MERCANTILE LAW

2014 BAR EXAMINATIONS

A. Letters of Credit
1. Definition/Concept
That issued by one merchant to another for the purpose of attending
to a commercial transaction.1
An instrument issued by a bank on behalf of one of its customers,
authorizing an individual or a firm to draw drafts on the bank or one of its
correspondents for its account under certain conditions of the credit. 2
An engagement by a bank or other person made at the request of a
customer that the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the credit. 3 Through it, the
bank merely substitutes its own promise to pay for the promise to pay of
one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon.
2. Governing laws
a.
Code of Commerce
b. Uniform Customs and Practice for Documentary Credits4
3. Nature of letter of credit
The LC is a financial device 5developed as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods before
paying.
4. Parties to a letter of credit
There are at least 3 basic parties:

Art. 567
Commercial Law Review, C. Villanueva, 2004 ed.
3
Prudential Bank vs. CA, 216 SCRA 257
4
The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be
payable to order.
5
mode of payment
2

1.

Applicant/buyer/importer one who purchases the goods, procures

the LC, and obliges himself to reimburse the issuing bank upon
receipt of the documents of title.

2.

Issuing/opening bank one which issues the LC, and undertakes to

pay the seller upon receipt of the draft and proper documents of title
from the seller and to surrender them to the buyer upon
reimbursement; and
3.
Seller/exporter/beneficiary one who sells the goods to the buyer,
and who delivers the draft and documents to the issuing bank to
recover payment.
The number of parties may be increased. Modern letters of credit are
usually not made between natural persons. They involve bank-to-bank
transactions.
4.

Advising/notifying bank the correspondent bank of the opening

bank through which it advises the beneficiary of the LC.

5.

Confirming bank bank which, upon the request of the beneficiary,

confirms the LC issued.

6.

Paying bank bank on which the drafts are to be drawn, which may
be the opening bank or another bank not in the city of the beneficiary.

7.

Negotiating bank bank in the city of the beneficiary which buys

or discounts the drafts contemplated by the LC, if such draft is to be
drawn on the opening bank or on another designated bank not in the
city of the beneficiary.
a. Rights and obligations of parties

1. Drawer is liable to person on whom it was issued provided identity

proven, for the amount paid within fixed maximum.
2. Bearer has no right of action if not paid by person who issued it.
3. Drawer may annul the
bearer and to whom it is addressed.

letter

of

credit, informing the

4. Bearer shall pay the amount received to drawer, otherwise action

for execution may be filed with interest and current exchange in place
where payment made on place where repaid.

5. If a bearer does not make use of letter of credit within agreed

period, or if none, within 6 months from date if in the Philippines, and 12
months if outside the Philippines, it shall be void.6
5. Basic Principles of letter of credit
a. Doctrine of independence
The 3 basic contracts are distinct and independent, and the
undertakings of the respective parties in each are neither subject to claims
and defenses nor affected by the breach in the others.
b. Fraud exception principle
Exists when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain,
expressly or by implication, material representations of fact that to his
knowledge are untrue.
c. Doctrine of strict compliance
It espouses that the documents tendered by the seller/beneficiary
must strictly conform to the terms of the LC, i.e. they must include all the
documents required by the LC.7
B. Warehouse Receipts Law
Warehousemans Lien
The warehousemans lien on the good deposited or on the proceeds
thereof in his hands consists of all lawful charges for storage and
preservation of the goods, all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing, coopering, and other charges
and expenses in relation to such goods, also all reasonable charges and
expenses for notices and advertisements of sale, and for the sale of the
goods where default has been made in satisfying the warehousemans lien.
C. Trust Receipts Law
1. Definition/Concept of a Trust Receipt Transaction
A trust receipt transaction is any transaction by and between a person
referred to as the entruster, and another person referred to as entrustee,
whereby the entruster, who owns or holds absolute title or security interests
over certain specified goods, documents or instruments, releases the same
6

Articles 569-572, Code of Commerce

Feati Bank vs. CA

to the possession of the entrustee upon the latter's execution and delivery to
the entruster of a signed document called a "trust receipt" wherein the
entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or
for other purposes substantially equivalent to any of the following:
1. In the case of goods or documents
a) to sell the goods or procure their sale; or
b) to manufacture or process the goods with the purpose of ultimate
sale. In the case of goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until
the entrustee has complied fully with his obligation under the trust receipt;
or
c) to load, unload, ship or tranship or otherwise deal with them in a
manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery
to a depository or register; or
d) toeffect their presentation, collection or renewal.
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 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 the Decree. 8
a. Loan/security feature
This is not a simple loan transaction between a creditor and debtorimporter.
8

Sec. 4

The law warrants the validity of the entrusters security interest as against
the creditors of the trust receipt agreement.
b. Ownership of the goods,
instruments under a trust receipt

documents

and

Goods are owned by the bank, and are only released to the importer
in trust after the grant of the loan. The bank acquires a security interest in
the goods as holder of a security title for the advances it made to the
entrustee.
Entrustee must deliver money or return unsold goods to entrustor
Bank is preferred over other creditors.
Bank is also not liable to buyer of goods as vendor
Purchaser from entrustee gets good title.
No particular form is required for trust receipt
2. Rights of the Entruster9
The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears
in the trust receipt, or to the return of the goods, documents or instruments
in case of non-sale, and to the enforcement of all other rights conferred on
him in the trust receipt provided such are not contrary to the provisions of
this Decree.
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time upon default or failure of the entrustee to comply
with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee, and the entruster in
possession of the goods, documents or instruments may, on or after default,
give notice to the entrustee of the intention to sell, and may, not less than
five days after serving or sending of such notice, sell the goods, documents
or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or
private, shall be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing the goods,
documents or instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency. Notice of sale shall be
deemed sufficiently given if in writing, and either personally served on the
9

Entruster" shall refer to the person holding title over the goods, documents, or instruments
subject of a trust receipt transaction, and any successor in interest of such person.

entrustee or sent by post-paid ordinary mail to the entrustee's last known

business address.
a. Validity of the security interest as against the
creditors of the entrustee/innocent purchasers for
value
The entruster's security interest in goods, documents, or instruments
pursuant to the written terms of a trust receipt shall be valid as against all
creditors of the entrustee for the duration of the trust receipt agreement.
3. Obligations and Liability of the Entrustee
The entrustee shall (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly in accordance with
the terms and conditions of the trust receipt; (2) receive the proceeds in
trust for the entruster and turn over the same to the entruster to the extent
of the amount owing to the entruster or as appears on the trust receipt; (3)
insure the goods for their total value against loss from fire, theft, pilferage
or other casualties; (4) keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of identification as property
of the entruster; (5) return the goods, documents or instruments in the
event of non-sale or upon demand of the entruster; and (6) observe all other
terms and conditions of the trust receipt not contrary to the provisions of
this Decree.
The risk of loss shall be borne by the entrustee. Loss of goods,
documents or instruments which are the subject of a trust receipt, pending
their disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation to the
entruster for the value thereof.
a. Payment/Delivery of proceeds of sale
disposition of goods, documents or instruments

or

Keep said goods or proceeds separate and capable of identification.

b. Return of goods, documents or instruments in
case of sale
Return the goods, documents or instruments in the event of non-sale
or upon demand.
c. Liability
instruments

for

loss

of

goods,

documents

or

The risk of loss shall be borne by the entrustee. Loss of goods,

documents or instruments which are the subject of a trust receipt, pending
their disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation to the
entruster for the value thereof.10
d. Penal sanction if offender is a corporation
If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.11
4. Remedies available
The entrustor can:
a. Cancel trust and take possession of the goofs
b. File a 3rd party claim or separate civil action at any time upon
default or failure of entrustee to comply with terms and conditions of the
trust agreement.12
D. Negotiable Instruments Law13
1. Forms and Interpretation
a. Requisites of Negotiability
1. Must be in writing and signed by the maker or drawer;14
10

