When the charterer
decides to exercise this option, he takes a normal
business risk.

Question:
What can be a basis for airline passengers action
for damages

A The contract of air carriage generates a
relation attended with a public duty, and neglect
or malfeasance of the carriers employees
naturally could give ground for an action for
damages.

Question:
Can the refusal by the airline to accord amenities
to stranded passengers in case of cancellation of
flight due to force majeure make the airline liable
for damages?

A Assuming arguendo that airline passengers
have no vested right to amenities in case of flight
cancellation due to force majeure, what makes
an airline liable for damages is its blatant refusal
to accord the so-called amenities equally to all its
stranded passengers who are similarly situated.

Question:
What are the two categories of international
transportation?

A They are: (1) that where the place of
departure and the place of destination are
situated within the territories of two High
Contracting Parties regardless of whether or not
there is a break in the transportation or a
transshipment; and (2) that where the place of
departure and the place of destination are within
the territory of a single High Contracting Party if
there is an agreed stopping place within a
territory subject to the sovereignty, mandate, or
authority of another power, even though the
power is not a party to the Convention.

COMMERCIAL LAW
RANDOM Q & A
291

2009 BAR OPERATIONS
Question:
What is the effect or nature of a copy of an
official entry in the ship captains logbook?

A It is legally binding and serves as an
exception to the hearsay rule.

Question:
What is an apprentice in maritime law?

A An apprentice is a person bound in the form
of law to a master, to learn from his art, trade or
business, and to serve him during the time of his
apprenticeship. An apprentice officer cannot be
considered a superior officer.

Question:
Anthony is the owner and driver of a Mazda
minibus which he uses to provide bus service for
school children in the Makati area. One Sunday,
the El Zhaddai asked Anthony to transport 20 of
its members from Makati to the Luneta, for
which service El Zhaddai offered Anthony 1,000
pesos. Anthony accepted and undertook the
transport. While enroute to Makati, Anthony lost
control of the steering wheel and caused the bus
to collide with parked truck, causing injuries to
some of his passengers. Is Anthony a common
carrier?

A- Yes. Anthony does not have to be
engaged in the business of public transport for
the provisions of the Civil Code on common
carriage to apply. Article 1732 of the Civil Code,
in defining common carriers, makes no
distinction between the whose principal business
activity is the carrying of persons or goods or
both, and one who does such carrying only as an
ancillary activity. Neither does the law
distinguish between a carrier offering its services
to the general public and one who offers services
only to a narrow segment of the general
population.

Question:
Does a charter party between a ship owner and a
charterer transform a common carrier into a
private one as to negate the civil law
presumption of negligence in the case of loss or
damage to its cargo?

A- It depends on the type of charter party.
Charter parties are 2 types:(a) contract of
affreightment which involves the use of
shipping space on vessels leased by the owner in
part or as a whole, to carry goods for others ; (b)
charter by demise or bareboat charter where
the whole vessel is leased to the charterer with a
transfer to him of its entire command and
possession and consequent control over its
navigation, including the master and the crew
who are his servants.
It is only in the case of charter by demise or
bareboat charter where the common carrier
becomes a private carrier. This is because this
type of charter includes both the vessel and its
crew; at least insofar as the particular voyage
covering the charter-party is concerned. In the
case of affreighnment (or time or voyage
charter), the carrier remains common because
the charter is limited to the ship only, the crew
remaining under the control the direction of the
shipowner. (Planters Products v. Court of
Appeals, 226 SCRA 476)

Question:
What is a maritime protest? When, where and
before whom should it be filled? What is the
effect of non-filing of the protest?

A- A maritime protest is a sworn
statement stating the circumstances of any of
the following incidents: (a) collision; (b)
arrival under stress (c)
shipwreck; and (d) after the
vessel has passed a hurricane and the cargo had
been, damaged. The protest must be presented
within 24 hours before the competent authority
of the port nearest to where the incident took
pace, or the first port of arrival; if the incident
occurs in a foreign country, the Philippine
consular representative.
An action to recover losses and
damages arising from the incident cannot be
admitted if such protest is not made. The lack of
protest, however, will not prejudice such action
by owners of cargo who were not in a condition
to make unknown their wishes.
Question:
Distinguish between a Certificate of
Public Convenience and Necessity (CPCN) and a
Certification of Public Convenience (CPC)

A- A CPC is an authorization issued for the
operation of a public service for which no
franchise, municipal or legislative, is required by
law. A CPCN, on the other hand is an
authorization issued for the operation of a-
public-service for which a franchise is required.

Question:
What do you understand by the prior operator rule?

A- By the prior operator rule, a first license
has more or less a vested and preferential right
over another who seeks to acquire a license and
operate a public service over the same route, as
long as the first license and complies with the
issuing agencys reasonable rules and
regulations.

Question:
Contrary to the instructions of his
employer, the captain or the M/V Morning Star

COMMERCIAL LAW
RANDOM Q & A
292

2009 BAR OPERATIONS
refused to leave for South Africa because, in his
judgment, the vessel needed repairs necessary to
ensure the safety of the voyage. For
insubordination, the captain was terminated
from his employment. Is the termination valid?

A- No. A captain commonly performs 3
distinct roles (a) general agent of the shipowner,
(b) commander and technical director of the
vessel; and (c) representative of the country
under whose flag he navigates.
Of these, the most important is the role
performed by him as commander of the vessel
during its voyage and the protection of the
passengers, crew and cargo. He must be
accorded a reasonable measure of discretionary
authority to decide what the safety of the ship
and of its crew and cargo specifically requires on
a stipulated voyage. He is right there on the
vessel, in command of it and presumably
knowledgeable as to the specific requirements of
seaworthiness and the particular risks and perils
of the voyage he is to embark upon. Thus, if the
captain is convinced as a reasonably competent
and prudent marirer that the shipowners or
agents instructions will result, in very specific
circumstances facing him, in imposing
unacceptable risks of loss or serious danger to
ship or crew he cannot seek absolution from his
responsibility, if a marine casualty occurs in such
instructions.(Inter Crient v. NLRC< 235 SCRA
268)

Question:
What is an average in maritime law?
What are the kinds of average?

A- An average is either (a) all the
extraordinary or accidental expenses which may
be incurred during the voyage for the
preservation of the vessel or cargo or both; or (b)
all damages or deterioration which the vessel
may suffer from the casts anchor in the port of
destination, and those suffered by the
merchandise form the time it is loaded in the
port of shipment until it is unloaded in the port of
the consignment.
Averages are of 2 kinds: (a) Simple or particular,
these are the expenses and damages caused to
the vessel or cargo which have not inured to the
benefit and common profits of all the persons
interested in the vessel and her cargo; and (b)
general or gross which are all the damages and
expenses which are deliberately caused in order
to save the vessel, her cargo or both from a real
or known risk.
Question:
Pascual Taxi Company prides itself in
employing only experienced and courteous taxi
drivers. In fact, applicants are examined not only
with respect to their technical competence but
also as to their total personality, behavior, family
background, and even their moral fiber.

Despite all these, a driver newly-hired
by Pascual stabbed his first passenger, Rogelio.
Rogelio survived the assault and sued the
Company for damages. The Company puts up
the defense that the employees acts were
beyond the scope of his employment, contrary to
instructions given to him and constituted force
majeure because the Company could not have
foreseen that its driver would perpetrate the
assault. Is the Company liable?

A- The Company is liable. Under the Civil
Code, common carriers are liable for injuries to
passengers through the negligence or willful acts
of its employees, although such employees may
have acted beyond the scope of their authority
or in violation of the orders of the common
carriers. This liability does not cease upon proof
that they exercise the diligence of a good father
of a family in selecting and supervising
employees.

Question:
What does pilotage service consist of?

A Pilotage service consists of navigating a
vessel from a specific point, usually about two (2)
miles offshore, to an assigned area at the pier
and vice-versa.

Question:
When may moral damages be recoverable in
case of breach of contract of carriage?

A- Moral damages are recoverable in a
damage suit predicated upon a breach of
contract of carriage only in the following cases:
1) where the mishap results in the death of a
passenger; 2) where it is proved that the carrier
was guilty of fraud or bad faith, even if death
does not result. In cases other than those two,
moral damages will be disallowed.

Question:
When may an award of exemplary damages by
proper?

A- It is proper when the carriers, is
committing the breach of contract, acted in
wanton, fraudulent, reckless, oppressive or
malevolent manner.

Question:
What kind of damages can be recovered where
the breach of contract is incurred in good faith?

A- What can be recovered in such a case
are only damages which are the natural and
probable consequences of said breach and which

COMMERCIAL LAW
RANDOM Q & A
293

2009 BAR OPERATIONS
the parties have foreseen at the time the
obligation was constitute. These damages
consist of the actual damages. (China Air Lines,
Ltd. V. IAC, G.R. No. 73835, January 17, 1989)

Qustion:
Name at least three grounds for arrival under
stress
A- They are:
1. lack of provisions
2. well-founded fear of seizure,
privateers or pirates
3. inability of the vessel to
navigate due to an accident of the sea

INSURANCE

Question:
May an insurance contract, by special provisio,
restrict or limit the operation of the general
provisions?

A Yes. The insurance company shall express
such limitation in clear and unmistakable
language.

Question:
Has marine insurance developed as an all-risk
coverage?

A Yes. Marine insurance developed as an all-
risk coverage, using the phrase perils of the sea
to encompass the wide and varied range of risks
that were covered.

Question:
When does the prescriptive period to bring a suit
in court under an insurance policy begin?

A It begins to run from the date of the insurers
rejection of the claim filed by the insured, the
beneficiary or any person claiming under an
insurance contract.

Question:
In every marine insurance policy, what does the
assured impliedly warrant to the assurer?

A The assured impliedly warrants to the assurer
that the vessel is seaworthy and such warranty is
as much a term of the contract as if expressly
written on the face of the policy. Hence, it
becomes the obligation of the cargo owner to
look for a reliable common carrier which keeps
its vessels in seaworthy condition.

Question:
How may a warranty of seaworthiness be
excluded in a marine insurance policy?

A In policies where the law will generally imply
a warranty of seaworthiness, such warranty can
only be excluded by terms in writing in the policy
in the clearest language.

Question:
What may the result of admission by the assurer
of seaworthiness mean?
A Such result of admission of seaworthiness
may mean one or two things, namely: (a) that
the warranty of the seaworthiness is to be taken
as fulfilled; or (b) that the risk of unseaworthiness
is assumed by the insurance company.

Question:
When does the right of subrogation accrue?

A The right of subrogation is not dependent
upon, nor does it from out of any privity of
contract or upon payment by the insurance
company of the insurance claim. It accrues
simply upon payment by the insurance company
of the insurance claim.

Question:
What is the coverage of an all risks insurance
policy?

A An all risks insurance policy covers all kinds
of loss other than those due to willful and
fraudulent act of the insured.

Question:
May an aggrieved party still recover the
deficiency from the person causing the loss in the
event the amount paid by the insurance
company does not fully cover the loss?

A Yes.

Question:
In insurance, when must the notice of claim be
files?

A The notice of claim must be filed within six
(6) months from the date of the accident.
Otherwise, the claim shall be deemed waived.
An application form does not prove that
insurance was secured.

Question:
What is a valid precondition before the insurer
can be compelled to turn over the whole amount
of the insurance to the insurer?

A It is the signing of the Loss and Subrogation
Receipt.

Question:
What do you understand by the no-
fault claim under a Compulsory Motor Vehicle
Liability (CMVLI)?

COMMERCIAL LAW
RANDOM Q & A
294

2009 BAR OPERATIONS
A- An insurance company shall
pay any claim for death or bodily injuries
sustained by a passenger on third party without
proving no fault or negligence of any kind subject
to certain conditions. (Sec.378, ICP)
Question:
Under the no fault insurance, against whom should
the claim be filed?

A- The law is clear. The claim shall
lie against insurer of the vehicle in which the
occupant is riding, mounting or dismounting
from and no other. The claimant is not free to
choose from which insurer he will claim be made
against the insurer in which the occupant is
riding, mounting or dismounting from.
Question:
Is the rusting pipes in the course of a voyable
peril of the sea?

A- Yes. This is in view of the toll on the
cargo of wind, water and salt conditions. (Cathay
Insurance Company v. Court of Appeals, G.R.
46145, June 30, 1987)

Question:
What is an all risks policy of insurance?

A- An all risks insurance policy insures
against all causes of conceivable loss of damage,
except as all causes of conceivable loss or
damage, except as otherwise excluded in the
policy or sue to fraud or intentional misconduct
on the part of the insured. It covers all losses
during the voyage whether arising from a marine
peril or not, including pilferage losses during the
war.

Question:
What is the measure of the insurers liability
under a policy of insurance?

A- The terms of the contract or policy
constitute the measure of the insurers liability
and compliance therewith is a condition
precedent to the insureds right of recovery from
the insurer. (Perla Compania de Seguros, Inc. vs.
Court of Appeals, G.R. 78860, May 28, 1990)

Question:
It is provided by law that notice of the claim must
be filed within six months from date of the
accident, otherwise the claim shall be deemed
waived and action or suit for recovery of damage
due to loss or injury must be brought, in proper
cases, with the Commission or the Courts within
one year from the date of accident, otherwise
claimants right of action shall prescribe (Section
384). Are those two (2) periods mandatory and
must always concur?

A- No. There is nothing in the law which
mandates that the two periods must concur. On
the contrary, the one-year period is only required
in proper cases. Had the lawmakers intended it
to be that way, then the phrase improper cases
would not have been used.

The one-year period should be counted from the
date of rejection by the insurer, as this is the time
when the cause of action accrues. Before such
final rejection (Subbmit Guaranty and Insurance
Company, Inc. v. Jose C. de Guzman, G.R. 50997,
and two companion cases, June 30, 1987)

BANKING AND ALLIED LAWS

Question:
When it appears prima facie that a bank is in a
condition of insolvency or so situated that its
condition in business would involve probable loss
to its depositors or creditors, what step/s may
be taken by the Monetary Board?

A- The Monetary Board may take the
following steps:

1.) To forbid the bank to do business and
appoint a receiver for the bank.

2.) To determinate within ninety (90) days
whether or not-
a.) The bank may be reorganized
and rehabilitated to such an
extent as to be permitted to
resume business with safety to
the depositors, creditors and
the general public. A
conservator may be appointed
for this purpose.

b.) If it is indeed insolvent or
cannot resume business with
safety to the depositors,
creditors and the general
public, and the public interest
requires that the bank be
liquidated, a liquidator shall be
appointed. Thereafter, the
Central Bank shall file in the
Regional Trial Court a petition
for insolvency praying of the
assistance of the court in
liquidation, with the Bangko
Sentral ng Pilipinas being
represented by the Office of
the Solicitor General.

Question:
May the actions of the Monetary Board in
appointing a conservator or to liquidate and

COMMERCIAL LAW
RANDOM Q & A
295

2009 BAR OPERATIONS
petitioning for an insolvency proceeding for a
bank be challenged by an interested party?

A- Generally, it cannot be challenged. Such
actions by the Monetary Board are final and
executory. They cannot be set aside or even
restrained by the court, except only upon
convincing proof that the action is plainly
arbitrary and not made in good faith.

Question:
When and how may these exceptions (stated in
the answer to the next preceding question) be
asserted?

A- These exceptions may be asserted as an
affirmative defense or a counterclaim in the
proceeding for assistance in liquidation. It is not
necessary to assert the same as a cause of action
in a separate and distinct action.

Question:
When does the rate of 12% interest referred to in
Circular NO. 416 apply?

