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Trust Receipts Law

1. S Corp. obtained letters of credit from
M Bank to cover its purchase of
construction materials. M Bank
required HTY, representative of S
Corp. to sign 24 trust receipts as
security
for
the
construction
materials and to hold those materials
or the proceeds of the sales in trust
for M Bank to the extent of the
amount stated in the trust receipts. S
Corp. defaulted thus M Bank filed a
criminal action against HTY for
estafa. Can HTY be held liable for
estafa under the trust receipts law?
No. A trust receipt transaction is one where the
entrustee has the obligation to deliver to the
entruster the price of the sale, or if the
merchandise is not sold, to return the
merchandise to the entruster. There are,
therefore, two obligations in a trust receipt
transaction: the first refers to money received
under the obligation involving the duty to turn
it over (entregarla) to the owner of the
merchandise sold, while the second refers to
the merchandise received under the obligation
to return it (devolvera) to the owner. When
both parties enter into an agreement knowing
fully well that the return of the goods subject of
the trust receipt is not possible even without
any fault on the part of the trustee, it is not a
trust receipt transaction penalized under Sec.
13 of PD 115 in relation to Art. 315, par. 1(b) of
the RPC, as the only obligation actually agreed
upon by the parties would be the return of the
proceeds of the sale transaction. This
transaction becomes a mere loan, where the
borrower is obligated to pay the bank the
amount spent for the purchase of the goods. In
this case, the dealing between HTY and M Bank
was not a trust receipt transaction but one of
simple loan. HTYs admissionthat he signed
the trust receipts on behalf of S Corp., which
failed to pay the loan or turn over the proceeds
of the sale or the goods to M Bank upon
demanddoes not conclusively prove that the
transaction was, indeed, a trust receipts
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transaction. In contrast to the nomenclature of

the transaction, the parties really intended a
contract of loan. It has been ruled that the fact
that the entruster bank knew even before the
execution of the trust receipt agreements that
the construction materials covered were never
intended by the entrustee for resale or for the
manufacture of items to be sold is sufficient to
prove that the transaction was a simple loan
and not a trust receipts transaction. [Hur Tin
Yang v. People of the Philippines,G.R. No.
195117, August 14, 2013]
2. Spouses dela Cruz was in the business
of selling fertilizers and agricultural
products, for which they were
granted a credit line by PPI, and to
secure it, trust receipts were issued
covering the goods to be paid for by
using the credit line. The trust
receipts contained the following: In
the event, I/We cannot deliver/serve
to the farmer-participants all the
inputs as enumerated above within
60 days, then I/We agree that the
undelivered inputs will be charged to
my/our credit line, in which case, the
corresponding adjustment of price
and interests shall be made by PPI. Is
there a trust receipt transaction?
No. The contract, its label notwithstanding, was
not a trust receipt transaction in legal
contemplation or within the purview of the
Trust Receipts Law such that its breach would
render the Spouses criminally liable for estafa.
Under Section 4 of the Trust Receipts Law, the
sale of goods by a person in the business of
selling goods for profit who, at the outset of the
transaction, has, as against the buyer, general
property rights in such goods, or who sells the
goods to the buyer on credit, retaining title or
other interest as security for the payment of the
purchase price, does not constitute a trust
receipt transaction and is outside the purview
and coverage of the law. The sale of goods,
documents or instruments by a person in the
business of selling goods, documents or
instruments for profit who, at the outset of the
transaction, has, as against the buyer, general
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property rights in such goods, documents or

instruments, or who sells the same to the buyer
on credit, retaining title or other interest as
security for the payment of the purchase price,
does not constitute a trust receipt transaction
and is outside the purview and coverage of this
Decree. When both parties enter into an
agreement knowing that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is
not a trust receipt transaction penalized under
Section 13 of P.D. 115; the only obligation
actually agreed upon by the parties would be
the return of the proceeds of the sale
transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay
the bank the amount spent for the purchase of
the goods. [Spouses Dela Cruz v. Planters
Products, Inc., GR No. 158649, February 18,
2013]

Negotiable Instruments Law

1. W was accused of estafa for using a
bum check to defraud another
person. The check he issued was
payable to cash. Can he be held liable
for estafa?
No. The check delivered was made payable to
cash. Under the Negotiable Instruments Law,
this type of check was payable to the bearer and
could be negotiated by mere delivery without
the need of an indorsement. This rendered it
highly probable that W had issued the check
not to the person allegedly defrauded, but to
somebody else, who then negotiated it to
another. Relevantly, the person allegedly
defrauded confirmed that he did not himself see
or meet W at the time of the transaction and
thereafter, and expressly stated that the person
who signed for and received the goods in
exchange for the check was someone else.
It bears stressing that the accused, to be guilty
of estafa as charged, must have used the check
in order to defraud the complainant. What the
law punishes is the fraud or deceit, not the
mere issuance of the worthless check. W could
not be held guilty of estafa simply because he
had issued the check used to defraud a person.
The proof of guilt must still clearly show that it
had been W as the drawer who had defrauded a
person by means of the check. [People of the
Philippines v. Gilbert Reyes Wagas, G.R. No.
157943, September 4, 2013]
2. A postdated check with the date
October 9, 2003 was issued, drawn
against an account of S with BPI,
presented for deposit with ABank, on
October 10, 2002. Upon presentment,
the check was sent to the PCHC. It was
cleared by BPI and its amount was
debited from the account of S, and
credited to the account of the payee.
The account of S was closed, but he
asked for the return of the amount of
the check, which BPI agreed to. When
BPI sent a photocopy of the check to
ABank saying it was postdated, ABank

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refused to accept it. After the check

was sent back and forth between the
two banks, ABank filed a complaint
saying BPI should solely bear the loss.
Is ABank correct?
No. ABank and BPI should both bear the loss by
allocating the damage on a 60-40 ratio. In light
of the contributory negligence of BPI, it should
bear 40% of the loss, but ABank should bear
60%. "Contributory negligence is conduct on
the part of the injured party, contributing as a
legal cause to the harm he has suffered, which
falls below the standard to which he is required
to conform for his own protection." Admittedly,
ABanks acceptance of the subject check for
deposit despite the one year postdate written
on its face was a clear violation of established
banking regulations and practices. In such
instances, payment should be refused by the
drawee bank and returned through the PCHC
within the 24-hour reglementary period.
Abanks failure to comply with this basic policy
regarding post-dated checks was "a telling sign
of its lack of due diligence in handling checks
coursed through it." It bears stressing that "the
diligence required of banks is more than that of
a Roman paterfamilias or a good father of a
family. The highest degree of diligence is
expected," considering the nature of the
banking business that is imbued with public
interest. While it is true that respondent's
liability for its negligent clearing of the check is
greater, petitioner cannot take lightly its own
violation of the long-standing rule against
encashment of post-dated checks and the
injurious consequences of allowing such checks
into the clearing system.
The antecedent negligence of the plaintiff does
not preclude him from recovering damages
caused by the supervening negligence of the
defendant, who had the last fair chance to
prevent the impending harm by the exercise of
due diligence. Moreover, in situations where
the doctrine has been applied, it was
defendants failure to exercise such ordinary
care, having the last clear chance to avoid loss
or injury, which was the proximate cause of the
occurrence of such loss or injury. If only BPI
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exercised ordinary care in the clearing process,

it could have easily noticed the glaring defect
upon seeing the date written on the face of the
check "Oct. 9, 2003". BPI could have then
promptly returned the check and with the
check thus dishonored, ABank would have not
credited the amount thereof to the payees
account. Thus, notwithstanding the antecedent
negligence of the ABank in accepting the postdated check for deposit, it can seek
reimbursement from BPI in the amount
credited to the payees account covering the
check. [Allied Banking Corporation v. Bank of the
Philippine Islands, GR No. 188363, 27 February
2013]

3. C and A were engaged in the business

of buying and selling cards, and they

had two deposit accounts with E
Bank. G ordered a second hand Pajero
and a brand new Honda CRV from
them who paid them 9 checks payable
to different payees, with PV Bank as
drawee. P was the branch manager of
E Bank, who assisted the transaction.
When the checks were deposited, P
told C and A that the checks were
honored, and the amounts were
credited in their accounts. However,
the checks were later on returned by
the drawee due to alteration of the
amounts thereon. When C and A
issued a check from their account
with E Bank, it was dishonored due to
deposit on hold. They asked the
bank to honor their check, to which
the bank refused, and later on closed
the account. The intermediary bank,
on the other hand, withdrew the
amount of the check deposited by C
and A which was dishonored due to
material alteration. What are the
liabilities of the drawee bank,
intermediary bank, and C and A in
this case?

As for the drawee bank, Section 63 of the

Negotiable Instruments Law provides that
the acceptor, by accepting the instrument,
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engages that he will pay it according to the

tenor of his acceptance. The acceptor is a
drawee who accepts the bill. In Philippine
National Bank v. Court of Appeals, the
payment of the amount of a check implies
not only acceptance but also compliance
with the drawees obligation.
In case the negotiable instrument is altered
before acceptance, is the drawee liable for
the original or the altered tenor of
acceptance? There are two divergent
intepretations
proffered
by
legal
analysts. The first view is supported by the
leading case of National City Bank of Chicago
v. Bank of the Republic. In said case, a certain
Andrew Manning stole a draft and
substituted his name for that of the original
payee. He offered it as payment to a jeweler
in exchange for certain jewelry. The jeweler
deposited the draft to the defendant bank
which collectedthe equivalent amount from
the drawee. Upon learning of the alteration,
the drawee sought to recover from the
defendant bank the amount of the draft, as
money paid by mistake. The court denied
recovery on the ground that the drawee by
accepting admitted the existence of the
payee and his capacity to endorse. Still, in
Wells Fargo Bank & Union Trust Co. v. Bank
of Italy, the court echoed the courts
interpretation in National City Bank of
Chicago, in this wise:
We think the construction placed upon the
section by the Illinois court is correct and
that it was not the legislative intent that the
obligation of the acceptor should be limited
to the tenorof the instrument as drawn by
the maker, as was the rule at common
law,but that it should be enforceable in
favor of a holder in due course against the
acceptor according to its tenor at the time of
its acceptance or certification.
The foregoing opinion and the Illinois
decision which it follows give effect to the
literal words of the Negotiable Instruments
Law. As stated in the Illinois case: "The
court must take the act as it is written and
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should give to the words their natural and

common meaning . . . if the language of the
act conflicts with statutes or decisions in
force before its enactment the courts should
not give the act a strained construction in
order to make it harmonize with earlier
statutes or decisions." The wording of the
act suggests that a change in the common
law was intended. A careful reading thereof,
independent of any common-law influence,
requires that the words "according to the
tenor of his acceptance" be construed as
referring to the instrument as it was at the
time it came into the hands of the acceptor
for acceptance, for he accepts no other
instrument than the one presented to him
the altered form and it alone he
engages to pay. This conclusion is in
harmony with the law of England and the
continental countries. It makes for the
usefulness and currency of negotiable paper
without seriously endangering accepted
banking practices, for banking institutions
can readily protect themselves against
liability on altered instruments either by
qualifying their acceptance or certification
or by relying on forgery insurance and
special paper which will make alterations
obvious. All of the arguments advanced
against the conclusion herein announced
seem highly technical in the face of the
practical facts that the drawee bank has
authenticated an instrument in a certain
form, and that commercial policy favors the
protection of anyone who, in due course,
changes his position on the faith of that
authentication.
The
second
view
is
that
the
acceptor/drawee despite the tenor of his
acceptance is liable only to the extent of the
bill prior to alteration. This view appears to
be in consonance with Section 124 of the
Negotiable Instruments Law which states
that a material alteration avoids an
instrument except as against an assenting
party and subsequent indorsers, but a
holder in due course may enforce payment
according to its original tenor. Thus, when
the drawee bank pays a materially altered
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check, it violates the terms of the check, as

well as its duty to charge its clients account
only for bona fide disbursements he had
made. If the drawee did not pay according
to the original tenor of the instrument, as
directed by the drawer, then it has no right
to claim reimbursement from the drawer,
much less, the right to deduct the erroneous
payment it made from the drawers account
which it was expected to treat with utmost
fidelity. The drawee, however, still has
recourse to recover its loss. It may pass the
liability back to the collecting bank which is
what the drawee bank exactly did in this
case. It debited the account of E Bank for the
altered amount of the checks.
As for the depositary bank and collecting
bank, a depositary/collecting bank where a
check is deposited, and which endorses the
check upon presentment with the drawee
bank, is an endorser. Under Section 66 of
the Negotiable Instruments Law, an
endorser warrants "that the instrument is
genuine and in all respects what it purports
to be; that he has good title to it; that all
prior parties had capacity to contract; and
that the instrument is at the time of his
endorsement valid and subsisting." It has
been repeatedly held that in check
transactions, the depositary/collecting bank
or last endorser generally suffers the loss
because it has the duty to ascertain the
genuineness of all prior endorsements
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 endorsements. If any
of the warranties made by the
depositary/collecting bank turns out to be
false, then the drawee bank may recover
from it up to the amount of the check.
The law imposes a duty of diligence on the
collecting bank to scrutinize checks
deposited with it for the purpose of
determining
their
genuineness
and
regularity. The collecting bank being
primarily engaged in banking holds itself
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out to the public as the expert and the law

holds it to a high standard of conduct.28
As collecting banks, the E Bank and
intermediary Bank are both liable for the
amount of the materially altered checks.
As for C and A, the Bank cannot debit their
savings account. A depositary/collecting
bank may resist or defend against a claim
for breach of warranty if the drawer, the
payee, or either the drawee bank or
depositary bank was negligent and such
negligence substantially contributed to the
loss from alteration. In the instant case, no
negligence can be attributed to C and A. At
the time of the sales transaction, the Banks
branch manager was present and even
offered the Banks services for the
processing and eventual crediting of the
checks. True to the branch managers
words, the checks were cleared three days
later when deposited by petitioners and the
entire amount of the checks was credited to
their savings account. [Areza v. Express
Savings Bank, G.R. No. 176697, September 10,
2014]

4. R obtained a loan from the spouses C,

covered by a promissory note, with R

promising to pay spouses C
P120,000.00 on December 31, 1995.
Failure to pay the said amount on the
said date would cause R to pay 5%
monthly interest until the entire
amount is paid, and in case the matter
is referred to a lawyer, R further
promised to pay 20% of the amount
due as attorneys fees, which should
not be less than P5,000.00, in
addition to litigation costs. About
three years after the stipulated date
of payment, R issued to the spouses C
a check as partial payment, drawn
against Rs account with PC Bank.
Thereafter, the spouses received
another check from R duly signed and
dated, but with no payee and amount.
As per understanding of the parties,
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the second check was issued in the

amount of P133,454.00 with cash as
payee. When presented for payment,
the checks were dishonored. Is
demand (presentment for payment)
still necessary to make R liable on the
checks?
No. The subject promissory note is not a
negotiable instrument and the provisions of the
NIL do not apply to this case. Section 1 of the
NIL requires the concurrence of the following
elements to be a negotiable instrument:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
On the other hand, Section 184 of the NIL
defines what negotiable promissory note is:
SECTION 184. Promissory Note, Defined. A
negotiable promissory note within the meaning
of this Act is 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 to bearer. Where a
note is drawn to the makers own order, it is
not complete until indorsed by him.
The Promissory Note in this case is made out to
specific persons, the spouses C, and not to order
or to bearer, or to the order of the Spouses C as
payees.
However, even if Rs Promissory Note is not a
negotiable instrument and therefore outside
the coverage of Section 70 of the NIL which
provides that presentment for payment is not
necessary to charge the person liable on the
instrument, R is still liable under the terms of
the Promissory Note that he issued.
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The Promissory Note is unequivocal about the

date when the obligation falls due and becomes
demandable31 December 1995. As of 1
January 1996, R had already incurred in delay
when he failed to pay the amount of
P120,000.00 due to the Spouses C on 31
December 1995 under the Promissory Note.
[Rivera v. Spouses Chua, G.R. No. 184458,
January 14, 2015]

5. A and N entered into a business

venture. In the course of their

business, A pre-signed several checks
to answer for expenses, but these did
not indicate any payee, date, nor
amount. The checks were entrusted
to N with instructions not to fill them
out without notice and approval of A.
Without the knowledge of A, N went
to M to secure a loan in the amount of
P200,000.00 on the ground that A
needed money for construction of his
house, with payment of interest at 5%
per month. M agreed, and thereafter,
N delivered to M one of the pre-signed
blank checks, with the blank portions
filled out with the words "Cash" "Two
Hundred Thousand Pesos Only", and
the amount of "P200,000.00". The
upper right portion of the check
corresponding to the date was also
filled out with the words "May 23,
1994." M was later on told that the
loan was not really for A. When M
deposited
the
check,
it
was
dishonored due to account closed.
When M could not recover from N, he
filed a case against A for violation of
B.P. 22, while A filed a Complaint for
Declaration of Nullity of Loan and
Recovery of Damages against N and
M. Can A be held liable?

The answer is supplied by the applicable

statutory provision found in Section 14 of the
Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the
instrument is wanting in any material
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particular, the person in possession thereof has

a prima facie authority to complete it by filling
up the blanks therein. And a signature on a
blank paper delivered by the person making the
signature in order that the paper may be
converted into a negotiable instrument
operates as a prima facie authority to fill it up
as such for any amount. In order, however, that
any such instrument when completed may be
enforced against any person who became a
party thereto prior to its completion, it must be
filled up strictly in accordance with the
authority given and within a reasonable time.
But if any such instrument, after completion, 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.
This provision applies to an incomplete but
delivered instrument. Under this rule, if the
maker or drawer delivers a pre-signed blank
paper to another person for the purpose of
converting it into a negotiable instrument, that
person is deemed to have prima facie authority
to fill it up. It merely requires that the
instrument be in the possession of a person
other than the drawer or maker and from such
possession, together with the fact that the
instrument is wanting in a material particular,
the law presumes agency to fill up the blanks.
In order however that one who is not a holder
in due course can enforce the instrument
against a party prior to the instruments
completion, two requisites must exist: (1) that
the blank must be filled strictly in accordance
with the authority given; and (2) it must be
filled up within a reasonable time. If it was
proven that the instrument had not been filled
up strictly in accordance with the authority
given and within a reasonable time, the maker
can set this up as a personal defense and avoid
liability. However, if the holder is a holder in
due course, there is a conclusive presumption
that authority to fill it up had been given and
that the same was not in excess of authority.

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In the present case, M is not a holder in due

course. The Negotiable Instruments Law (NIL)
defines a holder in due course, thus:
Sec. 52 A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) 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;
(c) That he took it in good faith and for value;
(d) 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.
Section 52(c) of the NIL states that a holder in
due course is one who takes the instrument "in
good faith and for value." It also provides in
Section 52(d) that in order that one may be a
holder in due course, it is necessary 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.
Acquisition in good faith means taking without
knowledge or notice of equities of any sort
which could be set up against a prior holder of
the instrument. It means that he does not have
any knowledge of fact which would render it
dishonest for him to take a negotiable paper.
The absence of the defense, when the
instrument was taken, is the essential element
of good faith. In the instant case, M knew that A
was not a party to the loan. Since he knew that
the underlying obligation was not actually for
the A, the rule that a possessor of the
instrument is prima facie a holder in due course
is inapplicable. His inaction and failure to
verify, despite knowledge of that the petitioner
was not a party to the loan, may be construed
as gross negligence amounting to bad faith.
Yet, it does not follow that simply because he is
not a holder in due course, M is already totally
barred from recovery. The NIL does not provide
that a holder who is not a holder in due course
may not in any case recover on the instrument.
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The only disadvantage of a holder who is not in

due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable.
Among such defenses is the filling up blank not
within the authority. And in this case, the check
was not completed strictly under the authority
of A. While under the law, N had a prima facie
authority to complete the check, such prima
facie authority does not extend to its use (i.e.,
subsequent transfer or negotiation) once the
check is completed. In other words, only the
authority to complete the check is presumed.
Further, the law used the term "prima facie" to
underscore the fact that the authority which the
law accords to a holder is a presumption juris
tantumonly; hence, subject to subject to
contrary proof. Thus, evidence that there was
no authority or that the authority granted has
been exceeded may be presented by the maker
in order to avoid liability under the instrument.
N was only authorized to use the check for
business expenses; thus, he exceeded the
authority when he used the check to pay the
loan he supposedly contracted for the
construction of A's house. This is a clear
violation of the A's instruction to use the checks
for the expenses of their business venture. It
cannot therefore be validly concluded that the
check was completed strictly in accordance
with the authority given by the A. [Patrimonio v.
Gutierrez, G.R. No. 187769, June 4, 2014]

Corporation Law
1. What are the current rules on
principal
office
address
of
corporations and partnerships?
Previously, the SEC had allowed corporations
and partnerships to indicate in their principal
office address only the name of the city, town,
or municipality where they conduct business,
and considered Metro Manila as a principal
office address. Thereafter, on 16 February
2006, the SEC issued Memorandum Circular No.
3, series of 2006, directing corporations and
partnerships whose articles of incorporation or
partnership still indicate a general address as
their principal office address, such as a city,
town or municipality, or Metro Manila, to file,
on or before 31 December 2014, and amended
articles of incorporation or partnership, in
order to specify their complete addresses, such
that it has a street number, street name,
barangay, city or municipality, and if applicable,
the name of the building, the number of the
building, and the name or number of the room
or unit.
To ease the burden imposed on corporations
and partnership by SEC Memorandum Circular
No. 3, s. 2006, the following guidelines should
be observed in the amendment of their articles
in case they transfer or move to another
location:
1. In the event that a corporation whose
principal office address as indicated in
its articles is already specific and
complete, or fully compliant with the
Circulars, has moved or moves to
another location within the same city or
municipality, the corporation is not
required to amend its articles. It must,
however, declare its new or current
specific address in its General
Information Sheet (GIS) within 15 days
from transfer of its transfer. For this
purpose, Metro Manila is no longer
considered a city or municipality.
2. A corporation, however, is not precluded
from filing an amended articles to

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indicate its new location within the same

city or municipality of its former
address.
3. In other cases, the corporation must file
an amended articles of incorporation to
indicate its new location in another city
or municipality.
4. In the case of a partnership, considering
that it has no obligation to file a GIS, it is
required to file an amended articles of
partnership every time it transfers to a
new location within the same or another
city or municipality.
5. Failure of a corporation to do the above
will make it liable for violation of Section
16 of the Corporation Code and to the
payment of fines imposed by the SEC.
[SEC Memorandum Circular No. 16, series of
2013]
2. Can stockholders of a previously
dissolved corporation, whose shares
are held in trust by another new
corporation, be considered as
individual subscribers of the latter
corporation?
Yes. A holder or stockholder includes a person
holding stocks in trust, and trustees holding
corporate stock are regarded for all legal
purposes as stockholders. However, the rights
of a beneficial owner will, of course, be
recognized and protected in equity in proper
cases. In other words, even where legal title to
stock is vested in a certain person, equity will
treat him as a trustee holding it for the real and
beneficial owners, in proper cases. Article 1455
of the Civil Code provides that when any trustee
uses trust funds for the purchase of property
and causes the conveyance to be made to him
or a third person, a trust is established by
operation of law in favor of the person to whom
the funds belong. Moreover, a trustee must not
make investments of funds in their own names
but always indicate that they are made in trust
capacities. Thus, the trustee merely acts for the
stockholders whose stocks are held in trust,
with the latter being the owners thereof. thus,
they are individual subscribers of shares of
Starr Weigand 2016

stock. [SEC OGC

September 2013]

Opinion

No.

13-09,

3. F jr. filed an action against AT, a

tabloid, for publishing an article
which was alleged to be libelous. AT,
not being incorporated, argued that it
cannot be sued since it is not a
juridical person. Can AT be sued?
AT can be sued for being a corporation by
estoppel. AT was a corporation by estoppel as
the result of its having represented itself to the
reading public as a corporation despite its not
being incorporated. The non-incorporation of
AT with the Securities and Exchange
Commission was of no consequence, for,
otherwise, whoever of the public who would
suffer any damage from the publication of
articles in the pages of its tabloids would be left
without recourse. [Macasaet v. Francisco Co, Jr.,
G.R. No. 156759, June 5, 2013]
4. Can
previously
incurred
indebtedness be used as payment for
subscription of shares?
Yes. Section 62 of the Corporation Code
expressly allows a previously incurred
indebtedness to be used as consideration for
the issuance of stocks, provided that the
valuation of the indebtedness be determined by
the board of directors, subject to approval of
the SEC, in order to prevent watering of stocks.
Watering of stocks is a situation wherein the
consideration for subscription is not a fair
valuation equal to the par or issue value of the
stock. The amount of the indebtedness or
liabilities to be settled should be at least equal
to the par value of the shares of stock which the
corporation intends to issue. However, there
must first be an indebtedness incurred in order
that a liability may be converted into
subscription payment.
In this connection, the following requirements
are to be submitted to the SEC:
1. Detailed schedule of liabilities being
offset, showing all debts and credit to
2013 & 2014 Q and A|Commercial Law

- 10 -

such liability account, date, nature of

account and amount.
2. Deed of assignment executed by the
creditor(s] assigning the amount due to
him in payment for the unpaid
subscription(s].
3. Company's book of accounts must be
kept up to date and be made available
for examination by the Commission to
determine that the liabilities represent
valid and legitimate claims against the
company.
4. If the principal office of the corporation
is located in the province, a report by an
independent certified public accountant
must be submitted.
[SEC OGC Opinion No. 13-03, 17 April 2013; SEC
Opinion, 2 October 1992; SEC Opinion, 24
February 1988]
Such payment through previously incurred
indebtedness does not violate the stockholders
preemptive rights, so long the terms are on
equal terms as with the owners of the original
stocks. A pre-emptive right under Section 39 of
the Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe
to all issues or disposition of shares of any
class, in proportion to their respective
shareholdings, and on equal terms with other
holders of the original stocks, before
subscriptions are received from the general
public. Thus, if the payments by other persons
or entities are in the form of conversion of the
previously incurred indebtedness, while the
payments of the other stockholders for their
subscriptions shall be in cash, it is still
considered to be on equal terms. However,
even when payment of the debt is in terms
required to be made by the corporation in
money or cash, a set-off of the debt without
going through this unnecessary formality is
equivalent to a payment for the stock in cash.
[SEC OGC Opinion No. 13-03, 17 April 2013]
5. What shall be done when properties
requiring ownership registration,
such as land, are used as paid-up
capital of a corporation?