Sec. 10
Sec. 13, last sen.
12
Prudential Bank vs. NLRC, 251 SCRA 421, 1995
Failure to turn over proceeds of the sale of goods or to return unsold goods is a public
nuisance to be abated by the imposition of penal sanctions (Tiomico vs. Court of Appeals,
1999)
The offense is malumprohibitum. There is no need to prove damage to the entrustor.
(Metropolitan Bank vs. Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981)
Offense: estafa under Art 315 of the Revised Penal Code.
13
Negotiable instrument (NI)
A written contract for the payment of money which complies with the requirements of
Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and
passes from hand to hand as money, so as to give the holder in due course (HDC) the right
to hold the instrument free from defenses available to prior parties. (Reviewer on
Commercial Law, Professors Sundiang and Aquino)
14
Any kind of material that substitutes paper is sufficient.
11

2. Must contain an unconditional promise or order to pay a sum certain

in money;15
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or to bearer;16 and
5. When the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.17
b. Kinds of negotiable instrument

With respect to the signature, it is enough that what the maker or drawer affixed shows his
intent to authenticate the writing. (Notes and Cases on Banks, Negotiable Instruments and
other Commercial Documents, Timoteo B. Aquino)
Signature, binding so long it is intended or adopted as the signature of the signer or made
with his authority.
No person liable on the instrument whose signature does not appear thereon.
One who signs in a trade or assumed name liable to same extent as if he had signed in his
own name. (Sec. 18, NIL)
Signature of party may be made by duly authorized agent; no particular form of
appointment necessary. (Sec. 19, NIL)
"In writing" - includes print; written or typed
15
Where the promise or order is made to depend on a contingent event, it is conditional, and
the instrument involved is non-negotiable. The happening of the event does not cure the
defect.
The unconditional nature of the promise or order is not affected by:
a) An indication of a particular fund out of which reimbursement is to be made, or a
particular account to be debited with the amount; or
b) A statement of the transaction which gives rise to the instrument
Where the promise or order is subject to the terms and conditions of the transaction stated,
the instrument is rendered non-negotiable. The NI must be burdened with the terms and
conditions of that agreement to destroy its negotiability. (Cesar Villanueva, Commercial Law
Review, 2004 ed.)
But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3)
The dates of each installment must be fixed or at least determinable and the amount to be
paid for each installment.
A sum is certain if the amount to be unconditionally paid by the maker or drawee can be
determined on the face of the instrument and is not affected by the fact that the exact
amount is arrived at only after a mathematical computation. (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
16
The instrument is payable to order where it is drawn payable to the order of a specified
person, or to him or his order. (Sec. 8)
The payee must be named or otherwise indicated therein with reasonable certainty.
The instrument may be made payable to the order of:
a. A payee who is not the maker, drawer or drawee
b. The drawer or maker
c. The drawee
d. 2 or more payees jointly
e. One or some of several payees
f. The holder of an office for a time being
Payable to Bearer
The instrument is payable to bearer:
a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or to bearer; or

Promissory note - an unconditional promise in writing by one person

to another signed by the maker engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money to order or to bearer.
(Sec. 184)
Bill of exchange - an unconditional order in writing addressed by
one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer.18
Check- a bill of exchange drawn on a bank payable on demand.19 It is
the most common form of bill of exchange.
2. Completion and delivery
a. Insertion of date
Where an instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an instrument payable at
a fixed period after sight is undated, any holder may insert therein the true
date of issue or acceptance, and the instrument shall be payable
accordingly. The insertion of a wrong date does not avoid the instrument in
the hands of a subsequent holder in due course; but as to him, the date so
inserted is to be regarded as the true date.20
b. Completion of blanks
c. When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or
d. When the name of the payee does not purport to be the name of any person; or
e. When the only or last indorsement is an indorsement in blank. (Sec. 9)
An instrument originally payable to bearer can be negotiated by mere delivery even if it is
indorsed especially. If it is originally a BEARER instrument, it will always be a BEARER
instrument.
As opposed to an original order instrument becoming payable to bearer, if the same is
indorsed specially, it can no longer be negotiated further by mere delivery, it has to be
indorsed.
A check that is payable to the order of cash is payable to bearer. Reason: The name of the
payee does not purport to be the name of any person. (AngTekLian vs. CA, 87 Phil. 383)
Fictitious payee rule:
It is not necessary that the person referred to in the instrument is really non-existent or
fictitious to make the instrument payable to bearer. The person to whose order the
instrument is made payable may in fact be existing but he is till fictitious or non-existent
under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the
specified persons. (Reviewer on Commercial Law, Professors Sundiang and Aquino)
17
Applicable only to a bill of exchange
A bill may be addressed to 2 or more drawees jointly whether they are partners or not but
not to 2 or more drawees in the alternative or in succession. (Sec. 128)
18
Sec. 126
19
Sec. 185
20
Sec. 13

Where the instrument is wanting in any material 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.21

c. Incomplete and undelivered instruments

If completed and negotiated without authority, not a valid contract
against a person who has signed before delivery of the contract even in the
hands of a holder in due course but subsequent indorsers are liable. This is
a real defense.22
d. Complete but undelivered instruments
1. Between immediate parties and those who are similarly situated,
delivery must be coupled with the intention of transferring title to the
instrument.
2. As to a holder in due course, it is conclusively presumed that there
was valid delivery; and
3. As against an immediate party and remote party who is not aholder
in due course, presumption of a valid and intentional delivery is
rebuttable.23
3. Rules of interpretation
a. Discrepancy between the amount in figures and that in words the
words prevail, but if the words are ambiguous, reference will be made to
the figures to fix the amount.

21
22
23

Sec. 14
Sec. 15
Sec. 16

10

b. Payment for interest is provided for interest runs from the date of
the instrument, if undated, from issue thereof.
c. Instrument undated consider date of issue.
d. Conflict between written and printed provisions written provisions
prevail.
e. When the instrument is so ambiguous that there is doubt whether it
is a bill or note, the holder may treat it as either at his election;
f. If one signs without indicating in what capacity he has affixed his
signature, he is considered an indorser.
g. If two or more persons sign We promise to pay, their liability is
joint (each liable for his part) but if they sign I promise to pay, the liability
is solidary (each can be compelled to comply with the entire obligation).24
4. Signature
a. Signing in trade name
One who signs in a trade or assumed name will be liable to the same
extent as if he had signed in his own name.25
b. Signature of agent
The signature of any party may be made by a duly authorized agent.
No particular form of appointment is necessary for this purpose; and the
authority of the agent may be established as in other cases of agency.26
Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent, or
as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.27
c. Indorsement by minor or corporation

24
25
26
27

Sec.
Sec.
Sec.
Sec.