A It applies to load or forbearance of money, or
to cases where money is transferred from one
person to another and the obligation to return
the same or a portion thereof is adjudged, and
any other monetary judgment which does not
involve or which has nothing to do with loads or
forbearance of any money, goods or credit does
not fall within the coverage for such imposition is
not within the ambit of the authority granted to
the Central Bank.

Question:
What is the rate of interest in a loan or
forbearance of money?

A The interest due should be that stipulated,
and, in the absence thereof, the rate shall be 12%
per annum. Where an obligation arises from a
contract of purchase and sale and not from a
contract of loan or mutuum, the applicable rate
is 6% per annum as provided in Article 2209 of
the New Civil Code and not the rate of 12% per
annum as provided in Central Bank Circular NO.
416.

Question:
Is the ceiling prescribed by the Usury Law for
interest rates still in force?

A No. Section 1 of Central Bank Circular No.
905, series of 1982, expressly removed the
interest ceilings prescribed by the Usury law.

Question:
Before a mortgagor can exercise his right of
redemption, is he required to make a previous
notice or formal tender to the vendee or
redemptioner?

A- No. Previous notice to the vendee or a
meeting between the mortgagor and the
redemptioner, or a previous formal tender before
action is begun to enforce the right of
redemption, is not required. The mortgagor is
given a maximum of three (3) months or up to
the registration of the foreclosure sale or real
estate, whichever is earlier, within which to
redeem the property by paying all the claims of
the bank against them on the date of the sale,
including all costs, and other expenses incurred
by reason of the foreclosure sale and custody of
the property, as well as charges and accrued
interest.

Question:
X secured a loan from Bank M. In the loan
contract, it is expressly provided under the so-
called escalation clause as follows:

I hereby authorized the bank to correspondingly
increase the interest rate stipulated in this
contract without advance notice to me in the
event a law increasing the lawful rate of interest
that may be charged on this particular kind of
loan. Subsequently, CB Circular No. 494
increased the interest rate from 12% to 17% per
annum. Correspondingly, the bank increased the
rate of interest of the loan of X from 12% to 17%
per annum. Is the act of the bank valid and
binding?

A- No. While an escalation clause like the
one in question can be ordinarily, the bank
cannot rely on it to raise the interest rate from
12% to 17% per annum in this case. Circular No.
494 of the Monetary Board is not the law
contemplated by the parties. Nor should said
circular be held applicable to loan secured by
registered real property in the4 absence of any
specific indication and in contravention of the
policy behind the Usury Law (Banco Filipino
Savings and Mortgage Bank vs. Navarro, G.R.
No. 46591, July 28, 1987)

Question:
Central Bank Circular Nos. 265 and 534 require
prior authority for taking out of the country of
foreign currency. X has a foreign currency
deposit with Bank A. X wants to withdraw from
said account certain sum of foreign currency to
be sent abroad. Does he need CB authority for
this purpose?

A- No. Under Sec.5, of Republic Act No.
6426, as amended, the transferability abroad of
foreign currency deposits is unrestricted. Only
one exception is provided for therein, which is,
any restriction arising from the contract

COMMERCIAL LAW
RANDOM Q & A
296

2009 BAR OPERATIONS
between the depositor and the bank. Neither is
a CB authority required for transferability abroad
of foreign currency deposits.

The underlying objective of the Foreign Currency
Deposits Act, as amended, is to attract and
invited the deposit of foreign currencies which
are acceptable as part of the international
reserve in duly authorized banks in order that
they may be put into transferability of such
funds, would defeat the very purpose of the law.
The countervailing effect would be To
discourage prospective foreign currency
depositors to the detriment of the banking
system. (Cancio v. CTA, G.R. No. 73382, October
22, 1987)

Question:
What is the purpose of the special affidavit of a
good faith in connection with a chattel
mortgage?

A It is not necessary for the validity of the
chattel mortgage itself but only to give it a
preferred status.

Question:
What is an affidavit of good faith? What
is the effect of the absence of an affidavit of
good faith?
A- It is an oath in a contract of
chattel mortgage wherein the parties severally
swear that the mortgage is made for the purpose
of securing the obligations specified in the
condition thereof and for no other purpose and
that the same is just and valid obligation and one
not entered into for the purpose of fraud.

Question:
Can a chattel mortgage secure after-incurred
obligations?
A While a pledge, real estate mortgage or
antichresis may exceptionally secure after-
incurred obligations so long as these future debts
are accurately described, a chatted mortgage
can only secure obligations existing at the time
the mortgage was constituted. This is because of
the Affidavit of Good Faith in the chattel
mortgage.

Question:
May the contracting parties to a pledge
agreement stipulate that the said pledge will also
stand as security for any future advancements
(or renewals thereof) that the pledgor may
procure from the pledgee?
A Yes. (Note: This in not true in the case of a
Chattel Mortgage where such stipulation cannot
be made.)

Question:
What is the nature of the trust receipt?

A A trust receipt is a security agreement to
which a bank requires a security interest in the
goods. By virtue of a trust receipt agreement, the
bank theoretically acquired ownership of the
imported personal property.

Question:
While acting as local correspondent bank, does
local bank have the right to intercept funds being
coursed through it by its foreign counterpart for
transmittal and deposit to the account of an
individual with another local bank, and
thereafter apply the said funds to certain
obligations owed to it by said individual?

A No.

FLAG LAW

Question:
In response to an invitation to bid for the
purchase of office supplies by a government
office, Acme Trading, A Filipino firm, submitted
the lowest bid, covering supplies made in
Taiwan. Having submitted the second lowest bid
covering supplies made in the Philippines, using
partly Korean raw materials and partly local
products, Super Marketing protested the award
of the contract to supply to Acme Trading. How
will you resolve the controversy? Explain briefly.

A- Under the Flag Law, Super Marketing
should be preferred. The product which Acme
Trading is offering to sell is not made in the
Philippines. On the other hand, what Super
Marketing is offering to sell is Philippine product,
even if it is using partly Korean raw materials as
long as the substantial portion of the materials is
locally produced.

Question:
When may the Flag Law be invoked?

A- The Flag Law may be invoked only
against a bidder who is not a domestic entity
who offers imported articles, materials or
supplies of those made or produced in the
Philippines from imported materials. But where
all the materials, goods or supplies offered in the
bids submitted are produced, made and
manufactured in the Philippines substantially
from articles, materials or supplies of the growth
of the Philippines, and the bidders are domestic
entities, the Flag Law finds no application.
(Asbestos Integrated Manufacturing, Inc. v.
Peralta, G.R. 45515, October 29,1987)

COMMERCIAL LAW
RANDOM Q & A
297

2009 BAR OPERATIONS
ANTI- DUMPING LAW

Question:
Predicting a shortage of rice supply in the
coming months, the Secretary of Agriculture
decided to import rice from Thailand. Can the
Rice Producers of the Philippine invoke the Anti-
Dumping Law to prevent such importation?
Discuss briefly.

A- No. The rice to be imported is not
meant to dump foreign rice into the country, but
to solve a rice shortage. Moreover, there is
nothing to protect in the local rice industry for
the moment.

RETAIL TRADE LAW

Question:
A Chinese national, Chua is a textile merchant
with a bodega in Binondo. He supplies textile
goods on consignment basis to Marta who
operates a stall at the Divisoria Market. Is Chua
violating the provision of Republic Act No. 1180,
otherwise known as the Retail Trade Law?

A- No. Chua is engaged in wholesale
business, and not in retail business, and not in
retail business which is reserved by the law for
Filipino citizens when the capitalization of the
business is not more than US$2.5 million. Chua
sells to Marta who does not use or consume the
textile goods herself, but who, in turn, sells the
goods to her customers. Under the end-user
doctrine, the transaction between Chua and
Marta is wholesale, while that between Marta
and her customer is retail.

INTELLECTUAL PROPERTY RIGHTS

Question:
What are the so-called intellectual property rights
under the IPC?
A-
1. copyright and related rights
2. trademarks and service marks
3. geographical indications
4. industrial designs
5. patents
6. layout-designs (topographies) of
integrated circuits

7. protection of undisclosed information

Question:
What are non-patentable inventions?
A-
1. discoveries, scientific theories and
mathematical methods
2. schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers
3. methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human
and animal body. This provision shall not to
apply to products and composition for use in
any of these.
4. plant varieties or animal breeds or essential
biological process for the production of
plants or animals. This provision shall not
apply to micro-organisms and non-biological
and microbiological processes
5. aesthetic creations
6. anything which is contrary to public order to
morality

Question:
What is a trademark?

A Trademark refers to a word, name, symbol,
emblem, sign or device or any combination
thereof adopted and used by a merchant to
identify, and distinguish from others, his goods
of commerce. Trademark is basically an
intellectual creation that is susceptible to
ownership by the incorporeal right is distinct
from the property in the material object subject
to it.

Question:
1.) Who is entitled to register in the principal
register?
2.) What is the effect of registration in the
principal register?
3.) In publication of the application necessary
for registration in the principal register?

A- 1.) Registration in the principal register
is limited to the actual owner of the trademark.
Proceedings therein on the issue of ownership
may be contested through opposition or
interference proceedings or, after registration, in
a petition for cancellation.

2.) Registration in the principal register is
constructive notice of the registrants claim of
ownership, while registration in the
supplemental register is merely proof of actual
use of the trademark and notice that the
registrant has used or appropriated it.

3.) In application for registration in the
Principal Registrar, publication of the application
is necessary. This is not so in application for
registration in the Supplemental Register.

COMMERCIAL LAW
RANDOM Q & A
298

2009 BAR OPERATIONS

Question:
What are the distinctions between infringement
and unfair competition?

A- 1.) Infringement of trademark is the
unauthorized use of a trademark, whereas unfair
competition is the passing off of ones goods as
those of another.

2.) In infringement of trademark, fraudulent
intent is unnecessary, whereas in unfair
competition, fraudulent intent is essential.

3.) In infringement of trademark, the prior
registration of the trademark is a prerequisite to
the action, whereas in unfair competition,
registration is not necessary.

Question:
To constitute infringement, to what extent must
the work be copied?

A To constitute infringement, it is not
necessary that the whole or even large portion of
the work shall have been copied.

Question:
What are the moral rights under the Intellectual
Property Code?
A-
(1) to make alterations of his work prior to
or withhold it from publication;
(2) to require that the authorship of the
works be attributed to him;
(3) to object to any alteration, mutilation or
other modification of his work which is
prejudicial to his honor or reputation;
(4) to restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work.

INSOLVENCY LAW

Question:
Distinguish suspension of payments
from insolvency

SUSPENSION OF
PAYMENTS
INSOLVENCY

1. The debtor has
sufficient property
but he foresees the
impossibility of
meeting his debts as
they fall.
2. The purpose is to

1. The debtor does not
have sufficient
property to pay his
debts.

2. The purpose is to
discharge the debtor
suspend or delay the
payment of debts.
3. The amount of
indebtedness is not
affected.
4. The number of
creditors is
immaterial

from the payment of
certain debts.

3. Some of the creditors
may receive less than
their credits.
4. In case of involuntary
insolvency, three or
more creditors are
required.

Question:
Distinguish voluntary solvency from involuntary
insolvency.

VOLUNTARY
INSOLVENCY
INVOLUNARY
INSOLVENCY

1. One creditor is
sufficient.
2. Filed by the debtor.

3. No need for
commissions of acts
of insolvency.
4. Amount of
indebtedness must
exceed one
thousand pesos (P1,
000.00)

5. Bond is not required

1. Three or more creditors
are required

2. Filed by three or more
qualified creditors.

3. Debtor must have
committed one or more
acts of insolvency.

4. Indebtedness must not
less than one thousand
pesos(P1, 000.00)

5. Bond is required.

COMMERCIAL LAW
FAQs
299

2009 BAR OPERATIONS


1. Subject matter:
REQUISITES FOR NEGOTIABILITY

Concept:
The requisites for negotiability are as
follows:
1. It must be in writing and signed by
the maker or drawer;
2. It must contain an unconditional
promise or order to pay a sum
certain in money;
3. It must be payable to order or to
bearer;
4. it must be payable on demand or at
determinable future time; and
5. Where the instrument is addressed
to a drawee, he must be named or
otherwise indicated therein with
reasonable certainty. (Section 1,
Negotiable Instruments Law)
In determining whether an instrument is
negotiable or not, the sole test is
whether or not the requisites of
negotiability expressed in Section 1 of
the Negotiable Instruments law are not
met on the face of the instrument itself.
The intrinsic validity of the instrument is
of no moment. Even the acceptance or
non-acceptance by the drawee of the
instrument would be irrelevant.
The fact that the instrument is not
dated and does not mention the place of
payment does not militate against its
being negotiable. The date and place of
payment are not material particulars
required to make an instrument
negotiable. However, when the day and
the month is so placed but the year of
maturity is not given, the instrument
ceases to be so negotiable for the time
for payment is not determinable in this
case as the year is not stated.
The serial number is not material
particular to the negotiability of a check.
Its alteration does not constitute
material alteration of the instrument.
The fact that the sum payable is to be
paid with interest or that the maturities
are in stated installments does not
render the amount payable as
uncertain.
The fact that the instrument is payable
to cash does not affect the
negotiability of the instrument for under
Sec. 9, NIL, this makes the instrument
payable to bearer because the name of
the payee does not purport to be the
name of any person.
If the bill is addressed to two or more
drawees in the alternative or in
succession, it is not negotiable.

Years Asked:
2002, 2000, 1999,1998,1997,1996, 1993, 1992,
1989, and 1988

Applicable Law:
Sec. 1, 2, 4, 5, 6, 9, 10, 11, 13, 17 Negotiable
Instruments Law

Illustrative Cases:
Caltex Phils. Inc. v. Court of Appeals
212 SCRA 448
Metropolitan Bank and Trust Company v. Court
of Appeals 194 SCRA 169
Salas v. Court of Appeals
181 SCRA 296
PNB v. Manila Oil and Refining Company
43 Phil. 444

2. Subject matter:
EFFECTS OF DELIVERY

Concept:
A. Delivery of Incomplete instrument (2006,
2003, 1997, 1993, 1978)
Where the instrument is wanting in any
material particular, the person in
possession thereof is prima facie
presumed authorized to complete it.
A signature on a blank paper delivered
by the person making the signature in
order that it may be converted into a
negotiable instrument operates as a
prima facie authority to fill it up as such
for any amount.
In both cases however, the instrument
must be filled up strictly in accordance
with the authority given and within
reasonable time in order that it may be
enforced against any person who
became a party thereto prior to its
completion. However, persons
negotiating after its completion are
liable because of their warranties.
A holder in due course may enforce the
instrument as if it had been filled up
strictly in accordance with the authority
given and within a reasonable time.
(Sec. 14,NIL)

B. Incomplete and undelivered instrument
(2006, 2000, 1985, 1982)

FREQUENTLY ASKED QUESTIONS
In
COMMERCIAL LAW

COMMERCIAL LAW
FAQs
300

2009 BAR OPERATIONS
Non-delivery of an incomplete
instrument is a real defense (Sec. 15,
NIL)
When an incomplete instrument has not
been delivered, it will not, if completed
and negotiated without the authority,
be a valid contract in the hands of any
holder, as against any person whose
signature was placed thereon before
delivery.