Starr Weigand 2016

Where payment is made in the form of land, the

corporation involved shall submit to the SEC
proof of the transfer of the certificate of
ownership thereon, in the name of the
transferee corporation, within 120 days from
the date of approval of the application filed
therefor with the SEC. Such period may be
extended for justifiable reasons. For properties
other than land, the proof of transfer of
registration shall be submitted to the SEC
within 90 days from approval of the application
by the SEC, which period may also be extended
for justifiable reasons. [SEC Memorandum
Circular No. 14, series of 2013]
6. GSIS acquired a Savings Bank, for
which it sought the approval of the
SEC to have the name of the bank
changed to GSIS Family Bank. BPI
Family Bank learned of this, and thus,
it petitioned the SEC to prevent GSIS
from using such name, or any name
with the words Family Bank in it,
claiming that it had exclusive
ownership to such name having
acquire the same since way back in
1985. The SEC sided with BPI Family
Bank. Is the SEC correct?
In Philips Export B.V. v. Court of Appeals, the SC
has ruled that to fall within the prohibition of
the law on the right to the exclusive use of a
corporate name, two requisites must be proven,
namely:
(1)that the complainant corporation acquired a
prior right over the use of such corporate name;
and
(2)
the proposed name is either
(a)
identical or (b)
deceptive or confusingly
similar to that of any existing corporation or to
any other name already protected by law; or
(c) patently deceptive, confusing or contrary
to existing law.
In the instant case, BPI appears to have a prior
right to the name. Likewise, the second
requisite in the Philips Export case is also
present because: the proposed name is (a)
identical or (b) deceptive or confusingly similar
2013 & 2014 Q and A|Commercial Law

- 11 -

to that of any existing corporation or to any

other name already protected by law. The
enforcement of the protection accorded by
Section 18 of the Corporation Code to o
corporate names is lodged exclusively in the
SEC. The jurisdiction of the SEC is not merely
confined to the adjudicative functions provided
in Section 5 of the SEC Reorganization Act, as
amended. By express mandate, the SEC has
absolute jurisdiction, supervision and control
over all corporations. It is the SECs duty to
prevent confusion in the use of corporate
names not only for the protection of the
corporations involved, but more so for the
protection of the public. It has authority to deregister at all times, and under all
circumstances corporate names which in its
estimation are likely to generate confusion.
[GSIS Family Bank-Thrift Bank (Formerly
Comsavings Bank, Inc.) Vs. BPI Family Bank, G.R.
No. 175278. September 23, 2015]
7. A, director and stockholder of
Corporation X, filed a complaint for
intra-corporate dispute against the
other directors and stockholders of
the corporation. The complaint arose
when A sought to have the real board
of directors rectify entries in the
Corporations General Information
Sheet (GIS) and questioned the
stockholders meeting, and to allow
him to inspect the books of the
corporation, all of which were not
acted upon. Subsequently, the
corporation
was
dissolved
by
revocation of its franchise. Does the
Complaint seek a continuation of
business or is it a settlement of
corporate affairs?
No. Section 122 of the Corporation Code
prohibits a dissolved corporation from
continuing its business, but allows it to
continue with a limited personality in order to
settle and close its affairs, including its
complete liquidation. Thus:
Sec. 122. Corporate liquidation.
Every corporation whose charter
Starr Weigand 2016

expires by its own limitation or is

annulled by forfeiture or
otherwise, or whose corporate
existence for other purposes is
terminated in any other manner,
shall nevertheless be continued
as a body corporate for three (3)
years after the time when it
would have been so dissolved,
for the purpose of prosecuting
and defending suits by or against
it and enabling it to settle and
close its affairs, to dispose of and
convey its property and to
distribute its assets, but not for
the purpose of continuing the
business for which it was
established.
There is nothing in the prayers in the complaint
which shows any intention to continue the
corporate business of Corporation X. The
Complaint does not seek to enter into contracts,
issue new stocks, acquire properties, execute
business transactions, etc. Its aim is not to
continue the corporate business, but to
determine
and
vindicate
an
alleged
stockholders right to the return of his
stockholdings and to participate in the election
of directors, and a corporations right to
remove usurpers and strangers from its affairs.
There is nothing to show that the resolution of
these issues can be said to continue the
business of Corporation X. [Vitaliano N. Aguirre
II and Fidel N. Aguirre II and Fidel N. Aguirre vs.
FQB+, Inc., Nathaniel D. Bocobo, Priscila Bocobo
and Antonio De Villa, G.R. No. 170770. January
9, 2013]
In relation to Question Number 2, will the
dissolution render the complaint moot and
academic?
No. A corporations board of directors is not
rendered functus officio by its dissolution. Since
Section 122 allows a corporation to continue its
existence for a limited purpose, necessarily
there must be a board that will continue acting
for and on behalf of the dissolved corporation
for that purpose. In fact, Section 122 authorizes
2013 & 2014 Q and A|Commercial Law

- 12 -

the dissolved corporations board of directors

to conduct its liquidation within three years
from its dissolution. Jurisprudence has even
recognized the boards authority to act as
trustee for persons in interest beyond the said
three-year period. Thus, the determination of
which group is the bona fide or rightful board
of the dissolved corporation will still provide
practical relief to the parties involved. [Ibid.]
8. Can a corporations dissolution also
bar a stockholder from enforcing or
vindicating his property right to his
shareholdings?
No. A partys stockholdings in a corporation,
whether existing or dissolved, is a property
right which he may vindicate against another
party who has deprived him thereof. The
corporations dissolution does not extinguish
such property right. Section 145 of the
Corporation Code ensures the protection of this
right, thus:
Sec. 145. Amendment or repeal.
No right or remedy in favor of or
against any corporation, its
stockholders,
members,
directors, trustees, or officers,
nor any liability incurred by any
such corporation, stockholders,
members, directors, trustees, or
officers, shall be removed or
impaired
either
by
the
subsequent dissolution of said
corporation
or
by
any
subsequent
amendment
or
repeal of this Code or of any part
thereof. [Ibid.]
9. B Corp. was dissolved through an
amendment of its articles of
incorporation
shortening
and
terminating its corporate life. It was
issued a SEC certificate of dissolution,
and during such time, it had deposit
accounts with BPI which were
assigned to E Insurance to serve as
security for surety bonds issued by
the latter to guaranty monetary
claims of a complainant in the labor
Starr Weigand 2016

case filed against B Corp. with the

NLRC. NLRC ordered the release and
cancellation of the bonds because the
case was terminated. The certificates
of deposit covering the deposits with
BPI were surrendered by E Insurance
to the former director and corporate
secretary of B Corp. Who can act as
trustees of the corporation even after
the expiration of the 3 year windingup period for its final liquidation?
The counsel of B Corp. during the labor case
before the NLRC can be considered as a trustee
of the corporation as to matters related to the
labor case. Likewise, the former director and
corporate secretary can also act as trustee-inliquidation of B Corp.
A corporation can go beyond the three-year
period in Section 122 of the Corporation Code
to complete its liquidation and to fully dispose
of the remaining corporate assets. If the threeyear period expires without a trustee being
appointed, the board of directors or trustees
itself, may be permitted to continue as trustees
by legal implication to complete corporate
liquidation. Likewise, counsel who prosecuted
and defended the corporation in a labor case,
when there was no trustee appointed, and who
in fact in behalf of the corporation may be
considered as a trustee of the corporation at
least with respect to the matter in litigation
only. As to which of them is the proper trustee,
the SEC cannot determine that. Section 122 of
the Corporation Code governing corporate
liquidation does not require SEC approval for
the distribution of the corporate assets of a
dissolved corporation. The liquidation process
is an internal concern of the corporation and
falls within the power of the directors and
stockholders to determine. [SEC OGC Opinion
No. 14-02, 21 February 2014]
10. Bank A granted loans to Corporation
X, which were secured by promissory
notes and mortgages over properties
owned by another corporation. The
transactions were entered into by
Corporation Xs president and
2013 & 2014 Q and A|Commercial Law

- 13 -

General Manager. Since Corporation X

defaulted in paying its loans, then the
mortgage
was
foreclosed
and
eventually sold. Because there was
still remaining amount to be paid, an
action was filed against Corporation
X, its President, and the latters wife,
who signed a surety agreement in
favor of the bank, which the lower
court had declared as falsified. Can
the wife of the President be held
liable?
No. Basic is the rule in corporation law that a
corporation is a juridical entity which is vested
with a legal personality separate and distinct
from those acting for and in its behalf and, in
general, from the people comprising it.
Following this principle, obligations incurred
by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is
generally not held personally liable for
obligations incurred by the corporation.24
Nevertheless, this legal fiction may be
disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the
circumvention of statutes, or to confuse
legitimate issues.25 This is consistent with the
provisions of the Corporation Code of the
Philippines, which states:
Sec. 31. Liability of directors,
trustees or officers. Directors
or trustees who willfully and
knowingly vote for or assent to
patently unlawful acts of the
corporation or who are guilty of
gross negligence or bad faith in
directing the affairs of the
corporation or acquire any
personal or pecuniary interest in
conflict with their duty as such
directors or trustees shall be
liable jointly and severally for all
damages resulting therefrom
suffered by the corporation, its
stockholders or members and
other persons.
Starr Weigand 2016

Solidary liability will then attach to the

directors, officers or employees of the
corporation in certain circumstances, such as:
a. When directors and trustees or, in
appropriate cases, the officers of a
corporation: (1) vote for or assent to
patently
unlawful
acts
of
the
corporation; (2) act in bad faith or with
gross negligence in directing the
corporate affairs; and (3) are guilty of
conflict of interest to the prejudice of the
corporation,
its
stockholders
or
members, and other persons;
b. When a director or officer has consented
to the issuance of watered stocks or
who, having knowledge thereof, did not
forthwith file with the corporate
secretary his written objection thereto;
c. When a director, trustee or officer has
contractually agreed or stipulated to
hold himself personally and solidarily
liable with the corporation; or
d. When a director, trustee or officer is
made, by specific provision of law,
personally liable for his corporate
action.
Before a director or officer of a corporation can
be held personally liable for corporate
obligations, however, the following requisites
must concur: (1) the complainant must allege in
the complaint that the director or officer
assented to patently unlawful acts of the
corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the
complainant must clearly and convincingly
prove such unlawful acts, negligence or bad
faith.
In this case, it was not proven that the wife of
the president of Corporation X committed an
act of an officer of the said corporation that
would permit the piercing of the corporate veil.
A reading of the complaint reveals that the
Bank did not demand that she be held liable for
the obligations of Hammer because she was a
corporate officer who committed bad faith or
gross negligence in the performance of her
2013 & 2014 Q and A|Commercial Law

- 14 -

duties such that the lifting of the corporate

mask would be merited. What the complaint
simply stated is that she, together with her
errant husband acted as surety, as evidenced by
her signature on the Surety Agreement which
was later found by the RTC to have been forged.
The piercing of the veil of corporate fiction is
frowned upon and can only be done if it has
been clearly established that the separate and
distinct personality of the corporation is used
to justify a wrong, protect fraud, or perpetrate a
deception. Hence, any application of the
doctrine of piercing the corporate veil should
be done with caution. A court should be mindful
of the milieu where it is to be applied. It must
be certain that the corporate fiction was
misused to such an extent that injustice, fraud,
or crime was committed against another, in
disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot
be presumed. Otherwise, an injustice that was
never unintended may result from an
erroneous application.
[Heirs of Fe Tan Uy (Represented by her heir,
Manling Uy Lim) vs. International Exchange
Bank/Goldkey Development Corporation vs.
International Exchange Bank, G.R. No.
166282/G.R. No. 166283, February 13, 2013.]
In relation to Question Number 5, can the
corporation,
whose
property
was
mortgaged to secure the loans of
Corporation X, be held liable for the said
loans? Note that the two corporations are
owned by the same family, sharing the same
office space, with their assets being comingled. The President of Corporation X is
also the Chief Operating Officer of the other
corporation involved.
Yes. Under a variation of the doctrine of
piercing the veil of corporate fiction, when 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 parties, disregard the legal fiction
that two corporations are distinct entities and
treat them as identical or one and the same.
Starr Weigand 2016

While the conditions for the disregard of the

juridical entity may vary, the following are
some probative factors of identity that will
justify the application of the doctrine of
piercing the corporate veil, as laid down in
Concept Builders, Inc. v NLRC:
(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, and
(4) Methods of conducting the business.
In this case, both corporations are family
corporations, who share the same office, with
the same set of officers, and their assets are comingled. Likewise, when the President of
Corporation X went missing, the other
corporation ceased its operations. Based on
these, it is apparent that the said corporation
was merely an adjunct of Corporation X and, as
such, the legal fiction that it has a separate
personality from that of Hammer should be
brushed aside as they are, undeniably, one and
the same. [Ibid.]
11. Spouses F entered into a contract to
sell with G Corp, covering a parcel of
land, in G Corps subdivision. Spouses
F full paid the purchase price, but G
Corp. failed to execute the deed of
sale and deliver the title to the
spouses. Thus, the spouses filed an
action for specific performance or
rescission against G Corp and its
Board of Directors. Can the Board of
Directors be held liable?
No. There is no basis to hold the members of
the board solidarily liable with G Corp for the
payment of damages in favor of Sps. F since it
was not shown that they acted maliciously or
dealt with the latter in bad faith. Settled 1s the
rule that in the absence of malice and bad faith,
as in this case, officers of the corporation
cannot be made personally liable for liabilities
of the corporation which, by legal fiction, has a
personality separate and distinct from its
officers, stockholders, and members. [Gotesco
2013 & 2014 Q and A|Commercial Law

- 15 -

Properties, Inc. v. SpousesFajardo, G.R. No.

201167, 27 February 2013]
12. DBP and PNB foreclosed mortgages
on the properties of MMIC, a
corporation. As a result, they
acquired substantially all the assets
of NMIC and resumed its business
operations. NMIC engaged the
services of H Corporation for which it
paid the latter. But, NMIC still had an
unpaid balance of around 8 million
pesos. Can DBP and PNB be held
liable for such amount?
No. A corporation is an artificial entity created
by operation of law. It possesses the right of
succession and such powers, attributes, and
properties expressly authorized by law or
incident to its existence. It has a personality
separate and distinct from that of its
stockholders and from that of other
corporations to which it may be connected. As a
consequence of its status as a distinct legal
entity and as a result of a conscious policy
decision to promote capital formation, a
corporation incurs its own liabilities and is
legally responsible for payment of its
obligations. In other words, by virtue of the
separate juridical personality of a corporation,
the corporate debt or credit is not the debt or
credit of the stockholder. This protection from
liability for shareholders is the principle of
limited liability.
Equally well-settled is the principle that the
corporate mask may be removed or the
corporate veil pierced when the corporation is
just an alter ego of a person or of another
corporation. For reasons of public policy and in
the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed
against third persons.
However, the rule is that a court should be
careful in assessing the milieu where the
doctrine of the corporate veil may be applied.
Otherwise an injustice, although unintended,
may
result
from
its
erroneous
Starr Weigand 2016

application. Thus, cutting through the corporate

cover requires an approach characterized by
due care and caution:
Hence, any application of the doctrine of
piercing the corporate veil should be done with
caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that
the corporate fiction was misused to such an
extent that injustice, fraud, or crime was
committed against another, in disregard of its
rights. The wrongdoing must be clearly and
convincingly established; it cannot be
presumed.
Sarona v. National Labor Relations Commission
has defined the scope of application of the
doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil
applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation; 2) fraud cases
or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3)
alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business
conduit of a person, or where the corporation is
so organized and controlled and its affairs are
so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
In this connection, case law lays down a threepronged test to determine the application of the
alter ego theory, which is also known as the
instrumentality theory, namely:
(1) Control, not mere 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;
(2) Such control must have been used by
the defendant to commit fraud or wrong,
2013 & 2014 Q and A|Commercial Law

- 16 -

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 have proximately caused the
injury or unjust loss complained of.
The first prong is the "instrumentality" or
"control" test. This test requires that the
subsidiary be completely under the control and
domination of the parent. It examines the
parent corporations relationship with the
subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and
its affairs are so conducted as to make it a mere
instrumentality or agent of the parent
corporation such that its separate existence as a
distinct corporate entity will be ignored. It
seeks to establish whether the subsidiary
corporation has no autonomy and the parent
corporation, though acting through the
subsidiary in form and appearance, "is
operating the business directly for itself."
The second prong is the "fraud" test. This test
requires that the parent corporations conduct
in using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the
relationship of the plaintiff to the
corporation. It recognizes that piercing is
appropriate only if the parent corporation uses
the subsidiary in a way that harms the plaintiff
creditor. As such, it requires a showing of "an
element
of
injustice
or
fundamental
unfairness."
The third prong is the "harm" test. This test
requires the plaintiff to show that the
defendants control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection
between the fraudulent conduct committed
through the instrumentality of the subsidiary
and the injury suffered or the damage incurred
by the plaintiff should be established. The
plaintiff must prove that, unless the corporate
veil is pierced, it will have been treated unjustly
by the defendants exercise of control and
Starr Weigand 2016

improper use of the corporate form and,

thereby, suffer damages.
To summarize, piercing the corporate veil
based on the alter ego theory requires the
concurrence of three elements: control of the
corporation by the stockholder or parent
corporation, fraud or fundamental unfairness
imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or
unfair act of the corporation. The absence of
any of these elements prevents piercing the
corporate veil.
In applying the alter ego doctrine, the courts
are concerned with reality and not form, with
how the corporation operated and the
individual defendants relationship to that
operation. With respect to the control element,
it refers not to paper or formal control by
majority or even complete stock control but
actual control which amounts to "such
domination of finances, policies and practices
that the controlled corporation has, so to speak,
no separate mind, will or existence of its own,
and is but a conduit for its principal." In
addition, the control must be shown to have
been exercised at the time the acts complained
of took place.
While ownership by one corporation of all or a
great majority of stocks of another corporation
and their interlocking directorates may serve as
indicia of control, by themselves and without
more, however, these circumstances are
insufficient to establish an alter ego
relationship or connection between DBP and
PNB on the one hand and NMIC on the other
hand, that will justify the puncturing of the
latters corporate cover. "Mere ownership by a
single stockholder or by another corporation of
all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for
disregarding
the
separate
corporate
personality." Likewise, the "existence of
interlocking directors, corporate officers and
shareholders is not enough justification to
pierce the veil of corporate fiction in the
absence of fraud or other public policy
considerations." [Phil. National Bank vs. Hydro
2013 & 2014 Q and A|Commercial Law

- 17 -

Resources Contractors Corp., .G.R. Nos. 167530,

167561, 16760311. March 13, 2013]

Yes. While the Corporation Code allows the

transfer of all or substantially all of the assets of
a corporation, the transfer should not prejudice
the creditors of the assignor corporation. Under
the business-enterprise transfer, the transferee
has consequently inherited the liabilities of M
Corp. because they acquired all the assets of the
latter corporation. The continuity of M Corp.s
land developments is now in the hands of the Y
Corp., with all its assets and liabilities. There is
absolutely no certainty that Y can still claim its
refund from M Corp. with the latter losing all its
assets. To allow an assignor to transfer all its
business, properties and assets without the
consent of its creditors will place the assignors
assets beyond the reach of its creditors. Thus,
the only way for Y to recover his money would
be to assert his claim against the Y Corp. as
transferees of the assets. Jurisprudence has
held that in a business-enterprise transfer, the
transferee is liable for the debts and liabilities
of his transferor arising from the business
enterprise conveyed. Many of the application of
the business-enterprise transfer have been
related by the Court to the application of the
piercing doctrine. Fraud is not an essential
element for the application of the businessenterprise transfer.

corporation assumes the debts and liabilities of

the transferor corporation because it is merely
a continuation of the latters business. A
cursory reading of the exception shows that it
does not require the existence of fraud against
the creditors before it takes full force and effect.
Section 40 of the Corporation Code refers to the
sale, lease, exchange or disposition of all or
substantially all of the corporation's assets,
including its goodwill. The sale under this
provision does not contemplate an ordinary
sale of all corporate assets; the transfer must be
of such degree that the transferor corporation
is rendered incapable of continuing its business
or its corporate purpose. Section 40 suitably
reflects the business-enterprise transfer under
the exception of the Nell Doctrine because the
purchasing
or
transferee
corporation
necessarily continued the business of the
selling or transferor corporation. Given that the
transferee corporation acquired not only the
assets but also the business of the transferor
corporation, then the liabilities of the latter are
inevitably assigned to the former. It must be
clarified, however, that not every transfer of the
entire corporate assets would qualify under
Section 40. It does not apply (1) if the sale of
the entire property and assets is necessary in
the usual and regular course of business of
corporation, or (2) if the proceeds of the sale or
other disposition of such property and assets
will be appropriated for the conduct of its
remaining business. Thus, the litmus test to
determine the applicability of Section 40 would
be the capacity of the corporation to continue
its business after the sale of all or substantially
all its assets. [Y-I Leisure Philippines, Inc., Yats
International Ltd. and Y-I Clubs and Resorts, Inc.
Vs. Yame Yu, G.R. No. 207161. September 8,
2015]

The Nell Doctrine states the general rule that

the transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. If any of the abovecited exceptions are present, then the
transferee corporation shall assume the
liabilities of the transferor. The exception of the
Nell doctrine, which finds its legal basis under
Section 40, provides that the transferee

14. M filed a complaint against the

Cuencas for collection of sum of
money, for which the court issued a
writ of preliminary attachment, with
M posting a bond issued by S
Insurance. The properties of A C Inc.
were levied upon in the execution of
the writ. The Cuencas sought to quash
the writ alleging that (1) the action

13. Y bought several country club shares

from M Corp. but the latter failed to
develop the supposed project. Y then
demanded return of his payment for
the shares, but M Corp. could no
longer do so since it had transferred
all its assets to Y Corp. Can Y Corp.
now be held liable by Y?

Starr Weigand 2016

2013 & 2014 Q and A|Commercial Law

- 18 -

involved intra-corporate matters that

were within the original and
exclusive jurisdiction of the Securities
and Exchange Commission (SEC); and
(2) there was another action pending
in the SEC as well as a criminal
complaint in the Office of the City
Prosecutor of Paraaque City. This
was denied by the CA. Thus, the
Cuencas filed an action for damages
against the S Insurance as a result of
the wrongful attachment. Can the
action prosper?
No. The complaint of the Cuencas lacks a cause
of action. It is true that the Cuencas could bring
in behalf of AC Inc. a proper action to recover
damages resulting from the attachment,
however, such action would be one directly
brought in the name of the corporation. In the
instant case, the Cuencas presented the claim in
their own names. The Cuencas were only
stockholders of AC Inc., which had a personality
distinct and separate from that of any or all of
them. The damages occasioned to the
properties by the levy on attachment, wrongful
or not, prejudiced AC Inc., not them. As such,
only AC Inc. had the right under the substantive
law to claim and recover such damages. This
right could not also be asserted by the Cuencas
unless they did so in the name of the
corporation itself. But that did not happen
herein, because AC Inc. was not even joined in
the action either as an original party or as an
intervenor. The Cuencas were clearly not
vested with any direct interest in the personal
properties coming under the levy on
attachment by virtue alone of their being
stockholders in AC Inc. Their stockholdings
represented only their proportionate or aliquot
interest in the properties of the corporation,
but did not vest in them any legal right or title
to any specific properties of the corporation.
Without doubt, AC Inc. remained the owner as a
distinct legal person. [Stronghold Insurance v.
Cuenca, G.R. No. 173297, March 6, 2013]
15. SMP Corp paid local business taxes to
the city of Manila, but they wrote a
letter to the latter claiming a refund
Starr Weigand 2016

of the amount paid on the ground of

double taxation. The letter was not
acted upon, thus SMP filed and action
in the RTC for refund of taxes. The
verification and certification of forum
shopping attached to the petition
filed by SMP was signed by B, but
there was no secretarys certificate to
show her authority to file the action
on behalf of SMP. Can B file the case
on behalf of SMP?
No. The power of a corporation to sue and be
sued is lodged in the board of directors, which
exercises its corporate powers. It necessarily
follows that an individual corporate officer
cannot solely exercise any corporate power
pertaining to the corporation without authority
from the board of directors. Thus, physical acts
of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a specific act of the
board of directors. Consequently, a verification
signed without an authority from the board of
directors is defective. However, the act of B in
filing the action may be ratified by a subsequent
board resolution passed by the corporation.
[Swedish Match Philippines v. Treasurer of the
City of Manila, G.R. No. 181277, 3 July 2013]
16. H Corp. filed a petition for certiorari
against the Esguerras, but they did
not secure and/or attach a certified
true copy of a board resolution
authorizing any of its officers to file
said petition, but it attached a
secretarys certificate. Should the
case be dismissed?
No. The general rule is that a corporation can
only exercise its powers and transact its
business through its board of directors and
through its officers and agents when authorized
by a board resolution or its bylaws. The power
of a corporation to sue and be sued is exercised
by the board of directors. The physical acts of
the corporation, like the signing of documents,
can be performed only by natural persons duly
authorized for the purpose by corporate bylaws
2013 & 2014 Q and A|Commercial Law

- 19 -

or by a specific act of the board. Absent the said

board resolution, a petition may not be given
due course. H Corp attached all the necessary
documents for the filing of a petition for
certiorari before the court. While the board
resolution may not have been attached, H Corp
complied just the same when it attached the
Secretarys Certificate, thus proving that its
representative had the authority from the
board of directors to appoint the counsel to
represent them in the case. [Esguerra v. Holcim
Philippines, Inc., G.R. No. 182571, 2 September
2013
17. SMBI is a family owned and run
corporation. One of the family
members agreed to loan money to
SMBI and other corporations owned
by the same family to settle the
corporate obligations. A check was
thus issued in the name of the family
members. SMBI thereafter increased
its capital stock. Thereafter, a series
of events transpired, which lead one
of the stockholders to file a derivative
suit, claiming he has been illegally
excluded from management and
participation in the business of SMBI
and that some of the family members
refuse to settle their obligations with
the corporation. Is the complaint a
derivative suit?
No. A derivative suit is an action brought by a
stockholder on behalf of the corporation to
enforce
corporate
rights
against
the
corporations directors, officers or other
insiders. Under Sections 23 and 36 of the
Corporation Code, the directors or officers, as
provided under the by-laws, have the right to
decide whether or not a corporation should sue.
Since these directors or officers will never be
willing to sue themselves, or impugn their
wrongful or fraudulent decisions, stockholders
are permitted by law to bring an action in the
name of the corporation to hold these directors
and officers accountable. In derivative suits, the
real party in interest is the corporation, while
the stockholder is a mere nominal party.

Starr Weigand 2016

The Court, in Yu v. Yukayguan, explained:

The Court has recognized that a stockholders
right to institute a derivative suit is not based
on any express provision of the Corporation
Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws
make corporate directors or officers liable for
damages suffered by the corporation and its
stockholders for violation of their fiduciary
duties. Hence, a stockholder may sue for
mismanagement, waste or dissipation of
corporate assets because of a special injury to
him for which he is otherwise without redress.
In effect, the suit is an action for specific
performance of an obligation owed by the
corporation to the stockholders to assist its
rights of action when the corporation has been
put in default by the wrongful refusal of the
directors or management to make suitable
measures for its protection. The basis of a
stockholders suit is always one in equity.
However, it cannot prosper without first
complying with the legal requisites for its
institution.
Section 1, Rule 8 of the Interim Rules imposes
the following requirements for derivative suits:
(1) The person filing the suit must be a
stockholder or member at the time the
acts or transactions subject of the action
occurred and the time the action was
filed;
(2) He must have 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.
Applying the foregoing, the Complaint is not a
derivative suit. The Complaint failed to show
how the acts of some of the family members
2013 & 2014 Q and A|Commercial Law

- 20 -

resulted in any detriment to SMBI. The loan was

not a corporate obligation, but a personal debt.
The check was issued to specific persons and
not SMBI. The proceeds of the loan were used
for payment of the obligations of the other
corporations owned by the family as well as the
purchase of real properties for the brothers.
SMBI was never named as a co-debtor or
guarantor of the loan. Both loan instruments
were executed by two of the family members in
their personal capacity, and not in their
capacity as directors or officers of SMBI. Thus,
SMBI is under no legal obligation to satisfy the
obligation.
The fact that the family members attempted to
constitute a mortgage over "their" share in a
corporate asset cannot affect SMBI. The Civil
Code provides that in order for a mortgage to
be valid, the mortgagor must be the "absolute
owner of the thing x x x mortgaged." Corporate
assets may be mortgaged by authorized
directors or officers on behalf of the
corporation as owner, "as the transaction of the
lawful business of the corporation may
reasonably and necessarily require." However,
the wording of the Mortgage reveals that it was
signed by two of the family members in their
personal capacity as the "owners" of a proindiviso share in SMBIs land and not on behalf
of SMBI. [Juanito Ang, for and in behalf of
Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto
and Rachel Ang, G.R. No. 201675, June 19, 2013]
18. FEGDI is a stock corporation involved
in developing golf courses, while FELI
is
engaged
in
real
estate
development. FEGDI obtained shares
of stock in one of FELIs projects as a
result of its financing support and
construction efforts. It sold some of
its shares to RSACC, which the latter
later sold to VST. However, the shares
remained under the name of FEGDI.
Can VST be considered as owner of
the shares of stock?
No. In a sale of shares of stock, physical delivery
of a stock certificate is one of the essential
requisites for the transfer of ownership of the
Starr Weigand 2016

stocks purchased. Here, FEGDI clearly failed to

deliver the stock certificates, representing the
shares of stock purchased by Vertex, within a
reasonable time from the point the shares
should have been delivered. This was a
substantial breach of their contract that entitles
VST the right to rescind the sale under Article
1191 of the Civil Code. It is not entirely correct
to say that a sale had already been
consummated as VST already enjoyed the rights
a shareholder can exercise. The enjoyment of
these rights cannot suffice where the law, by its
express terms, requires a specific form to
transfer ownership. [Fil-Estate Gold and
Development, Inc., et al. v. Vertex Sales and
Trading, Inc., G.R. No. 202079, June 10, 2013]
19. AP is a domestic corporation with G
as its President, and C, the latters
wife, as its General Manager. AT is
also a Domestic corporation, with T
as its President and U as its treasurer.
AT purchased notebooks from AP on
credit. Loans were also obtained by
AT from AP upon the representation
of T and U. To pay for its purchases,
AT gave AP 82 postdated checks
signed T and U. the check were
dishonored for having been drawn
against
insufficient
funds.
A
complaint for collection of sum of
money was filed AT, U, T, and its other
officers. Can AT be held liable?
Yes. The acts of T and U clearly bound the
corporation, and thus, it could be made liable
therefor under the doctrine of apparent
authority. The doctrine of apparent authority
provides that a corporation will be estopped
from denying the agents authority if it
knowingly permits one of its officers or any
other agent to act within the scope of an
apparent authority, and it holds him out to the
public as possessing the power to do those acts.
The doctrine of apparent authority does not
apply if the principal did not commit any acts
or conduct which a third party knew and relied
upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agents

2013 & 2014 Q and A|Commercial Law

- 21 -

acts or conduct must have produced a change of

position to the third partys detriment.
Under Section 23 of the Corporation Code, the
power and responsibility to decide whether the
corporation should enter into a contract that
will bind the corporation is lodged in the board,
subject to the articles of incorporation, bylaws,
or relevant provisions of law. However, just as a
natural person who may authorize another to
do certain acts for and on his behalf, the board
of directors may validly delegate some of its
functions and powers to officers, committees or
agents. The authority of such individuals to
bind the corporation is generally derived from
law, corporate bylaws or authorization from
the board, either expressly or impliedly by
habit, custom or acquiescence in the general
course of business, viz.:
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that [the] authority to do
so has been conferred upon him, and this
includes powers as, in the usual course of the
particular business, are incidental to, or may be
implied from, the powers intentionally
conferred, powers added by custom and usage,
as usually pertaining to the particular officer or
agent, and such apparent powers as the
corporation has caused person dealing with the
officer or agent to believe that it has conferred.
[A]pparent authority is derived not merely
from practice. Its existence may be ascertained
through (1) the general manner in which the
corporation holds out an officer or agent as
having the power to act or, in other words the
apparent authority to act in general, with which
it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or
constructive knowledge thereof, within or
beyond the scope of his ordinary powers. It
requires presentation of evidence of similar
act(s) executed either in its favor or in favor of
other parties. It is not the quantity of similar
acts which establishes apparent authority, but
the vesting of a corporate officer with the
power to bind the corporation.