17
18
19
20

11

The indorsement or assignment of the instrument by a corporation or

by an infant passes the property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability thereon.28
d. Forgery29
Counterfeit making or fraudulent alteration of any writing, which may
consist of:
1. Signing of anothers name with intent to defraud; or
2. Alteration of an instrument in the name, amount, name of payee,
etc. with intent to defraud.30
General Rule:
When a signature is forged or made without the authority of the
person, the signature31 is wholly inoperative.32
Exception:
Unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.33
5. Consideration
Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration. Every person whose signature appears
thereon is presumed to have become a party thereto for value.34
6. Accommodation party
28

Sec. 22
Persons precluded from setting up defense of forgery
1. Those who warrant or admit the genuineness of the signature in question. This includes
indorsers, persons negotiating by delivery and acceptors.
2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense
of forgery.
30
1 Agbayani, 1992 ed.
31
not instrument itself and the genuine signatures
32
Legal Effects:
1. No right to retain the instrument
2.To give a discharge therefore
3. To enforce payment thereof against any party thereto, can be acquired through or under
such signature
33
Sec. 23
34
Sec. 24
What constitutes value:
a. An antecedent or pre-existing debt
b. Value previously given
c. Lien arising from contract or by operation of law. (Sec. 27)
29

12

One who has signed the instrument as maker, drawer, acceptor, or

indorser, without receiving value therefor, and for the purpose of lending his
name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.35
7. Negotiation
a. Distinguished from assignment
Negotiation the transfer of the instrument from one person to
another so as to constitute the transferee as holder thereof.36
Assignment The transferee does not become a holder and he
merely steps into the shoes of the transferor. Any defense available against
the transferor is available against the transferee.37
b. Modes of negotiation
a. Issuance first delivery of the instrument complete in form to a
person who takes it as a holder.38
b. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be negotiated by
mere delivery.
2. If payable to order, a NI may be negotiated by indorsement
completed by delivery.39
c. Incomplete negotiation of order instrument
Where the holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee such title as
the transferor had therein and he also acquires the right to have the
35

Sec. 29
Sec.30
37
Timoteo B. Aquino, Notes and Cases on Banks, Negotiable Instruments and other
Commercial Documents
Assignment may be effected whether the instrument is negotiable or non-negotiable.
(Sesbreo vs. CA, 222 SCRA 466)
38
Sec. 191
Steps:
1. Mechanical act of writing the instrument completely and in accordance with the
requirements of Section 1; and
2. The delivery of the complete instrument by the maker or drawer to the payee or holder
with the intention of giving effect to it. (The Law on Negotiable Instruments with Documents
of Title, Hector de Leon, 2000 ed.)
39
In both cases, delivery must be intended to give effect to the transfer of instrument.
(Development Bank vs. Sima Wei, 219 SCRA 736)
36

13

indorsement of the transferor. But for the purpose of determining whether

the transferee is a holder in due course, the negotiation takes effect as of
the time when the indorsement is made.40
d. Indorsement
Legal transaction effected by the affixing one's signature at the:
a. Back of the instrumentor
b. Upon a paper41 attached thereto with or without additional words
specifying the person to whom or to whose order the instrument is to be
payable whereby one not only transfers legal title to the paper transferred
but likewise enters into an implied guaranty that the instrument will be duly
paid.42
8. Rights of the Holder43
a. Holder in Due Course44
1. May sue on the instrument in his own name;
2. May receive payment and if payment is in due course, the
instrument is discharged;
3. Holds the instrument free from any defect of title of prior parties
and free from defenses available to parties among themselves; and
4. May enforce payment of the instrument for the full amount thereof
against all parties liable thereon.45
b. Defenses against the Holder
40

Sec. 49
allonge
42
Sec. 31
General rule: Indorsement must be of the entire instrument.
Exception: Where instrument has been paid in part, it may be indorsed as to the residue.
(Sec. 32)
43
Holder - a payee or endorsee of a bill or note who is in possession of it or the bearer
thereof. (Sec. 191)
44
A holder who has taken the instrument under the following conditions:
1 .Instrument is complete and regular upon its face;
2. Became a holder before it was overdue and without notice that it had been previously
dishonored;
3 For value and in good faith; and
4. At the time he took it, he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it. (Sec. 52)
Every holder of a negotiable instrument is deemed prima facie a holder in due course.
However, this presumption arises only in favor of a person who is a holder as defined in
Section 191 of the NIL. The weight of authority sustains the view that a payee may be a
holder in due course. Hence, the presumption that he is a prima facie holder in due course
applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003)
45
Secs. 51 and 57
41

14

In the hands of any holder other than a holder in due course, a

negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all parties
prior to the latter.
9. Liabilities of Parties
a. Maker
The maker of a negotiable instrument, by making it, engages that he
will pay it according to its tenor, and admits the existence of the payee and
his then capacity to indorse.
b. Drawer
The drawer by drawing the instrument admits the existence of the
payee and his then capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or both, according to
its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to
any subsequent indorser who may be compelled to pay it. But the drawer
may insert in the instrument an express stipulation negativing or limiting
his own liability to the holder.
c. Acceptor
The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and
his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
d. Indorser
Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorser, in
accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is
liable to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or
is payable to bearer, he is liable to all parties subsequent to the maker or
drawer.
15

(c) If he signs for the accommodation of the payee, he is liable to all

parties subsequent to the payee.
Where a person places his indorsement on an instrument negotiable
by delivery, he incurs all the liability of an indorser.
e. Warranties
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports
to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in
favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a
person negotiating public or corporation securities other than bills and
notes.
Every indorser who indorses without qualification, warrants to all
subsequent holders in due course:
a) That the instrument is genuine and in all respects what it purports
to be;
b) That he has a good title to it;
c) That all prior parties had capacity to contract;
d) That the instrument is, at the time of his indorsement, valid and
subsisting;and
e) He engages that, on due presentment, it shall be accepted or paid,
or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.
10. Presentment for Payment
The production of a Bill of Exchange to the drawee for his acceptance,
or to the drawee or acceptor for payment or the production of a Promissory
Note to the party liable for the payment of the same.
a. Necessity of presentment for payment
16

Presentment for payment is necessary in order to charge the drawer

and indorsers.
b. Parties to whom presentment for payment should
be made
To the person primarily liable or if he is absent or inaccessible, to any
person found at the place where the presentment is made.
c. Dispensation with presentment for payment
1. In order to charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the instrument.
2. In order to charge an indorser when the instrument was made or
accepted for his accommodation and he has no reason to expect that the
instrument will be paid if presented.46
d. Dishonor by non-payment47
1. Payment is refused or cannot be obtained after due presentment
for payment;
2. Presentment is excused and the instrument is overdue and unpaid.
(Sec. 83)
11. Notice of Dishonor
Notice given by holder or his agent to party or parties secondarily
liable that the instrument was dishonored by non-acceptance by the drawee
of a bill or by non-payment by the acceptor of a bill or by non-payment by
the maker of a note.48
a. Parties to be notified
Given to secondary party or his agent.49
b. Parties who may give notice of dishonor
Given by holder or his agent, or by any party who may be compelled
by the holder to pay.50
46

Sec. 80
Effect: There is an immediate right of recourse by the holder against persons secondarily
liable. However, notice of dishonor is generally required. (Sec. 84)
48
Sec. 89
49
Sec. 97
50
Sec. 90
47

17

c. Effect of notice
Immediate right of recourse against the drawer and indorsers accrues
to the holder and no presentment for payment is necessary.51
d. Form of notice
1. By bringing verbally or
2. By writing to the knowledge of the person liable the fact that a
specified instrument, upon proper proceedings taken, has not been
accepted or has not been paid, and that the party notified is expected to pay
it.
e. Waiver
Either before the time of giving notice, or after the omission to give
due notice. Waiver may be expressed or implied.52
As to who are affected by an express waiver depends on where the
waiver is written:
1.
If it appears in the body or on the face of the instrument, it
binds all parties; but
2.
If it is written above the signature of an indorser, it binds him
53
only.
f. Dispensation with notice
1. When party to be notified knows about the dishonor, actually or
constructively;54
2. If waived;55 and
3. When after due diligence, it cannot be given.56
g. Effect of failure to give notice
An omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the omission.57
12. Discharge of Negotiable Instrument

51

Sec. 151
Sec. 109
53
Sec. 110
54
Secs. 114-117
55
Sec. 109
56
Sec. 112
57
Sec. 117
52

18

a. Discharge of negotiable instrument

A release of all parties, whether primary or secondary, from the
obligations arising thereunder. It renders the instrument without force and
effect and, consequently, it can no longer be negotiated.58
b. Discharge of parties secondarily liable
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a prior party;
5. By the release of the principal debtor, unless the holders right of
recourse against the party secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to extend the time of
payment or to postpone the holders right to enforce the instrument.59
c. Right of party who discharged instrument
Where the instrument is paid by a party secondarily liable thereon, it
is not discharged; but the party so paying it is remitted to his former rights
as regard all prior parties, and he may strike out his own and all subsequent
indorsements and against negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been
paid
by
the
drawer;
and
(b) Where it was made or accepted for accommodation and has been
paid by the party accommodated.60
d. Renunciation by holder
The holder may expressly renounce his rights against any party to the
instrument before, at, or after its maturity. An absolute and unconditional
renunciation of his rights against the principal debtor made at or after the
maturity of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice. A