Years asked:
2006, 2003, 2000, 1997, 1993, 1985, 1982, 1978

Applicable Law:
Secs. 14, 15, 16, NIL

Illustrative cases:
Kauffman v. National Bank 42
Phil. 183

3. Subject Matter:
HOLDER IN DUE COURSE

Concept:
A holder in due course is one who has taken
the instrument under the following
conditions:
1. That it is complete and regular upon
its face.
2. That he became holder of it before it
was overdue and without notice that it
had been previously dishonored, if such
was the fact;
3. That he took it in good faith and for
value;
4. That 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.

Years Asked:
2000, 1996, 1995, 1994,1993, 1992,
1985,1978,1977

Applicable Law:
Sec. 52, NIL

4. Subject matter:
EFFECTS OF CROSSING A CHECK

Concept:
The effects of crossing a check (Sec.542,
Code of Commerce) are as follows:
1. The check is for deposit only in the
account of the payee and cannot be
encashed;
2. The check may be negotiated only once
to one who has an account with the
bank;
3. The check is issued for a specific
purpose and the person who takes it not
in accordance with said purpose does
not become a holder in due course and
is not entitled to payment thereunder.
The act of crossing a check serves as a
warning to the holder thereof that the check
has been issued for a definite purpose so
that the holder must inquire if he has
received the check pursuant to that purpose;
otherwise he is not a holder in due course.
(Bataan Cigar and Cigarette Factory, Inc. v.
Court of Appeals, et. Al. G.R. No. 93048,
March 3, 1994; 230 SCRA 643)
Crossing a check is done by writing two
parallel lines diagonally on the left top
portion of the checks. The crossing is special
where the name of a bank or a business
institution is written between the two
parallel lines, which mean that the drawee
should pay only with the intervention of that
company. The crossing is general where the
words written between two parallel lines are
and Co. or for payees account only.
(Associated Bank v. Court of Appeals, 208
SCRA 468)

Years asked:
2005, 2004, 1996, 1995, 1994, 1991

Applicable Law:
Sec. 542, Code of Commerce

Illustrative Cases:
Bataan Cigar and Cigarette Factory, Inc. v. Court
of Appeals, et. Al. G.R. No. 93048, March 3,
1994; 230 SCRA 643
Associated Bank v. Court of Appeals, 208 SCRA
468

5. Subject matter:
ACCOMODATION PARTY

Concept:
An accommodation party is one who has
signed the instrument as maker, drawer,
acceptor or indorser, without receiving value
therefor and for the purpose of lending his
name to some other person.
The accommodation party is liable as a
maker to a holder up to the sum of which he
accommodated even if he did not receive
any consideration for the promissory note.
This is the nature of accommodation.
The accommodation party is liable on the
instrument to a holder in value. This is true
even if the holder was aware at the time he
took the instrument that the party is merely
an accommodation party.
Absence of consideration is in the nature of
accommodation. Defense of the absence of

COMMERCIAL LAW
FAQs
301

2009 BAR OPERATIONS
consideration cannot be validly interposed
by accommodation party against a holder in
due course. (Sec. 29, Negotiable
Instruments Law)
The party accommodating can recover what
he has paid from the accommodated party
since the relation between the two is in
effect that of principal and surety. (PNB v.
Maza & Macenas, 48 Phil, 207)

Years Asked:
2005, 1996, 1993, 1991, 1990, 1985, 1977, 1975

Applicable Law:
Sec. 29, NIL

Illustrative Case:
PNB v. Maza & Macenas, 48 Phil, 207

6. Subject matter:
DEFENSES

Concept:
A. Alteration (1999, 1996, 1995, 1983)
Material Alteration is any alteration
which changes the date, sum
payable, time or place of payment,
number or relation of parties, or
medium or currency of payment, or
adds a place where none is specified
or which alters the effect of the
instrument in any respect.
Under Sec. 124 of the Negotiable
Instruments Law, a material
alteration avoids the instrument,
except as against the party who
made, authorized, or assented to
the alteration and subsequent
indorsers. However, a holder in due
course can enforce the instrument
according to its original tenor and
for the value placed therein.
The alteration of a serial number of
a check does not alter the effect of
the instrument, nor does it modify
in any respect the obligation of a
party thereto. It does not change
the items which are required to be
in Section 1, NIL.

B. Forgery (2006, 2004, 1997, 1995, 1992,
1990, 1989, 1987, 1984,
1983, 1982, 1981, 1977,
and 1976)
When a signature is forged or made
without authority of the person whose
signature it purports to be, it is wholly
inoperative, and no right to retain the
instrument, or to give a discharge
therefor, or to enforce payment thereof
against any party thereto, can be
acquired through or under such
signature, unless the party against
whom it is sought to enforce such right
is precluded from setting up forgery or
want of authority.
Parties to an instrument who are such
prior to the forgery cannot be held liable
by any party who became such at or
subsequent to the forgery. However, a
party who had been a party subsequent
to the forgery and who later on indorses
the same can be held liable to a holder
in due course.
Only the forged signature is wholly
inoperative not the instrument itself,
and not the genuine signatures.
Despite the forgery of the signature,
there may be parties who shall be
precluded from setting up forgery or
want of authority, such as: 1. those who
warrants the genuineness of the
instrument like acceptors, indorsers; 2.
those who ratified the forgery express
or implied; 3. those who were negligent
The general rule is that in case of
forgery of the indorsement of the payee
of the check the drawee bank cannot
debit the drawers account and that the
loss shall be borne by the drawee bank.
The depositary or collecting bank is
liable to the drawee in case of forged
indorsement because it guarantees all
prior indorsement. However, this is
subject to the qualification that the
drawee himself was not negligent or
guilty of such conduct as would stop
him from asserting the forged character
of the instrument as against the drawer.
The legal consequences when a bank
honors a forged check are
as follows:
1. When Drawers Signature is
Forged: Drawee-bank by
accepting the check cannot set
up the defense of forgery
because by accepting the
instrument, the drawee bank
admits the genuineness, the
drawee bank admits the
genuineness of signature of the
drawer (BPI Family Bank v.
Buenaventura Sept. 30, 2005)
2. Forged Payees signature:
When drawee-bank pays a the
forged check, it must be
considered as paying out of its
funds and cannot charge the
amount so paid to the account
of the depositor. In such case,
the bank becomes liable since
its primary duty is to verify the
authenticity of the payees

COMMERCIAL LAW
FAQs
302

2009 BAR OPERATIONS
Signature. (Traders Royal Bank
v. Radio Philippines Network,
Oct 10, 2002; Westmont Bank v.
Ong, January 30, 2002)
3. Forged Indorsment
o Drawers account cannot
be charged and if charged,
he can recover from the
drawee bank. (Associated
Bank v. CA, Jan. 31, 1996)
o Drawer has no cause of
action against collecting
bank, since the duty of
collecting bank is only to
the payee. A collecting
bank is not guilty of
negligence over a forged
indorsement on checks for
it has no way of
ascertaining the authority
of the endorsement and
when it caused the checks
to pass through the
clearing house before
allowing withdrawal of the
proceeds thereof. (Manila
Lighter Transportation, Inc.
V. CA, Feb. 15, 1990) On
the other hand, a
collecting bank which
endorses a check bearing a
forged endorsement and
presents it to the drawee
bank guarantees all prior
endorsements including
the forged endorsement
itself and should be liable
therefor . (Traders Bank v.
RPN, Oct 10, 2002)
o Drawee-bank can recover
from the collecting bank
(Great Eastern Life Ins. Co.
v. Hongkong and Shanghai
Bank, Aug. 23, 1922)
because even if the
indorsement on the check
deposited by the banks
client is forged, collecting
bank is bound by its
warranties as an indorser
and cannot set up the
defense of forgery as
against drawee
bank.(Association Bank v.
CA, Jan. 31, 1996)

C. Lack of Consideration (1998, 1996, 1994,
1989, 1979)
Failure, absence of, or illicit
consideration are only personal
defenses. However, with respect to
illegality, the exceptional cases when it
is a real defense is if the statute declares
the instrument void for any purpose.
Absence of consideration is in the
nature of an accommodation. Defense
of absence of consideration cannot be
validly interposed by an
accommodation party as against a
holder in due course.
The defense of absence or lack of
consideration is a personal defense that
can not be used against a holder in due
course. Therefore, the person invoking
such defense is still liable to a holder in
due course. (State Investment House v.
IAC, 175 SCRA 310)

Years asked:
2006, 2004, 1999, 1998, 1997, 1996, 1995, 1994,
1992, 1990, 1989, 1987, 1984, 1983, 1982, 1979,
1977, and 1976

Applicable Law:
Sec. 1, 124, NIL

Illustrative Cases:
BPI Family Bank v. Buenaventura
Sept. 30, 2005
Manila Lighter Transportation, Inc. V. CA
Feb. 15, 1990
Traders Bank v. RPN
Oct 10, 2002
Great Eastern Life Ins. Co. v. Hongkong and
Shanghai Bank Aug. 23, 1922
Association Bank v. CA
Jan. 31, 1996
State Investment House v. IAC
175 SCRA 310

7. Subject Matter:
LIABILITY OF PARTIES TO A NEGOTIABLE
INSTRUMENT

Concept:
a. Of maker
The maker is the party primarily liable
and (1) engages himself to pay
according to the tenor of the
instrument, and (2) admits the existence
of the payee and his capacity to indorse.

b. Of Acceptor and Drawee who pays without
accepting the instrument
The drawee is generally not liable until
he accepts the instrument and becomes
the drawee/acceptor. When he becomes
a drawee/acceptor, he is primarily liable
and (1) engages to pay according to the
tenor of his acceptance, (2) admits the
existence of the drawer, the
genuineness of his signature and his
capacity and authority to draw the

COMMERCIAL LAW
FAQs
303

2009 BAR OPERATIONS
instrument,, (3) admits the existence of
the payee and his capacity to indorse.
The payee has no cause of action
against the drawee-bank. The bank is
not liable to the holder unless and until
it accepts or certifies a check. The
remedy of the holder is against the
drawer, provided notice of dishonor is
given to him on the basis of the
transaction that gave rise to the
issuance of the check. Once the bank\
certifies the check, the bank becomes
liable thereon because certification is
equivalent to acceptance and if
procured by the holder, the drawer and
all indorsers are discharged from
liability. (Sec. 188 and 189, NIL)
A drawee becomes liable the moment
he accepts the instrument. Sec. 62
provides that the acceptor, by
accepting the instrument, engages that
he will pay it according to the tenor of
his acceptance.

c. Of Drawer
Secondarily liable and (1) admits the
existence of the payee and his capacity
to indorse; (2) engages that the
instrument will be accepted or paid by
the party primarily liable; and (3)
engages that if the instrument is
dishonored and proper proceedings are
brought, he will pay to the party entitled
to be paid.

d. Of indorsers
1. Qualified Indorsers and persons
negotiating by delivery
Every person negotiating an
instrument by delivery or by
qualified indorsement
warrants:
o that the instrument is
genuine and in all
respects what it
purports to be;
o that he has a good
title to it.
o That all prior parties
had capacity to
contract;
o That he has no
knowledge of any fact
which would impair
the validity of the
instrument or render it
valueless.
The warranty of persons
negotiating by mere delivery
extends to immediate parties.

2. General indorsers (Sec. 66, NIL)
Every indorser who endorses
without qualification, warrants
to all subsequent holders in due
course:
o that the insttrfument
is genuine and in all
respect what it
purports to be;
o that he has good title
to its;
o that all prior parties
had capacity to
contract;
o that the instrument is,
at the time of the
endorsement, valid
and subsisting.
The general indorser also
engages that on due
presentment, it shall be
accepted or paid or both, as the
case may be, according to its
tenor; and if it be dishonored
and the necessary proceedings
on dishonor will be duly taken,
he will pay the amount thereof
to the holder, or to any
subsequent indorser who may
be compelled to it.
However, a general indorser
of a bearer instrument warrants
the foregoing only in favor of
those persons who make title
through the indorsement. (Sec.
66, 67 and 40, NIL)
Years asked:
2002, 2001, 1999,1998, 1997, 1996, 1995, 1993,
1992,1991, 1990, 1989, 1988, 1987, 1986,1985,
1984, 1983, 1982, 1981, 1980, 1979, 1977, 1975

Applicable Law:
Sec. 60-69, 188, 189, NIL

COMMERCIAL LAW
FAQs
304

2009 BAR OPERATIONS
TRANSPORTATION LAW

1. Subject Matter:
COMMON CARRIER v. PRIVATE CARRIER; TEST IN
DETERMINING A COMMON CARRIER

Concept:
Art. 1732 of the Civil Code provides that
common carriers are persons,
corporations, firms or associations
engaged in the business of carrying or
transporting passengers or goods or
both, by land, water or air, for
compensation, offering their services to
the public.
The tests for determining whether a
party is a common carrier of goods are
the following:
a. he must be engaged in the
business of carrying goods
for others as a public
employment, and must hold
himself out as ready to
engage in the transportation
of goods generally as a
business and not as a casual
occupation;
b. he must undertake to carry
goods of the kind to which
his business is confined;
c. he must undertake to carry
by the method by which his
business is conducted and
over his established routes;
and
d. The transportation must be
for hire.

Common Carrier v. Private Carrier
Common carrier Private carrier
Holds himself out in common, that
is, to all persons who choose to
employ him, ready to carry for hire
Agrees in some
special case with
some private
individual to carry for
hire
Bound to carry for all those who
offer such goods as it is
accustomed to carry and tender
reasonable compensation for
carrying them
Not bound to carry
for any reason unless
it enters into a special
agreement to do so.
Subject to regulation as it is a
public service
Not subject to
regulation
Bound to exercise extraordinary
diligence
Owes only diligence
of a good father of a
family
Cannot stipulate that it is exempt
from liability for the negligence of
its agents or employees. Such
stipulation is void as it is against
public policy
May enter into a
stipulation
exempting itself from
liability for negligent
acts of its agents or
employees.

Year asked:
2002, 2000, 1996, 1991

Applicable Provisions:
Art. 1732, Civil Code of the Philippines

Illustrative Cases:
De Guzman v. Court of Appeals
Dec. 22, 1988
First Philippine Industrial Corp. v. CA
300 SCRA 661
National Steel Corporation v. Court of Appeals
283 SCRA 45,61
Caltex Philippines v. Sulpicio Lines
315 SCRA 709
Coastwise Lighterage Corp. v. Court of Appeals
245 SCRA 797
Virgines Calvo v. UCPB General Insurance Co.
No. March 19, 2002
Phil. American General Insurance Company v.
PKS Shipping Company April 9, 2003
Asia Lighterage and Shipping, Inc. v. Court of
Appeals August 19, 2003

2. Subject Matter:
EXTRAORDINARY DILIGENCE AND PRESUMPTION
OF NEGLIGENCE

Concept:
In case of loss of effects of passengers or
death or injuries to passengers, the
common carrier is presumed to be at
fault or to have acted negligently unless
it has observed extraordinary diligence
in the vigilance thereof. The court need
not make an express finding of fault or
negligence of common carriers as the
law imposes to common carriers strict
liability as long it is shown that there
exist a contract between the passenger
(or the shipper of the goods to be
carried) and the common carrier and
that the loss, deterioration injury or
death took place during the existence of
the contract.
The exercise of extraordinary diligence
is a defense which could exempt a
common carrier from liability.