Starr Weigand 2016

In Peoples Aircargo and Warehousing Co., Inc. v.

Court of Appeals, the Court ruled that the
doctrine of apparent authority is applied when
the petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract
without first securing board approval. Despite
such lack of board approval, petitioner did not
object to or repudiate said contract, thus
clothing its president with the power to bind
the corporation. Inasmuch as a corporate
president is often given general supervision
and control over corporate operations, the
strict rule that said officer has no inherent
power to act for the corporation is slowly giving
way to the realization that such officer has
certain limited powers in the transaction of the
usual and ordinary business of the
corporation.
In the absence of a charter or bylaw provision
to the contrary, the president is presumed to
have the authority to act within the domain of
the general objectives of its business and within
the scope of his or her usual duties. [Advance
Paper Corporation and George Haw, in his
capacity as President of Advance Paper
Corporation v. Arma Traders Corporation,
Manuel Ting, et al., G.R. No. 176897, December
11, 2013]
20. P, the OIC of an Aircraft Hangar
executed
a
Memorandum
of
Agreement with Capt. A, the president
of a company, whereby for a period of
4 years the hangar space was allowed
to be used by the company
exclusively
for
the
company
helicopter/aircraft. The said hangar
space was previously leased to LA
Corp. which assigned the same to P.
An issue arose when P insisted that
Capt. A was using the hangar space
for purposes other than for the
company
aircraft/helicopter,
resulting in the company filing a
complaint in court against P. P insists
that the case filed by the company
should be dismissed for failure of the
company to satisfy the essential
requisites of being a party to an
2013 & 2014 Q and A|Commercial Law

- 22 -

action, i.e., legal personality, legal

capacity to sue or be sued, and real
interest in the subject matter of the
action. Decide.
Section 21 of the Corporation Code explicitly
provides that one who assumes an obligation to
an ostensible corporation, as such, cannot resist
performance thereof on the ground that there
was in fact no corporation. Clearly, P is bound
by his obligation under the MOA not only on
estoppel but by express provision of law. [Paz v.
New International Environmental Universality,
G.R. No. 203993, April 20, 2015]
21. L filed a complaint for recovery of
ownership of land against R, alleging
that the latter encroached on a
quarter of her property by arbitrarily
extending his concrete fence beyond
the correct limits. R alleged that this
was the fault of OLFI, a corporation,
after the latter trimmed his property
for
the
construction
of
the
subdivision road. He thus filed a third
party complaint against OLFI. Acting
on the third party complaint, the
court ordered OLFI to reimburse R,
and issued a writ of execution. The
sheriff then proceeded to garnish the
accounts of the general manager of
OLFI in UCPB. Can the funds of the
general manager be garnished to
satisfy the judgment against OLFI?
No. In order to hold the general manager
personally liable alone for the debts of the
corporation and thus pierce the veil of
corporate fiction, it is required that the bad
faith of the officer must first be established
clearly and convincingly. However, there is
nothing to indicate any wrongdoing of the
general manager. Necessarily, it would be
unjust to hold the latter personally liable. Any
piercing of the corporate veil has to be done
with caution. There is no evidence that would
prove OLFI's status as a dummy corporation. A
court should be mindful of the milieu where it
is to be applied. It must be certain that the
corporate fiction was misused to such an extent
Starr Weigand 2016

that injustice, fraud, or crime was committed

against another, in disregard of rights. The
wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise,
an injustice that was never unintended may
result from an erroneous application. [Roxas v.
Our Ladys Foundation, Inc., G.R. No. 182378, 6
March 2013]
22. P granted loans to NSI. On the part of
NSI, the loan agreement between the
two parties was signed by its
president, N. Payments were made by
N, however, NSI still defaulted on its
loan obligation to P, for which the
latter filed a collection suit against N
and NSI. Can N be held jointly and
severally liable for the loan obligation
of NSI?
No. The rule is settled that a corporation is
vested by law with a personality separate and
distinct from the persons composing it.
Following this principle, a stockholder,
generally, is not answerable for the acts or
liabilities of the corporation, and vice versa. The
obligations incurred by the corporate officers,
or other persons acting as corporate agents, are
the direct accountabilities of the corporation
they represent, and not theirs. A director,
officer or employee of a corporation is
generally not held personally liable for
obligations incurred by the corporation9 and
while there may be instances where solidary
liabilities may arise, these circumstances are
exceptional.
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stocks of the corporation is not, by itself,
a sufficient ground for disregarding the
separate corporate personality. Other than
mere
ownership
of
capital
stocks,
circumstances showing that the corporation is
being used to commit fraud or proof of
existence of absolute control over the
corporation have to be proven. In short, before
the corporate fiction can be disregarded, alterego elements must first be sufficiently
established. The mere fact that it was N who, in
2013 & 2014 Q and A|Commercial Law

- 23 -

behalf of the corporation, signed the loan

agreement is not sufficient to prove that he
exercised control over the corporations
finances. Neither the absence of a board
resolution authorizing him to contract the loan
nor NSIs failure to object thereto supports this
conclusion. These may be indicators that,
among others, may point the proof required to
justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level
of proof required to support the desired
conclusion. It should be noted in this regard
that while N was the signatory of the loan and
the money was delivered to him, the proceeds
of the loan were unquestionably intended for
NSIs proposed business plan. There is no
sufficient evidence in the instant case to justify
a piercing, in the absence of proof that the
business plan was a fraudulent scheme geared
to secure funds from the respondent for the
petitioners undisclosed goals. [Saverio v. Puyat,
G.R. No. 186433, November 27, 2013]
23. PTA is a GOCC which administers
tourism zones. It allowed PTC
Cooperative to operate a restaurant
business in one of its main buildings,
but in 1993, its CALABARZON area
manager notified the latter to cease
its operations as a result of the
rehabilitation of its tourism complex.
Thus, PTC Cooperative filed an action
in court to stop PTA from evicting and
preventing it from carrying out the
restaurant business in the main
building of PTA. Can the area
manager be held liable?
No. As a general rule the officer cannot be held
personally liable with the corporation, whether
civilly or otherwise, for the consequences of his
acts, if acted for and in behalf of the
corporation, within the scope of his authority
and in good faith. [Rodolfo Laborte, et al. v.
Pagsanjan Tourism Consumers Cooperative, et
al., G.R. No. 183860, January 15, 2014]
24. C was a salesman of A, engaged in the
selling of broadcasting equipment.
When A created B Corp. C was made
Starr Weigand 2016

an Assistant Vice President (AVP) for

sales, while AA was then appointed as
VP for sales. C accused AA of several
irregularities which were made the
subject of a memo sent to A. Allegedly,
C was asked by A to tender his
resignation, to which he refused. He
received a memo, signed by A,
charging
him
with
serious
misconduct and willful breach of
trust. He was later on barred from
entering company premises, and
allegedly suspended. Thus, he filed a
complaint for illegal dismissal before
the NLRC against B Corp. and A. Does
the labor arbiter of the NLRC have
jurisdiction?
Yes. C, although an officer of B Corp. for being
its AVP for Sales, was not a "corporate officer"
as the term is defined by law. Corporate
officers in the context of Presidential Decree
No. 902-A are those officers of the corporation
who are given that character by the
Corporation Code or by the corporations bylaws. There are three specific officers whom a
corporation must have under Section 25 of the
Corporation Code. These are the president,
secretary and the treasurer. The number of
officers is not limited to these three. A
corporation may have such other officers as
may be provided for by its by-laws like, but not
limited to, the vice-president, cashier, auditor
or general manager. The number of corporate
officers is thus limited by law and by the
corporations by-laws." It has been held that an
"office" is created by the charter of the
corporation and the officer is elected by the
directors and stockholders. On the other hand,
an "employee" usually occupies no office and
generally is employed not by action of the
directors or stockholders but by the managing
officer of the corporation who also determines
the compensation to be paid to such employee.
As may be deduced from the foregoing, there
are two circumstances which must concur in
order for an individual to be considered a
corporate officer, as against an ordinary
employee or officer, namely: (1) the creation of
2013 & 2014 Q and A|Commercial Law

- 24 -

the position is under the corporations charter

or by-laws; and (2) the election of the officer is
by the directors or stockholders. It is only when
the officer claiming to have been illegally
dismissed is classified as such corporate officer
that the issue is deemed an intra-corporate
dispute which falls within the jurisdiction of the
trial courts.
Under B Corp.s By-laws only provide the
following as corporate officers: the President,
Vice-President, Treasurer and Secretary.
Although a blanket authority provides for the
Boards appointment of such other officers as it
may deem necessary and proper, the
respondents failed to sufficiently establish that
the position of AVP for Sales was created by
virtue of an act of B Corps board, and that C
was specifically elected or appointed to such
position by the directors. No board resolutions
to establish such facts form part of the case
records.
Also, an enabling clause in a corporations bylaws empowering its board of directors to
create additional officers, even with the
subsequent passage of a board resolution to
that effect, cannot make such position a
corporate office. The board of directors has no
power to create other corporate offices without
first amending the corporate by-laws so as to
include therein the newly created corporate
office. "To allow the creation of a corporate
officer position by a simple inclusion in the
corporate by-laws of an enabling clause
empowering the board of directors to do so can
result in the circumvention of that
constitutionally well-protected right [of every
employee to security of tenure]."
Likewise, the mere fact that C was a stockholder
of B Corp. at the time of the cases filing did not
necessarily make the action an intra- corporate
controversy. "Not all conflicts between the
stockholders and the corporation are classified
as intra-corporate. There are other facts to
consider in determining whether the dispute
involves corporate matters as to consider them
as
intra-corporate
controversies."
In
determining the existence of an intra-corporate
Starr Weigand 2016

dispute, the status or relationship of the parties

and the nature of the question that is the
subject of the controversy must be taken into
account.
An intra-corporate controversy, which falls
within the jurisdiction of regular courts, has
been regarded in its broad sense to pertain to
disputes that involve any of the following
relationships: (1) between the corporation,
partnership or association and the public; (2)
between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned; (3) between the corporation,
partnership or association and its stockholders,
partners, members or officers; and (4) among
the stockholders, partners or associates,
themselves.
Settled jurisprudence, however, qualifies that
when the dispute involves a charge of illegal
dismissal, the action may fall under the
jurisdiction of the LAs upon whose jurisdiction,
as a rule, falls termination disputes and claims
for damages arising from employer-employee
relations as provided in Article 217 of the Labor
Code.
Considering that the pending dispute
particularly relates to Cs rights and obligations
as a regular officer of B Corp., instead of as a
stockholder of the corporation, the controversy
cannot be deemed intra-corporate. This is
consistent with the "controversy test", which
provides that the incidents of that relationship
must also be considered for the purpose of
ascertaining whether the controversy itself is
intra-corporate. The controversy must not only
be rooted in the existence of an intra-corporate
relationship, but must as well pertain to the
enforcement of the parties correlative rights
and obligations under the Corporation Code
and the internal and intra-corporate regulatory
rules of the corporation. If the relationship and
its incidents are merely incidental to the
controversy or if there will still be conflict even
if the relationship does not exist, then no intracorporate controversy exists. [Raul C. Cosare v.

2013 & 2014 Q and A|Commercial Law

- 25 -

Broadcom Asia, Inc., et al., G.R. No. 201298,

February 5, 2014]
25. The janitors and their supervisors of
the maintenance department of PCCr,
a non-stock educational institution,
were dismissed from employment as
a result of the termination of the
contract PCCr had with their agency.
The contract was terminated as a
result of the discovery of the
revocation of the certificate of
incorporation of the agency. The said
dismissed
employees
executed
quitclaims and waivers in favor of the
agency, which was already dissolved.
Can the janitors and supervisors hold
its agency liable even if it had already
been dissolved? Are the quitclaims
and waivers valid even if executed 6
years after dissolution?
Yes. The revocation does not result in the
termination of its liabilities. Section 122 of the
Corporation Code provides for a three-year
winding up period for a corporation whose
charter is annulled by forfeiture or otherwise to
continue as a body corporate for the purpose,
among others, of settling and closing its affairs.
Even if said documents six (6) years after the
dissolution, the same are still valid and binding
upon the parties and the dissolution will not
terminate the liabilities incurred by the
dissolved corporation pursuant to Sections 122
and 145 of the Corporation Code. A corporation
is allowed to settle and close its affairs even
after the winding up period of three (3) years.
Section 145 of the Corporation Code clearly
provides that "no right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers, nor
any liability incurred by any such corporation,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by
the subsequent dissolution of said corporation."
Even if no trustee is appointed or designated
during the three-year period of the liquidation
of the corporation, it has been held that the
Starr Weigand 2016

board of directors may be permitted to

complete the corporate liquidation by
continuing as "trustees" by legal implication.
[Vigilla v. College of Criminology, G.R. No.
200094, June 10, 2013]
26. What can be done in case the board
refuses to recognize the legitimacy of
newly elected board members?
An outgoing President or the Board which
refuses to recognize the legitimacy of those
newly-elected and who continue to exercise
their functions may be the subjects of an intracorporate case filed with the regular courts.
[SEC OGC Opinion No. 14-09, 2 June 2014]
27. What constitutes a quorum for
purposes of election of directors or
trustees of a corporation?
Section 24 of the Corporation requires the
presence in person or by proxy of the owners
of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the
members entitled to vote. This section governs
since it is the provision which is specifically
applicable to quorum of election of directors or
trustees. The phrase entitled to vote should
be interpreted to apply to both stock and nonstock corporations. This does not include
shares under litigation. However, not all shares
under litigation cannot vote. For example, stock
owned by the estate of a decedent may be voted
by the estates executor or administrator. If
there is no executor or administrator, then the
shares of a decedent cannot be voted. Also, if
there is a dispute as to who owns the shares,
and thus, who has the right to vote such shares,
then the general rule is that the registered
owner of the shares of the corporation
exercises the right and the privilege of voting.
[SEC-OGC Opinion No. 13-11, 20 November 2013]
28. Does cumulative voting apply to
election of trustees of a non-stock
condominium corporation?
The general rule for the election of trustees of a
non-stock corporation is that members may
2013 & 2014 Q and A|Commercial Law

- 26 -

cast as many votes as there are trustees to be

elected but may cast only one vote per
candidate. By way of exception, a non-stock
corporation may adopt other modes of casting
votes, including, but not limited to, cumulative
voting, if the same is authorized in its articles or
by-laws, or the master deed or the declaration
of restrictions (in case of a non-stock
condominium corporation). otherwise, the
general rule that members may not cast more
than one vote for any candidate will apply. [SEC
OGC Opinion No. 14-10, 2 June 2014]
29. What is cumulative voting?
Cumulative voting is a mode of casting votes
during the elections of directors in a stock
corporation. this is in line with Section 24 of the
Corporation Code, which provides that every
stockholder entitled to vote shall have the right
to vote in person or by proxy the number of
shares of stock standing, at the time fixed in the
by-laws, in his own name on the stock books of
the corporation, or where the by-laws are
silent, at the time of the election; and said
stockholder may vote such number of shares
for as many persons as there are directors to be
elected or he may cumulate said shares and
give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal, or he may
distribute them on the same principle among as
many candidates as he shall see fit: Provided,
That the total number of votes cast by him shall
not exceed the number of shares owned by him
as shown in the books of the corporation
multiplied by the whole number of directors to
be elected.
Under this provision, there are two methods of
cumulative voting: Cumulative voting for one
candidate, and cumulative voting by
distribution.
Under the first method, a stockholder is
allowed to concentrate his votes and give one
candidate as many votes as the number of
directors to be elected, multiplied by the
number of his shares shall equal. For example,
supposing a stockholder owns 200 shares and
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there are five directors to be elected, he is

entitled to 1,000 votes, all of which he may cast
in favor of one candidate.
Under the second method, a stockholder may
cumulate his shares by multiplying also the
number of his shares by the number of
directors to be elected, and distribute the same
among as many candidates as he shall see fit.
For example, a stockholder with 100 shares is
entitled to 500 votes if there are five directors
to be elected. He may cast his votes in any
combination desired by him, provided that the
total number of votes cast by him does not
exceed 500, which is the number of shares
owned by him multiplied by the total number of
directors to be elected. [SEC OGC Opinion No.
14-10, 2 June 2014]
30. Can a hold-over director appoint
another director to fill a vacancy
caused by the resignation of another
hold-over director?
No. a vacancy caused by resignation of a holdover director or a trustee cannot be filled by the
vote of the directors or trustees, but rather, by
the vote of the stockholders or members in a
regular or special meeting called for the
purpose, as provided by Section 29 of the
Corporation Code. Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or by
expiration of term, may be filled by majority of
the remaining directors or trustees, if still
constituting a quorum, otherwise, said
vacancies must be filled by the stockholders in
a regular or special meeting called for that
purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the unexpired
term of his predecessor in officer. Thus, in a
situation where directors or trustees are acting
in a hold-over capacity, there are actually
vacancies caused by expiration of terms, and
the resignation of a hold-over director or
trustee cannot change the nature of the
vacancy. [Valle Verde Country Club v. Africa, GR
No. 151696, September 4, 2009; SEC-OGC
Opinion No. 13-11, 20 November 2013]

2013 & 2014 Q and A|Commercial Law

- 27 -

31. Is it required that, in order to be

elected as a member of the board of
trustees of a non-stock corporation,
majority of the votes of the members
be obtained?
No. While the Corporation Code requires the
presence of at least majority of the members of
the non-stock corporation for the election of its
Board, it does not require such number of votes
for one to be declared elected. under the Code,
the candidates receiving the highest number of
votes shall be declared elected. Thus, for a
candidate to be elected as trustee, such
candidate must be among the group of
candidates who received the highest number of
votes. In case the number of candidates does
not exceed the number of seats in the board,
said candidates, provided they received votes,
can be said to have received the highest
number of votes, as the law requires only
plurality of the votes to cast at the election. [SEC
OGC Opinion No. 14-09, 2 June 2014]
32. Can there be an election of members
of the board which is less than the
number of director/trustees as fixed
in the articles of incorporation?
Yes. An election of less number of directors
than the number which the meeting was called
to elect is valid as to those elected. Thus, the
stockholders or members may opt to elect a
number of directors/trustees less than the
number of directors/trustees as fixed in the
articles of incorporation. Such a situation would
merely give rise to vacancy in the board, which
may be later filled up. The power of the board is
not suspended by vacancies in the board unless
the number is reduced below a quorum. This is
so since the board can only transact business if
it reaches a quorum, which is at least a majority
of the number of trustees as fixed in the articles
of incorporation or by-laws, unless the Articles,
by-laws, or Master Deed, in the case of a
condominium corporation provide for a greater
number. For decisions of the board to be valid
as a corporate act, at least a majority of such
majority or quorum has to concur. However, for
the election of officers, the vote of the majority
Starr Weigand 2016

of all the members of the board as fixed in the

articles of incorporation, rather than majority
of the quorum, shall be required. [SEC OGC
Opinion No. 14-09, 2 June 2014]
33. Can notices of stockholders or
directors meetings be sent through
electronic mail (e-mail)? Are the
resolutions passed during such
meetings valid?
Yes. Generally and as a default rule, written
notice of the meeting, sent through regular post
mail, must be given to stockholders/directors/
trustees in relation to the holding of meetings
within the periods provided in the Corporation
Code. However, Section 47(1), (2), and (6)
allows the corporation to provide a different
mode of notice in the by-laws. Thus, since the
Corporation Code requires notice to be sent in
writing, an e-mail notice may be included as a
mode of notice in the by-laws of a corporation,
since an e-mail is considered in writing. In
such a case, the by-laws must, likewise, provide
for mechanics of such sending of notices
through e-mail, including indication, recording,
changing, and recognition of e-mail addresses
of each stockholder/director. However, it must
be stressed that absent such specific provisions
on notice requirements in a corporations
current and standing by-laws, the general or
default rule written notice sent through
regular postal mail applies. Since such notice
is allowed, provided it is in accordance with a
corporations by-laws, then resolutions passed
during such meetings are also valid. [SEC OGC
Opinion No. 13-10, 25 October 2013]
34. APOs by-laws, a non-stock non-profit
corporation,
provide
that
its
members are those that are issued
certificates of ownership, with only
one certificate being issued for one
member. The same by-laws provide
that not more than 500 certificates of
ownership will be issued. However,
its articles of incorporation provide
that members enjoy membership
rights,
upon
payment
of
a
membership fee, upon payment of
2013 & 2014 Q and A|Commercial Law

- 28 -

which, they will be issued a

membership fee certificate, which
shall not be issued in excess of 250,
with only one certificate being issued
per member. What is the authorized
membership of APO, 500 or 250?
The maximum number of members allowed for
APO is 250. The question arose from what
appears to be a conflict between the articles
and the by-laws. When the by-laws of a
corporation are inconsistent with the articles of
incorporation, the latter shall be controlling, as
the by-laws are subordinate to, and cannot
contravene, the corporate charter. As provided
for in the articles of APO, the maximum
permitted
number
of
Certificates
of
Membership issued by it is limited to 250, and
no member shall be issued more than one
certificate. Hence, the maximum number of
members is the maximum number of
certificates that may be issued, that is 250, by
virtue of the articles of incorporation, and not
500 as provided by the by-laws. [SEC OGC
Opinion No. 14-25, 4 September 2014]
35. L was hired as a Director of CBB, who
was later on appointed as managing
director. Alleging failure to pay a
significant portion of his salary, after
closure of CBB and the incorporation
of a new corporation, he filed a
complaint for illegal dismissal against
CBB and its president. Can CBBs
president be held liable?
Yes. There is indubitable link between closure
of CBB and the incorporation of the new
corporation, which was done to avoid payment
of the obligations to L. CBB ceased to exist only
in name; it re-emerged in the person of the new
corporation for an urgent purpose to avoid
payment by CBB of the last two installments of
its monetary obligation to L, as well as its other
financial liabilities. Freed of CBBs liabilities,
especially that owing to L, the new
corporation can continue, as it did continue,
CBBs business. It has long been settled that the
law vests a corporation with a personality
distinct and separate from its stockholders or
Starr Weigand 2016

members. In the same vein, a corporation, by

legal fiction and convenience, is an entity
shielded by a protective mantle and imbued by
law with a character alien to the persons
comprising it. Nonetheless, the shield is not at
all times impenetrable and cannot be extended
to a point beyond its reason and policy.
Circumstances might deny a claim for corporate
personality, under the doctrine of piercing the
veil of corporate fiction.
Piercing the veil of corporate fiction is an
equitable doctrine developed to address
situations where the separate corporate
personality of a corporation is abused or used
for wrongful purposes. Under the doctrine, the
corporate existence may be disregarded where
the entity is formed or used for nonlegitimate
purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction
will be disregarded and the individuals
composing it and the two corporations will be
treated as identical. [Eric Godfrey Stanley
Livesey v. Binswanger Philippines, Inc. and Keith
Elliot, G.R. No. 177493, March 19, 2014]
36. M was hired by S Tech as the head
and manager of one of its units.
Subsequently, N was employed as her
manager. M's hard disk crashed
causing her to lose files, and she
informed N. Ms position was
downgraded twice and later on, she
was informed that her position was
redundant. An action for illegal
dismissal was filed by M against S
Tech and its HR Director. Can the case
prosper against the HR Director?
No. It is hornbook principle that personal
liability of corporate directors, trustees or
officers attaches only when: (a) they assent to a
patently unlawful act of the corporation, or
when they are guilty of bad faith or gross
negligence in directing its affairs, or when
there is a conflict of interest resulting in
damages to the corporation, its stockholders
2013 & 2014 Q and A|Commercial Law

- 29 -

or other persons; (b) they consent to the

issuance of watered down stocks or when,
having knowledge of such issuance, do not
forthwith file with the corporate secretary
their written objection; (c) they agree to hold
themselves personally and solidarily liable with
the corporation; or (d) they are made by
specific provision of law personally answerable
for their corporate action. In the case of M,
there is no evidence to show that the aboveenumerated exceptions when a corporate
officer becomes personally liable for the
obligation of a corporation to this case. [SPI
Technologies, Inc., et al. v. Victoria K. Mapua, G.R.
No. 191154, April 7, 2014]
37. Is the presentation of a stock
certificate a condition sine qua non
for proving one's shareholding in a
corporation?
No. A stock certificate is prima facie evidence
that the holder is a shareholder of the
corporation, but the possession of the
certificate is not the sole determining factor of
ones stock ownership. To establish stock
ownership, other documents may be presented,
such as official receipts of payments of
subscription of shares, certification from the
SEC stating that the company issued shares in
favor of the particular stockholder. [Insigne v.
Abra Valley Colleges, Inc., G.R. No. 204089, July
29, 2015]
38. M Corp employed B, who was later on
dismissed from employment after
having tested positive during a
random drug test conducted in the
office. B thus filed an action for illegal
dismissal against M Corp and E, its
president. Should the case prosper
against E?
No. A corporation has a personality separate
and distinct from its officers and board of
directors who may only be held personally
liable for damages if it is proven that they acted
with malice or bad faith in the dismissal of an
employee. Absent any evidence on record that
petitioner E acted maliciously or in bad faith in
Starr Weigand 2016

effecting the termination of respondent, plus

the apparent lack of allegation in the pleadings
E acted in such manner, the doctrine of
corporate fiction dictates that only petitioner
corporation should be held liable for the illegal
dismissal of respondent. [Mirant (Philippines)
Corporation, et al. v. Joselito A. Caro, G.R. No.
181490, April 23, 2014]
39. A mortgage his property to Bank A,
predecessor of Bank B. However, A
defaulted in his payments, so the
mortgage was foreclosed and Bank B
bought the property. A offered to
repurchase the property, but no
agreement was reached. With A
insisting that a purchase agreement
was reached, he sold portions of the
property after being subdivided, and
offered to pay for the entire property.
Bank B however sold the remaining
portions of the property to another
person, which prompted A to cause
an annotation of his adverse claim on
the title thereof. Thereafter, the
property was sold by Bank B to other
persons, without As knowledge.
Thus, A filed an action for specific
performance against the bank. Was
there
a
perfected
repurchase
agreement between A and Bank B,
even if no acceptance was made by
Bank Bs representatives?
No. No such agreement was reached. Section 23
of the Corporation Code expressly provides that
the corporate powers of all corporations shall
be exercised by the board of directors. Just as a
natural person may authorize another to do
certain acts in his behalf, so may the board of
directors of a corporation validly delegate some
of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a
corporation must be made either by the board
of directors or by a corporate agent duly
authorized by the board. Absent such valid
delegation/authorization, the rule is that the
declarations of an individual director relating to
the affairs of the corporation, but not in the
course of, or connected with, the performance
2013 & 2014 Q and A|Commercial Law

- 30 -

of authorized duties of such director, are held

not binding on the corporation.
Thus, a corporation can only execute its powers
and transact its business through its Board of
Directors and through its officers and agents
when authorized by a board resolution or its
by-laws.
In the absence of conformity or acceptance by
properly authorized bank officers of
petitioners counter-proposal, no perfected
repurchase contract was born out of the talks
or negotiations between petitioner and Bank
Bs representatives. Petitioner therefore had no
legal right to compel respondent bank to accept
the P600,000 being tendered by him as
payment for the supposed balance of
repurchase price. [Heirs of Fausto C. Ignacio vs.
Home Bankers Savings and Trust Co., et al., G.R.
No. 177783. January 23, 2013]
40. TRB sold to BOC its banking business
which was later on approved by the
BSP monetary board. Later, as a
result of previous court litigation,
TRB was order to pay RPN, IBB and
BBC damages, for which a writ of
execution was issued, which included
properties covered by the covered by
the sale to BOC. Can BOC be held
liable for the damages to be paid to
RPN, IBB and BBC?
No. Merger is a re-organization of two or more
corporations that results in their consolidating
into a single corporation, which is one of the
constituent corporations, one disappearing or
dissolving and the other surviving. To put it
another way, merger is the absorption of one or
more corporations by another existing
corporation, which retains its identity and takes
over the rights, privileges, franchises,
properties, claims, liabilities and obligations of
the absorbed corporation(s). The absorbing
corporation continues its existence while the
life or lives of the other corporation(s) is or are
terminated.
The Corporation Code requires the following
steps for merger or consolidation:
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(1) The board of each corporation draws

up a plan of merger or consolidation.
Such plan must include any amendment,
if necessary, to the articles of
incorporation
of
the
surviving
corporation, or in case of consolidation,
all the statements required in the
articles
of
incorporation
of
a
corporation.
(2) Submission of plan to stockholders
or members of each corporation for
approval. A meeting must be called and
at least two (2) weeks notice must be
sent to all stockholders or members,
personally or by registered mail. A
summary of the plan must be attached to
the notice. Vote of two-thirds of the
members
or
of
stockholders
representing two thirds of the
outstanding capital stock will be needed.
Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement,
referred to as the articles of merger o[r]
consolidation, by the corporate officers
of each constituent corporation. These
take the place of the articles of
incorporation of the consolidated
corporation, or amend the articles of
incorporation
of
the
surviving
corporation.
(4) Submission of said articles of merger
or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a
hearing, notifying all corporations
concerned at least two weeks before.
(6) Issuance of certificate of merger or
consolidation.
Indubitably, it is clear that no merger took place
between BOC and TRB as the requirements and
procedures for a merger were absent. A merger
does not become effective upon the mere
agreement of the constituent corporations. All
the requirements specified in the law must be
2013 & 2014 Q and A|Commercial Law