58

The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.
Sec. 120
60
In the following cases, the agreement to extend the time of payment does not discharge
a party secondarily liable:
a) where the extension of time is consented to by such party;
b) where the holder expressly reserves his right of recourse against such party.
Payment at or after maturity by a party secondarily liable does not discharge the instrument.
It only cancels his own liability and that of the parties subsequent to him. (Sec. 121)
Sec. 121
59

19

renunciation must be in writing unless the instrument is delivered up to the

person primarily liable thereon.61
13. Material alteration
a. Concept
Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment:
d) The number or the relations of the parties;
e) The medium or currency in which payment is to be made;
f) Adds a place of payment where no place of payment is specified, or
g) Any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.62
b. Effect of material alteration
Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to the alteration and
subsequent indorsers.
When an instrument has been materially altered and is in the hands of
a holder in due course not a party to the alteration, he may enforce payment
thereof according to its original tenor.63

14. Acceptance
a. Definition
The signification by the drawee of his assent to the order of the
drawer.
It is the act by which the drawee manifests his consent to comply with
the request contained in the bill of exchange directed to him.
b. Manner
61
62
63

Sec. 122
Sec. 125
Sec. 124

20

Must be in writing and signed by the drawee and must not express
that the drawee will perform his promise by any other means than the
payment of money.64
The holder of the bill presenting the same for acceptance may require
that the acceptance be written on the bill, and if such request is refused,
may treat the bill as dishonored.65
c. Time for acceptance
The drawee is allowed twenty-four (24) hours after presentment in
which to decide whether or not he will accept the bill; the acceptance, if
given, dates as of the day of presentation.66
d. Rules governing acceptance
The holder of a bill presenting the same for acceptance may require
that the acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.67
Where an acceptance is written on a paper other than the bill itself, it
does not bind the acceptor except in favor of a person to whom it is shown
and who, on the faith thereof, receives the bill for value.68
An unconditional promise in writing to accept a bill before it is drawn
is deemed an actual acceptance in favor of every person who, upon the faith
thereof, receives the bill for value.69
Where a drawee to whom a bill is delivered for acceptance destroys
the same, or refuses within twenty-four hours after such delivery or within
such other period as the holder may allow, to return the bill accepted or
non-accepted to the holder, he will be deemed to have accepted the same. 70
A bill may be accepted before it has been signed by the drawer, or
while otherwise incomplete, or when it is overdue, or after it has been
dishonored by a previous refusal to accept, or by nonpayment. But when a
bill payable after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, the holder, in the absence of any different

64

Sec. 132
Sec. 133
66
Sec. 136
67
Sec. 133
68
Sec. 134
69
Sec. 135
70
Sec. 137
65

21

agreement, is entitled to have the bill accepted as of the date of the first
presentment.71
An acceptance is either general or qualified. A general acceptance
assents without qualification to the order of the drawer. A qualified
acceptance in express terms varies the effect of the bill as drawn.72
An acceptance to pay at a particular place is a general acceptance
unless it expressly states that the bill is to be paid there only and not
elsewhere.73
An acceptance is qualified when it is:
(a) Conditional - which makes payment by the acceptor dependent on
the fulfillment of a condition therein stated;
(b) Partial - an acceptance to pay part only of the amount for which
the bill is drawn;
(c) Local - an acceptance to pay only at a particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of
all.74
The holder may refuse to take a qualified acceptance and if he does
not obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance. Where a qualified acceptance is taken, the drawer and
indorsers are discharged from liability on the bill unless they have expressly
or impliedly authorized the holder to take a qualified acceptance, or
subsequently assent thereto. When the drawer or an indorser receives
notice of a qualified acceptance, he must, within a reasonable time, express
his dissent to the holder or he will be deemed to have assented thereto.75
15. Presentment for Acceptance
a. Time/place/manner of presentment
a. Where the bill is payable after sight, or when it is necessary in
order to fix the maturity of the instrument;
b. Where the bill expressly stipulates that it shall be presented for
acceptance;

71

Sec.
Sec.
73
Sec.
74
Sec.
75
Sec.
72

138
139
140
141
142

22

c. Where the bill is drawn payable elsewhere than at the residence or

place of business of the drawee.76
d. Where a bill is addressed to 2 or more drawees who are not
partners, presentment must be made to all.
e. Where drawee is dead, presentment may be made to his personal
representative.
f. Where the drawee is adjudged a bankrupt, insolvent or made an
assignment to his creditors, presentment may be made to him or his trustee
or assignee.
b. Effect of failure to make presentment
The drawer and all indorsers are discharged.77
c. Dishonor by non-acceptance
When duly presented for acceptance acceptance is refused or cannot
be obtained; or
When presentment for acceptance is excused bill is not accepted.78
16. Promissory Notes79
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 maker's own order, it is not complete
until indorsed by him.80
17. Checks
a. Definition
A bill of exchange drawn on a bank payable on demand.81
b. Kinds82

76

Sec. 143
See sec. 144, last sen.
78
Sec. 149
79
A promise to pay money
80
Sec. 184
81
Sec. 185
82
Cesar Villanueva, Commercial Law Review, 2004 ed.
77

23

a. Cashiers Check - one drawn by the cashier of a bank, in the name

of the bank against the bank itself payable to a third person. It is a primary
obligation of the issuing bank and accepted in advance upon issuance.83
b. Managers Check - a check drawn by the manager of a bank in the
name of the bank itself payable to a third person. It is similar to the
cashiers check as to the effect and use.
c. Memorandum Check - a check given by a borrower to a lender for
the amount of a short loan, with the understanding that it is not to be
presented at the bank, but will be redeemed by the maker himself when the
loan falls due and which understanding is evidenced by writing the word
memorandum, memo or mem on the check.
d. Certified Check - an agreement whereby the bank against whom a
check is drawn undertakes to pay it at any future time when presented for
payment. (Sec. 187)
c. Presentment for payment
(1) Time
A check must be presented for payment within reasonable time after
its issue.84
(2) Effect of delay
The drawer will be discharged from liability thereon to the extent of
the loss caused by the delay.85
E. Insurance Code
1. Concept of Insurance
An agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown
or contingent event.86
2. Elements of an Insurance Contract
1. The insured possesses an insurable interest susceptible of
pecuniary estimation;
83

Tan vs. CA, 239 SCRA 310

Sec. 186
85
Ibid
86
Sec. 2, par. 2
84

24

2. The insured is subject to a risk of loss through the destruction or

impairment of that interest by the happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general scheme to distribute actual
losses among a large group or substantial number of persons
bearing somewhat similar risks; and
5. The insured makes a ratable contribution (premium) to a
general insurance fund.
A contract possessing only the first 3 elements above is a risk-shifting
device. If all the elements, it is a risk-distributing device.87

3. Characteristics/Nature of Insurance Contracts

1. Consensual it is perfected by the meeting of the minds of the
parties.
2. Voluntary the parties may incorporate such terms and conditions
as they may deem convenient.
3. Aleatory it depends upon some contingent event.
4. Unilateral imposes legal duties only on the insurer who promises
to indemnify in case of loss.
5. Conditional It is subject to conditions the principal one of which is
the happening of the event insured against.
6. Contract of indemnity Except life and accident insurance, a
contract of insurance is a contract of indemnity whereby the insurer
promises to make good only the loss of the insured.
7. Personal each party having in view the character, credit and
conduct of the other.88
4. Classes
87
88

The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.
The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed

25

a. Marine89
Insurance against risks connected with navigation, to which a ship,
cargo, freightage, profits or other insurable interest in movable property,
may be exposed during a certain voyage or a fixed period of time. 90

b. Fire91
A contract by which the insurer for a consideration agrees to
indemnify the insured against loss of, or damage to, property by hostile fire,
including loss by lightning, windstorm, tornado or earthquake and other
allied risks, when such risks are covered by extension to fire insurance
policies or under separate policies.92
c. Casualty93
89

Coverage:
A.
1. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry
and respondentia, and interest in respect to all risks or perils of navigation;
2.Persons or property in connection with marine insurance;
3. Precious stones, jewels, jewelry and precious metals whether in the course of
transportation or otherwise; and
4. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99)
Cargo can be the subject of marine insurance, and once it is entered into, the implied
warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether
he be the shipowner or not. (Roque v. IAC, 139 SCRA 596)
B. Marine Protection and Indemnity Insurance
90
Sec. 99
91
Prerequisites to recovery:
1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly
by the insurer
2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly
or impliedly by the insurer
It is very crucial to determine whether a marine vessel is covered by a marine insurance
or fire insurance. The determination is important for 2 reasons:
1. Rules on constructive total loss and abandonment applies only to marine insurance;
2. Rule on co-insurance applies primarily to marine insurance;
3. Rule on co-insurance applies to fire insurance only if expressly agreed upon. (Commercial
Law Reviewer, AguedoAgbayani, 1988 ed.)
92
Sec. 167
93
Classifications:

26

Insurance covering loss or liability arising from accident or mishap,

excluding those falling under other types of insurance such as fire or
marine.94
d. Suretyship95
An agreement whereby a surety guarantees the performance by the
principal or obligor of an obligation or undertaking in favor of an obligee.96
e. Life
Insurance on human lives and insurance appertaining thereto or
connected therewith which includes every contract or pledge for the
payment of endowments or annuities.
f. Compulsory Motor Vehicle Liability Insurance97
A species of compulsory insurance that provides for protection
coverage that will answer for legal liability for losses and damages for
1. Insurance against specified perils which may affect the person and/or property of the
insured. (accident or health insurance)
Examples: personal accident, robbery/theft insurance
2. Insurance against specified perils which may give rise to liability on the part of the insured
for claims for injuries to or damage to property of others. (third party liability insurance)
Insurable interest is based on the interest of the insured in the safety of persons, and their
property, who may maintain an action against him in case of their injury or destruction,
respectively.
Examples: workmens compensation, motor vehicle liability
94
Sec. 174
95
It is essentially a credit accommodation.
It is considered an insurance contract if it is executed by the surety as a vocation, and not
incidentally. (Sec. 20)
When the contract is primarily drawn up by 1 party, the benefit of doubt goes to the other
party (insured/obligee) in case of an ambiguity following the rule in contracts of adhesion.
Suretyship, especially in fidelity bonding, is thus treated like non-life insurance in some
respects.
Nature of liability of surety:
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee. (Sec. 176)
96
Sec. 175
97
Purpose: To give immediate financial assistance to victims of motor vehicle accidents
and/or their dependents, especially if they are poor regardless of the financial capability of
motor vehicle owners or operators responsible for the accident sustained (Shafer v. Judge,
RTC, 167 SCRA 386).
Claimants/victims may be a passenger or a 3rd party
It applies to all vehicles whether public and private vehicles.
It is the only compulsory insurance coverage under the Insurance Code.

27

bodily injuries or property damage that may be sustained by another arising

from the use and operation of motor vehicle by its owner.
5. Insurable Interest
It means that the insured possess an interest of some kind susceptible
of pecuniary estimation.
A person has an insurable interest in the subject matter if he is so
connected, so situated, so circumstanced, so related, that by the
preservation of the same he shall derive pecuniary benefit, and by its
destruction he shall suffer pecuniary loss, damage or prejudice.
a. In Life/Health98
Every person has an insurable interest in the life and health:
1. of himself, of his spouse and of his children;
2. of any person on whom he depends wholly or in part for education
or support;
3. of any person under a legal obligation to him to pay money or
respecting property or services, of which death or illness might delay or
prevent performance; and
4. of any person upon whose life any estate or interest vested in him
depends.
When it should exist: When the insurance takes effect; not thereafter
or when the loss occurs.

b. In Property
Every interest in property whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature that the contemplated
peril might directly damnify the insured, which may consist in:
1. an existing interest;
2. any inchoate interest founded on an existing interest; or
3. an expectancy coupled with an existing interest in that out of
which the expectancy arises.
98

General rule: There is no limit in the amount the insured can insure his life.
Exception: In a creditor-debtor relationship where the creditor insures the life of his
debtor, the limit of insurable interest is equal to the amount of the debt.
If at the time of the death of the debtor the whole debt has already been paid, the
creditor can no longer recover on the policy because the principle of indemnity applies.

28

The measure of insurable interest in property is the extent to which

the insured might be damnified by loss or injury thereof.
When insurable interest should exist:
It must exist at the time the policy is taken and at the time the loss
incurred but it need not exist in the meantime
c. Double Insurance99 and Over Insurance100
Double insurance exists where same person is insured by several
insurers separately in respect to same subject and interest.101
Over-insurance results when the insured insures the same
property for an amount greater than the value of the property with the same
insurance company.
d. Multiple or Several Interests on Same Property
99

Requisites:
1. Person insured is the same;
2. Two or more insurers insuring separately;
3. Subject matter is the same;
4. Interest insured is also the same;
5. Risk or peril insured against is likewise the same.
Effects: Where double insurance is allowed, but over insurance results: (Sec. 94)
1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such
order as he may select, up to the amount for which the insurers are severally liable under their
respective contracts;
2. Where the policy under which the insured claims is a valued policy, the insured must give credit as
against the valuation for any sum received by him under any other policy without regard to the actual
value of the subject matter insured;
3. Where the policy under which the insured claims is an unvalued policy he must give credit, as
against the full insurable value, for any sum received by him under any policy;
4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of
the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves;
5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract.
Additional or Other Insurance Clause
A condition in the policy requiring the insured to inform the insurer of any other insurance coverage
of the property insured. It is lawful and specifically allowed under Sec. 75 which provides that (a)
policy may declare that a violation of a specified provision thereof shall avoid it, otherwise the breach
of an immaterial provision does not avoid it.
A stipulation against double insurance.
Purposes:
1. To prevent an increase in the moral hazard
2. To prevent over-insurance and fraud.
To constitute a violation of the clause, there should have been double insurance.
100
Effect in case of loss:
1. The insurer is bound only to pay to the extent of the real value of the property lost;

2. The insured is entitled to recover the amount of premium corresponding to the excess
in value of the property;
101
Sec. 93

29

Several persons have insurable interests on same property. Unless

each of them is named as insured in the property insurance, there would be
no coverage for those not named. While they did have an insurable interest
in the property, their interests were not identified.
6. Perfection of the Contract of Insurance102
An insurance contract is a consensual contract and is therefore
perfected the moment there is a meeting of minds with respect to the object
and the cause or consideration.
a. Offer and Acceptance/Consensual
Applicant usually makes the offer to the insurer.
Submission of application, even w/ payment is a mere offer on the part
of the applicant, it does not bind the insurer.
Approval of the application by the insurer is necessary to perfect
contract. If made:
- w/ payment of premium policy becomes effective
- w/o payment effective upon payment of premium
(1) Delay in acceptance
Tort Theory
Situation where applicant submits application for insurance, but due
to negligence of company, w/c takes an unreasonably long time before
processing the application, the applicant dies before the application is
processed, thus, the contract is not perfected.103
(2) Delivery of Policy
Delivery the act of putting the insurance policy the physical
document into the possession of the insured.104
102

What is being followed in insurance contracts is what is known as the cognition theory.
Thus, an acceptance made by letter shall not bind the person making the offer except from
the time it came to his knowledge. (Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil.
269)
103
Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the
policy, w/c is given to the estate of the deceased applicant. (not to beneficiary because
contract not perfected. Also, no contractual liability also bec. no contact)
104
Effects of Delivery:

30

Actual delivery of the policy is not essential unless the parties have so
agreed in clear language. Constructive delivery may be sufficient.105
b. Premium Payment106
Consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.
c. Non-Default Options in Life Insurance
a. Cash Surrender Value
The amount the insured, in case of default, after the payment of at
least three (3)full annual premiums, is entitled to receive if he surrenders
the policy and releases his claims upon it. It is the portion of reserve on a
life policy.
1) Where delivery is conditional Non-performance of Condition precedent prevents
contract from taking effect
2) Where delivery is unconditional Delivery corresponding terms of application
consummates the contract and policy delivered becomes final contract bet the
parties
3) Where premium still unpaid after unconditional delivery Policy will lapse if premium
unpaid at time and manner specified in the policy, in the absence of any clear
agreement that insurer will extend credit.
Individual life insurance contracts usually stipulate that:
1) Premium be paid and
2) Policy be delivered to the insured while he is alive and in good health. Concurrence of
both is necessary. (see Perez v CA case)
105
Vda. De Sindayen case
Whether or not policy was delivered after its issuance depends not upon manual possession
by the insured but rather upon the intention of the parties as manifested in their acts or
agreements.
Whether or not delivery to agent is delivery to insured is a question over w/c there has
been many conflicting opinions.
106
Basis of the right of the insurer to collect premiums: Assumption of risk.
General rule: No policy issued by an insurance company is valid and binding until actual
payment of premium. Any agreement to the contrary is void. (Sec. 77)
Exceptions:
1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)
2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)
3. Section 77 may not apply if the parties have agreed to the payment of the premium
in installments and partial payment has been made at the time of the loss. (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA 462)
4. Where a credit term has been agreed upon. (UCPB vs. MasaganaTelemart, 308 SCRA
259)
5. Where the parties are barred by estoppel. (id., 356 SCRA 307)
Section 77 merely precludes the parties from stipulating that the policy is valid even if
the premiums are not paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)
Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid. (Sec. 78)

31

Nature of CSV:
Premium is uniform throughout lifetime of policy, so during the earlier
years of the policy, the premium charges will be more than the actual cost of
the protection against the risk in order to meet the higher cost of risk
during the latter years of the policy when the insured is older.107
The more premiums he has paid, the greater will be the CSV but the
value is always a lesser sum than the total amt. of premiums paid.
CSV is the amount company holds in trust for insured deliverable
upon demand. So long as the policy remains in force, the company has
practically no beneficial interest in it except as its custodian; this is the
practical, though not the legal, relation of the company to this fund.108
b. Extended Insurance
Depends on availability of CSV.109
Either stated or equal to the amount of the cash surrender value,
taken as a single premium, will purchase; the insured is given the right,
upon default, after the payment of at least three full annual premiums to
have the policy continued in force from the date of default for a time either
stated or equal to the amount as the net value of the policy taken as a single
premium, will purchase Also called term insurance, temporary
insurance or paid-up extended insurance
c. Paid-up Insurance
Amount of Insurance that the CSV, applied as a single premium, can
purchase.110
Better option if insured is still young and in good health because
unlike extended insurance, he may later reinstate policy if he wishes.
107

Reserve Value - Surrender Charge = Cash Surrender Value

Effect: Surrender policy; terminates the contract of insurance
109
Effect: Policy continues in force from date of default, for a period
During extended period: If insured dies, beneficiary can recover face amount of policy.
Insured can also reinstate the policy w/in this period.
Beyond extended period: If he survives No benefits. He cannot even reinstate the policy
by paying past premiums; has to purchase new policy
Better option if insured not in good health or geriatric
110
Effect: Policy continues in force from date of default for the whole period and under the
same conditions of the original contract w/o further payment of premiums. However, in case
of death of insured, he may recover only the paid-up value of the policy w/c is much less
than the original amount agreed upon. (In other words, na-reduce yung original insurance
contract to one with a lower value)
108

32

d. Automatic Premium Loan

Upon default, insurer lends/advances to the insured without any need
of application on his part, amount necessary to pay overdue premium, but
not to exceed the CSV of the policy.
Only applies if requested in writing by the insured either in the
application or at any time before the expiration of the grace period.111
If there is still CSV, auto premium loan continues until it is exhausted.
Advantageous to the insured because ithelps to continue the contract
and allits features in full force and effect.
Insured under no legal obligation to repay loan
d. Reinstatement of a Lapsed
Insurance112

Policy

of

Life

Does not create a new contract, merely revives the old policy. Thus,
insurer cannot require higher premium than amount stipulated in the
contract.
Required by Insurance Code for every individual and industrial life
policy.
Not required that three (3) annual premiums have been paid.
Application for reinstatement must be filed during the insureds
lifetime.
e. Refund of Premiums113
111

Effect: Insurance continues in force for period covered by the payment. After period, if
insured still does not resume paying his premiums, policy lapses, unless there remains CSV.
112
Sec. 227 (j)
Requisites:
a) Exercised w/in 3 years from default
b) Insured must present evidence of insurability satisfactory to the company
c) Pay all back premiums and all his indebtedness to the insurance company
d) CSV has not been duly paid nor the extension period expired
Insurability does not mean that insured is in good health. Other factors affect
insurability like nature of work, age, etc.
113
There is no right to recovery of premiums in life insurancebecause it is not a divisible
contract. It is not an insurance forany single year, w/ a privilege of renewal from year to year
bypaying the annual premium. It is an entire contract of insurancefor life subject to
discontinuance
and
forfeiture
for
nonpayment of any of the stipulated premiums.

33

A person insured is entitled to a return of premium, as follows:

1) To the whole premium if no part of his interest in the thing insured
be exposed to any of the perils insured against;
2) Where the insurance is made for a definite period and the insured
surrenders his policy, before termination thereof (such portion as
corresponds w/ unexpired time, as a pro rata rate, returned).114
7. Rescission of Insurance Contracts
a. Concealment115
114

Sec 79
Exceptions:
a) Short period rate agreed upon and appears on face of policy (exception to pro rata
rate).
b) Life insurance (exception to applicability of this section).
c) When the contract is voidable because of fraud or misrepresentations of the insurer
or his agent (Sec. 81)
d) When the contract is voidable because of the existence of facts of w/c the insurer was
ignorant w/o his fault (ibid.);
e) When the insurer never incurred any liability under the policy because of default of
the insured other than actual fraud (ibid.);
f) When there is over insurance (Sec. 82);
g) When rescission is granted due to the insurers breach of contract
115
Requisites:
a. A party knows a fact which he neglects to communicate or disclose to the other.
b. Such party concealing is duty bound to disclose such fact to the other.
c. Such party concealing makes no warranty as to the fact concealed.
d. The other party has not the means of ascertaining the fact concealed.
e. Material
Effects: Entitles insurer to rescind, even if the death or loss is due to a cause not related
to the concealed matter (Sec. 27).
Good Faith is not a defense in concealment. Sec. 27 clearly provides that, the
concealment whether intentional or unintentional entitles the injured party to rescind the
contract of insurance.
Test of Materiality: Determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the advantages of the proposed contract, or in making his inquiries
(Sec. 31).
Exception to Sec. 31:
a. Incontestability clause
b. Matters under Sec.110 (marine insurance)
The waiver of medical examination in a non-medical insurance contract renders even more
material the information required of the applicant concerning the previous conditions of
health and diseases suffered. (Sunlife v. Sps. Bacani, 246 SCRA 268).
The right to information of material facts may be waived, either by the terms of the
insurance or by neglect to make inquiries as to such facts where they are distinctly implied
in other facts of which information is communicated. (Sec.33)
Where matters of opinion or judgment are called for, answers made in good faith and
without intent to deceive will not avoid the policy even though they are untrue. Reason: The
insurer cannot rely on those statements. He must make further inquiry. (Philamcare Health
Systems vs. CA, G.R. No. 125678, March 18, 2002).