Years asked:
2000, 1997, 1996, 1990, 1989, 1988, 1986, 1983,
1982, 1979, 1978, 1975

Applicable Law:
Arts. 1974, 1975, 1976 of the Civil Code of the
Philippines

3. Subject Matter:
DEFENSES OF COMMON CARRIERS

Concept:

COMMERCIAL LAW
FAQs
305

2009 BAR OPERATIONS
The defenses that a common carrier
may use are the following:
a. exercise of extraordinary
diligence (Art. 1735 and 1736,
NCC)
b. flood, storm, earthquake,
lightning or other natural
disaster or calamity;
c. acts or omission of the
shipper or owner of the
goods;
d. the character of the goods or
defects in the packing or in
the containers;
e. order or act of the
competent public authority
(Art. 1734,NCC)
The above enumeration is exclusive or a
closed list. If not one of those
enumerated is present, the carrier is
liable.
The requisite diligence would not vary in
case the contract is for transport of
passengers; the carrier is obliged to
carry the passenger safely as far as
human care and foresight can provide,
using the utmost diligence of every
cautious person with due regard to all
the circumstances. (Art. 1755, NCC)
Hijacking of a carrier does not fall
among the five categories of exempting
causes. It would follow therefore that
the hijacking of the carriers vehicle
must be dealt with under Art. 1735 of
the New Civil Code, in other words, the
common carrier is presumed to be at
fault or to have acted negligently unless
there is proof of extraordinary diligence
on the part of the common carrier.
The carrier was not held liable where the
goods were lost as a result of robbery
attended by grave irresistible threat,
violence or force. (De Guzman v. CA,
September 15, 1993)
The seizure of a passenger bus by armed
men is not fortuitous event and does not
excuse the carrier from liability where
there is already a report from police
agents that a certain group will attack
the buses and the carrier did not take
steps to safeguard the lives and
properties of its passengers (Fortune
Express, Inc. v. Court of Appeals, March
18, 1999)
Contributory negligence on the part of
the passenger is not a defense that will
excuse the carrier from liability. It will
only mitigate such liability.
The carrier, knowing the fact of
improper packing of the goods upon
ordinary observation, still accepts the
goods notwithstanding such condition,
is not relieved of liability or loss or injury
resulting there from. (Southern Lines,
Inc. v. Court of Appeals, 4 SCRA 258)
The common carrier is also liable for
acts caused by third persons

Years asked:
2001, 1997, 1996, 1995, 1994, 1993,
1992, 1991 1989, 1987, 1986, 1985, 1984,
1979, 1978, 1976

Applicable Law:
Art. 1734, 1735, 1755, New Civil Code

Illustrative Cases:
Delsan Transport Lines v. Court of
Appeals November 15, 2001
De Guzman v. CA
September 15, 1993
Fortune Express, Inc. v. Court of Appeals
March 18, 1999
Southern Lines, Inc. v. Court of Appeals
4 SCRA 258

4. Subject Matter:
STIPULATIONS REDUCING DILIGENCE OR
LIMITING LIABILITY

Concept:
The parties cannot stipulate so as to
totally exempt the carrier from
exercising any degree of diligence
whatsoever; and that the parties cannot
stipulate that the common carrier shall
exercise diligence of a good father of a
family. In other words, in carriage of
goods, the parties may stipulate that
the diligence to be exercised by the
common carrier shall be less than
extraordinary diligence provided the
following requisites are complied with;
a. that the stipulation be in
writing signed by both
parties;
b. that the stipulation be
supported by a valuable
consideration other than the
service rendered by the
common carrier;
c. that the stipulation be
reasonable, just and not
contrary to law (Art. 1744,
NCC)
Article 1750 is different from the above
provision because it involves a
stipulation fixing the amount that may
be recovered which only requires that it
is reasonable and just under the
circumstances; and it is fairly agreed
upon

COMMERCIAL LAW
FAQs
306

2009 BAR OPERATIONS
The following are considered as valid
stipulations relative to liability of
common carriers:
a. an agreement limiting the common
carriers liability for delay on
account of strikes and riots;
b. a stipulation that the common
carriers liability is limited to the
value of the goods appearing in the
bill of lading unless the shipper or
owner declared a greater value
(Edgar Cokaliong Shipping Lines v.
UCPB Gen. Insurance, Co., June 25,
2003)
--If the goods are to be shipped
from a foreign port to the
Philippines, the COGSA shall
apply suppletorily. Under the
COGSA, the liability of the
carrier is US$500 per package
in the absence of a shippers
declaration of a higher value in
the bill of lading. (Sec. 4(5),
COGSA)
The condition is part
of the bill of lading even if not
expressly stated.
The purpose of
limiting the stipulation in the
bill of lading is to protect the
common carrier. Such
stipulation obliges the
shipper/consignee to notify the
common carrier of the amount
that the latter may be liable for
in case of loss of the goods.
c. When a passenger is carried
gratuitously, a stipulation limiting
the carriers liability for negligence
is valid, but not for willful acts or
gross negligence. However
reduction of fare does not justify
any limitation of liability (Art.
1758,NCC)
The following are considered as invalid
stipulations with common carriers under
Art. 1745, NCC:
a. the goods are transported at the
risk of the owner or shipper;
b. the carrier will not be liable for any
loss, destruction or deterioration of
the goods;
c. the carrier need not observe any
diligence in the custody of the
goods;
d. the carrier shall exercise a degree of
diligence less than that of a good
father of a family over the movable
transported;
e. the carrier shall not be responsible
for the acts or omissions of his or its
employees;
f. the carriers liability for acts
committed by thieves or robbers
who do not act with grave or
irresistible threat, violence or force
is dispensed with or diminished;
g. the carrier is not responsible for the
loss, destruction or deterioration of
the goods on account of the
defective condition of the car,
vehicle, ship or other equipment
used in the contract of carriage.

Years asked:
2002, 2001, 1998, 1989, 1987, 1985,
1984, 1983, 1978

Applicable Law:
Arts. 1744, 1757, 1748, 1758, 1745 of the
New Civil Code
Sec. 4(5) Carriage of Goods by Sea Act
(COGSA)

Illustrative Cases:
Edgar Cokaliong Shipping Lines v. UCPB
Gen. Insurance Co., June 23, 2003
Eastern Shipping v. IAC
150 SCRA 464
Belgian Overseas Chartering v. Phil.
First Ins. Co. June 5, 2002

5. Subject Matter:
REGISTERED OWNER RULE AND KABIT
SYTEM

Concept:
The Registered Owner Rule states that
the person who is the registered owner
of a vehicle is liable for any damages
caused by the negligent operation of
the vehicle although the same was
already sold or conveyed to another
person at the time of the accident. The
registered owner is liable to the injured
party subject to his right of recourse
against the transferee or the buyer.
(Gaudioso Erezo, et. Al. v. Aluedo Jepte,
September 30, 1957; Equitable Leasing
Corporation v. Lucita Suyon, et. Al.
September 5, 2002)
The registered owner is also liable even
if the vehicle was leased to another
person (BA Finance Corporation v. Court
of Appeals, 215 SCRA 715)
The registered owner is not liable if the
vehicle was taken from the garage
without his knowledge and consent. To
hold the registered owner liable would
be absurd as it would then be holding
liable the owner of a stolen vehicle for
an accident caused by the person who
stole such vehicle. (Duavit v. Court of

COMMERCIAL LAW
FAQs
307

2009 BAR OPERATIONS
The registered owner rule is not
applicable whenever the persons
involved are engaged in what is known
as the kabit system. The Kabit
System is an arrangement whereby a
person who has been granted a
certificate of public convenience allows
other persons who own motor vehicles
to operate them under his license,
sometimes for a fee or percentage of
earnings. Although the parties to such
an agreement are not outrightly
penalized by law, the kabit sytem is
invariably recognized as being contrary
to public policy and therefore void and
inexistent under Art. 1409 of the Civil
Code. (Abelardo Lim, et. Al., v. Court of
Appeals, January 16, 2002; Baliwag
Transit, inc. v. Court of Appeals, 147
SCRA 82)
Under the Kabit system, the apparent
owner (who has a certificate of public
convenience) is liable to the injured
person without right of recourse/
reimbursement against the actual
owner. This is based on the principle of
pari delicto.

Years asked:
2005, 1990, 1988, 1976

Illustrative Cases:
Gaudioso Erezo, et. Al. v. Aluedo Jepte
September 30, 1957
Equitable Leasing Corporation v. Lucita
Suyon, et. Al. September 5, 2002
BA Finance Corporation v. Court of
Appeals 215 SCRA 715
Duavit v. Court of Appeals
173 SCRA 490
Abelardo Lim, et. Al., v. Court of
Appeals January 16, 2002;
Baliwag Transit, inc. v. Court of Appeals
147 SCRA 82

6. Subject Matter:
DOCTRINE OF LIMITED LIABILITY

Concept:
It is also called the exclusive real and
hypothecary nature of maritime law which is
embodied in Arts. 587, 590 and 837 of the
Code of Commerce.
By limited liability is meant that the
liability of the ship owner for damages in
case of loss is limited to the value of the
vessel involved. The ship owners other
properties cannot be reached by the parties
entitled to damages.
The total destruction of the vessel
extinguishes maritime lien as there is no
longer any res to which it can attach.
Under the doctrine of limited liability in
maritime law, the liability of the ship owner
arising from the operation of the ship is
confined to the vessel, equipment and
freight, or insurance if any, so that if the ship
owner abandoned the ship, equipment and
freight, his liability is extinguished.
Exception to the rule: when the ship
owner of the vessel involved is guilty of
negligence, the limited liability rule does not
apply. In such case, the ship owner is liable
to the full extent of the damages sustained
by the aggrieved parties.
The Code of Commerce sanctions the
application of the doctrine in the following
cases:
a. Civil liability for the
indemnities in favor of third
persons which arise from the
conduct of the captain in the
care of the goods which the
vessel carried. (Art. 587, Code
of Commerce)
b. Civil liability arising from
collisions (Art. 837,CC)
c. Unpaid wages of the captain
and the crew if the vessel and
its cargo are totally lost by
reason of capture or
shipwreck (Art. 643,CC)
The exceptions are:
a. when the injury to or death of a
passenger is due either to the fault
of the shipowner, or to the
concurring negligence of the ship
owner and the captain;
b. when the vessel is insured (to the
extent of the insurance proceeds);
and
c. in Workmens Compensation claims
(Yangco v. Laserna, 73 Phil. 330;
Chua yek Hong v. IAC, 166 SCRA183)
d. if the carrier failed to overcome the
presumption of negligence
(Monarch Ins. Co. v. Court of
Appeals; June 8, 2000)

Years asked:
2000, 1998, 1997, 1994, 1991, 1989,
1985, 1982, 1979

Applicable Law:
Code of Commerce, Secs. 587, 590, 643,
837

Illustrative Cases:
Yangco v. Laserna,
73 Phil. 330
Chua Yek Hong v. IAC
166 SCRA183
Monarch Ins. Co. v. Court of Appeals
June 8, 2000

COMMERCIAL LAW
FAQs
308

2009 BAR OPERATIONS
Aboitiz Shipping Corp. v. Gen Accident
Fire and Life Assurance Corp.
217 SCRA 359

7. Subject Matter:
DOCTRINE OF INSCRUTABLE FAULT

Concept:
In a collision, the vessel at fault shall
indemnify the damages sustained or
losses incurred (Art. 826, CC), and if
both vessels were at fault, each shall
suffer its own damages, and both shall
be solidarily liable to others (Art. 827-
28,CC). This solidarity expressed in Art.
827 of the Code of Commerce has been
held to preclude a common carrier
operating a vessel from interposing a
defense of due diligence in the selection
and supervision of its employees in an
action against it by the shipper of the
other colliding vessel as distinguished
from the ordinary rule in liabilities for
tort or culpa acquiliana. Under the
Doctrine of Inscrutable Fault, where
fault is established but it cannot be
determined which of the two vessels
were at fault, both shall be deemed to
have been at fault.
Rules on the collision of Vessels:
(Arts. 826, 827, 828, 830, 831
and 832, CC)
o The collision may be due to the
fault, negligence or lack of skill
of the captain, sailing mate, or
any other member of the
complement of the vessel. The
owner of the vessel at fault
shall be liable for losses or
damages. (Art. 826,CC)
o The collision may be de to the
fault of both vessels. Each
vessel shall suffer its own
losses, but as regards the
owner of the cargoes, both
vessels shall be jointly and
severally liable (Art. 827,CC)
o If it cannot be determined
which vessel is at fault, each
vessel shall also suffer its own
losses and both shall be
solidarily liable for losses or
damages on the cargoes. (art.
828,CC)
o The vessels may collide with
each other through fortuitous
event or force majeure. In this
case, each shall bear its own
damage. (Art. 830,CC)
o Two vessels may collide with
each other without their fault
by reason of a third vessel. The
third vessel will be liable for
losses and damages (Art.
831,CC)
o A vessel which is properly
anchored and moored may
collide with those nearby by
reason of storm or other causes
of force majeure. The vessel run
into shall suffer its own damage
or expense.(Art. 832, CC)

Years asked:
1998, 1997, 19995,1991, 1987

Applicable Law:
Code of Commerce, Arts. 826, 827, 828,
830, 831, 832

8. Subject Matter:
LIABILITY OF A CHARTER PARTY

Concept:
A charter party is a contract by which
with the entire ship or some principal
part thereof is let by the owner to
another person for a specified period of
time or use.
There are two types of charter parties
a. a contract of affeightment
which involves the use of
shipping space leased by the
owner in part or as a whole,
to carry goods for others, and
Time charterleased for a
period of time, Voyagefor
a single voyage.
b. A charter by demise or
bareboatby the terms of
which the whole vessel is let
to the charterer which
transfers to him the entire
command and possession
and consequent control over
its navigation including the
master and crew who are his
servants. The charterer is
treated as owner pro hac vice
of the vessel. In such case,
the common carrier becomes
a private carrier. (Planters
Products, Inc. v. Court of
Appeals 226 SCRA 476)

Years asked:
2004, 1991, 1989, 1987, 1981, 1980

Illustrative Cases:
Planters Products, Inc. v. Court of

COMMERCIAL LAW
FAQs
309

2009 BAR OPERATIONS

9. Subject Matter:
PRESCRIPTIVE PERIOD UNDER THE CARRIAGE OF
GOODS BY SEA ACT (COGSA)

Concept:
When to file a claim with carriernot a
condition precedent
a. upon discharge of the goods,
if the damage is apparent,
claim should be filed
immediately;
b. if the damage is not
apparent, claim should be
filed within 3 days from
delivery.
When to file the court-case prescriptive
period
--within a period of one year from
discharge
The prescriptive period of one year
starts after the delivery of the goods or
the date the goods should have been
delivered.(Sec. 3,COGSA). The period
does not apply to conversions or
misdeliveries. It starts from the delivery
to the arrastre operator, not consignee.
A stipulation reducing the one year
period is null and void, but a written
agreement to suspend it is valid.
The rule applies also in cases of collision
but when the goods should have been
delivered, had the cargoes been saved.
(Maritime Company of the Philippines v.
Court of Appeals 164 SCRA 593)
The insurer who is exercising its right of
subrogation is also bound by the one
year prescriptive period (Fil. Merchants
v. Alejandro, 145 SCRA 42)
However, the prescriptive period does
not apply to claim against the insurer for
the insurance proceeds. The claim
against the insurer which is based on a
written contract expires in ten years.
(Mayer Steel Pipe Corp. v. Court of
Damages arising from delay or late
delivery is not the damage or loss
contemplated under the COGSA. The
goods are not actually lost or damaged.
The applicable period is ten years.
(Mitsui v. Court of Appeals, 287 SCRA
366)

Years asked:
2004, 2000, 1995, 1992, 1978, 1976

Applicable Law:
Sec. 3, Carriage of Goods by Sea Act

Illustrative Cases:
Maritime Company of the Philippines v.
Court of Appeals 164 SCRA 593
Fil. Merchants v. Alejandro
145 SCRA 42
Mayer Steel Pipe Corp. v. Court of
Mitsui v. Court of Appeals
287 SCRA 366

COMMERCIAL LAW
FAQs
310

2009 BAR OPERATIONS
CORPORATION LAW

1. Subject matter:
DISTINCT PERSONALITY OF A CORPORATION

Concept:
The corporation has a separate and distinct
personality from that of the stockholders
and the manager. The stockholders or the
manager cannot be held solidarily liable for
the obligations incurred by the corporation
as a general rule.
The liability of the corporation is that of the
corporation and not that of its officers and
stockholders who are not liable for corporate
liabilities.