- 31 -

complied with in order for merger to take

effect. Section 79 of the Corporation Code
further provides that the merger shall be
effective only upon the issuance by the
Securities and Exchange Commission (SEC) of a
certificate of merger.
Here, BOC and TRB remained separate
corporations
with
distinct
corporate
personalities. What happened is that TRB sold
and BOC purchased identified recorded assets
of TRB in consideration of BOCs assumption of
identified recorded liabilities of TRB including
booked contingent accounts. In strict sense, no
merger or consolidation took place as the
records do not show any plan or articles of
merger or consolidation. More importantly, the
SEC did not issue any certificate of merger or
consolidation. [Bank of Commerce v. Radio
Philippines Network, Inc., et al., G.R. No. 195615,
April 21, 2014]
41. A special meeting was held by the
stockholders of MSC Corp. where
several directors were removed and
some new directors were elected. The
meeting was called by MSC Corp.s
management committee. Is the
special meeting valid, and can the
elections held during such meeting be
considered as valid?
No. The Corporation Code provides that a
special meeting of the stockholders or members
of a corporation for the purpose of removal of
directors or trustees, or any of them, must be
called by the secretary on order of the
president or on the written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock. In this
case, the meeting was not called in accordance
with the requirements of the Corporation Code.
The board of directors is the directing and
controlling body of the corporation. It is a
creation of the stockholders and derives its
power to control and direct the affairs of the
corporation from them. The board of directors,
in drawing to itself the power of the
corporation, occupies a position of trusteeship
in relation to the stockholders, in the sense that
Starr Weigand 2016

the board should exercise not only care and

diligence, but utmost good faith in the
management of the corporate affairs. A
corporation's board of directors is understood
to be that body which (1) exercises all powers
provided for under the Corporation Code; (2)
conducts all business of the corporation; and
(3) controls and holds all the property of the
corporation. Its members have been
characterized as trustees or directors clothed
with fiduciary character. Relative to the powers
of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it
be gathered that the Oversight Committee is
authorized to step in wherever there is breach
of fiduciary duty and call a special meeting for
the purpose of removing the existing officers
and electing their replacements even if such call
was made upon the request of shareholders.
Needless to say, the MSCOC is neither
empowered by law nor the MSC by-laws to call
a meeting and the subsequent ratification made
by the stockholders did not cure the
substantive infirmity, the defect having set in at
the time the void act was done. The defect goes
into the very authority of the persons who
made the call for the meeting. It is apt to recall
that illegal acts of a corporation which
contemplate the doing of an act which is
contrary to law, morals or public order, or
contravenes some rules of public policy or
public duty, are, like similar transactions
between individuals, void. They cannot serve as
basis for a court action, nor acquire validity by
performance, ratification or estoppel. A
distinction should be made between corporate
acts or contracts . which are illegal and those
which are merely ultra vires. The former
contemplates the doing of an act which are
contrary to law, morals or public policy or
public duty, and are, like similar transactions
between individuals, void: They cannot serve as
basis of a court action nor acquire validity by
performance, ratification or estoppel. Mere
ultra vires acts, on the other hand, or those
which are not illegal or void ab initio, but are
not merely within the scope of the articles of
incorporation, are merely voidable and may
become binding and enforceable when ratified
by the stockholders. In this case, the meeting
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- 32 -

belongs to the category of the latter, that is, it is

void ab initio and cannot be validated. The
elected officers are not de facto officers of the
corporation and they are without colorable
authority to authorize corporate acts. [Bernas v.
Cinco, G.R. No. 163356-57, July 1, 2015]
42. F and S were incorporators of A Corp.,
along with their daughter, A. F and S
died, and thus, A inherited their
shares, resulting in her obtaining
70.82% of A Corp.s shares of stock. A
became the chairman of the board,
but late on died without any children,
but left M, her spouse. M executed an
affidavit of self-adjudication covering
As shares of stock in A Corp. Thinking
that he is already the controlling
stockholder,
M
called
for
a
stockholders meeting. On the other
hand, the current corporate secretary
also called a special stockholders
meeting. During the two meetings,
new board of directors and a new set
of officers were elected, resulting in A
Corp. having two sets of directors and
officers. During the hearing called by
the corporate secretary, only two
board members attended. Which
meeting is valid?
Both meetings are not valid. The meeting called
by the corporate secretary is invalid for lacking
a quorum. On the other hand, the meeting
called by M, is likewise invalid since he cannot
yet be considered a stockholder at the time
considering that the transfer of As shares to
him had not yet been recorded in the corporate
books. M's inheritance of A's shares of stock
does not ipso facto afford him the rights
accorded to such majority ownership of FA
Corp.s shares of stock. Section 63 of the
Corporation Code governs the rule on transfers
of shares of stock. It is stated that no transfer,
shall be valid, except as between the parties,
until the transfer is recorded in the books of the
corporation showing the names of the parties
to the transaction, the date of the transfer, the
number of the certificate or certificates and the
number of shares transferred. erily, all
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transfers of shares of stock must be registered

in the corporate books in order to be binding on
the corporation. Specifically, this refers to the
Stock and Transfer Book. An owner of shares of
stock cannot be accorded the rights pertaining
to a stockholder -such as the right to call for a
meeting and the right to vote, or be voted for -if
his ownership of such shares is not recorded in
the Stock and Transfer Book. This is so even if
he is reflected as a stockholder in the General
Information Sheet (GIS). The contents of the GIS
should not be deemed conclusive as to the
identities of the registered stockholders of the
corporation, as well as their respective
ownership of shares of stock, as the controlling
document should be the corporate books,
specifically the Stock and Transfer Book. [F & S
Velasco Company, Inc., et al. v. Dr. Rommel L.
Madrid, et al., G.R. No. 208844, November 10,
2015]
43. KMBIs by-laws and articles of
incorporation provide that its board
of trustees shall consist of 9 members
to serve for one year. But, due to
resignation of five of them, and the
death of another, only 3 members of
the board remain. Can the remaining
3 members continue the regular
business of the corporation and fill up
the vacancies in the board?
The general rule is well-settled that the power
of the board is not suspended by vacancies in
the board unless the number is reduced to
below a quorum, the rule being that the number
necessary to constitute a quorum under a bylaw which provides that a majority of the
directors shall be necessary and sufficient to
constitute a quorum, is a majority of the entire
board, notwithstanding that there may be
vacancies in the board at a time. In the case of
KMBI, the presence of 9 members would be
required to constitute a quorum. There being
no quorum with only 3 remaining members of
the board, then the board has no authority to
transact business. Also, they do not have
authority to fill-up vacancies in the board. Not
only is there no quorum, but the circumstances
are not one of those which would allow the
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- 33 -

remaining directors to fill in a vacancy. Based

on 29 of the Corporation Code, the remaining
directors/trustees can fill-up the vacancies in
the board when: (1) such vacancies were
occasioned by reasons other than removal by
the stockholders/members or expiration of
term; and (2) such remaining director/trustees
still constitute a quorum of the Board. These
conditions must concur; otherwise, the fillingup of vacancies must be done by the
stockholders or members in a regular or special
meeting called for the purpose. [SEC OGC
Opinion No. 13-06, 6 May 2013]
44. Does the President of a close
corporation have the authority to
decide on matters concerning the
corporation
even
without
the
approval of the Board?
Yes. A close corporation is one where the
articles of incorporation provide that: (1) all the
corporations issued stocks of all classes,
exclusive of treasury shares, shall be held of
records by not more than a specified number of
persons, not exceeding 20; (2) all of the issued
stocks of all classes shall be subject to
restrictions on transfer permitted by the
Corporation Code; and (3) the corporation shall
not list in any stock exchange or make any
public offering of any of its stock of any class.
The main difference between a close
corporation and other corporations is the
identity of stock ownership and active
management, that is, all or most of the
stockholders of a close corporation are active in
the corporate business either as directors,
officers or other key men in management.
Where business associates belong to a small,
closely-knit group, they usually prefer to keep
the organization exclusive and would not
welcome strangers. Since it is through their
efforts and managerial skills that they expect
the business to grow and prosper, it is quite
understandable why they would not trust
outsiders to come in and interfere with their
management of business, and much less share
whatever fortune, big or small, that the
business may bring.

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In an ordinary corporation, the Presidents

power of general control and supervision over
the corporate business grants him an apparent
authority to enter into transactions on behalf o
the corporation in the ordinary course of
business, unless prohibited by the Articles of
Incorporation or the By-laws. The acts, even if
priorly unauthorized, may be later ratified by
the Board of Directors or Trustees, which
ratification cleanses the transaction of defects.
In the case of close corporations, the act of the
President, who is also a Director, may not need
later ratification of the Board, provided that any
of the following conditions are present:
1. Before the action is taken, written
consent thereto is signed by all the
directors;
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing;
3. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
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.
[SEC OGC Opinion No. 14-23, 26 August
2014]
45. What is the current limit on the
shareholdings of an Independent
Director?
Paragraphs 2 and 6, Rule 38 of the Amended
IRR of the Securities Regulation Code are the
controlling provisions on the definition,
qualification and disqualification of an
independent director. In other words, a person
is qualified to be elected as an independent
director provided he 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
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- 34 -

any covered company, and includes, among

others, any person who does not own more
than 2% of the shares of the covered
company and/or its related companies or
any of its substantial shareholders. The 10%
limit on beneficial ownership in the covered
company's equity security in which an
independent director is to be elected no longer
holds true. [SEC OGC Opinion No. 13-04, 18 April
2013; Emphasis supplied]
46. M Corp. was engaged in the business
of selling medical equipment, and has
A as one of its directors. A had a
daughter, B, who owns 80% of E
Corp., also engaged in the selling of
medical equipment. Some of the
clients of M Corp. stopped doing
business with it, allegedly due to the
intervention of A, in favor of his
daughters interest in E Corp. Is there
a conflict of interest on the part of A,
which would disqualify him from
continuing to be a director in M Corp?
If the by-laws of M Corp. provides as a
qualification for directors that a director shall
not be the immediate member of the family of
any stockholder in any other firm, company, or
association which competes with the subject
corporation, then A can be disqualified. Every
corporation has the inherent power to adopt
by-laws for its internal government, and to
regulate the conduct and prescribe the rights of
its members towards itself and among
themselves in reference to the management of
its affairs. Thus, under Section 47(5) of the
Corporation Code, a corporation may prescribe
in its by-laws the qualifications of its directors,
officers, and employees. The qualification that
a director shall not be the immediate member
of the family of any stockholder in any other
firm, company, or association which competes
with the subject corporation is a qualificational
by-law provision which may be added to those
specified in the Corporation Code (Sections 23
and 27), pursuant to the case of Gokongwei v.
SEC, GR No. L-45911, 11 April 1979). Thus,
corporations have the power to make by-laws
declaring a person employed in the service of a
Starr Weigand 2016

rival company to be ineligible for the

Corporations Board of Directors and a
provision which renders ineligible, or if elected,
subjects to removal, a directors if he be also a
director in a corporation whose business is in
competition with or is antagonistic to the other
corporation
is
valid.
However,
these
qualifications become effective only when the
by-laws expressly provide for the same.
However, A may be held liable for damages for
bad faith in directing the affairs of the
corporation, under Section 31 of the
Corporation Code, or to account for any profit
obtained to the prejudice of the corporation by
acquiring business opportunity which should
have belonged to the corporation, pursuant to
Section 34 of the Corporation Code. [SEC OGC
Opinion No. 14-04, 21 April 2014]
47. M Corp, T Corp and N Corp applied for
Mineral
Production
Sharing
Agreements (MPSA) with the DENR.
This was opposed by R Corp because
it alleged that at least 60% of the
capital stock of the corporations are
owned and controlled by MBMI, a
100% Canadian corporation. R Corp
reasoned that since MBMI is a
considerable
stockholder
of
petitioners, it was the driving force
behind petitioners filing of the
MPSAs over the areas covered by
applications since it knows that it can
only participate in mining activities
through corporations which are
deemed Filipino citizens. R Corp
argued that given that petitioners
capital stocks were mostly owned by
MBMI,
they
were
likewise
disqualified from engaging in mining
activities through MPSAs, which are
reserved only for Filipino citizens.
Decide.
It is quite safe to say that petitioners M Corp, T
Corp and N Corp are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or
more of their equity interests.

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- 35 -

Basically, there are two acknowledged tests in

determining the nationality of a corporation:
the control test and the grandfather rule.
Paragraph 7 of DOJ Opinion No. 020, Series of
2005, adopting the 1967 SEC Rules which
implemented the requirement of the
Constitution and other laws pertaining to the
controlling interests in enterprises engaged in
the exploitation of natural resources owned by
Filipino citizens, provides:
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. Thus, if 100,000 shares
are registered in the name of a corporation or
partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino
citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say,
50% of the capital stock or capital of the
corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the
other 50,000 shall be recorded as belonging to
aliens.
The first part of paragraph 7, DOJ Opinion No.
020, stating "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,"
pertains to the control test or the liberal rule.
On the other hand, the second part of the DOJ
Opinion which provides, "if the percentage of
the Filipino ownership in the corporation or
partnership is less than 60%, only the number
of shares corresponding to such percentage
shall be counted as Philippine nationality,"
pertains to the stricter, more stringent
grandfather rule.
Prior to this recent change of events,
petitioners were constant in advocating the
Starr Weigand 2016

application of the "control test" under RA 7042,

as amended by RA 8179, otherwise known as
the Foreign Investments Act (FIA), rather than
using the stricter grandfather rule.
"Corporate layering" is admittedly allowed by
the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it
becomes illegal.
Sec. 2, Article XII of the Constitution focuses on
the State entering into different types of
agreements for the exploration, development,
and utilization of natural resources with
entities who are deemed Filipino due to 60
percent ownership of capital is pertinent to this
case, since the issues are centered on the
utilization of our countrys natural resources or
specifically, mining. Thus, there is a need to
ascertain the nationality of petitioners since, as
the Constitution so provides, such agreements
are only allowed corporations or associations
"at least 60 percent of such capital is owned by
such citizens."
Elementary in statutory construction is when
there is conflict between the Constitution and a
statute, the Constitution will prevail. In this
instance, specifically pertaining to the
provisions under Art. XII of the Constitution on
National Economy and Patrimony, Sec. 3 of the
FIA will have no place of application. As
decreed by the honorable framers of our
Constitution, the grandfather rule prevails and
must be applied.
Paragraph 7, DOJ Opinion No. 020, Series of
2005 provides:
The above-quoted SEC Rules provide for the
manner of calculating the Filipino interest in a
corporation for purposes, among others, of
determining compliance with nationality
requirements (the Investee Corporation). Such
manner of computation is necessary since the
shares in the Investee Corporation may be
owned both by individual stockholders
(Investing Individuals) and by corporations
and partnerships (Investing Corporation). The
said rules thus provide for the determination of
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- 36 -

nationality depending on the ownership of the

Investee Corporation and, in certain instances,
the Investing Corporation.
Under the above-quoted SEC Rules, there are
two cases in determining the nationality of the
Investee Corporation. The first case is the
liberal rule, later coined by the SEC as the
Control Test in its 30 May 1990 Opinion, and
pertains to the portion in said Paragraph 7 of
the 1967 SEC Rules which states, (s)hares
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. Under the liberal
Control Test, there is no need to further trace
the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation
since a corporation which is at least 60%
Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the
Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC
Rules which states, "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."
Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing
Corporation and the Investee Corporation must
be traced (i.e., "grandfathered") to determine
the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of
the shares must first be traced to the level of
the Investing Corporation and added to the
shares directly owned in the Investee
Corporation.
In other words, based on the said SEC Rule and
DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when
the 60-40 Filipino-foreign equity ownership is
in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign
stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint
venture corporation which is either 60-40%
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Filipino-alien or the 59% less Filipino). Stated

differently, where the 60-40 Filipino- foreign
equity ownership is not in doubt, the
Grandfather Rule will not apply.
The control test is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipinoequity ownership in the corporation, then it
may apply the grandfather rule.
After a scrutiny of the evidence extant on
record, the Court finds that this case calls for
the application of the grandfather rule since, as
ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate
ownership of petitioners. Here, doubt is present
in the 60-40 Filipino equity ownership the
corporations, since their common investor, the
100% Canadian corporationMBMI, funded
them. [Narra Nickel Mining and Development
Corp., et al. v. Redmont Consolidated Mines, G.R.
No. 195580, April 21, 2014]
N.B. Primarily, it is the incorporation test which
should be applied in determining the
nationality of a corporation. "Under Philippine
jurisdiction, the primary test is always the Place
of Incorporation Test since we adhere to the
doctrine that a corporation is a creature of the
State whose laws it has been created. A
corporation organized under the laws of a
foreign country, irrespective of the nationality
of the persons who control it is necessarily a
foreign corporation. The control test and the
principal place of business test (siege social),
are merely adjunct tests, when the place of
incorporation test indicates that the subject
corporation is organized under Philippine
laws. However, based upon the foregoing,
while the incorporation test serves as the
primary test under Philippine jurisdiction,
other tests such as the control test must be
used for purposes of compliance with the
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- 37 -

provisions of the Constitution and of other laws

on nationality requirements. Even if the
corporation is a creature of the State, there is a
need to further safeguard/regulate certain
areas of investment and activities for the
protection of the interests of Filipinos. For
instance, the control test is used to determine
the eligibility of a corporation, which has
foreign equity participation in its ownership
structure, to engage in nationalized or partly
nationalized activities. [SEC-OGC Opinion No.
11-42, 12 October 2011; Underscoring supplied]
Also note the following 2015 case:
The Grandfather Rule is used as a supplement
to the Control Test so that the intent underlying
the averted Sec. 2, Art. XII of the Constitution be
given effect. The use of the Grandfather Rule as
a supplement to the Control Test is not
proscribed by the Constitution or the Philippine
Mining Act of 1995. To reiterate, Sec. 2, Art. XII
of the Constitution reserves the exploration,
development, and utilization of natural
resources to Filipino citizens and corporations
or associations at least sixty per centum of
whose capital is owned by such citizens.
Similarly, Section 3(aq) of the Philippine Mining
Act of 1995 considers a corporation x x x
registered in accordance with law at least sixty
per cent of the capital of which is owned by
citizens of the Philippines as a person qualified
to undertake a mining operation. Consistent
with this objective, the Grandfather Rule was
originally conceived to look into the citizenship
of the individuals who ultimately own and
control the shares of stock of a corporation for
purposes of determining compliance with the
constitutional
requirement
of
Filipino
ownership. It cannot, therefore, be denied that
the framers of the Constitution have not
foreclosed the Grandfather Rule as a tool in
verifying the nationality of corporations for
purposes of ascertaining their right to
participate
in
nationalized
or
partly
nationalized activities.
Admittedly, an ongoing quandary obtains as to
the role of the Grandfather Rule in determining
compliance with the minimum Filipino equity
Starr Weigand 2016

requirement vis--vis the Control Test. This

confusion springs from the erroneous
assumption that the use of one method
forecloses the use of the other.
As exemplified by the above rulings, opinions,
decisions and this Courts April 21, 2014
Decision, the Control Test can be, as it has been,
applied jointly with the Grandfather Rule to
determine the observance of foreign ownership
restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are
not, as it were, incompatible ownershipdeterminant methods that can only be applied
alternative to each other. Rather, these methods
can, if appropriate, be used cumulatively in the
determination of the ownership and control of
corporations engaged in fully or partly
nationalized activities, as the mining operation
involved in this case or the operation of public
utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should
not be used to determine the Filipino
ownership and control in a corporation, as it
could result in an otherwise foreign
corporation rendered qualified to perform
nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject
corporations Filipino equity falls below the
threshold 60%, the corporation is immediately
considered foreign-owned, in which case, the
need to resort to the Grandfather Rule
disappears.
On the other hand, a corporation that complies
with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino
corporation if there is no doubt as to who has
the beneficial ownership and control of the
corporation. In that instance, there is no need
for a dissection or further inquiry on the
ownership of the corporate shareholders in
both the investing and investee corporation or
the application of the Grandfather Rule. As a
corollary rule, even if the 60-40 Filipino to
foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the
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- 38 -

Grandfather Rule is necessary if doubt exists as

to the locus of the beneficial ownership and
control. In this case, a further investigation as
to the nationality of the personalities with the
beneficial ownership and control of the
corporate shareholders in both the investing
and investee corporations is necessary.
As explained in the April 21, 2012 Decision, the
doubt that demands the application of the
Grandfather Rule in addition to or in tandem
with the Control Test is not confined to, or
more bluntly, does not refer to the fact that the
apparent
Filipino
ownership
of
the
corporations equity falls below the 60%
threshold. Rather, doubt refers to various
indicia that the beneficial ownership and
control of the corporation do not in fact reside
in Filipino shareholders but in foreign
stakeholders. As provided in DOJ Opinion No.
165, Series of 1984, which applied the pertinent
provisions of the Anti-Dummy Law in relation
to the minimum Filipino equity requirement in
the Constitution, significant indicators of the
dummy status have been recognized in view of
reports that some Filipino investors or
businessmen are being utilized or [are]
allowing themselves to be used as dummies by
foreign investors specifically in joint ventures
for national resource exploitation. These
indicators are:
1. That the foreign investors provide
practically all the funds for the joint
investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being
minority stockholders, manage the
company and prepare all economic
viability studies.
(However) Suffice it to say in this regard that,
while the Grandfather Rule was originally
intended to trace the shareholdings to the point
where natural persons hold the shares, the SEC
had already set up a limit as to the number of
corporate layers the attribution of the
Starr Weigand 2016

nationality of the corporate shareholders may

be applied.
In a 1977 internal memorandum, the SEC
suggested applying the Grandfather Rule on
two (2) levels of corporate relations for
publicly-held corporations or where the shares
are traded in the stock exchanges, and to three
(3) levels for closely held corporations or the
shares of which are not traded in the stock
exchanges.14 These limits comply with the
requirement in Palting v. San Jose Petroleum ,
Inc. that the application of the Grandfather Rule
cannot go beyond the level of what is
reasonable.
[Narra Nickel Mining and Development Corp. v.
Redmont Consolidated, GR No. 195580, January
28, 2015]
48. For
purposes
of
determining
compliance
with
ownership
requirements under the Constitution
and existing laws, for corporations
engaged in areas of activities or
enterprises specifically reserved,
wholly or partly, to Philippine
Nationals,
what
should
be
considered?
For this purpose, capital under Section 11,
Article XII of the 1987 Constitution refers to
shares of stock entitled to vote in the election of
directors. [Heirs of Gamboa v. Teves,
G.R.No.176579, October 9, 2012] Thus, for
purposes of determining compliance therewith,
the required percentage of Filipino ownership
shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total
number of outstanding shares of stock, whether
or not entitled to vote in the election of
directors. [SEC Memorandum Circular no. 8,
series of 2013]
Both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine
whether a corporation is a Philippine
national. [Heirs of Gamboa v. Teves,
G.R.No.176579, October 9, 2012]
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49. Y was the newly elected president of S

Corp. who, during a meeting,
demanded the turnover of the
corporate records from Q. The said
records, however, were with C, the
corporate accountant, who kept them
for Q. Later on, C and Q caused the
removal of the corporate records
from the company premises. B, the
corporate secretary, also demanded
for the turnover of the stock and
transfer book from P. P however said
it will be deposited in a safety deposit
but with E Bank. But, this was also
taken by Q. Q brought the book to the
company office and demanded that
entries be made therein. A court had
already ordered that the said entries
be deleted, but Q refused to do so, and
he still kept custody of the corporate
records. Thus, a criminal complaint
was filed against C, Q, and P. Should
the case be dismissed?
Yes. A criminal action based on the violation of
a stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code-such as this criminal case-can only be maintained against corporate
officers or any other persons acting on behalf of
such corporation. However, the instant case
clearly suggest that respondents are neither in
relation to S Corp. While Section 74 of the
Corporation Code expressly mentions the
application of Section 144 only in relation to
the act of "refus[ing] to allow any director,
trustees, stockholder or member of the
corporation to examine and copy excerpts from
[the corporation's] records or minutes," the
same does not mean that the latter section no
longer applies to any other possible violations
of
the
former
section.
It must be emphasized that Section 144 already
purports to penalize "[v]iolations" of "any
provision" of the Corporation Code "not
otherwise specifically penalized therein." It is
inconsequential the fact that that Section 74
Starr Weigand 2016

expressly mentions the application of Section

144 only to a specific act, but not with respect
to the other possible violations of the former
section.
There is no cogent reason why Section 144 of
the Corporation Code cannot be made to apply
to violations of the right of a stockholder to
inspect the stock and transfer book of a
corporation under Section 74(4) given the
already unequivocal intent of the legislature to
penalize violations of a parallel right, i.e., the
right of a stockholder or member to examine
the other records and minutes of a corporation
under Section 74(2). Certainly, all the rights
guaranteed to corporators under Section 74 of
the Corporation Code are mandatory for the
corporation to respect. All such rights are just
the same underpinned by the same policy
consideration of keeping public confidence in
the corporate vehicle thru an assurance of
transparency in the corporation's operations.
Refusing to allow inspection of the stock and
transfer book when done in violation of Section
74(4) of the Corporation Code, properly falls
within the purview of Section 144 of the same
code and thus may be penalized as an offense.
A criminal action based on the violation of a
stockholder's right to examine or inspect the
corporate records and the stock and transfer
hook of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only he maintained
against corporate officers or any other persons
acting on behalf of such corporation.
A perusal of the second and fourth paragraphs
of Section 74, as well as the first paragraph of
the same section, reveal that they are
provisions that obligates a corporation: they
prescribe what books or records a corporation
is required to keep; where the corporation shall
keep them; and what are the other obligations
of the corporation to its stockholders or
members in relation to such books and records.
Hence, by parity of reasoning, the second and
fourth paragraphs of Section 74, including the
first paragraph of the same section, can only be
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- 40 -

violated by a corporation. It is clear then that a

criminal action based on the violation of the
second or fourth paragraphs of Section 74 can
only be maintained against corporate officers
or such other persons that are acting on behalf
of the corporation. Violations of the second and
fourth paragraphs of Section 74 contemplates a
situation wherein a corporation, acting thru one
of its officers or agents, denies the right of any
of its stockholders to inspect the records,
minutes and the stock and transfer book of such
corporation.
The problem the instant case and the evidence
submitted during preliminary investigation is
that they do not establish that respondents
were acting on behalf of S Corp. Quite the
contrary, the scenario painted by the complaint
is that the respondents are merely outgoing
officers of S Corp who, for some reason,
withheld and refused to tum-over the company
records of S Corp; that it is the petitioners who
are actually acting on behalf of S Corp; and that
S Corp is actually merely trying to recover
custody of the withheld records. In other
words, petitioners are not actually invoking
their right to inspect the records and the stock
and transfer book of S Corp under the second
and fourth paragraphs of Section 74. What they
seek to enforce is the proprietary right of S
Corp to be in possession of such records and
book. Such right, though certainly legally
enforceable by other means, cannot be enforced
by a criminal prosecution based on a violation
of the second and fourth paragraphs of Section
74. That is simply not the situation
contemplated by the second and fourth
paragraphs of Section 74 of the Corporation
Code. [Aderito Z. Yujuico and Bonifacio C.
Sumbilla v. Cezar T. Quiambao and Eric C. Pilapil,
G.R. No. 180416, June 2, 2014]
50. Can a corporation prevent a
stockholder
from
inspecting
corporate books on the ground that
she only holds 0.001% of the shares
of the said corporation?
No. The Corporation Code has granted to all
stockholders the right to inspect the corporate
Starr Weigand 2016

books and records, and in so doing has not

required any specific amount of interest for the
exercise of the right to inspect. Ubi lex non
distinguit nec nos distinguere debemos. When
the law has made no distinction, we ought not
to recognize any distinction. Under Section 74,
third paragraph, of the Corporation Code, the
only time when the demand to examine and
copy the corporations records and minutes
could be refused is when the corporation puts
up as a defense to any action that the person
demanding had improperly used any
information secured through any prior
examination of the records or minutes of such
corporation or of any other corporation, or was
not acting in good faith or for a legitimate
purpose in making his demand. The right of
the shareholder to inspect the books and
records of the petitioner should not be made
subject to the condition of a showing of any
particular dispute or of proving any
mismanagement or other occasion rendering an
examination proper, but if the right is to be
denied, the burden of proof is upon the
corporation to show that the purpose of the
shareholder is improper, by way of defense.
[Terelay
Investment
and
Development
Corporation v. Yulo, G.R. No. 160924, August 5,
2015]
51. Which court has jurisdiction over a
stockholders suit to enforce its right
of inspection under Section 74 of the
Corporation
Code,
when
the
corporation involved is a sequestered
corporation under the PCGG?
It is the RTC and not the Sandiganbayan which
has jurisdiction over cases which do not involve
a sequestration-related incident but an intracorporate controversy. Originally, Section 5 of
Presidential Decree (P.D.) No. 902-A vested the
original and exclusive jurisdiction over cases
involving the following in the SEC, to wit:
x