34

A neglect to communicate that which a party knows and ought to

communicate.116
There is concealment where the insured has knowledge of facts
material to the risk, and good faith and fair dealing requires him to reveal
them, and he fails to do so.117

b. Misrepresentation/Omissions118
Factual statements made by the insured at the time of, or prior to, the
issuance of the policy to give information to the insurer and induce him to
enter into the insurance contract. They are considered an active form of
concealment.
c. Breach of Warranties
General rule:
Violation of material warranty or of a material provision of a policy
will entitle the other party to rescind the contract. (Sec. 74)
116

Sec. 26
Villanueva, Phil Commercial Law, 1998 Ed., p. 177
118
Requisites of a false representation (misrepresentation):
a. The insured stated a fact which is untrue.
b. Such fact was stated with knowledge that it is untrue and with intent to deceive or
which he states positively as true without knowing it to be true and which has a tendency to
mislead.
c. Such fact in either case is material to the risk.
Characteristics:
a. It is not a part of the contract but merely a collateral inducement to it.
b. It may be oral or written.
c. It is made at the same time of issuing the policy or before but not after.
d. It may be altered or withdrawn before the insurance is effected but not afterwards.
e. It always refers to the date the contract goes into effect.
Kinds:
a. Affirmative affirmation of a fact when the contract begins; and
b. Promissory promise to be performed after policy was issued.
Effect of Misrepresentation: the injured party is entitled to rescind from the time when the
representation becomes false.
117

35

Exceptions:
a) Loss occurs before the time of performance of the warranty.
b) The performance becomes unlawful at the place of the contract.
c) Performance becomes impossible.119
Immaterial120
General rule: It will not avoid the policy.
Exception: When the policy expressly provides or declares that a
violation thereof will avoid it.121

8. Claims Settlement and Subrogation

a. Notice and Proof of Loss
Notice of Loss the formal notice given the insurer by the insured or
claimant under a policy of the occurrence of the loss insured against.
The purpose is to apprise the insurance company so that it may make
proper investigation and take such action as maybe necessary to protect its
interest.
It is necessary as the insurer cannot be liable to pay a claim unless he
receives notice of that claim.122
Proof of Loss is the formal evidence given the insurance company
by the insured or claimant under a policy of the occurrence of the loss, the
particulars and the data necessary to enable the company to determine its
liability and the amount. Is not tantamount to proof or evidence under the
law on evidence.123
119

Sec. 73
ex. Other insurance clause
121
Sec. 75
122
Under Sec. 88, insurer is exonerated if notice of loss is not given to the insurer by the
insured or by the person entitled to the benefit without unnecessary delay.
It has been held however that formal notice of loss is not necessary if insurer has actual
notice of loss already.
123
Proof of loss is distinct from notice of loss and intended to:
1. give the insurer information by which he may determine the extent of his liability
2. afford him a means of detecting any fraud that may have been practiced upon him.
120

36

Other provisions:
When a preliminary proof of loss is required by a policy, the insured is
not bound to give such proof as would be necessary in a court of justice; but
it is sufficient for him to give the best evidence which he has in his power at
the time.124
All defects in a notice of loss, or in preliminary proof thereof, which
the insured might remedy, and which the insurer omits to specify to him,
without unnecessary delay, as grounds of objection, are waived.125
Delay in the presentation to an insurer of notice or proof of loss is
waived if caused by any act of him, or if he omits to take objection promptly
and specifically upon that ground.126
If the policy requires, by way of preliminary proof of loss, the
certificate or testimony of a person other than the insured, it is sufficient for
the insured to use reasonable diligence to procure it, and in case of the
refusal of such person to give it, then to furnish reasonable evidence to the
insurer that such refusal was not induced by any just grounds of disbelief in
the facts necessary to be certified or testified.127
b. Guidelines on Claims Settlement
(1) Unfair Claims Settlement; Sanctions
Unfair claim settlement practices:
a) knowingly misrepresenting to claimants pertinent facts or policy
provisions relating to coverage at issue;
The law does not stipulate any requirement as to the form in which notice or proof of loss
must be given. However, according to De Leon, it is advisable to give the notice in writing for
the protection of the insured or his beneficiary. Notice may be an informal or provisional
claim containing a minimum of information as distinguished from a formal claim which
contains full details of the loss, computations of the amounts claimed, and supporting
evidence, together with a demand or request for payment
Nature of notice and proof of loss
Although they are in the form of conditions precedent, they are in the nature of
conditions subsequent the breach of which affects a right that has already accrued (before
the loss, insurers liability is contingent but with the happening of the loss, his liability
becomes properly fixed).
These conditions are intended merely for evidentiary purposes and do not form any part
of the conditions of liability and are construed with much less strictness than those
conditions that operate prior to loss.
124
Sec. 89
125
Sec. 90
126
Sec. 91
127
Sec. 92

37

b) failing to acknowledge with reasonable promptness pertinent

communications with respect to claims arising under its policies;
c) failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies;
d) not attempting in good faith to effectuate prompt, fair and
equitable settlement of claims submitted in which liability has become
reasonably clear; or
e) compelling policyholders to institute suits to recover amounts due
under its policies by offering without justifiable reason substantially less
than the amounts ultimately recovered in suits brought by them.
Sanction:
Considered sufficient cause for the suspension or revocation of the
company's certificate of authority.128
(2) Prescription of Action
All criminal actions for the violation of any of the provisions of this
Code shall prescribe after three (3) years from the discovery of such
violation. Such actions shall in any event prescribe after ten years from the
commission of such violation.129
(3) Subrogation130
It is a process of legal substitution where the insurer steps into the
shoes of the insured and he avails of the latters rights against the
wrongdoer at the time of loss.131
128

See Sec. 241 (1) & (3)

Sec. 420
130
There can be no subrogation in cases:
a. Where the insured by his own act releases the wrongdoer or third party liable for the
loss or damage;
b. Where the insurer pays the insured the value of the loss without notifying the carrier
who has in good faith settled the insureds claim for loss;
c. Where the insurer pays the insured for a loss or risk not covered by the policy. ( Pan
Malayan Insurance Company v. CA, 184 SCRA 54)
d. In life insurance
e. For recovery of loss in excess of insurance coverage
131
The principle of subrogation is a normal incident of indemnity insurance as a legal effect
of payment; it inures to the insurer without any formal assignment or any express stipulation
to that effect in the policy. Said right is not dependent upon nor does it grow out of any
private contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan
129

38

F. Transportation Law132
1. Common Carriers
Persons, corporations, firms or associations engaged in the business
of carrying or transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public.133
a. Diligence Required of Common Carriers
Common carriers are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.134
Insurance Co., Inc. v. CA, 165 SCRA 536; see also Art. 2207, NCC)
132
The articles mentioned are under the Civil Code
133
Art. 1732
The said article avoids any distinction between one whose principal business activity is
the carrying of persons or goods or both and one who does such carrying only as an ancillary
activity (sideline). It also avoids a distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis.
Neither does the law distinguish between a carrier offering its services to the general public
that is the general community or population and one who offers services or solicits business
only from a narrow segment of the general population.
A person or entity is a common carrier even if he did not secure a Certificate of Public
Convenience (De Guzman vs. CA, 168 SCRA 612).
It makes no distinction as to the means of transporting, as long as it is by land, water or air.
It does not provide that the transportation should be by motor vehicle. (First Philippine
Industrial Corporation vs. CA)
One is a common carrier even if he has no fixed and publicly known route, maintains no
terminals, and issues no tickets (Asia Lighterage Shipping, Inc. vs. CA).
134
Art. 1733
The law requires CC to exercise extra-ordinary diligence which means that they must
render service with the greatest skill and utmost foresight.The extra-ordinary diligence
required of carriers in thehandling of the goods of the shippers and consigneeslast from the
time the cargoes are loaded in thevessels until they are discharged and delivered to
theconsignees.
Rendition of service with the greatest skill and utmost foresight (Davao Stevedore Co. v.
Fernandez)
Coverage:
1. Vigilance over goods (Arts. 1734-1754); and
2. Safety of passengers (Arts. 1755-1763).
Passenger:
A person who has entered into a contract of carriage, express or implied, with the carrier.
They are entitled to extraordinary diligence from the common carrier.
The following are not considered passengers, and are entitled to ordinary diligence only:
a. One who has not yet boarded any part of a vehicle regardless of whether or not he has
purchased a ticket;
b. One who remains on a carrier for an unreasonable length of time after he has been
afforded every safe opportunity to alight;
c. One who has boarded by fraud, stealth, or deceit;