Year asked:
2000, 1999, 1997, 1996, 1989, 1988

2. Subject matter:
PRE-EMPTIVE RIGHTS OF STOCKHOLDERS

Concept:
A pre-emptive right is the shareholders right
to subscribe to all issues or disposition of
shares of any class in proportion to his
present stockholdings, the purpose being to
enable the shareholder to retain his
proportionate control in the corporation and
to retain his equity in the surplus.
Under the Corporation Code, each
stockholder has the pre-emptive right to all
issues of shares made by the corporation in
proportion to the number of shares he holds
on record in the corporation.
All stockholders of a corporation shall enjoy
pre-emptive right to subscribe to all issues
on disposition of shares of any class in
proportion to their respective share-
holdings.
Pre-emptive rights must be exercised in
accordance with the Articles of
Incorporation or the By-Laws. When the
Articles of Incorporation or the By-Laws are
silent, the Board, may fix, by reasonable
time within which the stockholders may
exercise the right.
Years asked: 2004, 2001, 1999, 1996, 1984,
1983,

3. Subject matter:
DOCTRINE OF PIERCING THE VEIL OF CORPORATE
ENTITY
Concept:
The doctrine of piercing the veil of
corporate entity is the doctrine that allows
the courts to look behind the separate
juridical personality of a corporation and
treat the corporation as an association of
persons and thereby make the individual
actors personally liable for corporate
liabilities. The fiction of corporate identity is
disregarded and the individuals comprising it
can be treated identically. The stockholders
can be held directly liable for corporate
obligations, even to the extent of their
personal assets.
The doctrine is applicable when the notion
of legal entity is used to:
1. defeat public convenience
2. justify wrong
3. protect fraud
4. defend crime
5. shield a violation of the proscription
against forum shopping
6. work inequities among members of
the corporation internally involving
no rights of the public or third
persons
7. evade the lawful obligations of the
corporation like a judgment credit
8. escape liability arising from a debt
9. avoid inclusion of corporate assets
as part of the estate of the
decedent
10. promote or shield unfair objectives
Where there are grounds for piercing the veil
of corporate entity, that is disregarding the
fiction, the corporation will follow the
nationality of the controlling members or
stockholders since the corporation will then
be considered as one and the same.
The elements that must be present to justify
the piercing of the veil of the corporate
fiction on the ground that the corporation is
a mere alter ego are the following:
1. controlnot mere stock control but
complete dominationnot only of
finances but of policy and business
practice in respect to the
transaction attacked and must have
been such that the corporate entity
as to this transaction had at the
time no separate mind, will, or
existence of its own;
2. such control must have been used
by the defendant to commit a fraud
or wrong to perpetuate the
violation of a statutory or other
positive legal breach of duty, or a
dishonest and an unjust act in
contravention of the plaintiffs legal
right; and
3. the said control and breach of duty
must have proximately caused the
injury or unjust loss complained of.

Years asked:
2006,2004, 2001, 1998, 1991, 19985, 1978

Illustrative cases:
Concept Builders v. NLRC, Marabe, et. Al.
May 29, 1996

COMMERCIAL LAW
FAQs
311

2009 BAR OPERATIONS
PNB v. Andrada Electric
April 17, 2002
First Philippine International Bank v. Court of
Appeals January 24, 1996
Secosa v. heirs of Erwin Suarez Francisco
June 29, 2004
Sibagat Timber Corp v. Garcia
December 11, 1992
Arcilla v. Court of Appeals
October 23, 1992
Cease v. Court of Appeals
October 18, 1979
Villanueva v. Adre
April 27, 1989
Commissioner of Internal Revenue v. Norton &
Harrison Company 11 SCRA 714
Lipat v. Pacific banking Corporation, et. Al
April 30, 2003

4. Subject matter:
KINDS OF CORPORATION: DE FACTO AND DE JURE
CORPORATION, CORPORATION BY ESTOPPEL AND
CORPORATION BY PRESCRIPTION

Concept:
a De Jure corporation is a corporation
organized in accordance with
requirements of law;
a de facto corporation is a corporation
where there exists a flaw in its
incorporation. The requisites for its
existence are:
a. the existence of a valid law
under which it
may be
incorporated;
b. an attempt in good faith to
incorporate;
c. use of corporate powers
De jure v. de facto

De jure De facto
One created in strict
or substantial
conformity with the
statutory
requirements for
incorporation
One which actually
exists for all practical
purposes as a
corporation but
which has legal right
to corporate
existence as against
the State
Right to exist cannot
be successfully
attacked even in
direct proceeding by
the State.
Right to exercise
powers cannot be
inquired into
collaterally in private
suit. But such inquiry
may be made by the
State in proper court
proceeding.

a corporation by estoppel is a group of
persons which holds itself out as a
corporation and enters into a contract
with a third person on the strength of
such appearance cannot be permitted to
deny its existence in an action under
said contract.
A corporation by prescription is a
corporation which is not formally
organized as such but has been duly
recognized by immemorial usage as a
corporation, with rights and duties
maintainable at law.

Years asked:
2004, 1994, 1986

5. Subject Matter:
INSTANCES WHERE THE CONCURRENCE OF THE
STOCKHOLDERS ARE NECESSARY FOR THE
EXERCISE OF THE POWERS OF THE CORPORATION

Concept:
Approval of the majority of the board and
the concurrence of the stockholders
representing 2/3 of the outstanding capital
(or 2/3 of the member whenever applicable)
is necessary in the exercise of the following
powers:
1. power to extend or shorten
corporate term (Section 37,
Corporation Code of the Phils.)
2. increase/ decrease corporate stock
(Sec. 38, CCP)
3. incur, create bonded indebtedness
(Sec. 38, CCP)
4. to deny pre-emptive rights (Sec. 39,
CCP)
5. sell, dispose, lease, encumber all or
substantially all of corporate assets
(Sec. 40, CCP)
6. to invest in another corporation,
business other than the primary
purpose (Sec. 42, CCP)
7. to declare stock dividends (Sec. 43,
CCP)
8. to enter into management contract
(Sec. 44, CCP) if:
a. a stockholder or
stockholders representing
the same interest of both
the managing and the
manged corporations own
or control more than 1/3 of
the total outstanding
capital entitled to vote of
the managing corporation;
or
b. a majority of the members
of the board of directors of
the managing corporation
also constitute a majority
of the members of the

COMMERCIAL LAW
FAQs
312

2009 BAR OPERATIONS
board of the managed
corporation.
9. to amend the articles of
incorporation (Sec. 16, CCP)
approval of the stockholders representing
majority of the outstanding capital is
necessary together with board approval in
the following instances:
1. to enter into management contract
if any of the two instances stated
above are absent;
2. to adopt, amend or repeal by-laws
(Sec. 46 and 48, CCP)
without board resolution, the stockholders
may by:
1. 2/3 outstanding capitaldelegate
to the board the power to amend
the by-laws (sec. 48, CCP)
2. majority of outstanding capital
revoke the power of the board to
amend the by-laws which was
previously delegated.

Years asked:
2001, 1998, 1996, 1995, 1993, 1987, 1984, 1983,
1982

Applicable laws:
Corporation Code of the Philippines Secs. 37, 38,
39,40, 42, 43, 44, 16, 46, 48

6. Subject Matter:
INSTANCES WHEN A CORPORATION MAY ACQUIRE
OR TRANSFER ITS OWN SHARES

Concept:
a corporation may acquire its own shares in
the following instances:
a. the corporation has unrestricted
retained earnings in its books to cover
the shares to be purchased/ acquired;
b. for legitimate corporate purpose/s
including but not limited to the
following:
1. to eliminate fractional shares
arising out of stock dividends;
2. to collect or compromise an
indebtedness to the corporation arising
out of unpaid subscription in a
delinquency sale and to purchase
delinquent shares sold during the sale;
3. to pay dissenting or
withdrawing stockholders entitled to
payment of their shares
shares of stock may be transferred in the
following:
a. if represented by a certificate, the
following must be strictly complied
with: (1) delivery of the certificate;
(2) indorsement by the owner or his
agent; (3) to be valid to third
parties, the transfer must be
recorded in the books of the
corporation. (Rural Bank of Lipa v.
Court of Appeals September 28,
2001)
b. if not represented by the certificate
(such as when the certificate has
not yet been issued or where for
some reason is not in the
possession of the stockholder:
1. by means of a deed of
assignment, and
2. such is duly recorded in the
books of the corporation

Years asked:
04, 2001, 1996, 1994, 1992, 1989, 1984, 1982,
1981

Illustrative case:
Rural Bank of Lipa v. Court of Appeals

7. Subject matter:
DECLARATION OF DIVIDENDS

Concept:
who may declare dividends? (Sec. 43)
1. Board of Directors alone for cash
and property dividends
2. Board of Directors with the
approval of stockholders
representing not less than 2/3 of
outstanding capital for stock
dividends
the conditions that must be present to
declare dividends are the following:
1. unrestricted retained earnings;
2. resolution of the board or if stock
dividends, the board with the
concurrence of 2/3 of outstanding
capital
Declaration of dividends is discretionary
upon the board. Dividends are payable only
when there are profits earned by the
corporation and as a general rule, even if
there are existing profits, the Board of
directors has the discretion to determine
whether or not dividends are declared
(Republic Planters Bank v. Agana, 269 SCRA
1).
Exception. Stock corporations are prohibited
from retaining surplus profits in excess of
100% of their paid-in capital.
However, even if the retained surplus profits
are in excess of 100% of the paid-in capital,
the board may still refuse to declare
dividends if:
1. Justified by definite corporate
expansion projects/ programs
approved by the Board; or
2. the corporation is prohibited under
any loan agreement with any
financial institution or creditor,

COMMERCIAL LAW
FAQs
313

2009 BAR OPERATIONS
whether local or foreign, from
declaring dividends without its/ his
consent, and such consent has not
yet been secured; or
3. It can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation.
Other rules concerning dividends:
1. Stockholders are entitled to dividends
pro-rata based on the total number of
shares and not on the amount paid for
the shares (SEC Opinion dated July 16,
1996)
2. Stockholders at the time of
declaration are the ones entitled to
dividends. Dividends declared before
the transfer of shares belong to the
transferor and those declared after the
transfer belongs to the transferee. (SEC
Opinion, July 14, 1994)
3. the stockholders right to be paid
dividends accrues as soon as the
declaration is made in accordance with
Sec. 43 of the Corporation Code. From
that time, the stockholder can already
demand payment thereof. (SEC opinion
dated October 10, 1992)
4. Stock dividends can be declared at a
premium (at value higher than par) (SEC
Opinion dated October 23, 1992)
5. Even unpaid subscribers are entitled
to dividends.

Years asked:
2005, 2001, 1991, 1990, 1989, 1987, 1982

Applicable law:
SEC Opinion dated July 16, 1996
SEC Opinion dated July 14, 1994
SEC Opinion dated October 10, 1992
SEC Opinion dated October 23, 1992
Sec. 43, Corporation Code of the Philippines

Illustrative cases:
Republic Planters Bank v. Agana
269 SCRA 1

8. Subject matter:
RIGHTS OF STOCKHOLDERS

Concept:
The basic rights of stockholders are the
following:
a. direct and indirect participation in
management;
b. voting rights (Sec. 6, CCP);
c. right to remove directors (Sec. 28,
CCP);
d. proprietary rights;
right to dividends;
appraisal right (Sec. 81,
CCP);
right to issuance of stock
certificate for fully paid
shares; (Sec. 64, CCP)
proportionate participation
in the distribution of assets
in liquidation (Secs. 118-
119, CCP);
right to transfer stocks in
corporate books (sec. 63,
CCP)
pre-emptive right (Sec. 39,
CCP)
e. right to inspect books and records
(Sec. 74, CCP);
f. right to be furnished with the most
recent financial statement/ financial
report (Secs. 74 and 75, CCP);
g. right to recover stocks unlawfully
sold for delinquent payment of
subscription;
h. right to file individual suit,
representative suit and derivative
suits.

Years asked:
1998, 1996, 1993, 199, 1988, 1985, 1984, 1983,
1981, 1976

Applicable law:
Corporation Code of the Philippines, Sections 6,
28, 81, 64, 118, 119, 63, 39, 74,
75

9. Subject mater:
DISSOLUTION OF A CORPORATION

Concept:
the dissolution of a corporation is the
extinguishment of the franchise of a
corporation and the termination of its
corporate existence
A corporation is dissolved by the following
modes:
1. Voluntary dissolution
a. where no creditors are
affected (Sec. 118, CCP)
b. where creditors are affected
(Sec. 119, CCP)
2. Involuntary dissolution (Sec. 121,
CCP)
3. Shortening term, (Sec. 120, CCP) and
4. Expiration of term
Dissolution has the following effects:
a. It results in the transfer of legal title
to properties in the stockholders
who become co-owners thereof;
b. The corporation ceases as a body
corporate to continue the business
for which it was established;

COMMERCIAL LAW
FAQs
314

2009 BAR OPERATIONS
c. The stockholders are not prevented
from conveying their respective
shareholdings toward the creation
of a new corporation to continue
the business of the old;
d. Though a dissolved corporation
cannot be revived, those interested
may reciprocate by re-filing the new
Articles of Incorporation and by-
laws;
e. The corporation continues as a
corporate body for three years for
purposes of winding up or
liquidation;
f. Upon the expiration of the three
year-winding up period, the
corporation ceases to exist for all
purposes.

Years asked:
2004, 2002, 2000, 1997, 1998, 1981

Applicable law:
Corporation Code of the Philippines, sections
118, 119, 120, 121

10. Subject Matter:
RECOVERY OF MORAL DAMAGES

Concept:
Moral damages cannot awarded in favor of
corporations because they do not have
feelings and mental state. Mental suffering
can be experienced only by one having a
nervous system and it flows from ills,
sorrows and griefs of lifeall of which
cannot be suffered by artificial person.
(National Power Corporation v. Philipp
brothers Oceanic, Inc. November 20, 2001)
The Supreme Court clarified in ABS-CBN
Broadcasting Corporation v. Court of Appeals
(January 21, 1999) that moral damages are
awarded to enable the injured party to
obtain means, diversion, or amusements
that will serve to obviate the moral suffering
he has undergone. The statement in People
v. Manero and Mambulao Lumber co. v. PNB
that a corporation may recover moral
damages if it has a good reputation that is
debased, resulting in social humiliation is
obiter dictum.
However, the Supreme Court ruled in
Filipinas Broadcasting Network, Inc. v. Ago
Medical and Educational Center (January 17,
2005) that a corporation can recover moral
damages under Art. 2219 (7) if it was the
victim of defamation.