(a) Devices or schemes employed by, or

any acts of the board of directors,
business associates, its officers or
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- 41 -

partners, amounting to fraud and

misrepresentation which may be
detrimental to the interest of the public
and/or of the stockholder, partners,
members of associations or organization
registered with the Commission;
(b) Controversies arising out of intracorporate or partnership relations,
between and among stockholders,
members or associates; between any or
all of them and the corporation,
partnership or association of which they
are
stockholders,
members
or
associates, respectively; and between
such corporation, partnership or
association and the State insofar as it
concerns their individual franchise or
right as such entity;
(c) Controversies in the election or
appointment of directors, trustees,
officers
or
managers
of
such
corporations,
partnership
or
associations;
(d)
Petitions
of
corporations,
partnerships or associations to be
declared in the state of suspension of
payment in cases where the corporation,
partnership or association possesses
sufficient property to cover all its debts
but foresees the impossibility of meeting
them when they respective fall due or in
cases
where
the
corporation,
partnership or association has no
sufficient assets to cover its liabilities
but is under the management of a
Rehabilitation Receiver or Management
Committee created pursuant to this
Decree.
Upon the enactment of Republic Act No. 8799
(The Securities Regulation Code), effective on
August 8, 2000, the jurisdiction of the SEC over
intra-corporate controversies and the other
cases enumerated in Section 5 of P.D. No. 902-A
was transferred to the Regional Trial Court
Starr Weigand 2016

pursuant to Section 5.2 of the law, which

provides:
5.2. The Commissions jurisdiction over
all cases enumerated in Section 5 of
Presidential Decree No. 902-A is hereby
transferred to the Courts of general
jurisdiction or the appropriate Regional
Trial Court; Provided,That the Supreme
Court in the exercise of its authority may
designate the Regional Trial Court
branches that shall exercise jurisdiction
over these cases. The Commission shall
retain jurisdiction over pending cases
involving
intra-corporate
disputes
submitted for final resolution which
should be resolved within one (1) year
from the enactment of this Code. The
Commission shall retain jurisdiction
over
pending
suspension
of
payments/rehabilitation cases filed as of
30 June 2000 until finally disposed.
To implement Republic Act No. 8799, the Court
promulgated its resolution of November 21,
2000 in A.M. No. 00-11-03-SC designating
certain branches of the RTC to try and decide
the cases enumerated in Section 5 of P.D. No.
902-A. Among the RTCs designated as special
commercial courts was the RTC (Branch 138) in
Makati City, the trial court for Civil Case No. 041049.
On March 13, 2001, the Court adopted and
approved the Interim Rules of Procedure for
Intra-Corporate Controversies under Republic
Act No. 8799 in A.M. No. 01-2-04-SC, effective on
April 1, 2001, whose Section 1 and Section 2,
Rule 6 state:
Section 1. Cases covered. The provisions of this
rule shall apply to election contests in stock and
non-stock corporations.
Section
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
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- 42 -

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.
Conformably with Republic Act No. 8799, and
with the ensuing resolutions of the Court on the
implementation of the transfer of jurisdiction to
the Regional Trial Court, the RTC (Branch 138)
in Makati had the authority to hear and decide
the election contest between the parties
herein. There should be no disagreement that
jurisdiction over the subject matter of an action,
being conferred by law, could neither be altered
nor conveniently set aside by the courts and the
parties.
The dispute concerns acts of the board of
directors claimed to amount to fraud and
misrepresentation which may be detrimental to
the interest of the stockholders, or is one
arising out of intra-corporate relations between
and among stockholders, or between any or all
of them and the corporation of which they are
stockholders.
Moreover,
the
jurisdiction
of
the
Sandiganbayan has been held not to extend
even to a case involving a sequestered company
notwithstanding that the majority of the
members of the board of directors were PCGG
nominees. [Abad
et
al.
v.
Philippine
Communications Satellite Corporation, G.R. No.
200620, March 18, 2015]
52. What happens when an intracorporate dispute has been properly
filed in the official station of the
designated Special Commercial Court
but is, however, later wrongly
assigned by raffle to a regular branch
of that station?
The erroneous raffling to a regular branch
instead of to a Special Commercial Court is only
a matter of procedure that is, an incident
related to the exercise of jurisdiction and,
thus, should not negate the jurisdiction which
the RTC had already acquired. In such a
Starr Weigand 2016

scenario, the proper course of action was not

for the commercial case to be dismissed;
instead, the branch where the case is raffled
should have first referred the case to the
Executive Judge for re-docketing as a
commercial case; thereafter, the Executive
Judge should then assign said case to the
only designated Special Commercial Court in
the station. Note that the procedure would be
different where the RTC acquiring jurisdiction
over the case has multiple special commercial
court branches; in such a scenario, the
Executive Judge, after re-docketing the same as
a commercial case, should proceed to order its
re-raffling among the said special branches.
Meanwhile, if the RTC acquiring jurisdiction
has no
branch designated as a Special
Commercial Court, then it should refer the case
to the nearest RTC with a designated Special
Commercial Court branch within the judicial
region.48 Upon referral, the RTC to which the
case was referred to should re-docket the case
as a commercial case, and then: (a) if the said
RTC has only one branch designated as a
Special Commercial Court, assign the case to the
sole special branch; or (b) if the said RTC has
multiple branches designated as Special
Commercial Courts, raffle off the case among
those special branches. In all the abovementioned scenarios, any difference regarding
the applicable docket fees should be duly
accounted for. On the other hand, all docket
fees already paid shall be duly credited, and any
excess, refunded. [Gonzales v. GJH Land, Inc., G.R.
No. 202664, November 10, 2015]
53. A complaint for injunction and
damages was filed by ADC Corp
against AHV Association and its
president. This arose as ADC alleged
that AHV Association constructed a
multi-purpose hall and swimming
pool on one of the parcels of land
owned by ADC which were to be sold
without its consent and approval.
However, its SEC registration had
been revoked more than three years
prior to the institution of the action.
Can it still file the instant case?

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No. It is to be noted that the time during which

the corporation, through its own officers, may
conduct the liquidation of its assets and sue and
be sued as a corporation is limited to three
years from the time the period of dissolution
commences; but there is no time limit within
which the trustees must complete a liquidation
placed in their hands. It is provided only (Corp.
Law, Sec. 78 [now Sec. 122]) that the
conveyance to the trustees must be made
within the three-year period. It may be found
impossible to complete the work of liquidation
within the three-year period or to reduce
disputed claims to judgment. The authorities
are to the effect that suits by or against a
corporation abate when it ceased to be an
entity capable of suing or being sued (7 R.C.L.,
Corps., par. 750); but trustees to whom the
corporate assets have been conveyed pursuant
to the authority of Sec. 78 [now Sec. 122] may
sue and be sued as such in all matters
connected with the liquidation. Still in the
absence of a board of directors or trustees,
those having any pecuniary interest in the
assets, including not only the shareholders but
likewise the creditors of the corporation, acting
for and in its behalf, might make proper
representations with the Securities and
Exchange Commission, which has primary and
sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the
corporate concerns. The trustee of a
corporation may continue to prosecute a case
commenced by the corporation within three
years from its dissolution until rendition of the
final judgment, even if such judgment is
rendered beyond the three-year period allowed
by Section 122 of the Corporation Code.
However, there is nothing in the said cases
which allows an already defunct corporation to
initiate a suit after the lapse of the said threeyear period. [Alabang Development Corporation
v. Alabang Hills Village Association and Rafael
Tinio, G.R. No. 187456, June 2, 2014]
54. INC, a religious corporation, had been
in existence since 1914. Has its
corporate term expired in line with
the provisions of the Corporation
Code?
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No. Religious corporations may be allowed to

exist perpetually. While the Corporation Code
has
specific
provisions
for
religious
corporations, set out in Title XIII on Special
Corporations, particularly Sections 110 and
116, both of which do not provide for a term of
existence for religious corporations, whether
classified as a corporation sole or religious
society. The law never intended to limit the
corporate life of religious corporations, hence,
they may be allowed to exist perpetually.
Religious corporations may limit their
corporate term by providing a specific term in
their articles of incorporation. However, absent
such specification, it shall be understood that
the corporation intended to exist for an
indefinite period. [SEC OGC Opinion No. 14-18,
10 July 2014]
55. What is the corporate term of an
educational institution incorporated
under the Corporation Code?
The corporate terms of such should also be 50
years in accordance with the provisions of the
Corporation Code. However, if the corporation
was incorporated under the older Corporation
Law, which did not require a maximum
corporate term for corporations, then they
should amend their articles of incorporation to
comply with the applicable provisions of the
Corporation Code on or before May 1, 1982, the
expiry date of the two (2) year period, the SEC
will consider the provisions of the latter law as
written into the articles of incorporation as of
May 1, 1980, the date of effectivity of the
Corporation Code." Hence, based on the said
pronouncement, the 50-year period should be
counted from 01 May 1980, in accordance with
the Corporation Code. The 50-year period
should not be counted from the date of
registration as this would adversely affect the
operations of pre-war schools which were
established more than fifty (50) years from the
date of effectivity of the Corporation Code since
it would result in the dissolution of said
corporations as the 50-year period had already
lapsed. [SEC-OGC Opinion No. 13-05, 24 April
2013]

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- 44 -

56. Is a foreign corporation required to

obtain a license to transact business
in the Philippines if such becomes a
member of a petroleum consortium,
but is not the operator thereof, and
will hold only a minority and noncontrolling interest therein?
Yes, if the corporation is not a mere limited
partner, then the subject foreign corporation
still needs to obtain a license to do business in
the Philippines under the Foreign Investments
Act (FIA) of 1991, notwithstanding the fact that
it holds a minority and non-controlling interest
in the consortium. A consortium or joint
venture is a form of partnership, governed by
the laws of partnership. Doing business is,
among others, the participation in the
management, supervision, or control of any
domestic business, firm, entity, or corporation.
in order to be exempted from obtaining a
license to do business in the Philippines, the
foreign corporation must prove that it merely
invested as a shareholder in a domestic
corporation. This is limited to investment in a
corporation, which does not necessarily
include investment in a partnership. There
being differences between the two, the effects
of such investments should be differentiated.
Investment in a partnership will only be akin to
an investment in a corporation that is exempt
from the doing of business rule only when the
foreign corporation is exclusively a limited
partner and takes no part in the management
and control of the business operation of the
limited partnership. If the corporation is not a
limited partner and actively takes part in the
control of the business, then the corporation is
doing business in the Philippines as provided in
Section 3(d) of the FIA, thus, must secure a
license to do business in the Philippines. [SEC
Opinion No. 14-01, 21 February 2014]

Securities Regulation Code

1. A complaint was filed by joint account
holders, G, T, and L, against Citibank
NA and its officials for violation of the
Revised Securities Act (RSA) and the
Securities Regulation Code. It was
alleged that G, T, and L were induced
by the banks VP and Director to sign
a subscription agreement to purchase
income notes. Later on, they were
again made to purchase other income
notes. They found out that the
investments declined and that the
notes were not registered with the
SEC in accordance with the law.
Citibank and its officials alleged that
the action had already prescribed.
What is the prescriptive period
applicable in the instant case?
The SRC does not provide for a prescriptive
period for the enforcement of criminal liability,
thus, RA 3362 would come into play. Under
Section 73 of the SRC, violation of its provisions
or the rules and regulations is punishable with
imprisonment of not less than seven (7)years
nor more than twenty-one (21) years. Applying
Section 1 of Act No.3326, a criminal prosecution
for violations of the SRC shall, therefore,
prescribe in twelve (12) years.
Hand in hand with Section 1, Section 2 of Act
No. 3326 states that "prescription shall begin to
run from the day of the commission of the
violation of the law, and if the same be not
known at the time, from the discovery thereof
and the institution of judicial proceedings for
its investigation and punishment." [Citibank
N.A. v. Tanco-Gabaldon, G.R. No. 198444,
September 4, 2013]
2. What is the nature of the power of the
SEC to revoke registration of
securities and permits to sell them to
the public under the SRC?

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2013 & 2014 Q and A|Commercial Law

- 45 -

The revocation of registration of securities and

permit to sell them to the public is not an
exercise of the SEC's quasi-judicial power, but
of its regulatory power. A "quasi-judicial
function" is a term which applies to the action,
discretion, etc., of public administrative officers
or bodies, who are required to investigate facts,
or ascertain the existence of facts, hold
hearings, and draw conclusions from them, as a
basis for their official action and to exercise
discretion of a judicial nature. Although the SRC
requires due notice and hearing before issuing
an order of revocation, the SEC does not
perform such quasi-judicial functions and
exercise discretion of a judicial nature in the
exercise of such regulatory power. It neither
settles actual controversies involving rights
which are legally demandable and enforceable,
nor adjudicates private rights and obligations in
cases of adversarial nature. Rather, when the
SEC exercises its incidental power to conduct
administrative hearings and make decisions, it
does so in the course of the performance of its
regulatory and law enforcement function. [SEC
v. Universal Rightfield Property Holdings, G.R.
No. 181381, July 20, 2015]

Transportation Laws
1. M. Corp. and MT Corp. entered into an
agreement whereby the latter bought
several buses from the former, but
until M Corp. would retain ownership
of the buses until certain conditions
are met, while MT Corp. would
operate the buses in Metro Manila.
One of the buses however met an
accident causing damage and injury
to R and J. R and J sued M Corp. for
damages. M Corp. denied liability
alleging that though it is still the
owner of the bus, the actual operator
and employer of the bus driver
involved in the accident was that of
MT Corp. Who should be held liable?
M Corp. cannot escape liability. This is because
of the registered-owner rule, whereby the
registered owner of the motor vehicle involved
in a vehicular accident could be held liable for
the consequences. The registered-owner rule
has remained good law in this jurisdiction. But,
although the registered-owner rule might seem
to be unjust towards M Corp., the law did not
leave it without any remedy or recourse. M
Corp. could recover from MT Corp, the actual
employer of the negligent driver, under the
principle of unjust enrichment, by means of a
cross-claim seeking reimbursement of all the
amounts that it could be required to pay as
damages arising from the drivers negligence. A
cross-claim is a claim by one party against a coparty arising out of the transaction or
occurrence that is the subject matter either of
the original action or of a counterclaim therein,
and may include a claim that the party against
whom it is asserted is or may be liable to the
cross-claimant for all or part of a claim asserted
in the action against the cross-claimant. [Metro
Manila Transit Corporation v. Cuevas, G.R. No.
167797, June 15, 2015]
2. N Corp. shipped goods to UMC from
Japan to Manila. The goods were
insured by P Insurance against all
risks. When they arrived in Manila, it
was found that one package was in

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2013 & 2014 Q and A|Commercial Law

- 46 -

bad order. UMC declared the

damaged goods as a total loss. P
insurance paid UMC for the loss, and
filed a complaint against N Corp. and
the brokers. The goods were
delivered to UMC on May 12, 1995,
and it filed a bad order survey on that
same day. The action was filed by the
insurer on January 18, 1996. Has the
action prescribed?
No. The prescriptive period for filing an action
for the loss or damage of the goods under the
COGSA is found in paragraph (6), Section 3,
thus:
(6) Unless notice of loss or damage and the
general nature of such loss or damage be
given in writing to the carrier or his agent at
the port of discharge before or at the time of
the removal of the goods into the custody of
the person entitled to delivery thereof
under the contract of carriage, such removal
shall be prima facie evidence of the delivery
by the carrier of the goods as described in
the bill of lading. If the loss or damage is not
apparent, the notice must be given within
three days of the delivery.
Said notice of loss or damage maybe endorsed
upon the receipt for the goods given by the
person taking delivery thereof.
The notice in writing need not be given if the
state of the goods has at the time of their
receipt been the subject of joint survey or
inspection.
In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year
after delivery of the goods or the date when the
goods should have been delivered: Provided,
That if a notice of loss or damage, either
apparent or concealed, is not given as provided
for in this section, that fact shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods
or the date when the goods should have been
delivered.
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A letter of credit 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 his goods before paying.
However, letters of credit are employed by the
parties desiring to enter into commercial
transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to
the original transaction, in these cases, N Corp.
as the seller and UMC as the buyer. Hence, the
latter, as the buyer of the goods, should be
regarded as the person entitled to delivery of
the goods. Accordingly, for purposes of
reckoning when notice of loss or damage
should be given to the carrier or its agent, the
date of delivery to UMC is controlling.
A request for, and the result of a bad order
examination, done within the reglementary
period for furnishing notice of loss or damage
to the carrier or its agent, serves the purpose of
a claim. A claim is required to be filed within
the reglementary period to afford the carrier or
depositary reasonable opportunity and
facilities to check the validity of the claims
while facts are still fresh in the minds of the
persons who took part in the transaction and
documents are still available. Here, UMC filed a
request for bad order survey on May 12, 1995,
even before all the packages could be unloaded
to its warehouse.
Moreover, paragraph (6), Section 3 of the
COGSA clearly states that failure to comply with
the notice requirement shall not affect or
prejudice the right of the shipper to bring suit
within one year after delivery of the goods. The
insurer, as subrogee of UMC, filed the
Complaint for damages on January 18, 1996,
just eight months after all the packages were
delivered to its possession on May 17, 1995.
Evidently, the action was seasonably filed.
[Asian Terminals, Inc. v. Philam Insurance Co.,
Inc. (now Chartis Philippines Insurance Inc.)/
Philam Insurance Co., Inc. (now Chartis
Philippines Insurance Inc.) v. Westwind Shipping
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- 47 -

Corporation and Asian Terminals, Inc./

Westwind Shipping Corporation v. Philam
Insurance Co., Inc. and Asian Terminals, Inc., G.R.
Nos. 181163/181262/181319, July 24, 2013]
3. S Corp. shipped goods on board a
vessel owned by E Shipping, to be
delivered to the consignee, C Steel.
The goods were insured by MS
Insurance. The shipment arrived in
Manila, but it was found that some of
the goods were in bad condition.
When delivered to C Steel, the latter
rejected the goods being unfit for
their intended purpose. S Corp
thereafter shipped another batch of
goods under similar circumstances,
which when they arrived in Manila,
were also found to be in bad order.
Again, C Steel rejected the goods. C
Steel was paid by MS Insurance for
the damage to the goods, and thus, MS
Insurance filed an action for damages
against E Shipping and the stevedore.
Can E Shipping be held liable?
Yes. It is settled in maritime law jurisprudence
that cargoes while being unloaded generally
remain under the custody of the carrier. Based
evidence presented, the goods were damaged
even before they were turned over to the
stevedore. Such damage was even compounded
by the negligent acts of E Shipping and the
Stevedore which both mishandled the goods
during the discharging operations. Thus, it
bears stressing unto E Shipping that common
carriers, from the nature of their business and
for reasons of public policy, are bound to
observe extraordinary diligence in the vigilance
over the goods transported by them. Subject to
certain exceptions enumerated under Article
1734 of the Civil Code, common carriers are
responsible for the loss, destruction, or
deterioration of the goods. The extraordinary
responsibility of the common carrier lasts from
the time the goods are unconditionally placed
in the possession of, and received by the carrier
for transportation until the same are delivered,
actually or constructively, by the carrier to the
consignee, or to the person who has a right to
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receive them. Owing to this high degree of

diligence required of them, common carriers, as
a general rule, are presumed to have been at
fault or negligent if the goods they transported
deteriorated or got lost or destroyed. That is,
unless they prove that they exercised
extraordinary diligence in transporting the
goods. In order to avoid responsibility for any
loss or damage, therefore, they have the burden
of proving that they observed such high level of
diligence. In this case, E Shipping failed to
hurdle such burden. [Eastern Shipping Lines v.
BPI/MS Insurance Corporation, G.R. No. 193986,
15 January 2014]
4. A shipped soybean meal on board a
chartered vessel M/V C to consignees
in the Philippines. While the soybean
meal was being unloaded, the
unloader hit a steel bar in the middle
of the soybean, causing two of the
screws of the unloader to break off.
The arrastre operator, owner of the
unloader, claimed for damages from
the ship owner and the shipping
agent, but was rejected. This being
the case, the claim was brought to
court. Can they be held liable by the
arrastre operator for the damage
sustained by the unloader?
Yes. The ship owner and the ship agent are
liable to the arrastre operator on the basis of
quasi-delict, and not breach of contract, there
being no contractual relation between them.
The arrastre operators contractual relation is
not with the ship owner and ship agent, but
with the consignee of the goods shipped and
with the Philippine Ports Authority (PPA). They
may be held liable in view of Article 2176 of the
Civil Code, which provides [w]hoever by act or
omission causes damage to another, there being
fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there
is no pre-existing contractual relation between
the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
And, by the failure of the ship owner and the
ship agent to explain the circumstances that
attended the accident, when knowledge of such
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- 48 -

circumstances is accessible only to them, they

failed to overcome the prima facie presumption
that the accident arose from or was caused by
their negligence or want of care. The res ipsa
loquitur doctrine is based in part upon the
theory that the defendant in charge of the
instrumentality which causes the injury either
knows the cause of the accident or has the best
opportunity of ascertaining it and that the
plaintiff has no such knowledge, and therefore
is compelled to allege negligence in general
terms and to rely upon the proof of the
happening of the accident in order to establish
negligence. The prima facie evidence of the ship
owner and ship agents negligence, being
unexplained and uncontroverted, is sufficient to
maintain the proposition affirmed. Hence, the
negligence of the Master of the Vessel is
conclusively presumed to be the proximate
cause of the damage sustained by the unloader.
Moreover, since the Masters liability is
ultimately that of the shipowner because he is
the representative of the shipowner, the
shipowner and its agents are solidarily liable to
pay the arrastre operator the amount of
damages actually proved. [Unknown Owner of
M/V China Joy v. Asian Terminals, G.R. No.
195661, March 11, 2015]
5. S Corp. shipped steel sheets to Manila
for CS, the consignee, on board Es
vessel. The steel sheets arrived in
Manila, and were turned over to the
arrastre operator of safe keeping, but
when withdrawn, they were found to
have been damaged, prompting the
consignee to reject the entire
shipment. Another shipment of steel
was made by S Corp. for the same
consignee on board another vessel
owned by E. but, when the sheets
arrived in Manila, they were
damaged, and sustained further
damage upon discharge from vessel.
Thus, the consignee again rejected
them. The consignee was able to
recover from the cargo insurers, who
then sought to recover damages from
the E. E argued that as the carrier, his
liability was limited to $500.00 per
Starr Weigand 2016

package, since the bills of lading

covering the damaged goods did not
state the value of the cargo, but only
made reference to invoices. The
invoices, in turn, specified the value
of the cargoes and bore the notation
Freight Prepaid and As Arranged.
Is E correct?
No. Both Bills of Lading complied with the
requirements provided by the COGSA. The bills
of lading represent the formal expression of the
parties rights, duties and obligations. It is the
best evidence of the intention of the parties
which is to be deciphered from the language
used in the contract, not from the
unilateral post facto assertions of one of the
parties, or of third parties who are strangers to
the contract. Thus, when the terms of an
agreement have been reduced to writing, it is
deemed to contain all the terms agreed upon
and there can be, between the parties and their
successors in interest, no evidence of such
terms other than the contents of the written
agreement.
The declaration requirement does not require
that all the details must be written down on the
very bill of lading itself. It must be emphasized
that all the needed details are in the invoice,
which contains the itemized list of goods
shipped to a buyer, stating quantities, prices,
shipping charges, and other details which may
contain numerous sheets. Compliance can be
attained by incorporating the invoice, by way of
reference, to the bill of lading provided that the
former containing the description of the nature,
value and/or payment of freight charges is as in
this case duly admitted as evidence. [Eastern
Shipping Lines v. BPI/MS Insurance Corp., G.R.
No. 182864, January 12, 2015]
6. What is the effect of a time charter
entered into by a carrier who also
does business as a common carrier?
If the intent of the parties to the time charter, as
evidenced by their agreement itself, appears to
be that they had intended that they enter into a
bareboat agreement, such that control not only
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- 49 -

of the ship but also of the entire crew is

transferred, then the common carrier would be
converted into a private carrier. [Federal
Phoenix Assurance v. Fortune Sea Carrier, G.R.
No. 188118, November 23, 2015]
7. R made travel reservations with S
Travel for his familys trip to
Australia.
Upon
booking
and
confirmation of his flight schedule, R
paid the airfare and was issued
Cathay Pacific round-trip plane
tickets
for
Manila-HongKongAdelaide-HongKong-Manila.
Their
flight to Australia went smoothly.
Before the flight back to Manila, the
booking was reconfirmed and it was
said that the reservation was still Ok
as scheduled. They were only able to
take a flight out back to Manila on the
next day. When R and his family were
at the airport to catch the flight back
to Manila, they were informed by S
Travel that they did not have
confirmed
reservations.
Cathay,
however, said that S Travel failed to
input the ticket numbers of R, and
made fictitious bookings for the other
members of Rs family. In Manila, R
was informed that it was Cathay that
cancelled the bookings. A complaint
for damages was filed against Cathay
and S Travel. Can Cathay and S Travel
be held liable?
The determination of whether or not the award
of damages is correct depends on the nature of
Rs contractual relations with Cathay Pacific
and S Travel. The cause of action against
Cathay Pacific stemmed from a breach of
contract of carriage. A contract of carriage is
defined as one whereby a certain person or
association of persons obligate themselves to
transport persons, things, or news from one
place to another for a fixed price. Under Article
1732 of the Civil Code, this "persons,
corporations, firms, or associations engaged in
the business of carrying or transporting
passengers or goods or both, by land, water, or

Starr Weigand 2016

air, for compensation, offering their services to

the public" is called a common carrier.
R and his family entered into a contract of
carriage with Cathay Pacific. As far as R and his
family are concerned, they were holding valid
and confirmed airplane tickets. The ticket in
itself is a valid written contract of carriage
whereby for a consideration, Cathay Pacific
undertook to carry respondents in its airplane
for a round-trip flight from Manila to Adelaide,
Australia and then back to Manila. In fact, R
called the Cathay Pacific office before his return
flight to re-confirm his booking. He was even
assured by a staff of Cathay Pacific that he does
not need to reconfirm his booking. Cathay
Pacific breached its contract of carriage with
respondents when it disallowed them to board
the plane to go back to Manila on the date
reflected on their tickets. Thus, Cathay Pacific
opened itself to claims for compensatory,
actual, moral and exemplary damages,
attorneys fees and costs of suit.
In contrast, the contractual relation between S
Travel and R is a contract for services. The
object of the contract is arranging and
facilitating the latters booking and ticketing. It
was even S Travel which issued the tickets.
Since the contract between the parties is an
ordinary one for services, the standard of care
required of respondent is that of a good father
of a family under Article 1173 of the Civil Code.
This connotes reasonable care consistent with
that which an ordinarily prudent person would
have observed when confronted with a similar
situation. The test to determine whether
negligence attended the performance of an
obligation is: did the defendant in doing the
alleged negligent act use that reasonable care
and caution which an ordinarily prudent
person would have used in the same situation?
If not, then he is guilty of negligence. There was
indeed failure on the part of S Travel to exercise
due diligence in performing its obligations
under the contract of services. It was
established by Cathay Pacific, that S Travel
failed to input the correct ticket number for Rs
ticket. Cathay Pacific even asserted that S
Travel made two fictitious bookings for the
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- 50 -

members of Rs family. The negligence of S

Travel renders it also liable for damages.
[Cathay Pacific Airways v. Juanita Reyes, et al.,
G.R. No. 185891, June 26, 2013]

Insurance Law
1. In a CBA, it was provided that the
employer
will
shoulder
hospitalization expenses of the
dependents of covered employees
subject to certain limitations and
restrictions. Accordingly, covered
employees
pay
part
of
the
hospitalization insurance premium
through monthly salary deductions
while
the
company,
upon
hospitalization of the covered
employees' dependents, shall pay the
hospitalization expenses incurred for
the same. The conflict arose when a
portion
of
the
hospitalization
expenses of the covered employees'
dependents were paid/shouldered by
the
dependent's
own
health
insurance. While the company
refused to pay the portion of the
hospital expenses already shouldered
by the dependents' own health
insurance, the union insists that the
covered employees are entitled to the
whole and undiminished amount of
said hospital expenses. Decide.
The covered employees are not entitled to full
payment of the hospital expenses incurred by
their dependents, including the amounts
already paid by other health insurance
companies based on the theory of collateral
source rule.
As part of American personal injury law, the
collateral source rule was originally applied to
tort cases wherein the defendant is prevented
from benefiting from the plaintiffs receipt of
money from other sources. Under this rule, if an
injured person receives compensation for his
injuries from a source wholly independent of
the tortfeasor, the payment should not be
deducted from the damages which he would
otherwise collect from the tortfeasor. In a
recent Decision by the Illinois Supreme Court,
the rule has been described as an established
exception to the general rule that damages in
negligence actions must be compensatory. The

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- 51 -

Court went on to explain that although the rule

appears to allow a double recovery, the
collateral source will have a lien or subrogation
right to prevent such a double recovery.
The collateral source rule applies in order to
place the responsibility for losses on the party
causing them. Its application is justified so that
the wrongdoer should not benefit from the
expenditures made by the injured party or take
advantage of contracts or other relations that
may exist between the injured party and third
persons. Thus, it finds no application to cases
involving no-fault insurances under which the
insured is indemnified for losses by insurance
companies, regardless of who was at fault in the
incident generating the losses. Here, it is clear
that the employer is a no-fault insurer. Hence,
it cannot be obliged to pay the hospitalization
expenses of the dependents of its employees
which had already been paid by separate health
insurance providers of said dependents.
[Mitsubishi
Motors
Philippines
Salaried
Employees Union v. Mitsubishi Motors
Philippines Corporation, G.R. No. 175773, June
17, 2013]
2. M Insurer insured PAPs machineries
and equipment against fire, for a
period of one year, for the amount of
15 million pesos. This was procured
by PAP for its mortgagee, RCBC. The
insurance policy was renewed before
the lapse of one year, on an as is
basis, and it was agreed that the
things insured will not be moved to
another location, without the consent
of M insurer. The machineries and
equipment were thereafter lost in a
fire, which prompted PAP to claim
from M insurer. The claim was denied
on the ground that the things insured
were transferred to a different
location from that indicated in the
policy. Can M insurer be held liable
for the loss?
No. Here, by the clear and express condition in
the renewal policy, the removal of the insured
property to any building or place required the
Starr Weigand 2016

consent of the insurer. Any transfer effected by

the insured, without the insurers consent,
would free the latter from any liability.
Considering that the original policy was
renewed on an as is basis, it follows that the
renewal policy carried with it the same
stipulations and limitations. The terms and
conditions in the renewal policy provided,
among others, that the location of the risk
insured against is at PAPs factory. The subject
insured properties, however, were totally
burned at another factory. Although it was also
located in the same area, the other factory was
not the location stipulated in the renewal
policy. There being an unconsented removal,
the transfer was at PAPs own risk.
Consequently, it must suffer the consequences
of the fire. Thus, the Court agrees with the
report of an international loss adjuster which
investigated the fire incident at the other
factory, which opined that [g]iven that the
location of risk covered under the policy is not
the location affected, the policy will, therefore,
not respond to this loss/claim. It can also be
said that with the transfer of the location of the
subject properties, without notice and without
M insurers consent, after the renewal of the
policy, PAP clearly committed concealment,
misrepresentation and a breach of a material
warranty.
Accordingly, an insurer can exercise its right to
rescind an insurance contract when the
following conditions are present, to wit:
1) the policy limits the use or condition of
the thing insured;
2) there is an alteration in said use or
condition;
3) the alteration is without the consent of
the insurer;
4) the alteration is made by means within
the insureds control; and
5) the alteration increases the risk of loss.
In the case at bench, all these circumstances are
present. It was clearly established that the
renewal policy stipulated that the insured
properties were located at PAPs factory; that
PAP removed the properties without the
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- 52 -

consent of M insurer; and that the alteration of

the location increased the risk of loss. [Malayan
Insurance Company, Inc. v. PAP co., Ltd.
(Philippine Branch), G.R. No. 200784, August 7,
2013]
3. M Insurance issued a life insurance
policy covering the life of S, with A as
beneficiary. More than two years
after the insurance was issued, S died,
thus, A filed a claim for the proceeds.
The claim was denied because the
claim was spurious, as it appeared
after its investigation that S did not
actually apply for insurance coverage,
was unlettered, sickly, and had no
visible source of income to pay for the
insurance premiums; and that A was
an impostor, posing as S and
fraudulently obtaining insurance in
the latters name without her
knowledge and consent. Can M
Insurance deny the claim?
No. "Fraudulent intent on the part of the
insured must be established to entitle the
insurer to rescind the contract." In the absence
of proof of such fraudulent intent, no right to
rescind arises. There being no evidence that
there was indeed fraud, except for the selfserving result of M Insurances investigation,
then the claim cannot be denied.
Also, Section 48 of the Insurance Code will
prevent the insurer from barring the claim. The
results and conclusions arrived at during the
investigation conducted unilaterally by
petitioner after the claim was filed may simply
be dismissed as self-serving and may not form
the basis of a cause of action given the existence
and application of Section 48, which provides
that if the life insurance policy has been in force
for at least two years from its date of issuance,
the insurer cannot deny the claim on the
ground of concealment or misrepresentation by
the insured.
Section 48 serves a noble purpose, as it
regulates the actions of both the insurer and the
insured. Under the provision, an insurer is
Starr Weigand 2016

given two years from the effectivity of a life

insurance contract and while the insured is
alive to discover or prove that the policy is
void ab initio or is rescindible by reason of the
fraudulent concealment or misrepresentation
of the insured or his agent. After the two-year
period lapses, or when the insured dies within
the period, the insurer must make good on the
policy, even though the policy was obtained by
fraud, concealment, or misrepresentation. This
is not to say that insurance fraud must be
rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business
must be penalized, for such recklessness and
lack of discrimination ultimately work to the
detriment of bona fide takers of insurance and
the public in general.
Section 48 prevents a situation where the
insurer knowingly continues to accept annual
premium payments on life insurance, only to
later on deny a claim on the policy on specious
claims of fraudulent concealment and
misrepresentation, such as what obtains in the
instant case. Thus, instead of conducting at the
first instance an investigation into the
circumstances surrounding the issuance of the
subject insurance policy which would have
timely exposed the supposed flaws and
irregularities attending it as it now professes, M
Insurance appears to have turned a blind eye
and opted instead to continue collecting the
premiums on the policy. For nearly three years,
the insurer collected the premiums and
devoted the same to its own profit. It cannot
now deny the claim when it is called to account.
Section 48 must be applied to it with full force
and effect. [Manila Bankers v. Crisencia Aban, GR
No. 175666, July 29, 2013]
4. V Corp operated a tanker which was
chartered by C Inc. to transport
petroleum. The petroleum was
insured by AHA Co. however, during
the course of the voyage, the tanker
collided with another vessel and sank
along with the petroleum. AHA Co.
indemnified C Inc. for the loss, and
later sued V Corp for reimbursement.
What is the prescriptive period for
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- 53 -

filing an action for reimbursement by

the insurer as a result of subrogation?
The cause of action of the insurer is one which
arose out of subrogation by virtue of Article
2207 of the Civil Code, which is based upon an
obligation created by law. It comes under
Article 1194(2) of the Civil Code and prescribes
in ten years. [Vector Shipping v. American Home
Insurance, GR No. 159213, 3 July 2013]
N.B. If there is a period within which the
insured can file a claim with the wrongdoer, the
subrogated insurance company is also bound
by such period. The subrogated insurance
company stands in the place and in substitution
of the consignee. [Federal Express v. American
Home Assurance, G.R. No. 150094, August 18,
2004]
5. R insured her car with P Insurer in
case of loss or damage thereto. The
car was to be taken to an auto shop by
Rs driver, but the driver no longer
return. After efforts to find it failed, R
notified the insurer of the loss. The
claim of R against the insurer was
denied because of a provision in the
policy which exempts the insurer
from liability in case malicious
damage to the car was caused by the
employee of the insured. Can the
insurer deny Rs claim on such
ground?
No. A contract of insurance is a contract of
adhesion. When the terms of the insurance
contract contain limitations on liability, courts
should construe them in such a way as to
preclude the insurer from non-compliance with
his obligation.
The words "loss" and "damage" mean different
things in common ordinary usage. The word
"loss" refers to the act or fact of losing, or
failure to keep possession, while the word
"damage" means deterioration or injury to
property.

Starr Weigand 2016

Therefore, the insurer cannot exclude the loss

of
vehicle under the exceptions in the
insurance policy since the same refers only to
"malicious damage," or more specifically,
"injury" to the motor vehicle caused by a
person under the insureds service. It clearly
does not contemplate "loss of property," as
what happened in the instant case.
"Malicious damage," as provided for in the
subject policy as one of the exceptions from
coverage, is the damage that is the direct result
from the deliberate or willful act of the insured,
members of his family, and any person in the
insureds service, whose clear plan or purpose
was to cause damage to the insured vehicle for
purposes of defrauding the insurer
Theft perpetrated by a driver of the insured is
not an exception to the coverage from the
insurance policy subject of this case. This is
evident from the very provision of the
insurance policy. The insurance company,
subject to the limits of liability, is obligated to
indemnify the insured against theft. Said
provision does not qualify as to who would
commit the theft. Thus, even if the same is
committed by the driver of the insured, there
being no categorical declaration of exception,
the same must be covered. "(A)n insurance
contract should be interpreted as to carry out
the purpose for which the parties entered into
the contract which is to insure against risks of
loss or damage to the goods. Such
interpretation should result from the natural
and reasonable meaning of language in the
policy. Where restrictive provisions are open to
two interpretations, that which is most
favorable to the insured is adopted." The
defendant would argue that if the person
employed by the insured would commit the
theft and the insurer would be held liable, then
this would result to an absurd situation where
the insurer would also be held liable if the
insured would commit the theft. This argument
is certainly flawed. Of course, if the theft would
be committed by the insured himself, the same
would be an exception to the coverage since in
that case there would be fraud on the part of

2013 & 2014 Q and A|Commercial Law

- 54 -

the insured or breach of material warranty

under Section 69 of the Insurance Code.
Indemnity and liability insurance policies are
construed in accordance with the general rule
of resolving any ambiguity therein in favor of
the insured, where the contract or policy is
prepared by the insurer. A contract of
insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be
resolved against the insurer; in other words, it
should be construed liberally in favor of the
insured and strictly against the insurer.
Limitations of liability should be regarded with
extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations. [Alpha
Insurance and Surety Co. v. Arsenia Sonia Castor,
G.R. No. 198174, September 2, 2013]
6. A was a health insurance policy
holder of M Inc. He underwent
emergency medical appendectomy
causing him to incur medical
expenses while in the US. However, M
In. only approved reimbursement of a
portion of the expenses, which was
based on the average cost of the
procedure if done in Manila. With the
denial
of
his
claim
for
reimbursement, A filed a complaint
for breach of contract against M Inc.
Should the action prosper?
Yes. M Inc.s liability to A under the subject
Health Care Contract should be based on the
expenses for hospital and professional fees
which he actually incurred, and should not be
limited by the amount that he would have
incurred had his emergency treatment been
performed in an accredited hospital in the
Philippines. . For purposes of determining the
liability of a health care provider to its
members, jurisprudence holds that a health
care agreement is in the nature of non-life
insurance, which is primarily a contract of
indemnity. Once the member incurs hospital,
medical or any other expense arising from
sickness, injury or other stipulated contingent,
the health care provider must pay for the same
Starr Weigand 2016

to the extent agreed upon under the contract.

that a health care agreement is in the nature of
a non-life insurance. It is an established rule in
insurance contracts that when their terms
contain limitations on liability, they should be
construed strictly against the insurer. These
are contracts of adhesion the terms of which
must be interpreted and enforced stringently
against the insurer which prepared the
contract. This doctrine is equally applicable to
health care agreements. L]imitations of liability
on the part of the insurer or health care
provider must be construed in such a way as to
preclude it from evading its obligations.
Accordingly, they should be scrutinized by the
courts with "extreme jealousy" and "care" and
with a "jaundiced eye. [Fortune Medicare, Inc. v.
David Robert U. Amorin, G.R. No. 195872, March
12, 2014]
7. Can the security deposit of an
insurance company under Section
203 of the insurance code be levied
upon by a judgment creditor? Can the
insurance commissioner bar or
prevent such levy?
The text of Section 203 indicates that the
security deposit is exempt from levy by a
judgment or any other claimant. worded, the
law and clearly states that the security deposit
shall be (1) answerable for all the obligations of
the depositing insurer under its insurance'
contracts; (2) at all times free from any liens or
encumbrance; and (3) exempt from levy by any
claimant. A single claimant cannot proceed
independently against the security deposit of an
insurance company, since to do so would not
only prejudice the policy holders and their
beneficiaries, but would also annul the very
reason for which the law required the security
deposit. Under Section 191 and Section 203 of
the
Insurance
Code,
the
Insurance
Commissioner has the specific legal duty to
hold the security deposits for the benefit of all
policy holders. Undeniably, the Insurance
commissioner has been given a wide latitude of
discretion to regulate the insurance industry so
as to protect the insuring public. The law
specifically confers custody over the securities
2013 & 2014 Q and A|Commercial Law

- 55 -

upon the commissioner, with whom these

investments are required to be deposited. An
implied trust is created by the law for the
benefit of all claimants under subsisting
insurance contracts issued by the insurance
company. As the officer vested with custody of
the
security
deposit,
the
insurance
commissioner is in the best position to
determine if and when it may be released
without prejudicing the right of other policy
holders. Before allowing the withdrawal or the
release of the deposit, the commissioner must
be satisfied that the conditions contemplated
by the law are met and all policy holders
protected. [Capital Insurance and Surety Co., Inc.
v. Del Monte Motor Works, Inc., G.R. No. 159979,
December 9, 2015]

Intellectual Property Laws

1. HIPOLITO
&
SEA
HORSE
&
TRIANGULAR DEVICE," "FAMA," and
other related marks were owned by
CH S.A. of Portugal to designate
kerosene burners. L claimed that the
true owner of the marks G corp.
assigned them to him. However, he
claimed that he bought kerosene
burners from W Corp. with the
subject marks and indicated thereon
that they were made in Portugal. He
thus filed a complaint against W Corp.
and its officers for false designation
of origin. Can W Corp. be held liable?
Yes. W Corp. did not have authority from CH
S.A. to place the words Made in Portugal and
Original Portugal with the trademarks on the
burners produced in the Philippines. W Corp.
placed the words "Made in Portugal" and
"Original Portugal" with the disputed marks
knowing fully well because of their previous
dealings with the Portuguese company that
these were the marks used in the products of
CH S.A. Portugal. More importantly, the
products that W Corp. sold were admittedly
produced in the Philippines, with no authority
CH S.A. Portugal. The law on trademarks and
trade names precisely precludes a person from
profiting from the business reputation built by
another and from deceiving the public as to the
origins of products. [Uyco v. Lo, G.R. No. 202423,
January 28, 2013]
2. Levis Inc. was a licensee of Levis, a
US Corporation owner of trademarks
and designs of Levis Jeans. It received
information that D was selling
counterfeit Levis jeans, and with the
help of the NBI, had seized from Ds
shop several fake Levis jeans, with
the trademark LS JEANS TAILORING.
It charged D with the crime of
trademark infringement. Is D guilty of
infringement?
No. The elements of the offense of trademark
infringement under the

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- 56 -

Intellectual Property Code are, therefore, the

following:
1. The trademark being infringed is
registered in the Intellectual Property
Office;
2. The
trademark
is
reproduced,
counterfeited, copied, or
colorably
imitated by the infringer;
3. The infringing mark is used in
connection with the sale, offering for
sale, or advertising of any goods,
business or services; or the infringing
mark is applied to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used
upon or in connection with such goods,
business or services;
4. The use or application of the infringing
mark is likely to cause confusion or
mistake or to deceive purchasers or
others as to the goods or services
themselves or as to the source or origin
of such goods or services or the identity
of such business; and
5. The use or application of the infringing
mark is without the consent of the
trademark owner or the assignee
thereof.
The gravamen of the offense is he likelihood of
confusion. There are two tests to determine
likelihood of confusion, namely: the dominancy
test, and the holistic test. The holistic test is
applicable here considering that the herein
criminal cases also involved trademark
infringement in relation to jeans products.
Accordingly, the jeans trademarks of Levis and
D must be considered as a whole in
determining the likelihood of confusion
between them. The jeans made and sold by
Levis, were very popular in the Philippines.
The consuming public knew that the original
Levis jeans were under a foreign brand and
quite expensive. Such jeans could be purchased
only in malls or boutiques as ready-to-wear
items, and were not available in tailoring shops
like those of Ds as well as not acquired on a
made-to-order
basis.
Under
the
circumstances, the consuming public could
easily discern if the jeans were original or fake
Starr Weigand 2016

Levis jeans, or were manufactured by other

brands of jeans. D used the trademark LS
JEANS TAILORING for the jeans he produced
and sold in his tailoring shops. His trademark
was visually and aurally different from the
trademark LEVI STRAUSS & CO appearing on
the patch of original jeans under the trademark
LEVIS. The word LS could not be confused as
a derivative from LEVI STRAUSS by virtue of
the LS being connected to the word
TAILORING, thereby openly suggesting that
the jeans bearing the trademark LS JEANS
TAILORING came or were bought from the
tailoring shops of D, not from the malls or
boutiques selling original Levis jeans to the
consuming public. [Diaz v. People, G.R. No.
180677, 18 February 2013]
3. A French partnership filed with the
IPO a trademark application for the
mark "LE CORDON BLEU & DEVICE".
This was opposed by Ecole alleging
that it was the owner of the mark "LE
CORDON BLEU, ECOLE DE CUISINE
MANILLE," which it has been using
since 1948 in cooking and other
culinary activities, including in its
restaurant business, it has earned
immense and invaluable goodwill
such that Cointreaus use of the
subject mark will actually create
confusion, mistake, and deception to
the buying public as to the origin and
sponsorship of the goods, and cause
great and irreparable injury and
damage
to
Ecoles
business
reputation and goodwill as a senior
user of the same. Can the said mark of
the French partnership be registered?
Yes. Foreign marks which are not registered are
still accorded protection against infringement
and/or unfair competition. Under the Paris
Convention, the Philippines is obligated to
assure nationals of the signatory-countries that
they are afforded an effective protection against
violation of their intellectual property rights in
the Philippines in the same way that their own
countries are obligated to accord similar
protection to Philippine nationals. Thus, under
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- 57 -

Philippine law, a trade name of a national of a

State that is a party to the Paris Convention,
whether or not the trade name forms part of a
trademark, is protected without the obligation
of filing or registration.
The present law on trademarks, Republic Act
No. 8293, otherwise known as the Intellectual
Property Code of the Philippines, as amended,
has already dispensed with the requirement of
prior actual use at the time of registration.
Thus, there is more reason to allow the
registration of the subject mark under the name
of the French partnership as its true and lawful
owner.
The function of a trademark is to point out
distinctly the origin or ownership of the goods
(or services) to which it is affixed; to secure to
him, who has been instrumental in bringing
into the market a superior article of
merchandise, the fruit of his industry and skill;
to assure the public that they are procuring the
genuine article; to prevent fraud and
imposition; and to protect the manufacturer
against substitution and sale of an inferior and
different article as his product. As such, courts
will protect trade names or marks, although not
registered or properly selected as trademarks,
on the broad ground of enforcing justice and
protecting one in the fruits of his toil. [Ecole De
Cuisine Manille (Cordon Bleu of the Philippines),
Inc. v. Renaud Cointreau & CIE and Le Condron
Bleu Intl., B.V., G.R. No. 185830, June 5, 2013]
4. F Manufacturing filed a case against
Harvard
U,
an
educational
corporation in the US, for the
cancellation of its registration of
trademark. It alleged that since 1995,
it had used the trademark Harvard
for its goods, for which its
predecessor had secured a certificate
of registration with the IPO. Can the
action prosper?
No. F Manufacturings registration of the mark
"Harvard" should not have been allowed
because Section 4(a) of R.A. No. 166 prohibits
the registration of a mark "which may
Starr Weigand 2016

disparage or falsely suggest a connection with

persons, living or dead, institutions, beliefs x x
x." its use of the mark "Harvard," coupled with
its claimed origin in the US, obviously suggests
a false connection with Harvard University. On
this ground alone, F Manufacturings
registration of the mark "Harvard" should have
been disallowed.
Also, the Philippines and the United States of
America are both signatories to the Paris
Convention for the Protection of Industrial
Property (Paris Convention). The Philippines
became a signatory to the
Paris Convention on 27 September 1965. The
Philippines is obligated to assure nationals of
countries of the Paris Convention that they are
afforded an effective protection against
violation of their intellectual property rights in
the Philippines in the same way that their own
countries are obligated to accord similar
protection to Philippine nationals. Thus, under
Philippine law, a trade name of a national of a
State that is a party to the Paris Convention,
whether or not the trade name forms part of a
trademark, is protected "without the obligation
of filing or registration."
Indeed, Section 123.1(e) of R.A. No. 8293 now
categorically states that "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," cannot be registered by
another in the Philippines. Section 123.1(e)
does not require that the well-known mark be
used in commerce in the Philippines but only
that it be well-known in the Philippines.
In determining whether a mark is well-known,
the following criteria or any combination
thereof may be taken into account:
(a) the duration, extent and geographical
area of any use of the mark, in particular,
the duration, extent and geographical
area of any promotion of the mark,
including advertising or publicity and
the presentation, at fairs or exhibitions,
of the goods and/or services to which
the mark applies;
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(b) the market share, in the Philippines and

in other countries, of the goods and/or
services to which the mark applies;
(c) the degree of the inherent or acquired
distinction of the mark;
(d) the quality-image or reputation acquired
by the mark;
(e) the extent to which the mark has been
registered in the world;
(f) the exclusivity of registration attained
by the mark in the world;
(g) the extent to which the mark has been
used in the world;
(h) the exclusivity of use attained by the
mark in the world;
(i) the commercial value attributed to the
mark in the world;
(j) the record of successful protection of the
rights in the mark;
(k) the outcome of litigations dealing with
the issue of whether the mark is a wellknown mark; and
(l) the presence or absence of identical or
similar marks validly registered for or
used on identical or similar goods or
services and owned by persons other
than the person claiming that his mark is
a well-known mark.
Since "any combination" of the foregoing
criteria is sufficient to determine that a mark is
well-known, it is clearly not necessary that the
mark be used in commerce in the Philippines.
Thus, while under the territoriality principle a
mark must be used in commerce in the
Philippines to be entitled to protection,
internationally well-known marks are the
exceptions to this rule.
Thus, the trademark of Harvard U, even if not
registered here, is still entitled to protection.
"Harvard" is the trade name of the world
famous Harvard University, and it is also a
trademark of Harvard University. Under Article
8 of the Paris Convention, as well as Section 37
of R.A. No. 166, Harvard University is entitled to
protection in the Philippines of its trade name
"Harvard" even without registration of such
trade name in the Philippines. This means that
no educational entity in the Philippines can use
Starr Weigand 2016

the trade name "Harvard" without the consent

of Harvard University. Likewise, no entity in the
Philippines can claim, expressly or impliedly
through the use of the name and mark
"Harvard," that its products or services are
authorized, approved, or licensed by, or
sourced from, Harvard University without the
latter's consent. [Fredco Manufacturing v.
President and Fellows of Harvard College, GR No.
185917, 1 June, 2011]
5. B Corp. was a German company who
applied for various trademark
registrations with the IPO, which
included the mark Birkenstock.
However, registration proceedings
were halted because the IPO found an
existing registration for the mark
Birkenstock and Device, in the
name of S Corp. predecessor of PS
Marketing. But, PS Marketing did not
file a declaration of actual use (DAU)
of the said marks. Should the
registration of B corp. be allowed?
Yes. The law requires the filing of a DAU on
specified periods, and failure to file the DAU
within the requisite period results in the
automatic cancellation of registration of a
trademark. In turn, such failure is tantamount
to the abandonment or withdrawal of any right
or interest the registrant has over his
trademark. Also, it must be emphasized that
registration of a trademark, by itself, is not a
mode of acquiring ownership. If the applicant is
not the owner of the trademark, he has no right
to apply for its registration. Registration merely
creates a prima facie presumption of the
validity of the registration, of the registrants
ownership of the trademark, and of the
exclusive right to the use thereof. Such
presumption, just like the presumptive
regularity in the performance of official
functions, is rebuttable and must give way to
evidence to the contrary.
Clearly, it is not the application or registration
of a trademark that vests ownership thereof,
but it is the ownership of a trademark that
confers the right to register the same. A
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trademark is an industrial property over which

its owner is entitled to property rights which
cannot be appropriated by unscrupulous
entities that, in one way or another, happen to
register such trademark ahead of its true and
lawful owner. The presumption of ownership
accorded to a registrant must then necessarily
yield to superior evidence of actual and real
ownership of a trademark.
In the instant case, B Corp. is the owner of the
mark "BIRKENSTOCK." There is evidence
relating to the origin and history of
"BIRKENSTOCK" and its use in commerce long
before respondent was able to register the
same here in the Philippines. It has been
sufficiently proven that "BIRKENSTOCK" was
first adopted in Europe in 1774 by its inventor,
Johann Birkenstock, a shoemaker, on his line of
quality footwear and thereafter, numerous
generations of his kin continuously engaged in
the manufacture and sale of shoes and sandals
bearing the mark "BIRKENSTOCK" until it
became the entity now known as the petitioner.
Petitioner also submitted various certificates of
registration of the mark "BIRKENSTOCK" in
various countries and that it has used such
mark in different countries worldwide,
including the Philippines. This being the case, B
Corp. is the true and lawful owner of the mark
"BIRKENSTOCK" and entitled to its registration,
and that PS Marketing was in bad faith in
having it registered in its name. [Birkenstock
Orthopaedie GMBH and Co. KG v. Philippine Shoe
Expo Maarketing, G.R. No. 194307, November
20, 2013]
6. P Corp and S Corp supply and produce
LPG in the Philippines. P Corp is the
registered owner of the trademarks
Gasul and Gasul cylinders, while S
Corp was the authorized user of
Shellane and Shellane cylinders in
the Philippines. With the help of the
NBI, it was found that R Corp was
engaged in the refilling and sale of
LPG cylinders bearing the registered
marks of the P Corp and S Corp
without authority from the latter. Can

Starr Weigand 2016

R Corp be held liable for infringement

of trademark and unfair competition?
Yes. The mere unauthorized use of a container
bearing a registered trademark in connection
with the sale, distribution or advertising of
goods or services which is likely to cause
confusion, mistake or deception among the
buyers or consumers can be considered as
trademark infringement. In the instant case, R
Corp committed trademark infringement when
they refilled, without the consent of P Corp and
S Corp, the LPG containers bearing the latters
registered marks. R Corps acts will inevitably
confuse the consuming public, since they have
no way of knowing that the gas contained in the
LPG tanks bearing the marks of P Corp and S
Corp is in reality not the latters LPG product
after the same had been illegally refilled. The
public will then be led to believe that R Corp are
authorized refillers and distributors of the LPG
products, considering that they are accepting
empty containers P Corp and S Corp, and
refilling them for resale.
Unfair competition has been defined as the
passing off (or palming off) or attempting to
pass off upon the public of the goods or
business of one person as the goods or business
of another with the end and probable effect of
deceiving the public. Passing off (or palming
off) takes place where the defendant, by
imitative devices on the general appearance of
the goods, misleads prospective purchasers
into buying his merchandise under the
impression that they are buying that of his
competitors. Thus, the defendant gives his
goods the general appearance of the goods of
his competitor with the intention of deceiving
the public that the goods are those of his
competitor. In the present case, P Corp and S
Corp pertinently observed that by refilling and
selling LPG cylinders bearing their registered
marks, R Corp was selling goods by giving them
the general appearance of goods of another
manufacturer. There is a showing that the
consumers may be misled into believing that
the LPGs contained in the cylinders bearing the
marks "GASUL" and "SHELLANE" are those
goods or products of the P Corp and S Corps
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when, in fact, they are not. Obviously, the mere

use of those LPG cylinders bearing the
trademarks "GASUL" and "SHELLANE" will give
the LPGs sold by R Corp the general appearance
of the products of the P Corp and S Corp.
[Republic Gas Corporation v. Petron Corporation
and Plipinas Shell, G.R. No. 194062, June 17,
2013]
7. TK filed with the IPO an application
for trademark registration of KOLIN
for use on a combination of goods,
including
colored
televisions,
refrigerators, window-type and splittype air conditioners, electric fans
and water dispensers. Said goods
allegedly fall under Classes 9, 11, and
21 of the Nice Classification (NCL).
The application was opposed by KE,
saying that that trademark being
registered by TK is identical, if not
confusingly
similar,
with
its
previously registered KOLIN mark,
covering the following products
under Class 9 of the NCL: automatic
voltage
regulator,
converter,
recharger, stereo booster, AC-DC
regulated power supply, step-down
transformer, and PA amplified AC-DC.
Should TK be allowed to register its
trademark?
Yes. Mere uniformity in categorization, by itself,
does
not
automatically
preclude
the
registration of what appears to be an identical
mark, if that be the case. Whether or not the
products covered by the trademark sought to
be registered by TK, on the one hand, and those
covered by the prior issued certificate of
registration in favor of KE on the other, fall
under the same categories in the NCL is not the
sole and decisive factor in determining a
possible violation of KEs intellectual property
right should TKs application be granted. It is a
hornbook doctrine that emphasis should be on
the similarity of the products involved and not
on the arbitrary classification or general
description
of
their
properties
or
characteristics. The mere fact that one person
has adopted and used a trademark on his goods
Starr Weigand 2016

would not, without more, prevent the adoption

and use of the same trademark by others on
unrelated articles of a different kind. And in
case of the parties products, they are unrelated,
and the ordinary buyer would not likely be
confused thereby.
A certificate of trademark registration confers
upon the trademark owner the exclusive right
to sue those who have adopted a similar mark
not only in connection with the goods or
services specified in the certificate, but also
with those that are related thereto.
In resolving one of the pivotal issues in this
casewhether or not the products of the
parties involved are relatedthe doctrine
in Mighty Corporation is authoritative. There,
the Court held that the goods should be tested
against several factors before arriving at a
sound conclusion on the question of
relatedness. Among these are:
(a) the business (and its location) to which
the goods belong;
(b) the class of product to which the goods
belong;
(c) the products quality, quantity, or size,
including the nature of the package,
wrapper or container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical
attributes or essential characteristics
with reference to their form,
composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for
immediate consumption, that is, day-today household items;
(h) the fields of manufacture;
(i) the conditions under which the article is
usually purchased; and
(j) the channels of trade through which the
goods flow, how they are distributed,
marketed, displayed and sold.
As mentioned, the classification of the products
under the NCL is merely part and parcel of the
factors to be considered in ascertaining
whether the goods are related. It is not
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- 61 -

sufficient to state that the goods involved

herein are electronic products under Class 9 in
order to establish relatedness between the
goods, for this only accounts for one of many
considerations
enumerated
in Mighty
Corporation. In this case, credence is accorded
to TKs assertions that:
a. TKs goods are classified as home
appliances as opposed to KEs goods
which are power supply and audio
equipment accessories;
b. TKs television sets and DVD players
perform distinct function and purpose
from KEs power supply and audio
equipment; and
c. TK sells and distributes its various home
appliance products on wholesale and to
accredited dealers, whereas KEs goods
are sold and flow through electrical and
hardware stores.
Clearly then, it cannot be concluded that all
electronic products are related and that the
coverage of one electronic product necessarily
precludes the registration of a similar mark
over another. In this digital age wherein
electronic products have not only diversified by
leaps and bounds, and are geared towards
interoperability, it is difficult to assert readily,
as respondent simplistically did, that all devices
that require plugging into sockets are
necessarily
related
goods.
It bears to stress at this point that the list of
products included in Class 9 can be subcategorized into five (5) classifications, namely:
(1) apparatus and instruments for scientific or
research purposes, (2) information technology
and audiovisual equipment, (3) apparatus and
devices for controlling the distribution and use
of electricity, (4) optical apparatus and
instruments, and (5) safety equipment. From
this sub-classification, it becomes apparent that
petitioners products, i.e., televisions and DVD
players, belong to audiovisiual equipment,
while that of respondent, consisting of
automatic voltage regulator,
converter,
recharger, stereo booster, AC-DC regulated
power supply, step-down transformer, and PA
Starr Weigand 2016

amplified AC-DC, generally fall under devices

for controlling the distribution and use of
electricity. [Taiwan Kolin v. Kolin Electronics,
G.R. No. 209843, March 25, 2015]
8. S Corp. filed an application for the
issuance of search warrant to search
a warehouse of IPI, alleging that the
latter engaged in infringement of
trademark. Upon implementation of
the warrant, it was found that there
were more than 6,000 pairs of shoes
bearing
S
Corps
registered
trademark (stylized S with an oval
design). Was there infringement?
Yes. There is colorable imitation between the
shoes of IPI and S Corp. The essential element
of infringement under R.A. No. 8293 is that the
infringing mark is likely to cause confusion. In
determining similarity and likelihood of
confusion, jurisprudence has developed tests:
the Dominancy Test and the Holistic or Totality
Test.
The Dominancy Test focuses on the similarity of
the prevalent or dominant features of the
competing trademarks that might cause
confusion, mistake, and deception in the mind
of the purchasing public. Duplication or
imitation is not necessary; neither is it required
that the mark sought to be registered suggests
an effort to imitate. Given more consideration
are the aural and visual impressions created by
the marks on the buyers of goods, giving little
weight to factors like prices, quality, sales
outlets, and market segments.
In contrast, the Holistic or Totality Test
necessitates a consideration of the entirety of
the marks as applied to the products, including
the labels and packaging, in determining
confusing similarity. The discerning eye of the
observer must focus not only on the
predominant words, but also on the other
features appearing on both labels so that the
observer may draw conclusion on whether one
is confusingly similar to the other.