Years asked:
1998, 1985, 1978

Applicable law:
Art. 2219 (7), Civil Code of the Philippines

Illustrative cases:
National Power Corporation v. Philipp brothers
Oceanic, Inc. November 20, 2001
ABS-CBN Broadcasting Corporation v. Court of
Appeals January 21, 1999
People v. Manero
Mambulao Lumber Co. v. PNB
Filipinas Broadcasting Network, Inc. v. Ago
Medical and Educational Center January 17, 2005

11. Subject matter:
FOREIGN STOCKHOLDERS IN A CORPORATION and
FOREIGN CORPORATION DOING BUSINESS IN THE
PHILIPPINES
Concept:
Stockholders in a corporation can be
foreigners except in fully or partly
nationalized corporations.
The fully or partly nationalized
corporations are the following:
a. Where no foreign stockholder
is allowed as in
1. mass media recording (Art.
XVI, Sec. 11, Constitution)
2. retail trade enterprises
with paid-up capital of les
than US $2.5 million (Sec.
5, R.A. No. 8762)
3. private security agencies
(Sec. 4, R.A. No. 5487)
4. utilization of natural
resources (Art. XII, Sec. 2,
Constitution)
5. small-scale mining (Sec. 3,
R. A. No. 7076)
6. cockpits (Sec. 5, P.D. No.
449)
7. manufacture, repair,
stockpiling and/ or
distribution of nuclear
weapons (Art. II, Sec. 8,
Constitution)
8. manufacture of
firecrackers and other
pyrotechnic devices (Sec.
5, R.A. No. 7183)
b. Up to twenty percent (20%)
foreign equity like private radio
communications network (R. A.
No. 3846)
c. Up to twenty-five percent
(25%) foreign equity
like the following:
1. private recruitment,
whether local or
overseas, employment
(Art. 27, P.D. No. 442)
2. construction and
repair of locally funded

COMMERCIAL LAW
FAQs
315

2009 BAR OPERATIONS
works (Sec. 1, C.A.
541)
3. construction of
defense-related
structures (Sec. 1, C.
A. 541)
d. Up to forty percent (40%)
foreign equity
1. exploration,
development and
utilization of natural
resources (Art. XII,
Sec. 2, Constitution)
2. realty companies and
other corporations
that own private lands
(Art. XII, Sec. 7,
Constitution)
3. operation and
management of public
utilities (Art. XII,
Sec.11, Constitution)
4. culture, production,
milling, processing,
trading except retail of
rice and corn and by-
products (Secs. 5, P.D.
No. 194; Sec. 15, R. A.
No. 8762)
5. adjustment companies
(Sec. 323, P.D.No. 612)
6. sauna and steam bath
bathhouses, massage
clinics and similar
activities (r. A. No.
7042)
e. Up to sixty (60%) foreign equity
1. financing companies
(Sec. 6, R.A. No. 5980,
as amended by R.A.
No. 8556)
2. investment houses
(Sec. 5, P.D. No. 129,
as amended by R. A.
No. 8366)
A foreign corporation is said to be
doing business in the Philippines
under the Continuity Test implies a
continuity of commercial dealings and
arrangements, and contemplates to
some extent the performance of acts or
works or the exercise of some functions
normally incident to and in progressive
prosecution of, and the purpose and
object of its organization. Under the
Substance Test, a foreign corporation is
doing business in the country if it is
continuing the body or substance of the
enterprise of business for which it was
organized.
In Pacific Vegetable Oil Corp. v. Singson
(April 1955), the Supreme Court held
that a foreign corporation is not doing
business in the Philippines when it
entered into a contract with a domestic
corporation providing for the delivery
and payment of copra from the
Philippines where the said contract was
negotiated, perfected and performed in
the United States. Thus, even if the twin
characterization tests (Continuity and
Substance tests) of Mentholatum
obtained in the case, so long as the
perfection and consummation of series
of transactions are done outside of the
Philippine territorial jurisdiction, the
same would not constitute doing
business in the Philippines, even if the
products themselves should be
manufactured or processed in the
Philippines.
DOING BUSINESS UNDER THE
FOREIGN INVESTMENT ACT OF 1991
1. DOING BUSINESS (Sec. 3(d))
a. soliciting orders, service
contracts, opening offices
(whether branch or liaison
officer);
b. appointing
representatives,
distributors domiciled
in the Philippines or
who stay for a period
or periods totaling 180
days or more;
c. participating in the
management,
supervision or control
of nay domestic
business, firm, entity
or corporation in the
Philippines;
d. any act or acts that
imply the continuity of
commercial dealings
or arrangements, and
contemplate to some
extent the
performance of acts or
works or the exercise
of some functions
normally incident to
and in progressive
prosecution of, the
purpose and object of
its organization
2. NOT DOING BUSINESS(Sec.
3(d))
a. mere investment as a
shareholder and
exercise of rights as
investor;
b. having a nominee
director or officer to

COMMERCIAL LAW
FAQs
316

2009 BAR OPERATIONS
represent its interest
in the corporation;
c. appointing
representative or
distributor which
transact business in its
own name and for its
own account.

Years asked:
2002, 1998, 1995, 1990, 1979

Applicable law:
Constitution, Art. XVI, Sec 11, Art. XII, Sec. 2; Art.
II, Sec. 8; Art.XII, Sec. 2 and 7;
Sec. 5, R. A. No. 8762
Sec 4, R.A. No. 5487
Sec. 3. R.A. No. 7076
Sec. 5, R. A. No. 449
Sec. 5, R.A. No. 7183
R.A. No. 3846
Art. 27, P.D. No. 442
Sec. 1, C.A. 541
Sec. 5, P.D. No. 194
Sec. 15, R.A. No. 8762
Sec. 323, P.D. No. 612
R.A. No. 7042
Sec. 6, R.A. No. 5980, as amended by R.A. No.
8556
Sec. 5, P.D. No. 129, as amended by R.A. No.
8366
Foreign Investment Act of 1991, Sec. 3 (d)

Illustrative cases:
Pacific Vegetable Oil Corp. v. Singson
April 1955
Aetna Casualty and Surety Co. v. Pacific Star
Lines 80 SCRA 835
Universal Shipping Lines, Inc. v. IAC
188 SCRA 170
Agilent Technologies v. Integrated Silicon
Technology April 2004

INSURANCE LAW

1. Subject Matter:
BENEFICIARY

Concept:
The beneficiary is the person designated to
receive proceeds of policy when risk
attaches.
When one insures his own life, he may
designate any person as the beneficiary,
whether or not the beneficiary has an
insurable interest in the life of the insured.
Exceptions: Persons specified in
Art. 739 (in re Art. 2012) of the Civil
Code cannot be designated
a. those made between persons
who were guilty of adultery and
concubinage at the time of the
donation; (conviction is not a
condition precedent)
b. those made between persons
found guilty of the same
criminal offense, in
consideration thereof;
c. those made to a public officer
or his wife, descendants or
ascendants by reason of his
office
If a person will insure the life of another
payable to himself, he must have insurable
interest on the life of the person whose life
he is insuring
The designation is revocable unless the right
to revoke is expressly waived in the policy.
o Thus, although Sec. 181 of the
Insurance Code of the Philippines
allows assignment of the life or
health insurance policies to any
person whether he has insurable
interest or not, the insured cannot
assign the policy if the designation
of the beneficiary is irrevocable.
The irrevocable beneficiary has
vested right.
o If there is no waiver of the right to
revoke under Section 181,
assignment of the policy may be
deemed as implied revocation.
o If the insured refuses to pay the
premiums, the designated
irrevocable beneficiary may
continue the policy by paying
premiums that are due.
If the premiums are paid out of the conjugal
funs, the proceeds are considered conjugal.
If the beneficiary is other than the insureds
estate, the source of the premiums would
not be relevant. (Del Val v. Del Val, 29 Phil.
534; BPI v. Posadas, 56 Phil. 215)
If the insured or beneficiary is a minor and
the amount involved does not exceed

COMMERCIAL LAW
FAQs
317

2009 BAR OPERATIONS
P50,000.000, the father in the absence of
judicial guardian, or in his absence or
incapacity, the mother may exercise the
minors rights under the policy, without the
need of court authority or bond.

Years Asked:
2005, 2000, 1998, 1991, 1985, 1981, 1978

Applicable law:
Section 11, 181 Insurance Code of the Philippines
(ICP)

Illustrative case:
Del Val v. Del Val 29 Phil. 534;
BPI v. Posadas 56 Phil. 215;
The Insular Life Assurance Co. v. Ebrado 80
SCRA 181

2. Subject Matter:
INCONTESTABILITY CLAUSE
Concept:
After a policy of life insurance made payable
on the death of the injured shall have been in
force during the lifetime of the insured for a
period of two years from the date of its issue
or of its last reinstatement, the insurer
cannot prove that the policy is void ab initio
or is rescindable by reason of the fraudulent
concealment or misrepresentation of the
insured or his agent.
Requisites for application:
1. the insurance is a life insurance
policy is payable on the death of the
insured.
2. it has been in force during the
lifetime of the insured for at least 2
years from the date of its issue or of
its last reinstatement. The period of
2 years may be shortened but it
cannot be extended by stipulation.
The following defenses are not barred by the
incontestability clause:
1. that the person taking the
insurance lacked insurable interest
as required by law;
2. that the cause of the death of the
insured is an accepted risk;
3. that the premiums had not been
paid; (Sec. 77, 227 (b), 228 (b); 230
(b), ICP);
4. that the conditions of the policy
relating to military or naval service
has been violated (Secs. 227 (b),
228 (b), ICP);
5. that the fraud is of particularly of
vicious type;
6. that the beneficiary failed to furnish
proof of death or to comply with
any condition imposed by the policy
after the loss has happened; or
7. that the action was not brought
within the time specified.

Years asked:
1998,1997, 1994, 1991, 1989, 1983

Applicable law:
Section 48, ICP

3. Subject Matter:
CONCEALMENT AND MISREPRESENTATION

Concept:
Concealment is the neglect to communicate
that which a party knows and ought to
communicate (Sec. 26, ICP)
Concealment vitiates the contract and
entitles the insurer to rescind, even if the
death or loss is due to a cause not related to
the concealed matter. (Section 27, ICP)
The matter concealed need not be the cause
of loss.
Representations are factual statements
made by the insured at the time of or prior
to the insurance policy to give information
to the insurer and otherwise induce him to
enter into the insurance contract. The effect
of misrepresentation is that the injured party
is entitled to rescind from the time when the
representation becomes false.
It is well settled that the insured need not die
of disease he failed to disclose to the insurer.
It is sufficient that his non-disclosure misled
the insurer in forming the estimate of the
risks of the proposed insurance policy or in
making inquiries.
It is not material that the insured died of a
different cause than the fact concealed.
Where the matters which the insured failed
to disclose were material and relevant to the
approval and issuance of the insurance
policy and they would have affected the
insurers action on the insured application,
the claim can be denied.

Years asked:
2001, 1998, 1997, 1996, 1993, 1989, 1987, 1984,
1983, 1980, 1979, 1977, 1975

Applicable law:
Section 26, 27, 31 ICP

Illustrative cases:
Vda. De Canilang v. Court of Appeals
223 SCRA 443
Sunlife Assurance Company of Canada v. Court
of Appeals 245 SCRA 268
Philamcare health Systems, Inc. v. Court of
Appeals March 18, 2002
The Insular Life Ltd. V. Feliciano
74 Phil. 468

COMMERCIAL LAW
FAQs
318

2009 BAR OPERATIONS
4. Subject matter:
INSURABLE INTEREST (2002, 2001, 2000)
Insurable interest in property v. insurable
interest in life

Insurable interest in Life Insurable Interest in
Property
As to extent
Unlimited (save in life
insurance effected by a creditor
on the life of the debtor)

Limited to the
actual value of the
interests thereon
As to the time when insurable
interest must exist
It is enough that the insurable
interest exist at the time the
policy takes effect and need not
exist at the time of the loss

It is necessary that
the insurable
interest exist when
the insurance takes
effect and when the
loss occurs, but
need not exist in the
meantime.
As to expectation of the
benefit to be derived
The expectation of the benefit
to be derived need not have any
legal basis

There must be legal
basis
As to the beneficiarys interest
The beneficiary need not have
insurable interest over the life of
the insured if the insured
himself secured the policy.
However, if the life insurance
was obtained by the
beneficiary, the latter must
have insurable interest over the
life of the insured.

The beneficiary
must have insurable
interest over the
thing insured.

Insurable Interest in Life Insurance: (1997,
1987, 1976)
Every person has an insurable interest in
the life and health:
o Of himself, his spouse and of
his children,
o Of any person on whom he
depends wholly or in part for
education or support, or in
whom he has pecuniary
interest;
o Of any person under legal
obligation to him for the
payment of money, or
respecting property or services,
of which death or illness might
delay or prevent the
performance; and
o Of any person upon whose life
any estate or interest vested in
him depends.
In general, the test is whether or not the
person is interested in the preservation of
the insured life despite the insurance.
In paragraph (a) of Section 10, mere
relationship is sufficient while the rest
(paragraphs b, c and d) requires pecuniary
interest. Thus the interest of the creditor
over the life of the debtor ceases upon full
payment.

Insurable Interest in Property Insurance
(1999, 1998, 1997, 1994, 1991, 1987, 1982,
1979, 1977, 1975)
o Insurable interest in property
insurance is any interest
therein, or liability in respect
thereof and it may consist in an
existing interest, an inchoate
interest founded on an existing
interest, or any expectancy
coupled with an existing
interest.
o In general, a person has
insurable interest in the
property, if he derives
pecuniary benefit or advantage
from its preservation or would
suffer pecuniary loss, damage
or prejudice by its destruction
whether he has or has no title
in, or lien upon, or possession
of the property. (Filipino
Merchants Insurance, Co., Inc. v.
Court of Appeals, 179 SCRA 638)
Hence pecuniary interest over
the property is always
necessary.
o The existence of insurable
interest is a matter of public
policy. Hence, the principle of
estoppel cannot be invoked.
o For the beneficiary to recover
on the fire or property
insurance policy, it is required
that he must have insurable
interest in the property insured.
o The businessman, as owner,
and the creditor, as mortgagee
have separate insurable
interests in the same stocks-in-
trade. Each may insure such
interest to protect his own
interest.

Years asked:
2002, 2001, 2000, 1999, 1998, 1997, 1994, 1991,
1987, 1982, 1979, 1977, 1976, 1975

Applicable Law:
Sections 10-25, Insurance Code of the Philippines

Illustrative case:
Filipino Merchants Insurance, Co., Inc. v. Court of

COMMERCIAL LAW
FAQs
319

2009 BAR OPERATIONS
5. Subject matter:
DOUBLE INSURANCE
Concept:
Double insurance exists where the same
person is insured by several insurers
separately in respect to same subject and
interest (Sec. 93, ICP). It is not prohibited by
law but it may be prohibited by an other
insurance clause.
Requisites of double insurance:
1. the person insured is the same;
2. there are two or more insurers
insuring separately;
3. the subject matter is the same;
4. the interest insured is also the
same;
5. the risk or peril insured against is
likewise the same.
When there is double insurance, the insured
can claim in case of loss only up to the
agreed valuation or up to the full insurable
value for any, some or all insurers, without
prejudice to the insurers ratably
apportioning the payments. The insured can
also recover before or after the loss, from
both insurers the excess premium he has
paid. (Sec. 94, ICP)

Years asked:
2005, 1999, 1990

Applicable provisions:
Section 93, 94, ICP

6. Subject Matter:
LOSS AND CLAIMS SETTLEMENT

Concept:
The insurer is liable if:
1. the proximate cause of the loss is the
peril insured against (Sec. 84)
2. the immediate cause of the loss is the
peril insured against except where
proximate cause is an excepted peril;
3. loss through negligence of insured
except where there was gross
negligence amounting to willful act;
4. loss caused by efforts to rescue the
thing from peril insured againstif
during the course of rescue, the thing is
exposed to a peril, not insured against,
which permanently deprives the insured
of its possession, in whole or in part.
(Sec. 85, ICP)
The insurer is not liable:
1. loss by insureds willful act or gross
negligence;
2. loss due to connivance of the insured
(Sec. 87, ICP), and
3. Loss where the excepted peril is the
proximate cause.
Claims settlement in life insurance: (Sec.
242, ICP)
1. the proceeds shall be paid immediately
upon the maturity of the policy if there
is such a maturity date;
2. If the policy matures by the death of the
insured, within 60 days after
presentation of the claim and filing of
the proof of the death of the insured.
Claims settlement in property insurance:
(Sec. 243, ICP)
1. Proceeds shall be paid within 30 days
after proof of loss is received by the
insurer and ascertainment of the loss or
damage is made either by agreement or
by arbitration.
2. If no ascertainment is made within 60
days after receipt of proof of loss, the
loss shall be paid within 90 days after
such receipt.

Years asked:
2000, 1996, 1995, 1993, 1990, 1989, 1978

Applicable law:
Sec. 84, 85, 87, 242, 243, ICP

7. Subject Matter:
IMPLIED WARRANTIES IN MARINE INSURANCE

Concept:
the implied warranties in marine insurance
are the following:
1. that the ship is seaworthy at the
inception of the insurance (Sec. 113,
ICP);
2. that the ship will not deviate from
agreed voyage unless deviation is
proper (Secs. 123, 124, 125, ICP);
3. that the ship will not engage in an
illegal venture;
4. warranty of the possession of
documents of neutrality: that the ship
will carry the requisite documents of
nationality or neutrality of the ship or
cargo where such nationality or
neutrality is expressly warranted;
5. presence of insurable interest.

Years asked:
2000, 1986, 1983

Applicable law:
Secs. 113, 123, 124, 125, ICP

8. Subject matter:
NO FAULT CLAUSE

Concept:
the injured third party or passenger is given
the option to file a claim for death or injury
without the necessity of proving fault or

COMMERCIAL LAW
FAQs
320

2009 BAR OPERATIONS
negligence of any kind under the following
conditions:
1. the total indemnity in respect of any
person shall not exceed five thousand
pesos;
2. the following proofs of loss, when
submitted under oath, shall be sufficient
evidence to substantiate the claim:
a. police report of accident, and
b. death certificate and evidence
sufficient to establish the
proper payee, or
c. medical report and evidence of
medical or hospital
disbursement in respect of
which refund is claimed.
3. claim may be made against one motor
vehicle only.

Years asked:
1994, 1989, 1977

Applicable law:
Sec. 378, ICP

9. Subject matter:
THEFT CLAUSE

Concept:
The risk insured against in the policy may
include theft. If there is such a provision and
the vehicle was unlawfully taken, the insurer
is liable under the theft clause and the
authorized driver clause does not apply. The
insured can recover even if the thief has no
drivers license. (Perla Compania de Seguros,
Inc. v. Court of Appeals, 208 SCRA 487)
Where the motor vehicle is unlawfully and
wrongfully taken without the owners
consent or knowledge, such taking
constitutes theft, and therefore, it is the
theft clause and not the authorized
drivers clause that should apply.
There is theft if an employee took the
vehicle of his employer without the latters
consent and therefore liable to the insured
for damage to the vehicle even if the
employee did not have a drivers license. The
theft clause operates (this is present in a
comprehensive policy unless theft is
excepted) and not the authorized drivers
clause.
The above rule is also true if an employee of
a repair shop took the car that is being
repaired for a joy ride

Years asked:
1993, 1988, 1985, 1981

Illustrative cases:
Perla Compania de Seguros, Inc. v. Court of
Appeals, 208 SCRA 487
Villacorta v. Insurance Comm.
100 SCRA 469
Assn of Baptist for World Evangelism, Inc. v.
Fielmens Ins. Co., Inc. 124 SCRA 618

COMMERCIAL LAW
FAQs
321

2009 BAR OPERATIONS
INTELECTUAL PROPERTY

1. Subject Matter:
INFRINGEMENT OF COPRYRIGHT

Concept:
There is infringement when there is piracy or
substantial reproduction. If so much is taken that the
value of the original work is substantially diminished
or the labors of the original author are substantially
and to an injurious extent appropriated by another.
The following acts do not constitute infringement of
copyright:
a. recitation or performance of a work: (1) made
accessible to the public, (2) privately done, (3)
free of charge, (4) strictly for charitable or
religious institution;
b. making of quotations from a published work: (1)
compatible with fair use, (2) extent is justified by
the purpose, (3) source and name of the author,
appearing on work, must be mentioned;
c. reproduction or communication to the public by
mass media of articles on current political, social,
economic, scientific or religious topic, lectures,
addresses and other works, derived in public (1)
for information purposes, (2) not expressly
reserved, and (3) sources already indicated;
d. reproduction and communication to the public of
literary or artistic works as part of reports of
current events by means of photography,
cinematography or broadcasting to the extent
necessary for the purpose;
e. inclusion of a work in a publication, broadcast, or
other communication to the public, sound
recording or film if made by way of illustration
for teaching purposes compatible with fair use
and the source and name of the author,
appearing on work must be mentioned;
f. recording made in schools, universities or
educational institutions of a work included in a
broadcast for the use of such schools,
universities or educational institutions.
g. Making of ephemeral recordings: (1) by a
broadcasting organization, (2) by means of its
own facilities, (3) for use of its own broadcast;
h. Use made of a work by or under the direction or
control of the Government for public interest
compatible with fair use;
i. Public performance or the communication to the
public of a work in a place where no admission
fee is charged by a club or institution for
charitable or educational purpose only and the
aim is not profit-making;
j. Public display of the original or a copy of the
work not made by means of a film, slide,
television image or otherwise on screen or by
means of any other device or process ;
k. Any use made of work for the purpose of any
judicial proceedings; or for giving of professional
advice by a legal practitioner;
l. Single copy of a published work by natural
person exclusively for research and private study
(even without authorization of the owner);
m. Reproduction by libraries of (1) fragile works,(2)
isolated articles in composite works, (3) brief
portions of published works,(4) to preserve or
replace copy;
n. One back-up copy of computer program.
Remedies against Infringement:
a. injunction to prevent
infringement; (Sec. 216, IPL)
b. action for damages which
should be filed within 4 years
c. filing of a criminal case (Sec.
218,IPL)

Years Asked:
1998, 1997, 1994, 1989, 1988, 1987, 1983, 1977

Applicable Law:
Secs. 216, 218, Intellectual Property Code

2. Subject Matter:
REGISTRATION OF TRADEMARKS

Concept:
The rights in a mark shall be acquired through
registration with the Intellectual Property Office
or the IPO. (Sec. 122, IPC)
Registration is necessary before one can file an
action for infringement.
The following are marks that cannot be
registered:
a. immoral, deceptive, or scandalous matter,
or matter which may disparage or falsely
suggest a connection with persons, living or
dead, institutions, beliefs, or national
symbols, or bring them into contempt or
disrepute;
b. consists of the flag or coat of arms or other
insignia of the Philippines or any of its
political subdivisions, or of any foreign
nation, or any simulation thereof;
c. consists of the name, portrait or signature
identifying a particular living individual
except by his written consent, or the name,
signature or portrait of a deceased President
of the Philippines, during the life of his
widow, if any, except by written consent of
the widow;
d. identical with a registered mark belonging to
a different proprietor or a mark with an
earlier filing or priority date, in respect of: (1)
the same goods or services, or (2) closely
related goods or services or (3) if it nearly
resembles such a mark as to be likely to
deceive or cause confusion;
e. generic terms for goods or services;
f. characteristics of goods like quality or
quantity;
g. customary sign in everyday language;

COMMERCIAL LAW
FAQs
322

2009 BAR OPERATIONS
h. color by itself.

Years Asked:
1994, 1985, 1983, 1982, 1979, 1978, 1976

Applicable Law:
Sec. 122, Intellectual Property Code

3. Subject Matter:
UNFAIR COMPETITION

Concept:
Unfair competition may be committed as
follows:
a. any person who shall employ deception or
other means contrary to good faith by which
he shall pass off the goods manufactured by
him or in which he deals, or his business, or
services for those of the one having
established such goodwill, or shall commit
any acts calculated to produce said result,
shall be guilty of unfair competition
b. selling goods and giving them the
appearance of goods of another
manufacturer or dealer, either as to the
goods themselves or the wrapping of the
packages in which they are contained, or the
devices or words thereon, or in any other
feature of their appearance, which would
likely to influence purchasers to believe that
the goods offered are those of a
manufacturer or dealer, or who otherwise
clothes the goods with such appearance as
shall deceive the public
c. using any artifice of employing other means
calculated to induce the false belief that
such person is offering the services of
another who has identified such services in
the mind of the public, or
d. making false statement in the course of the
trade or who shall commit any other act
contrary to good faith of a nature calculated
to discredit the goods, business or services
of another.

Infringement of trademark v. Unfair
Competition
Infringement Unfair competition
There is unauthorized use of a
trademark
Involves passing off of
ones goods and giving
ones goods the
appearance of that of
another
It is not necessary to establish
fraudulent intent
It is necessary to
establish fraudulent
intent
Registration of the trademark is
necessary for the filling of an
action for infringement
Prior registration is not
necessary
Limited in scope Broader as it includes
cases that are covered
not only by the IPC but
also by Art. 27 of the
New Civil Code

Years Asked:
1996, 1988, 1984, 1982, 1981, 1980

Applicable Law:

4. Subject matter:
INFRINGEMENT OF PATENT

Concept:
The making, using, offering for sale, selling
importing patented product or a product
obtained directly or indirectly from a
patented process, or the use of a patented
process without the authorization of the
patentee is considered an infringement of
patent.

Years asked:
1993, 1992, 1985, 1977

Applicable Law:

COMMERCIAL LAW
FAQs
323

2009 BAR OPERATIONS
SPECIAL LAWS ON COMMERCIAL LAW

1. Subject matter:
BULK SALES LAW

Concept:
The sale of all the stock of goods, fixtures
and entire business, not in the ordinary
course of business or trade of the vendor is
covered by the provisions of the Bulk Sales
Law. Hence, before receiving from the
vendee any part of the purchase price, the
vendor must deliver to such vendee a
written statement, duly sworn, containing
the names and addresses of all creditors to
whom said vendor may be indebted,
together with the amount of indebtedness
due or owing, on account of the goods,
fixtures or business subject matter of the
bulk sale.
The vendee should require from the vendor
submission of a written waiver of the Bulk
Sales Law by the creditors as shown by the
verified statement or to comply with the
requirements of the Bulk Sales Law, that is,
the seller, must notify his creditors of the
terms and conditions of the sale (Sec. 2, Act
No. 3952, as amended).
The two instances when the sale, transfer,
mortgage or assignment of stock of goods,
wares, merchandise, provision or material
otherwise than in the ordinary course of
trade and the regular prosecution of the
business of the vendor are not deemed to be
a sale or transfer in bulk are the following:
a. if the sale or transfer is made by the
vendor, mortgagor, transferor or
assignor who produces and delivers
a written waiver of the provisions of
the Bulk Sales Law from his
creditors as shown by the verified
statement;
b. if the sale and transfer is made by
the vendor, mortgagor, transferor
or assignor who is an executor,
administrator, receiver, assignee in
insolvency, or public officer acting
in judicial process.

Years asked:
2006, 2005, 2001, 2000, 1997, 1994, 1993, 1988,
1982

Applicable Law:
Republic Act No. 3952

2. Subject Matter:
LAW ON SECRECY OF BANK DEPOSITS (R.A. NO.
1405)

Concept:
The law is intended to encourage people to
deposit their money in banking institutions and
also to discourage private hoarding so that the
same may be properly utilized by banks to assist
in the economic development of the country.
All deposits of whatever nature with banks or
banking institutions in the Philippines including
investment bonds issued by the Government of
the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as an
absolutely confidential nature and may not be
examined, inquired or looked into by any person,
government official, bureau or office. (Sec. 2, RA.
No. 1405)
Exceptions:
o when there is written permission of the
depositor or investor;
o special or general examination of a
bank, authorized by the Bangko Sentral
ng Pilipinas Monetary Board in
connection with a bank fraud or serious
irregularity;
o examination by an independent Auditor,
hired by a Bank and for the Banks
exclusive use;
o DOSRI Loans: Loans with their Banks
of banks of Directors, Officers,
Stockholders and related interests
1. loans in excess of 5% of the
banks capital and surplus
2. the borrower waived his
rights as regards the
secrecy of bank deposits
o impeachment cases;
o upon the order of a competent court in
cases of bribery or dereliction of duty of
public officials;
o upon the order of a competent court in
cases where the money deposited or
invested is the subject of litigation;
o upon order of the competent court or
tribunal in cases involving unexplained
wealth under the Anti-Graft and Corrupt
Practices Act, R.A. No. 3019 (Banco
Filipino v. Purisima, 161 SCRA 576);
o upon inquiry by the Commissioner of
Internal Revenue for the purposes of
determining the net estate of a
deceased depositor;
o upon the order of a competent court or
in proper cases in the Anti-money
Laundering Council where there is
probable cause of money laundering
and in some instances even without
court order;
o Disclosure to the Treasurer of the
Philippines for dormant deposits for at

COMMERCIAL LAW
FAQs
324

2009 BAR OPERATIONS
least ten (10) years under the Unclaimed
balances Act (Sec.2, R.A. No. 3936)
o Coup detat law (RA 6968, October 24,
1990)
o When the state exercises/ invokes its
Police Power
The above-enumerated exceptions do not apply
to foreign currency deposits. There is only one
exception under the Foreign Currency Deposits
Act (Intengan v. Court of Appeals, February 15,
2002) although another is provided for under the
Anti-Money Laundering Law. These Exceptions
are:
o When there is written consent of
depositor under Sec. 8 of the Foreign
Currency Deposits Act; and
o Upon the order of the court (or even
without court order in proper cases)
when there is probable cause of money
laundering as provided for under
Section 11 of the Anti-Money
Laundering Act.
The Anti-Money Laundering Council may inquire
into the deposits upon order of the court when
there is probable cause that the deposits are
related to the crime of unlawful activities defined
in Sec. 3 (1) and Sec. 4 of R.A. 9160. However, a
court order is not even necessary when the
offense or unlawful activity involved is any of the
following:
o Kidnapping for ransom under Art. 267 of
the Revised Penal Code as amended,
o Sections 4, 5, 7, 8,9, 10, 12, 13,14, 15,
and 16 of R.A. No. 9165 otherwise
known as the Comprehensive
Dangerous Drugs Act of 2002, and
o Hi-jacking and other violations of
Republic Act No. 6235; destructive arson
and murder as defined under the
Revised Penal Code, as amended,
including those perpetrated by terrorists
against non-combatant persons and
similar targets.
Bank accounts may be garnished by the creditors
of the depositor. There is no violation of the Law
on Secrecy of Bank Deposits if the accounts are
garnished. The amount of deposit is not actually
disclosed and the intent of the legislature does
not cover garnishment. The notice of
garnishment served on a bank at the instance of
the creditor of a depositor is not covered by the
Law on Secrecy of Bank Deposits. Garnishment
is just part of the process of execution. The
moment notice of garnishment is served on a
bank and there exists a deposit by the judgment
debtor, the bank is directly accountable to the
sheriff, for benefit of the judgment creditor, for
the whole amount of the deposit. In such event,
the amount of the deposit becomes, in effect,
subject of the litigation.
Whether the transaction is considered a sale of
money placement does not make the money
subject matter of litigation within the meaning
of Sec. 2(g), RA 1405 which prohibits the
disclosure or inquiry into bank deposits in cases
where the money deposited or invested is the
subject matter of litigation nor will it matter
whether the money is swindled.