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Relative to the question on confusion of marks

and trade names, jurisprudence has noted two
(2) types of confusion, viz.: (1) confusion of
goods (product confusion), where the
ordinarily prudent purchaser would be induced
to purchase one product in the belief that he
was purchasing the other; and (2) confusion of
business (source or origin confusion), where,
although the goods of the parties are different,
the product, the mark of which registration is
applied for by one party, is such as might
reasonably be assumed to originate with the
registrant of an earlier product, and the public
would then be deceived either into that belief
or into the belief that there is some connection
between the two parties, though inexistent.
Applying the Dominancy Test to the case at bar,
this Court finds that the use of the stylized "S"
by IPI in its shoes infringes on the mark already
registered by S Corp. with the IPO. While it is
undisputed that S Corp.s stylized "S" is within
an oval design, to this Court's mind, the
dominant feature of the trademark is the
stylized "S," as it is precisely the stylized "S"
which catches the eye of the purchaser. Thus,
even if IPI did not use an oval design, the mere
fact that it used the same stylized "S", the same
being the dominant feature of S Copr.'s
trademark, already constitutes infringement
under the Dominancy Test. [Sketchers USA v.
Inter Pacific Industrial, GR No. 164321, Marche
23, 2011]
9. EYIS corp., a Philippine company,
distributes air conditioners and other
industrial tools and equipment. SD
corp., on the other hand, is a
Taiwanese company engaged in the
manufacture of air compressors. Both
claimed to have the right to register
the trademark "VESPA" for air
compressors.
EYIS
buys
air
compressors from SD, but the
documents do not show that the said
goods were marked as VESPA. EYIS
was able to register the mark VESPA
with the IPO. A month later, SD was
also granted registration. SD filed a

Starr Weigand 2016

petition to cancel EYIS registration.

Who is the true owner of the mark?
EYIS must be considered as the prior and
continuous user of the mark "VESPA" and its
true owner. Hence, EYIS is entitled to the
registration of the mark in its name. the
registration of a mark is prevented with the
filing of an earlier application for registration.
This must not, however, be interpreted to mean
that ownership should be based upon an earlier
filing date. While RA 8293 removed the
previous requirement of proof of actual use
prior to the filing of an application for
registration of a mark, proof of prior and
continuous use is necessary to establish
ownership of a mark. Such ownership
constitutes sufficient evidence to oppose the
registration of a mark. Sec. 134 of the IP Code
provides that "any person who believes that he
would be damaged by the registration of a mark
x x x" may file an opposition to the application.
The term "any person" encompasses the true
owner of the mark the prior and continuous
user. Notably, the Court has ruled that the prior
and continuous use of a mark may even
overcome the presumptive ownership of the
registrant and be held as the owner of the mark.
By itself, registration is not a mode of acquiring
ownership. When the applicant is not the
owner of the trademark being applied for, he
has no right to apply for registration of the
same. Registration merely creates a prima facie
presumption of the validity of the registration,
of the registrants ownership of the trademark
and of the exclusive right to the use thereof.
Such presumption, just like the presumptive
regularity in the performance of official
functions, is rebuttable and must give way to
evidence to the contrary. In the instant case,
EYIS is the prior user of the mark, and is thus
the true owner thereof. [E.Y. Industrial Sales v.
Shen Dar Electricity and Machinery Co. Ltd., GR
No. 184850, 20 October 2010]
10. M
Pharmaceuticals
registered
Dermalin
as
its
trademark.
Thereafter, D Inc. sought to have
Dermaline
registered
as
a
trademark under its name. this was
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opposed to be M Pharmaceuticals
allegeing that registration by D Inc.
will likely cause confusion, mistake
and deception to the purchasing
public, as the trademark sought to be
registered by D Inc. so resembles its
trademark, Dermalin. Can the
trademark
Dermaline
be
registered?
No. While there are no set rules that can be
deduced as what constitutes a dominant feature
with respect to trademarks applied for
registration; usually, what are taken into
account are signs, color, design, peculiar shape
or name, or some special, easily remembered
earmarks of the brand that readily attracts and
catches the attention of the ordinary consumer.
Verily, when one applies for the registration of
a trademark or label which is almost the same
or that very closely resembles one already used
and registered by another, the application
should be rejected and dismissed outright, even
without any opposition on the part of the
owner and user of a previously registered label
or trademark. This is intended not only to avoid
confusion on the part of the public, but also to
protect an already used and registered
trademark and an established goodwill. In the
instant case, the likelihood of confusion is
apparent. The two marks are almost spelled the
same way and are even pronounced in
practically the same manner in three (3)
syllables. Thus, when an ordinary purchaser,
for example, hears an advertisement of D Inc.'s
applied trademark over the radio, chances are
he will associate it with M Pharmaceutical's
registered mark.
Even if the marks do not refer to the same
classification of goods, does not eradicate the
possibility of mistake on the part of the
purchasing public to associate the former with
the latter. Indeed, the registered trademark
owner may use its mark on the same or similar
products, in different segments of the market,
and at different price levels depending on
variations of the products for specific segments
of the market. The Court is cognizant that the
registered trademark owner enjoys protection
Starr Weigand 2016

in product and market areas that are the

normal potential expansion of his business.
Verily, when one applies for the registration of
a trademark or label which is almost the same
or that very closely resembles one already used
and registered by another, the application
should be rejected and dismissed outright, even
without any opposition on the part of the
owner and user of a previously registered label
or trademark. This is intended not only to avoid
confusion on the part of the public, but also to
protect an already used and registered
trademark and an established goodwill.
[Dermaline, Inc. v. Myra Pharmaceuticals, GR No.
190065, 16 August 2010]
11. ABS-CBN was able to cover the
release of a Filipino worker
kidnapped in Iraq. The said Filipino
was released because of the
withdrawal of Filipino troops from
the said country. ABS-CBN allowed
Reuters Television Service (Reuters)
to air the footages it had taken earlier
under a special agreement. Under the
same agreement, it was stated that
any of the footages taken by ABS-CBN
would be for the "use of Reuter's
international subscribers only, and
shall be considered and treated by
Reuters under 'embargo' against use
by
other
subscribers
in
the
Philippines. . . . [N]o other Philippine
subscriber of Reuters would be
allowed to use ABS-CBN footage
without the latter's consent. However,
GMA received live video feed of the
coverage of the arrival of the
kidnapped Filipino from Reuters, and
immediately carried the same in its
Flash Report. ABS-CBN thus filed a
complaint for copyright infringement
against GMA. Is news footage is
subject to copyright, and would the
prohibited use thereof be punishable
under the Intellectual Property Code?
Yes. The news footage is copyrightable.
The Intellectual Property Code is clear about
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the rights afforded to authors of various kinds

of work. Under the Code, "works are protected
by the sole fact of their creation, irrespective of
their mode or form of expression, as well as of
their content, quality and purpose." These
include
"[audio-visual
works
and
cinematographic works and works produced by
a process analogous to cinematography or any
process for making audiovisual recordings.

The idea/expression dichotomy has long been

subject to debate in the field of copyright law.
Abolishing the dichotomy has been proposed,
in that non-protectibility of ideas should be reexamined, if not stricken, from decisions and
the law:

Contrary to the old copyright law, the

Intellectual Property Code does not require
registration of the work to fully recover in an
infringement suit. Nevertheless, both copyright
laws provide that copyright for a work is
acquired by an intellectual creator from the
moment of creation.

If the underlying purpose of the copyright law

is the dual one expressed by Lord Mansfield,
the only excuse for the continuance of the ideaexpression test as a judicial standard for
determining protectibility would be that it was
or could be a truly useful method of
determining the proper balance between the
creator's right to profit from his work and the
public's right that the "progress of the arts not
be retarded."

It is true that under Section 175 of the

Intellectual Property Code, "news of the day
and other miscellaneous facts having the
character of mere items of press information"
are considered unprotected subject matter.
However, the Code does not state
that expression of the news of the day,
particularly when it underwent a creative
process, is not entitled to protection.

. . . [A]s used in the present-day context[,] the

dichotomy has little or no relationship to the
policy which it should effectuate. Indeed, all too
often the sweeping language of the courts
regarding the nonprotectibility of ideas gives
the impression that this is of itself a policy of
the law, instead of merely a clumsy and
outdated tool to achieve a much more basic
end.

An idea or event must be distinguished from

the expression of that idea or event. An idea has
been likened to a ghost in that it "must be
spoken to a little before it will explain itself." It
is a concept that has eluded exact legal
definition. There is no one legal definition of
"idea" in this jurisdiction. The term "idea" is
mentioned only once in the Intellectual
Property Code.

The idea/expression dichotomy is a complex

matter if one is trying to determine whether a
certain material is a copy of another. This
dichotomy would be more relevant in
determining, for instance, whether a stage play
was an infringement of an author's book
involving the same characters and setting. In
this case, however, GMA admitted that the
material under review which is the subject of
the controversy is an exact copy of the
original. GMA did not subject ABS-CBN's
footage to any editing of their own. The news
footage did not undergo any transformation
where there is a need to track elements of the
original. News as expressed in a video footage is
entitled to copyright protection. Broadcasting
organizations have not only copyright on but
also neighboring rights over their broadcasts.
Copyrightability of a work is different from fair
use of a work for purposes of news reporting.

News or the event itself is not copyrightable.

However, an event can be captured and
presented in a specific medium. As recognized
by the court in Joaquin, television "involves a
whole spectrum of visuals and effects, video
and audio." News coverage in television
involves framing shots, using images, graphics,
and sound effects. It involves creative process
and originality. Television news footage is an
expression of the news.

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The mere act of rebroadcasting without

authority from the owner of the broadcast gives
rise to the probability that a crime was
committed under the Intellectual Property
Code. Note that, unless clearly provided in the
law, offenses involving infringement of
copyright
protections
should
be
considered malum prohibitum. It is the act of
infringement, not the intent, which causes the
damage. To require or assume the need to
prove intent defeats the purpose of intellectual
property
protection.
Nevertheless, proof beyond reasonable doubt is
still the standard for criminal prosecutions
under the Intellectual Property Code.[ABS-CBN
Corporation v. Gozon et al., G.R. No. 195956,
March 11, 2015]
12. K Inc. had the trademarks, trading
styles, company names and business
names
"KENNEX",
"KENNEX
&
DEVICE", "PRO KENNEX" and "PROKENNEX", in its name. S Corp. filed an
action against K Inc. alleging
trademark infringement, saying that
K Inc. is a mere distributor of the
goods covered by the marks and it is
the actual owner of the marks.
However, S Corp.s registration of the
marks was cancelled by in a
registration cancellation case. Can the
action prosper? Was there unfair
competition?
No. By operation of law, specifically Section 19
of RA 166, the trademark infringement aspect
of S Corp.'s case has been rendered moot and
academic in view of the finality of the decision
in the Registration Cancellation Case. In short, S
Corp. is left without any cause of action for
trademark infringement since the cancellation
of registration of a trademark deprived it of
protection from infringement from the moment
judgment or order of cancellation became final.
To be sure, in a trademark infringement, title to
the trademark is indispensable to a valid cause
of action and such title is shown by its
certificate of registration. With its certificates of
registration over the disputed trademarks
Starr Weigand 2016

effectively cancelled with finality, S Corp.'s case

for trademark infringement lost its legal basis
and no longer presented a valid cause of action.
Likewise, there can be no infringement
committed by K Inc. who was adjudged with
finality to be the rightful owner of the disputed
trademarks in the Registration Cancellation
Case. Even prior to the cancellation of the
registration of the disputed trademarks, S Corp.
- as a mere distributor and not the owner
cannot assert any protection from trademark
infringement as it had no right in the first place
to the registration of the disputed trademarks.
In fact, jurisprudence holds that in the absence
of any inequitable conduct on the part of the
manufacturer, an exclusive distributor who
employs the trademark of the manufacturer
does not acquire proprietary rights of the
manufacturer, and a registration of the
trademark by the distributor as such belongs to
the manufacturer, provided the fiduciary
relationship does not terminate before
application for registration is filed.
To establish trademark infringement, the
following elements must be proven: (1) the
validity of plaintiff's mark; (2) the plaintiff's
ownership of the mark; and (3) the use of the
mark or its colorable imitation by the alleged
infringer results in "likelihood of confusion."
Based on these elements, it is immediately
obvious that the second element the plaintiff's
ownership of the mark - was what the
Registration Cancellation Case decided with
finality. On this element depended the validity
of the registrations that, on their own, only gave
rise to the presumption of, but was not
conclusive on, the issue of ownership.
Likewise, there is also no unfair competition in
the instant case. From jurisprudence, unfair
competition has been defined as the passing off
(or palming off) or attempting to pass off upon
the public of the goods or business of one
person as the goods or business of another with
the end and probable effect of deceiving the
public. The essential elements of unfair
competition are (1) confusing similarity in the
general appearance of the goods; and (2) intent
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to deceive the public and defraud a competitor.

In the instant case, there is no evidence exists
showing that K Inc. ever attempted to pass off
the goods it sold (i.e. sportswear, sporting
goods and equipment) as those of S Corp. In
addition, there is no evidence of bad faith or
fraud imputable to K Inc. in using the disputed
trademarks. [Superior Commercial Enterprises v.
Kunnan Enterprises., GR No. 169974, April 20,
2010]
13. To constitute copyright infringement
of computer/software programs, is it
required that the computer/software
programs involved that
the
computer
programs
be
first
photographed, photo-engraved, or
pictorially illustrated?
No. Presidential Decree No. 49 already
acknowledged the existence of computer
programs
as
works
or
creations
protected by copyright. To hold that the
legislative intent was to require that the
computer
programs
be
first
photographed,
photo-engraved,
or
pictorially illustrated as a condition for the
commission of copyright infringement
invites ridicule. Such interpretation of
Section 5(a) of Presidential Decree No. 49
defies logic and common sense because it
focused on terms like copy, multiply, and
sell, but blatantly ignored terms like
photographs, photo-engravings, and
pictorial illustrations. The mere sale of the
illicit copies of the software programs was
enough by itself to show the existence of
probable cause for copyright infringement.
There was no need for the petitioner to still
prove who copied, replicated or reproduced
the
software
programs.
[Microsoft
Corporation v. Rolando D. Manansala, et al.,
G.R. No. 166391, October 21, 2015]

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Banking Laws
1. The BSP, through the Monetary Board
is granted the power and authority to
prescribe different maximum rates of
interest which may be imposed for a
loan or renewal thereof or the
forbearance of any money, goods or
credits, provided that the changes are
effected gradually and announced in
advance. Thus, it issued CB Circular
No. 905, removing all interest ceilings
and suspended the usury law. Did the
BSP commit grave abuse of discretion
in issuing CB Circular No. 905?
No. The BSP has the power to do so. It has been
held that CB Circular No. 905 did not repeal
nor in anyway amend the Usury Law but simply
suspended the latters effectivity; that a [CB]
Circular cannot repeal a law, [for] only a law
can repeal another law; that by virtue of CB
Circular No. 905, the Usury Law has been
rendered ineffective; and Usury has been
legally non-existent in our jurisdiction. Interest
can now be charged as lender and borrower
may agree upon. The law creating the BSP
covered only loans extended by banks, whereas
under Section 1-a of the Usury Law, as
amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans
or renewals thereof or the forbearance of any
money, goods or credits, including those for
loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance
companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe
different maximum rate or rates for different
types of borrowings, including deposits and
deposit substitutes, or loans of financial
intermediaries. By lifting the interest ceiling, CB
Circular No. 905 merely upheld the parties
freedom of contract to agree freely on the rate
of interest. Article 1306 of the New Civil Code
provides that the contracting parties may
establish such stipulations, clauses, terms and
conditions as they may deem convenient,
provided they are not contrary to law, morals,
good customs, public order, or public policy.
Starr Weigand 2016

Nothing in CB Circular No. 905 grants lenders a

carte blanche authority to raise interest rates to
levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets.
Stipulations
authorizing
iniquitous
or
unconscionable interests have been invariably
struck down for being contrary to morals, if not
against the law. Indeed, under Article 1409 of
the Civil Code, these contracts are deemed
inexistent and void ab initio, and therefore
cannot be ratified, nor may the right to set up
their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of
usurious interest does not affect the lenders
right to recover the principal of a loan, nor
affect the other terms thereof. [Advocates for
Truth in Lending v. Bangko Sentral Monetary
Board, G.R. No. 192986, 15 January 2013]
2. Can the exercise by the BSP Monetary
Board of its power under Section
37 of RA No. 7653 and Section 66 of
RA No. 8791, imposing, at its
discretion, administrative sanctions,
upon any bank for violation of any
banking law, be the subject of an
action for declaratory relief?
No, the act of the BSP Monetary Board imposing
administrative sanctions is done in the exercise
of its quasi-judicial power, which cannot be the
subject of an action for declaratory relief.
A quasi-judicial agency or body is an organ of
government other than a court and other than a
legislature, which affects the rights of private
parties through either adjudication or rulemaking.
The
very
definition
of an
administrative agency includes its being vested
with quasi-judicial powers. The ever increasing
variety of powers and functions given to
administrative agencies recognizes the need for
the active intervention of administrative
agencies in matters calling for technical
knowledge
and
speed
in
countless
controversies which cannot possibly be
handled by regular courts. A quasi-judicial
function is a term which applies to the action,
discretion, etc. of public administrative officers
or bodies, who are required to investigate facts,
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or ascertain the existence of facts, hold

hearings, and draw conclusions from them, as a
basis for their official action and to exercise
discretion of a judicial nature.
Undoubtedly, the BSP Monetary Board is a
quasi-judicial agency exercising quasi-judicial
powers or functions. The BSP Monetary Board
is an independent central monetary authority
and a body corporate with fiscal and
administrative autonomy, mandated to provide
policy directions in the areas of money,
banking, and credit. It has the power to issue
subpoena, to sue for contempt those refusing to
obey the subpoena without justifiable reason,
to administer oaths and compel presentation of
books, records and others, needed in its
examination, to impose fines and other
sanctions and to issue cease and desist order.
Section 37 of Republic Act No. 7653, in
particular, explicitly provides that the BSP
Monetary Board shall exercise its discretion in
determining whether administrative sanctions
should be imposed on banks and quasi-banks,
which necessarily implies that the BSP
Monetary Board must conduct some form of
investigation or hearing regarding the same.
A priori, having established that the BSP
Monetary Board is indeed a quasi-judicial body
exercising quasi-judicial functions, then its act
in imposing sanctions upon a bank cannot be
the proper subject of an action for declaratory
relief. [Monetary Board v. Philippine Veterans
Bank, G.R. No. 189571, January 21, 2015]
3. The late Mr. G deposited 2 million
pesos with PALI. Conflicting claims of
his relatives were presented to PALI
seeking the release of the money
deposited. Pending investigation of
the claims, PALI deposited the money
with UCPB, in account which was in
trust for the heirs of Mr. G. UCPB
however allowed PALI to withdraw
the money leaving a balance of
around 9 thousand pesos. Can UCPB
be held liable for the allowing the
withdrawal?

Starr Weigand 2016

No. UCPB did not become a trustee by the mere

opening of the ACCOUNT. While this may seem
to be the case, by reason of the fiduciary nature
of the banks relationship with its depositors,
this fiduciary relationship does not convert the
contract between the bank and its depositors
from a simple loan to a trust agreement,
whether express or implied. It simply means
that the bank is obliged to observe high
standards of integrity and performance in
complying with its obligations under the
contract of simple loan. Per Article 1980 of the
Civil Code, a creditor-debtor relationship exists
between the bank and its depositor. The
savings deposit agreement is between the bank
and the depositor; by receiving the deposit, the
bank impliedly agrees to pay upon demand and
only upon the depositors order. [Joseph
Goyanko, Jr., as administrator of the Estate of
Joseph Goyanko, Sr. vs. United Coconut Planters
Bank, Mango Avenue Branch, G.R. No. 179096.
February 6, 2013]
4. BOMC was created by a BSP circular
to provide support service for banks,
and is a subsidiary of BPI. A service
agreement was entered into by BPI
and BOMC where the latter provides
services to a branch of the former.
Later on, the services included those
for another branch. As a result, some
services of the employees of BPI were
transferred to BOMC. This was
contested by the Union of BPI, mainly
invoking DOLE department order No.
10 which provides what jobs may be
contracted out. BSP has a circular on
bank service contracts, while the
DOLE has a department order
governing what jobs may be
contracted out. Which administrative
issuance should prevail?
Both actually apply. There is no conflict
between D.O. No. 10 and CBP Circular No. 1388.
In fact, they complement each other.
Consistent with the maxim, interpretare et
concordare
leges
legibus
est
optimus
interpretandi modus, a statute should be
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construed not only to be consistent with itself

but also to harmonize with other laws on the
same subject matter, as to form a complete,
coherent
and
intelligible
system
of
jurisprudence.35 The seemingly conflicting
provisions of a law or of two laws must be
harmonized to render each effective.36 It is
only when harmonization is impossible that
resort must be made to choosing which law to
apply.
In the case at bench, the Union submits that
while the Central Bank regulates banking, the
Labor Code and its implementing rules regulate
the employment relationship. To this, the Court
agrees. The fact that banks are of a specialized
industry must, however, be taken into account.
The competence in determining which banking
functions may or may not be outsourced lies
with the BSP. This does not mean that banks
can simply outsource banking functions
allowed by the BSP through its circulars,
without giving regard to the guidelines set forth
under D.O. No. 10 issued by the DOLE.
While D.O. No. 10, Series of 1997, enumerates
the permissible contracting or subcontracting
activities, it is to be observed that, particularly
in Sec. 6(d) invoked by the Union, the provision
is general in character "x x x Works or
services not directly related or not integral to
the main business or operation of the
principal x x x." This does not limit or prohibit
the appropriate government agency, such as the
BSP, to issue rules, regulations or circulars to
further and specifically determine the
permissible services to be contracted out. CBP
Circular No. 138838 enumerated functions
which are ancillary to the business of banks,
hence, allowed to be outsourced. Thus,
sanctioned by said circular, BPI outsourced the
cashiering (i.e., cash-delivery and deposit pickup) and accounting requirements of its Davao
City branches D.O. No. 10 is but a guide to
determine what functions may be contracted
out, subject to the rules and established
jurisprudence on legitimate job contracting and
prohibited labor only contracting. Even if the
Court considers D.O. No. 10 only, BPI would still
be within the bounds of D.O. No. 10 when it
Starr Weigand 2016

contracted out the subject functions. This is

because the subject functions were not related
or not integral to the main business or
operation of the principal which is the lending
of funds obtained in the form of deposits. From
the very definition of banks as provided
under the General Banking Law, it can easily be
discerned that banks perform only two (2)
main or basic functions deposit and loan
functions. Thus, cashiering, distribution and
bookkeeping are but ancillary functions whose
outsourcing is sanctioned under CBP Circular
No. 1388 as well as D.O. No. 10. Even BPI itself
recognizes that deposit and loan functions
cannot be legally contracted out as they are
directly related or integral to the main business
or operation of banks. The CBPs Manual of
Regulations has even categorically stated and
emphasized on the prohibition against
outsourcing inherent banking functions, which
refer to any contract between the bank and a
service provider for the latter to supply, or any
act whereby the latter supplies, the manpower
to service the deposit transactions of the
former. [BPI Employees Union-Davao City-Fubu
(BPIEU-Davao City-Fubu) v. Bank of the
Philippine Islands (BPI), et al., G.R. No. 174912,
July 24, 2013]
5. A was the corporate secretary of BPI,
a bank. He was also the corporate
secretary of IPB, a quasi-bank. Does
this violate the rule on interlocking
directors?
No, not exactly. As a general rule, there shall be
no
concurrent
officerships,
including
secondments, between banks, or between an
bank and a quasi-bank or a non-bank financial
institution. However, subject to approval of the
Monetary Board, concurrent officerships,
including secondments, may be allowed for
concurrent officiership positions as corporate
secretary or assistance corporate secretary
between bank/s, quasi-bank/s and non-bank
financial institutions, provided that proof of
disclosure to and consent from all of the
involved financial institutions, on the
concurrent officership positions, shall be
submitted to the BSP. Likewise, concurrent
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officership positions in the same capacity which

do not involve management functions, i.e.
internal auditors, corporate secretary, assistant
corporate secretary and security officer,
between a quasi-bank and one or more of its
subsidiary quasi-banks or non-bank financial
institutions, or between a quasi-bank and/or a
non-bank financial institution, or between
bank/s, quasi-bank/s and non-bank financial
institution/s, other than investment houses,
may also be allowed. Provides than in the last
two instances, at least 20% of the equity of each
bank, quasi-bank and non-bank financial
institution is owned by a holding company or
by any banks or quasi-banks within the group.
[BSP Circular No. 851, series of 2014, amending
Section X145 of the Manual of Regulations for
Banks (MORB) and Section 4145Q of the Manual
for Regulations for Non-Bank Financial
Institutions (MORNBFI)]
6. BSP Circular No. 799 was issued in
2013, which changed the legal rate of
interest for loans and forebearances
of money from 12% to 6% per
annum. How will this affect the rules
governing interest rates laid down by
the Court in the case of Eastern
Shipping Lines?
The guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its
source,
i.e.,
law,
contracts,
quasicontracts, delicts or quasidelicts is breached, the contravenor
can be held liable for damages. The
provisions under Title XVIII on
Damages of the Civil Code govern
in determining the measure of
recoverable damages.
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of
interest, as well as the accrual
thereof, is imposed, as follows:

Starr Weigand 2016

1. When the obligation is breached, and it

consists in the payment of a sum of
money, i.e., a loan or forbearance of
money, the interest due should be that
which may have been stipulated in
writing. Furthermore, the interest due
shall itself earn legal interest from the
time it is judicially demanded. In the
absence of stipulation, the rate of
interest shall be 6% per annum to be
computed from default, i.e., from judicial
or extrajudicial demand under and
subject to the provisions of Article 1169
of the Civil Code.
7. When an obligation, not constituting a
loan or forbearance of money, is
breached, an interest on the amount of
damages awarded may be imposed at
the discretion of the court at the rate of
6% per annum. No interest, however,
shall be adjudged on unliquidated claims
or damages, except when or until the
demand can be established with
reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall
begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so
reasonably established at the time the demand
is made, the interest shall begin to run only
from the date the judgment of the court is made
(at which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any case,
be on the amount finally adjudged.
8. When the judgment of the court
awarding a sum of money becomes final
and executory, the rate of legal interest,
whether the case falls under paragraph
1 or paragraph 2, above, shall be 6% per
annum from such finality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit. And, in addition to
the above, judgments that have become
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final and executory prior to July 1, 2013,

shall not be disturbed and shall continue
to be implemented applying the rate of
interest fixed therein.
[Dario Nacar v. Gallery Frames and/or Felipe
Bordey, Jr., G.R. No. 189871, August 13, 2013.]
9. M obtained a loan with time deposit
from Prubank evidenced by a
promissory note, wherein it was
stipulated that the loan was subject to
21% p.a., attorney's fees equivalent to
15% of the total amount due but not
less than P200.00 and, in case of
default, a penalty and collection
charges of 12% p.a. of the total
amount due, with maturity date of 10
January 1985. The loan was renewed
up to 17 February 1985. Through a
deed of assignment, M authorized BPI
to pay his loan obligations with
Prubank. M and his wife again
obtained a loan from BPI covered by a
promissory note with maturity date
of 22 March 1990, to bear interest at
23% p.a., with attorney's fees
equivalent to 15% p.a. of the total
amount due. To secure such loan, M
mortgaged his land in favor of BPI. M
failed to pay his loan obligations, thus
BPI sought to have the mortgage
extrajudicially foreclosed. Thereafter,
M and his wife filed an action for
annulment of mortgage. Are the
interest rate of 23% p.a. and the
penalty charge of 12% p.a., excessive
or unconscionable?
No. Jurisprudence establish that the 24% p.a.
stipulated interest rate was not considered
unconscionable, thus, the 23% p.a. interest rate
imposed on Ms loan in this case can by no
means
be
considered
excessive
or
unconscionable. In Medel v. Court of Appeals, the
Court found the stipulated interest rate of 66%
p.a. or a 5.5% per month on a P500,000.00 loan
excessive, unconscionable and exorbitant,
hence, contrary to morals if not against the law
and declared such stipulation void. In Toring v.
Starr Weigand 2016

Spouses Ganzon-Olan, the stipulated interest

rates involved were 3% and 3.81% per month
on a P10 million loan, which the Court found
under the circumstances excessive and reduced
the same to 1% per month. While in Chua v.
Timan, where the stipulated
interest rates were 7% and 5% a month, which
are equivalent to 84% and 60% p.a.,
respectively, the Court reduced the same to 1%
per month or 12% p.a. the Court said that it
need not unsettle the principle it had affirmed
in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive,
unconscionable and exorbitant, hence, the
stipulation was void for being contrary to
morals. However, in Spouses Zacarias Bacolor
and Catherine Bacolor v. Banco Filipino Savings
and Mortgage Bank, Dagupan City Branch, this
Court held that the interest rate of 24% per
annum on a loan of P244,000.00, agreed upon
by the parties, may not be considered as
unconscionable and excessive. As such, the
Court ruled that the borrowers cannot renege
on their obligation to comply with what is
incumbent upon them under the contract of
loan as the said contract is the law between the
parties and they are bound by its stipulations.
Also, in Garcia v. Court of Appeals, the Court
sustained the agreement of the parties to a 24%
per annum interest on an P8,649,250.00 loan
finding the same to be reasonable and clearly
evidenced by the amended credit line
agreement entered into by the parties as well as
two promissory notes executed by the
borrower in favor of the lender.
Likewise, the stipulated 12% p.a. penalty
charge is not excessive or unconscionable. In
Ruiz v. CA, the Court has held that 1% surcharge
on the principal loan for every month of default
is valid. This surcharge or penalty stipulated in
a loan agreement in case of default partakes of
the nature of liquidated damages under Art.
2227 of the New Civil Code, and is separate and
distinct from interest payment. Also referred to
as a penalty clause, it is expressly recognized by
law. It is an accessory undertaking to assume
greater liability on the part of an obligor in case
of breach of an obligation. The obligor would
then be bound to pay the stipulated amount of
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indemnity without the necessity of proof on the

existence and on the measure of damages
caused by the breach. The enforcement of the
penalty can be demanded by the creditor only
when the non-performance is due to the fault or
fraud of the debtor. The non-performance gives
rise to the presumption of fault; in order to
avoid the payment of the penalty, the debtor
has the burden of proving an excuse - the
failure of the performance was due to either
force majeure or the acts of the creditor
himself. In the instant case, petitioners
defaulted in the payment of their loan
obligation with respondent bank and their
contract provided for the payment of 12% p.a.
penalty charge, and since there was no showing
that petitioners' failure to perform their
obligation was due to force majeure or to
respondent bank's acts, petitioners cannot now
back out on their obligation to pay the penalty
charge. [Mallari v. Prudential Bank, G.R. No.
197861, 5 June 2013]
10. The Lims obtained a loan from DBP to
finance their business. It was covered
by a promissory note wherein it was
stipulated that the loan is subject to
an interest rate of 9% per annum and
penalty charge of 11% per annum.
Another loan was obtained by the
Lim, covered by another promissory
note with an interest rate of 12% per
annum and a penalty charge of 1/3%
per
month
on
the
overdue
amortization. The loans were covered
by mortgages on the properties of the
Lims. They failed to pay their loans as
a result of the collapse of their
business. DBP sought to foreclose the
mortgage and sell the properties, but
the Lims asked for an extension of the
period within which they could pay.
They were granted an extension,
subject to the condition that they will
be liable for an additional interest of
18.5%,
and
other
additional
penalties. Is the imposition of
additional penalties and interests
allowed under the law?

Starr Weigand 2016

No. The imposition of additional interest and

penalties not stipulated in the Promissory
Notes, this should not be allowed. Article 1956
of the Civil Code specifically states that "no
interest shall be due unless it has been
expressly stipulated in writing." Thus, the
payment of interest and penalties in loans is
allowed only if the parties agreed to it and
reduced their agreement in writing. In this case,
the Lims never agreed to pay additional interest
and penalties. Hence, the imposition of
additional interest and penalties are illegal, and
thus, void. [Lim v. Development Bank of the
Philiipines, G.R. No. 177050, July 01, 2013]
11. The Spouses J obtained a loan from
Chinabank
covered
by
two
promissory notes, secured by real
estate mortgage over their property
in White Plains. They failed to pay
their loan, thus the mortgage was
foreclosed. Since the proceeds of the
sale of the mortgage property did not
cover the entire amount of the loan,
Chinabank filed and action against
the Spouses J for collection of the
remaining balance. During the trial it
was found that the interest rate on
the loan changes every month based
on the prevailing market rate and
DBP allegedly notified the spouses of
the prevailing rate by calling them
monthly before their account became
past due. DBP also alleged that the
spouses agreed to a changing interest
rate by signing the promissory note,
indicating that they agreed to pay
interest at the prevailing rate. Can
DBP subject the loan of the spouses to
a changing rate of interest?
No. It is now settled that an escalation clause is
void where the creditor unilaterally determines
and imposes an increase in the stipulated rate
of interest without the express conformity of
the debtor. Such unbridled right given to
creditors to adjust the interest independently
and upwardly would completely take away
from the debtors the right to assent to an
important modification in their agreement and
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would also negate the element of mutuality in

their contracts. While a ceiling on interest rates
under the Usury Law was already lifted under
Central Bank Circular No. 905, nothing therein
"grants lenders carte blanche authority to raise
interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of
their assets." The provision in the promissory
notes of the Spouses J authorizing DBP to
increase, decrease or otherwise change from
time to time the rate of interest and/or bank
charges "without advance notice" to the
spouses, "in the event of change in the interest
rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines," does not
give DBP unrestrained freedom to charge any
rate other than that which was agreed upon.
Here,
the
monthly
upward/downward
adjustment of interest rate is left to the will of
respondent bank alone. It violates the essence
of mutuality of the contract. Modifications in
the rate of interest for loans pursuant to an
escalation clause must be the result of an
agreement between the parties. Unless such
important change in the contract terms is
mutually agreed upon, it has no binding effect.
In the absence of consent on the part of the
spouses to the modifications in the interest
rates, the adjusted rates cannot bind them.
Monthly telephone calls to the spouses advising
them of the prevailing interest rates would not
suffice. A detailed billing statement based on
the new imposed interest with corresponding
computation of the total debt should have been
provided by the DBP to enable the spouses to
make an informed decision. An appropriate
form must also be signed by the spouses to
indicate their conformity to the new rates.
Compliance with these requisites is essential to
preserve the mutuality of contracts. For indeed,
one-sided impositions do not have the force of
law between the parties, because such
impositions are not based on the parties
essential equality. Hence, the interest charged
over the interest rate indicated in the
promissory notes is invalid. [Juico v. China
Banking Corporation, G.R. No. 187678, April 10,
2013]

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12. A is the estranged wife of B, who had

several and/or time deposit accounts
with a bank. The bank allowed the
time deposits to be pre-terminated
and released the proceeds to B,
without requiring the presentation of
the requisite certificates of time
deposit. Should the bank be held
liable?
Yes. A certificate of deposit is defined as a
written acknowledgment by a bank or banker
of the receipt of a sum of money on deposit
which the bank or banker promises to pay to
the depositor, to the order of the depositor,
or to some other person or his order, whereby
the relation of debtor and creditor between the
bank and the depositor is created. In particular,
the certificates of deposit contain provisions on
the amount of interest, period of maturity, and
manner of termination. Specifically, they
stressed that endorsement and presentation of
the certificate of deposit is indispensable to
their termination. In other words, the accounts
may only be terminated upon endorsement and
presentation of the certificates of deposit.
Without the requisite presentation of the
certificates of deposit, BPI may not terminate
them. The bank, thus, may only terminate the
certificates of deposit after it has diligently
completed two steps. First, it must ensure the
identity of the account holder. Second, the bank
must demand the surrender of the certificates
of deposit. This is the essence of the contract
entered into by the parties which serves as an
accountability measure to other co-depositors.
By requiring the presentation of the certificates
prior to termination, the other depositors may
rely on the fact that their investments in
the interest-yielding accounts may not be
indiscriminately withdrawn by any of their codepositors. This protective mechanism likewise
benefits the bank, which shields it from liability
upon showing that it released the funds in good
faith to an account holder who possesses the
certificates. Without the presentation of the
certificates of deposit, the bank may not validly
terminate the certificates of deposit. [Bank of
the Philippine Islands v. Tacila Fernandez, G.R.
No. 173134, September 2, 2015]
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13. Spouses A obtained a loan from PNB,

secured by a real estate mortgage,
and covered by 12 promissory notes
providing for varying interest rates of
17.5% to 27% per interest period. It
was agreed upon by the parties that
the rate of interest may be increased
or decreased for the subsequent
interest periods, with prior notice to
the spouses in the event of changes in
interest rates prescribed by law or
the Monetary Board, or in the banks
overall cost of funds. Can PNB impose
varying rates of interest on the loan
of the spouses?
No. The interest rates imposed by DBP are
excessive and arbitrary. Thus, the foregoing
interest rates imposed on the Spouses loan
obligation without their knowledge and
consent should be disregarded, not only for
being iniquitous and exorbitant, but also for
being violative of the principle of mutuality of
contracts. In the instant case, it is clear from the
contract of loan between the spouses and the
bank that the spouses, as borrowers, agreed to
the payment of interest on their loan obligation.
That the rate of interest was subsequently
declared illegal and unconscionable does not
entitle the spouses to stop payment of interest.
It should be emphasized that only the rate of
interest was declared void. The stipulation
requiring the Spouses to pay interest on their
loan remains valid and binding. They are,
therefore, liable to pay interest from the time
they defaulted in payment until their loan is
fully paid. Pursuant to Circular No. 799, series
of 2013, issued by the Office of the Governor of
the BSP on 21 June 2013, and in accordance
with the ruling of the Supreme Court in the
recent case of Dario Nacar v. Gallery Frames
and/or Felipe Bordey, Jr., effective 1 July 2013,
the rate of interest for the loan or forbearance
of any money, goods or credits and the rate
allowed in judgments, in the absence of an
express contract as to such rate of interest,
shall be six percent (6%) per annum.
Accordingly, the rate of interest of 12% per
annum on petitioners-spouses obligation shall
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apply from the date of default until 30 June

2013 only. From 1 July 2013 until fully paid, the
legal rate of 6% per annum shall be applied to
the Spouses unpaid obligation. [Andal v.
Philippine National Bank, G.R. No. 194201,
November 27, 2013]
14. ECBI was a banking institution which
underwent
BSPs
general
examination. It was issued a cease
and desist order and enjoined it from
pursuing
certain
acts
and
transactions that were considered
unsafe or unsound banking practices,
and from doing such other acts or
transactions constituting fraud or
might result in the dissipation of its
assets. This was the result of the
continuing refusal of ECBIs BOD to
allow the examination of the BSP.
Thereafter, for defying the cease and
desist order, BSP issued as resolution
placing it under receivership. Was the
action of the BSP proper?
Yes. The Monetary Board (MB) may forbid a
bank from doing business and place it under
receivership without prior notice and hearing.
This is called the close now, hear later
doctrine. It must be emphasized that R.A .No.
7653 is a later law and under said act, the
power of the MB over banks, including rural
banks, was increased and expanded. The Court,
in several cases, upheld the power of the MB to
take over banks without need for prior hearing.
Prior hearing is not necessary inasmuch as the
law entrusts to the MB the appreciation and
determination of whether any or all of the
statutory grounds for the closure and
receivership of the erring bank are present. The
MB, under R.A. No. 7653, has been invested
with more power of closure and placement of a
bank under receivership for insolvency or
illiquidity, or because the banks continuance in
business would probably result in the loss to
depositors or creditors.
Accordingly, the MB can immediately
implement its resolution prohibiting a banking
institution to do business in the Philippines
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and, thereafter, appoint the PDIC as receiver.

The procedure for the involuntary closure of a
bank is summary and expeditious in nature.
Such action of the MB shall be final and
executory, but may be later subjected to a
judicial scrutiny via a petition for certiorari to
be filed by the stockholders of record of the
bank representing a majority of the capital
stock. Obviously, this procedure is designed to
protect the interest of all concerned, that is, the
depositors, creditors and stockholders, the
bank itself and the general public. The
protection afforded public interest warrants the
exercise of a summary closure.
Management take-over under Section 11 of R.A.
No. 7353 was no longer feasible considering the
financial quagmire that engulfed ECBI showing
serious conditions of insolvency and illiquidity.
Besides, placing ECBI under receivership would
effectively put a stop to the further draining of
its assets. [Alfeo D. Vivas, on his behalf and on
behalf of the Shareholders or Eurocredit
Community Bank v. The Monetary Board of the
Bangko Sentral ng Pilipinas and the Philippine
Deposit Insurance Corporation, G.R. No. 191424,
August 7, 2013]
15. What is the nature of liquidation
proceedings?
A liquidation proceeding is a special proceeding
involving the administration and disposition,
with judicial intervention, of an insolvent's
assets for the benefit of its creditors. Under the
Central Bank Act, this proceeding is cognizable
by the Regional Trial Courts. But, if liquidation
proceedings have already been started in one
court, another RTC branch cannot rule on the
propriety of the rulings of the liquidation court.
Due to the nature of their transactions and
functions, the banking industry is affected with
public interest and banks can properly be
subject to reasonable regulation under the
police power of the State.
It is the
Government's responsibility to see to it that the
financial interests of those who deal with banks
and banking institutions are protected. Hence,
the
Monetary
Board,
under
certain
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circumstances, is empowered to (summarily

and without need for prior hearing) forbid a
banking institution from doing business in the
Philippines and designate a Receiver for the
institution. Such grounds include:
1) Inability 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; or
2) Has sufficient realizable assets, as
determined by the Bangko Sentral, to meet its
liabilities; or
3) Cannot continue in business without
involving probable losses to its depositors or
creditors; or
4) Willful violation of 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 ...
The judicial liquidation is intended to prevent
multiplicity of actions against the insolvent
bank. The lawmaking body contemplated thaf
for convenience only one court, if possible,
should pass upon the claims against the
insolvent bank and that the liquidation court
should assist the Superintendent of Banks and
control his operations.
The judicial liquidation is a pragmatic
arrangement designed to establish due process
and orderliness in the liquidation of the bank,
to obviate the proliferation of litigations and to
avoid
injustice
and
arbitrariness.
Notwithstanding this "pragmatic arrangement,"
claims may, under certain circumstances, be
litigated before courts other than the
liquidation court. This, however, does not mean
that the other courts can interfere with the
liquidation proceedings. Adjudicated claims
must still be submitted to the liquidators for
processing. [The Consolidated Bank and Trust
Corporation Vs. The Court of Appeals, United
Pacific Leasing and Finance Corporation, G.R. No.
169457, October 19, 2015]
16. G Corp. obtained a loan from DBP
bank to finance its development of a
resort complex. To secure it, a
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promissory note was executed by the

G Corp. and mortgages were
constituted on its properties. Also, a
cash equity was put up. The loan was
released to G Corp. in tranches, but
DBP eventually refused to release the
balance thereof, alleging that it failed
to develop the said resort complex.
DBP then foreclose the mortgages,
which prompted G Corp. to file an
action for specific performance
against DBP. Was it proper for DBP to
foreclose the mortgages?
No. Considering that it had yet to release the
entire proceeds of the loan, DBP could not yet
make an effective demand for payment upon G
Corp. to perform its obligation under the loan.
Being a banking institution, DBP owed it to G
Corp. to exercise the highest degree of
diligence, as well as to observe the high
standards of integrity and performance in all its
transactions because its business was imbued
with public interest. The high standards were
also necessary to ensure public confidence in
the banking system. The stability of banks
largely depends on the confidence of the people
in the honesty and efficiency of banks. Thus,
DBP had to act with great care in applying the
stipulations of its agreement with G Corp., lest it
erodes such public confidence. Yet, DBP failed
in its duty to exercise the highest degree of
diligence by prematurely foreclosing the
mortgages and unwarrantedly causing the
foreclosure sale of the mortgaged properties
despite G Corp. not being yet in default.
[Development Bank of the Philippines (DBP) v.
Guaria Agricultural and Realty Development
Corporation, G.R. No. 160758. January 15, 2014]
17. The spouses S applied for a loan
which was granted by BPI for a term
of six months, secured by a mortgage
over land owned by the Spouses S. the
Spouses S later on obtained a credit
line from BPI in the amount of P5.7
million. The mortgage was released
on the representation of the spouses
that the proceeds will be used to pay
the loans, but the same remained
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unpaid. Having defaulted on their

loan obligations, BPI demanded
payment. However, the spouses filed
a complaint against BPI, to maintain
the status quo, and alleged that BPI
"deliberately refused to comply with
the condition/undertaking of the loan
for IGLF endorsement and approval"
until the maturity date of the loan
lapsed to their great prejudice and
irreparable damage. They further
alleged they neither executed any
P5.7 Million promissory note nor did
they receive P5.7 Million from BPI.
Thus, there is no existing P5.7 Million
Credit Line Facility Agreement as far
as they are concerned. Is the
contention of the Spouses correct?
No. It appears from the allegations that Spouses
S have misconstrued the concept of a Credit
Line Facility Agreement. A credit line is "that
amount of money or merchandise which a
banker, merchant, or supplier agrees to supply
to a person on credit and generally agreed to in
advance." It is the fixed limit of credit granted
by a bank, retailer, or credit card issuer to a
customer, to the full extent of which the latter
may avail himself of his dealings with the
former but which he must not exceed and is
usually intended to cover a series of
transactions in which case, when the
customers line of credit is nearly exhausted, he
is expected to reduce his indebtedness by
payments before making any further drawings.
Thus, contrary to the belief and understanding
of Spouses S, BPI does not have to require the
execution of promissory note of the entire P5.7
Million since a credit line as stated above, is
merely a fixed limit of credit. Furthermore, still
applying the above quoted definition, a credit
line usually presupposes a series of
transactions until the credit line is nearly
exhausted. BPI is not obliged to release the
amount of P5.7 Million to Spouses S all at once,
in a single transaction. [Spouses Pio Dato and
Sonia Y. Sia v. Bank of the Philippine Islands, G.R.
No. 181873, November 27, 2013]

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18. ABC is a trust corporation which is a

subsidiary of Z Corp., a quasi-bank.
Are the assets held in trust by ABC
included in the computation of the
single borrowers limit for Z Corp.?
No. In case a stand-alone trust corporation is a
subsidiary or an affiliate of a quasi-bank, the
asset under management of the trust
corporation shall not form part of the relevant
exposures of the parent quasi-bank for
purposes of calculating the single borrowers
limit and the ceilings for accommodation to
DOSRI of the parent quasi-bank. Likewise, the
purchase by the trust corporation, in behalf of
its client, of securities and instruments issued
by its parent quasi-bank shall not form part of
the relevant exposure of the trust corporation
for purposes of the single borrowers limits and
DOSRI ceilings of the said trust corporation.
[BSP Circular No. 849, Series of 2014]
19. Can the account of a depositor be
made the subject of a waiver of bank
secrecy laws, which is a mere
provision
in
a
compromise
agreement involving parties other
than the depositor himself?
No. Section 2 of R.A. No. 1405, the Law on
Secrecy of Bank Deposits enacted in 1955, was
first amended by Presidential Decree No. 1792
in 1981 and further amended by R.A. No. 7653
in 1993. It now reads:
SEC. 2. 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, 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, except 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
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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 to
establish such fraud or irregularity, or
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,
or upon written permission of the
depositor, or in cases of impeachment,
or upon order of a competent court in
cases of bribery or dereliction of duty of
public officials, or in cases where the
money deposited or invested is the
subject matter of the litigation.
R.A. No. 1405 provides for exceptions when
records of deposits may be disclosed. These are
under any of the following instances: (a) upon
written permission of the depositor, (b) in
cases of impeachment, (c) upon order of a
competent court in the case of bribery or
dereliction of duty of public officials or, (d)
when the money deposited or invested is the
subject matter of the litigation, and (e) in cases
of violation of the Anti-Money Laundering Act,
the Anti-Money Laundering Council may
inquire into a bank account upon order of any
competent court.
In this case, the compromise agreement did not
involve the depositor. There was no written
consent given by the depositor or its
representatives, that it is waiving the
confidentiality of its bank deposits. The
provision on the waiver of the confidentiality of
bank deposits was merely inserted in the
agreement. It is clear therefore that the
depositor is not bound by the said provision
since it was without the express consent of the
depositor who was not a party and signatory to
the said agreement.
Neither can the depositor be deemed to have
given its permission by failure to interpose its
objection during the proceedings. It is an
elementary rule that the existence of a waiver
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must be positively demonstrated since a waiver

by implication is not normally countenanced.
The norm is that a waiver must not only be
voluntary, but must have been made knowingly,
intelligently, and with sufficient awareness of
the relevant circumstances and likely
consequences. There must be persuasive
evidence to show an actual intention to
relinquish the right. Mere silence on the part of
the holder of the right should not be construed
as a surrender thereof; the courts must indulge
every reasonable presumption against the
existence and validity of such waiver. [Dona
Adela International, Inc. v. Trade Investment
Development Corporation, G.R. No. 201931,
February 11, 2015]

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Anti-Money Laundering Law

1. The AMLC filed an Urgent Ex-Parte
Application for the issuance of a
freeze order with the CA against
certain monetary instruments and
properties of the L et al., pursuant to
the Anti-Money Laundering Act of
2001. This application was based on
the February 1, 2005 letter of the
Office of the Ombudsman to the
AMLC, recommending that the latter
conduct an investigation on L and his
family for possible violation of the
law. The CA granted the application
and issued the freeze order.
Thereafter, an Urgent Motion for
Extension of Effectivity of Freeze
Order was filed, arguing that if the
bank accounts, web accounts and
vehicles of L not continuously frozen,
they could be placed beyond the
reach of law enforcement authorities
and the governments efforts to
recover the proceeds of the Ls
unlawful
activities
would
be
frustrated. In support of the motion, it
was alleged that various cases against
L were presently being investigated
by the Ombudsman. The motion for
extension was also granted by the CA.
L sought to have the extended freeze
order lifted, arguing that there was
no evidence to support the extension
of the freeze order, and that the
extension not only deprived them of
their property without due process; it
also punished them before their guilt
could be proven. The CA subsequently
denied this motion. The Rules on Civil
Forfeiture took effect and stated that
an extension of a freeze order was
only for a maximum period of 6
months. Thus, L asked the CA to
reconsider its resolution denying his
motion, insisting that the freeze order
should be lifted considering: (a) no
predicate crime has been proven to
support the freeze orders issuance;
(b) the freeze order expired six
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months after it was issued; and (c) the

freeze order is provisional in
character and not intended to
supplant
a
case
for
money
laundering. Should Ls Motion for
Reconsideration be granted?
Yes. A freeze order is an extraordinary and
interim relief issued by the CA to prevent the
dissipation, removal, or disposal of properties
that are suspected to be the proceeds of, or
related to, unlawful activities as defined in
Section 3(i) of RA No. 9160, as amended. The
primary objective of a freeze order is to
temporarily preserve monetary instruments or
property that are in any way related to an
unlawful activity or money laundering, by
preventing the owner from utilizing them
during the duration of the freeze order. The
relief is pre-emptive in character, meant to
prevent the owner from disposing his property
and thwarting the States effort in building its
case and eventually filing civil forfeiture
proceedings and/or prosecuting the owner.
The Anti-Money Laundering Act of 2001, as
amended, from the point of view of the freeze
order that it authorizes, shows that the law is
silent on the maximum period of time that the
freeze order can be extended by the CA. The
final sentence of Section 10 of the Anti-Money
Laundering Act of 2001 provides, "the freeze
order shall be for a period of twenty (20) days
unless extended by the court." In contrast,
Section 55 of the Rule in Civil Forfeiture Cases
qualifies the grant of extension "for a period not
exceeding six months" "for good cause" shown.
Nothing in the law grants the owner of the
"frozen" property any substantive right to
demand that the freeze order be lifted, except
by implication, i.e., if he can show that no
probable cause exists or if the 20-day period
has already lapsed without any extension being
requested from and granted by the CA. Notably,
the Senate deliberations on RA No. 9160 even
suggest the intent on the part of our legislators
to make the freeze order effective until the
termination of the case, when necessary.

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The silence of the law, however, does not in any

way affect the Courts own power under the
Constitution to "promulgate rules concerning
the
protection
and
enforcement
of
constitutional rights xxx and procedure in all
courts." Pursuant to this power, the Court
issued A.M. No. 05-11-04-SC, limiting the
effectivity of an extended freeze order to six
months to otherwise leave the grant of the
extension to the sole discretion of the CA, which
may extend a freeze order indefinitely or to an
unreasonable amount of time carries serious
implications on an individuals substantive
right to due process. This right demands that no
person be denied his right to property or be
subjected to any governmental action that
amounts to a denial. The right to due process,
under these terms, requires a limitation or at
least an inquiry on whether sufficient
justification for the governmental action.
In this case, the law has left to the CA the
authority to resolve the issue of extending the
freeze order it issued. Without doubt, the CA
followed the law to the letter, but it did so by
avoiding the fundamental laws command
under its Section 1, Article III. This command
sought to implement through Section 53(b) of
the Rule in Civil Forfeiture Cases which the CA
erroneously assumed does not apply. The
extension granted by the CA effectively bars L
from using any of the property covered by the
freeze order until after an eventual civil
forfeiture proceeding is concluded in their
favor and after they shall have been adjudged
not guilty of the crimes they are suspected of
committing. These periods of extension are way
beyond the intent and purposes of a freeze
order which is intended solely as an interim
relief; the civil and criminal trial courts can very
well handle the disposition of properties
related to a forfeiture case or to a crime
charged and need not rely on the interim relief
that the appellate court issued as a guarantee
against loss of property while the government
is preparing its full case. A freeze order is
meant to have a temporary effect; it was never
intended to supplant or replace the actual
forfeiture cases where the provisional remedy which means, the remedy is an adjunct of or an
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incident to the main action of asking for the

issuance of an asset preservation order from
the court where the petition is filed is precisely
available. For emphasis, a freeze order is both a
preservatory and preemptive remedy.
Thus, as a rule, the effectivity of a freeze order
may be extended by the CA for a period not
exceeding six months. Before or upon the lapse
of this period, ideally, the Republic should have
already filed a case for civil forfeiture against
the property owner with the proper courts and
accordingly secure an asset preservation order
or it should have filed the necessary
information. Otherwise, the property owner
should already be able to fully enjoy his
property without any legal process affecting it.
However, should it become completely
necessary for the Republic to further extend the
duration of the freeze order, it should file the
necessary motion before the expiration of the
six-month period and explain the reason or
reasons for its failure to file an appropriate case
and justify the period of extension sought. The
freeze order should remain effective prior to
the resolution by the CA, which is hereby
directed to resolve this kind of motion for
extension with reasonable dispatch. [Ligot v.
Republic of the Philippines, G.R. No. 176944,
March 6, 2013]

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2013 & 2014 Q and A|Commercial Law