Years asked:
2006, 2005, 2004, 2001, 2000, 1998, 1997, 1995,
1994, 1992, 1991, 1990, 1989, 1988,1985, 1981,
1980, 1977, 1976

Applicable laws:
Sec. 2, Republic Act 1405 (Law on Secrecy of
Bank Deposits)
Sec. 3 (1), 4, 11, Republic Act No. 9160
Sec. 2, Republic Act No. 3936
Sec. 8, Foreign Currency Deposits Act
Anti-Money Laundering Act

Illustrative cases:
Banco Filipino v. Purisima
161 SCRA 576
Intengan v. Court of Appeals
February 15, 2002
China Bank v. Ortega
49 SCRA 356
Salvacion, et.al. v. Central Bank of the
Philippines, et.al. August 21, 1997
Benedicto and Riviera v. Court of Appeals
364 SCRA 334

3. Subject matter:
INSOLVENCY LAW

Conept:
Insolvency is declared when the liabilities of the
debtor are more than his assets.
The assets of the debtor are to be converted to
cash for distribution among his creditors.
The insolvency has for its object to obtain
discharge from all debts and liability.
The Insolvency Law seeks:
o to effect equitable distribution of the
insolvents property among his
creditors, and
o To discharge the debtor from his
liabilities so that he can start afresh with
the property set apart to him as exempt

Involuntary insolvency v. voluntary insolvency
Involuntary
insolvency
Voluntary insolvency
Three or more
creditors are
required
One creditor is
sufficient
Filed by three or
more qualified
debtors
Filed by the debtor
Debtors must have
committed one or
No need for
commission of acts of

COMMERCIAL LAW
FAQs
325

2009 BAR OPERATIONS
more acts of
insolvency
insolvency
Indebtedness must
not be less than one
thousand pesos
Amount of
indebtedness must
exceed one thousand
pesos.
Petition must be
accompanied by a
bond
Bond is not required
An insolvent debtor, after a lawful discharge
following an adjudication of insolvency, is
released generally from all debts, claims,
liabilities and demands which are or have been
proved against his estate.

Suspension of payments v. Insolvency
Suspension of
payments
Insolvency
Debtor has
sufficient property
but he foresees the
impossibility of
meeting his debts
as they fall due
The debtor does not
have sufficient
property to pay his
debts
The purpose is to
suspend or delay
the payments of
debts
The purpose is to
discharge the debtor
from the payment of
certain debts
The amount of
indebtedness is not
affected
Some of the creditors
may receive less than
their credits
The number of
creditors is
immaterial
In case of involuntary
insolvency, three or
more creditors are
required.

Years asked:
2005, 2004, 1999, 1998, 1997, 1995, 1991, 1988,
1982, 1980, 1979,
1978, 1976, 1975

Applicable Law:
Insolvency law (Act No. 1956)

4. Subject matter:
ORIGINAL AND EXCLUSIVE JURISDICTION OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC)

Concept:
Formerly, the SEC has original and exclusive
jurisdiction over cases involving:
1. devices or schemes amounting to
fraud or misrepresentation;
2. controversies arising out of intra-
corporate or partnership
representations;
3. controversies in the election or
appointment of directors, officers,
etc.
4. petitions to be declared in the state
of suspension of payments.
At present, the jurisdiction over these cases
has been transferred to the Courts of
general jurisdiction or the appropriate
Regional Trial Court acting as a Special
Commercial Court.
Sec. 5, PD 902-A
The SEC has jurisdiction to declare
suspension of payments with respect to
corporations, partnerships, or associations, but
not with respect to individuals.

Years asked:
2006, 1997, 1996, 1994, 1991, 1990, 1988, 1987,
1985, 1984, 1981, 1976

Applicable law:
Securities Regulations Code, R.A. No. 8799

5. Subject matter:

Concept:
The registration of the chattel
mortgage is an effective and
binding notice to other creditors of
its existence and creates a real right
or a lien which being recorded, it
follows the chattel wherever it
goes. The registration gives the
mortgagee the symbolical
possession. (Northern Motors, Inc.
vs. Coquia, 68 SCRA 374 [1975]).
Foreclosure of Chattel Mortgage
1. Public Sale if the mortgagor
defaults in the payment of the
secured debt or otherwise fails to
comply with the conditions of the
mortgage, the creditor has no right
to appropriate to himself the
personal property (Article 2141,
2088) because he is permitted only
to recover his credit from the
proceeds of the sale of the property
at public auction through a public
officer in the manner prescribed in
Section 14 of Act No. 1508.
(Mahoney vs. Tuason, 39 Phil. 951
[1919]); Esguerra vs. Court of
Appeals, 173 SCRA 1 [1989]).
2. Private Sale if there is an
express stipulation in the contract.
Exception: fraud or duress
The mortgagee may, after thirty
(30) days from the time of the
condition broken, cause the
mortgaged property to be sold at
public auction by a public officer
(Section 14, Act No. 1508)
The 30-day period to foreclose a
chattel mortgage is the minimum
period after violation of the
mortgage condition for the

COMMERCIAL LAW
FAQs
326

2009 BAR OPERATIONS
mortgage creditor with at least ten
(10) days notice to the mortgagor
and posting of public notice of time,
place and purpose of such sale, and
is a period of grace for the
mortgagor, to discharge the
mortgage obligation. After the sale
of the chattel at public auction, the
right of redemption is no longer
available to the mortgagor. (Cabral
vs. Evangelista, 28 SCRA 1000
[1969])
Right of Mortgagee to Recover
Deficiency
1. The creditor may maintain an
action for the deficiency although
the Chattel Mortgage Law is silent
on this point (Ablaza vs. Ignacio,
(unrep) 103 Phil. 1151 [1958];
Garrido vs. Tuason, 24 SCRA 727
[1968] Phil. National Bank vs.
Manila Investment & Construction,
Inc., supra; Bank of the Philippine
Isalnd vs. Olutanga Lumber Co., 47
Phil. 20 [1924]). The action may be
sought within ten (10) years from
the time the cause of action
accrues.
2. If the chattel mortgage is
constituted, whether by the debtor-
vendee or a third person, as security
for the purchase of personal
property payable in installments, no
deficiency judgment can be asked
and any agreement to the contrary
shall be void (Article 1484, Civil
Code).
3. The chattel mortgagee is
entitled to deficiency judgment in
an action for specific performance
(Article 1484 [1]) where the
mortgaged property is
subsequently attached and sold.
The execution sale in such case is
not a foreclosure sale. (Industrial
Finance Corporation vs. Ramirez, 77
SCRA 152 [1977]).
A chattel mortgage constituted over an
immovable is binding only between the
parties and is therefore unenforceable
against third parties.

Years asked:
2001, 1999, 1997, 1991, 1990, 1987, 1986, 1985,
1984, 1983,1982, 1977, 1976

Applicable law:
Sec. 14, Chattel Mortgage Law (Act No. 1508)
Article 1484, 2141, 2088, Civil Code of the
Philippines

Illustrative cases:
Northern Motors, Inc. vs. Coquia
68 SCRA 374 [1975]
Mahoney vs. Tuason,
39 Phil. 951 [1919]
Esguerra vs. Court of Appeals
173 SCRA 1 [1989]
Cabral vs. Evangelista
28 SCRA 1000 [1969]
Ablaza vs. Ignacio, (unrep)
103 Phil. 1151 [1958]
Garrido vs. Tuason
24 SCRA 727 [1968]
Bank of the Philippine Isalnd vs. Olutanga
Lumber Co. 47 Phil. 20 [1924]
Industrial Finance Corporation vs. Ramirez
77 SCRA 152 [1977]

6. Subject Matter:
FORECLOSURE OF REAL ESTATE MORTGAGE LAW

Concept:
The foreclosure of Real Estate Mortgages
can either be:
1. Judicial foreclosure governed
by Rule 68 of the Rules of Court.
2. Extrajudicial Foreclosure
governed by Act. No. 3135 as amended,
if and when the mortgagee is given a
specific power or express authority to
do so.
Debtor has the right to redeem the property
sold within the term of one year from and
after the date of the sale (Section 6). The
reckoning date in case of registered land is
from the registration of the certificate of
sale since it is only from such date that the
sale takes effect as a conveyance. (Jose vs.
Blue, 42 SCRA 351, [1971]; Gorospe vs.
Santos, 69 SCRA 191 [1976]; General vs.
Barrameda, 60 SCRA 162 [1976]. Every
conveyance of lands acquired under the free
patent or homestead provisions, when
proper, shall be subject to repurchase by the
applicant, his widow or legal heirs, within a
period of five years from the date of the
conveyance. (Section 119, C.A. No. 141
[Public Land Law], as amended) or
foreclosure sale (Tupas vs. Damasco, 132
SCRA 593 [1984]).
Rules on the Right of Mortgagee to
Recover Deficiency
1. If there be a balance due to the
mortgagee after applying the proceeds of
the sale, the mortgagee is entitled to
recover the deficiency. (Development Bank
of the Philippines vs. Mirang, 66 SCRA 141
[1975]. In judicial foreclosure, the Rules of
Court specifically gives the mortgagee the
right to claim for deficiency in case a
deficiency exists (Section 6, Rule 70). While
Act No. 3135 governing extrajudicial
foreclosures of mortgage does not give a

COMMERCIAL LAW
FAQs
327

2009 BAR OPERATIONS
mortgagee the right to recover deficiency
after the public auction sale, neither does it
expressly or impliedly prohibit such
recovery.
This right to recover deficiency had
been categorically resolved in State
Investment vs. Court of Appeals (217 SCRA 32
[1993]). Ergo, the mortgagee is entitled to
recover the deficiency in case the sale
proceeds are not sufficient to cover the debt in
extrajudicial foreclosures.
2. The action to recover a deficiency after
foreclosures prescribes after ten (10) years
from the time the right of action accrues as
provided in Article 1144(2) of the Civil Code
(Development Bank of the Philippines vs.
Tomeldan, 101 SCRA 171 [1980].
Rules on the Right of Redemption:
1. In all cases of extrajudicial sale,
the mortgagor may redeem the
property at any time within the term of
one year from and after the date of
registration of the sale (see Section 6,
Act No. 3135; Reyes vs. Tolentino 42
SCRA 365 [1971]).
2. In judicial foreclosure of real
estate mortgage, there is an equity of
redemption which he can exercise at
any time after service of judgment of
foreclosure and within the 90-day period
and even thereafter provided he does so
before the foreclosure sale is confirmed
by the court. (Anderson vs. Reyes, 54
Phil 944). Confirmation of the sale of
mortgaged real property cuts off all the
rights or interests of the mortgagor and
of the mortgagee and persons holding
under him, and with them the equity of
redemption in the property and vests
them in the purchaser. Confirmation
retroacts to the date of the sale. It is a
final order, not interlocutory. (Ocampo
vs. Domalanta, 20 SRCA 1136 [1967];
Binalbagan Estate, Inc. vs. Gatuslao, 76
Phil. 128 [1946]; Villar vs. Javier, 97 Phil
604 [1955]; Lonzome vs. Amores, 134
SCRA 380 [1985].

Exception: Right of Redemption
by Reason of Foreclosure of Mortgages
because of the General Banking Laws
In the event of foreclosure,
whether judicially or extrajudicially, of
any mortgage on real estate which is
security for any loan or other credit
accommodation granted, the mortgagor
or debtor whose real property has been
sold for the full or partial payment of his
obligation shall have the right within one
year after the sale of the real estate, to
redeem the property by paying the
amount due under the mortgage deed,
with interest thereon at the rate specified
in the mortgage and all the costs and
expenses incurred by the banking
institution from the sale and custody of
said property less the income derived
therefrom. However, the purchased at
the auction sale concerned whether in a
judicial or extrajudicial foreclosure shall
have the right to enter upon and take
possession of such property immediately
after the date of the confirmation of the
auction sale and administer the same in
accordance with law. Any petition in
court to enjoin or restrain the conduct of
foreclosure proceedings instituted
pursuant to this provision shall be given
due course only upon the filing by the
petitioner of a bond in an amount fixed by
the court conditioned that he will pay all
the damages which the bank may suffer
by the enjoining or the restraint of the
foreclosure proceedings.
Notwithstanding Act 3135,
juridical persons whose property is being
sold pursuant to an extrajudicial
foreclosure, shall have the right to
redeem the property in accordance with
this provision until, but not after, the
registration of the certificate of
foreclosure sale with the applicable
Register of Deeds which in no case shall
be more than three months after
foreclosure, whichever is earlier. Owners
of property that has been sold in a
foreclosure sale prior to the effectivity of
this Act shall retain their redemption
rights until their expiration.

SUMMARY OF THE RULES:
1. if the real estate mortgage has been foreclosed
extrajudicially by a bank, the owner, if an individual,
has the right of redemption of one year from the
registration of the certificate of sale;
2. if a real estate mortgage had been foreclosed
extrajudicially by a bank, the owner, if a juridical
person, has a right of redemption until, but not after
the registration of the certificate of foreclosure sale
with the applicable Register of Deeds which in no
case shall be more than threee (3) months after
foreclosure, whichever is earlier;
3. if a real estate mortgage had been foreclosed
judicially by a bank, the owner, whether an
individual or a corporation, has the right of
redemption of one year from registration of the
certificate of sale.(Sec. 47, GBL)

Years asked:
2006, 2005, 2002, 1999, 1996, 1991, 1987, 1979,
1978

Applicable law:
Article 1144(2) of the Civil Code

COMMERCIAL LAW
FAQs
328

2009 BAR OPERATIONS
Section 119, C.A. No. 141 [Public Land Law], as
amended
Rule 68, 70 (Sec. 6) of the Rules of Court.
Sec. 78, Republic Act No. 337
Common Wealth Act No. 459
Sec. 6, Foreclosure of Real Estate Mortgage Law
(Act No. 3135 in relation to R.A. No. 8791
Sec. 47, General banking Laws of 2000
Illustrative cases:
Development Bank of the Philippines vs.
Tomeldan 101 SCRA 171 [1980].
Reyes vs. Tolentino
42 SCRA 365 [1971]
Anderson vs. Reyes
54 Phil 944
Ocampo vs. Domalanta
20 SCRA 1136 [1967]
Binalbagan Estate, Inc. vs. Gatuslao
76 Phil. 128 [1946]
Villar vs. Javier
97 Phil 604 [1955]
Lonzome vs. Amores
134 SCRA 380 [1985].
State Investment vs. Court of Appeals
217 SCRA 32 [1993]
Development Bank of the Philippines vs. Mirang,
66 SCRA 141 [1975]
Tupas vs. Damasco
132 SCRA 593 [1984]
Jose vs. Blue

42
SCRA 351, [1971]
Gorospe vs. Santos
69 SCRA 191 [1976]
General vs. Barrameda
60 SCRA 162 [1976]. Conzales
vs. Phil. National Bank,
48 Phil. 824 [1926])

Commercial Law Reviewer

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Commercial Law Reviewer

Uploaded by

Copyright:

Available Formats

COMMERCIAL LAW

You might also like