39

b. Liabilities of Common Carriers

Common carriers are liable for the death of or injuries to passengers
through the negligence or willful acts of the carriers employees, although
such employees may have acted beyond the scope of their authority or in
violation of the orders of the common carriers. The liability does not cease
even upon proof that they exercised diligence in the selection and
supervision of their employees.135
Carrier is responsible for injuries suffered by a passenger on account
of the willful acts or negligence of other passengers or of strangers, if the
common carriers employees through the exercise of the diligence of a good
father of a family could have prevented or stopped the act or omission.136
2. Vigilance over goods
a. Exempting Causes
(1) Requirement of Absence of Negligence
The extra-ordinarydiligencerequired of common carriers in the
handling ofthe goods of theshipper and the consignees lasts from the time
thecargoes are loaded in the vessels until they aredischarged and delivered
to the consignees. To comply with this obligation, the common carrier
should be afforded a wide discretion in the selection and supervision of
persons who will handle the goods.
(2) Absence of Delay
The common carrier must not be in delay. Ifthecommon carrier incurs
in delay, a natural disaster shall not free it from responsibility.137
d. One who attempts to board a moving vehicle, although he has a ticket, unless the
attempt be with the knowledge and consent of the carrier;
e. One who has boarded a wrong vehicle, has been properly informed of such fact, and on
alighting, is injured by the carrier;
f. Invited guests and accommodation passengers. (Lara vs. Valencia)
g. One who rides any part of the vehicle which is unsuitable or dangerous or which he
knows is not designed or intended for passengers.
135
Art. 1759
136
Art. 1763
A common carrier is responsible for injuries suffered by a passenger on account of the
lawful acts/negligence of other passengers or of strangers provided that the employees
could have prevented the act or omission through the exercise of a good father of a family.
Common Carrier is liable for damages for defects of its equipment.
Common Carrier is liable for the misconduct of its employees done in their own interest.
Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he
is not put in that flight.
Carrier liable only for damages that are natural and probable consequence and breach of
contract which includes medical, hospital and other expenses.
137
Art. 1740

40

(3) Due diligence to prevent or lessen the loss

The common carrier must exercise due diligence to prevent or
minimize the loss before, during and after the occurrence of flood, storm,or
other natural disaster in order that the common carrier may be exempted
from liability for the loss,destruction, or deterioration of the goods.
b. Contributory negligence
If the shipper or owner merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof being the
negligence of the common carrier, the latter shall be liable in damages,
which however, shall be equitably reduced.138
c. Duration of liability
(1) Delivery of goods to common carrier
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 the right to receive them.139
(2) Actual or constructive delivery
(3) Temporary unloading or storage
It remains in full force and effect even when they are temporarily
unloaded or stored in transit unless the shipper or owner has made use of
the right of stoppage in transitu.140
It continues to be operative even during the time the goods are stored
in a warehouse of the carrier at the place of destination until the consignee
has been advised of the arrival of the goods and has had reasonable
opportunity thereafter to remove them or otherwise dispose of them.141
d. Stipulation for limitation of liability
(1)Void stipulations
138

Under Art. 1165, par. 3, if the obligor incurs delay, he shall be responsible for any
fortuitous event until he has effected delivery.
Art. 1741
139
Art. 1736
140
Art. 1737
141
Art. 1738

41

a) The goods are transported at the risk of the owner or shipper;

b) The carrier will not be liable for any loss, destruction or
deterioration of the goods;
c) The carrier need not observe any diligence in the custody of the
goods;
d) The carrier shall exercise a degree of diligence less than that of a
good father of a family over the movable transported;
e) Thecarrier shall not be responsible for the acts or omissions of his
or its employees;
f) The carriers liability for acts committed by thieves or robbers who
do not act with grave or irresistible threat, violence or force is dispensed
with or diminished;
g) The carrier is not responsible for the loss, destruction or
deterioration of the goods on account of the defective condition of the car,
vehicle, ship or other equipment used in the contract of carriage.142
(2) Limitation of liability to fixed amount
A contract fixing the sum that may be recovered, by the owner or
shipper for the loss, destruction, or deterioration of the goods is valid, if it is
reasonable and just under the circumstances, and has been fairly and freely
agreed upon.143
(3) Limitation of liability in absence of declaration of
greater value
A stipulation that the common carrier's liability is limited to the value
of the goods appearing in the bill of lading, unless the shipper or owner
declares a greater value, is binding.144
e. Liability for baggage of passengers
(1) Checked-in baggage

142

Art. 1745
Art. 1750
144
Art. 1749
143

42

The carrier who has in his custody the baggage of a passenger to be

carried, like any other goods, is required to observe extraordinary diligence.
In case of loss or damage, the carrier is presumed negligent.145
(2) Baggage in possession of passengers
The baggage in transit will be considered as necessary deposit. The
common carrier shall be responsible for the baggage as depositaries,
provided that notice was given to them or its employees. And the passenger
took the necessary precaution, which the carrier has advised them relative
to the care and vigilance of their baggage. In case of loss due to fault of the
passenger, the carrier will not be liable.146
3. Safety of Passengers
a. Void stipulations
Dispensing with or lessening the extraordinary responsibility of a
common carrier for the safety of passengers imposed by law by stipulation,
by posting of notices, by statements on tickets or otherwise.147
b. Duration of liability
(1) Waiting for carrier or Boarding of carrier
It is the duty of common carriers of passengers to stop their
conveyances a reasonable length of time in order to afford passengers an
opportunity to enter, and they are liable for injuries suffered from the
sudden starting up or jerking of their conveyances while doing so. The duty
which the carrier of passengers owes to its patrons extends to persons
boarding the cars as well as to those alighting therefrom.148
(2) Arrival at destination
The duty of a common carrier to provide safety to its passengers so
obligates it not only during the course of the trip, but for so long as the
passengers are within its premises and where they ought to be in pursuance
to the contract of carriage.149
145

Under Arts. 1733 to 1753, Civil Code

The act of the thief or robber, who has entered the common carriers vehicle is not
deemed force majeure, unless it is done with the use of arms or through an irresistible force
(Art. 1754, id.)
147
Art. 1757
148
Dangwa Trans Co., Inc. vs. CA, 202 SCRA 574
149
LRTA v. Navidad, [2003]
All persons who remain on the premises within a reasonable time after leaving the
conveyance are to be deemed passengers, and what is a reasonable time or a reasonable
delay within this rule is to be determined from all the circumstances, and includes a
146

43

c. Liability for acts of others

(1) Employees
Tort; however, the employee must be on duty at the time of the act.150
(2) Other passengers and strangers
Not absolute; limited by Art. 1763.151
d. Extent of liability for damages
Common carriers are liable for the death of or injuries to passengers
through the negligence or willful acts of the former's employees, although
such employees may have acted beyond the scope of their authority or in
violation of the orders of the common carriers.
This liability of the common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in the selection and
supervision of their employees.152
The common carrier's responsibility prescribed in the preceding
article cannot be eliminated or limited by stipulation, by the posting of
notices, by statements on the tickets or otherwise.153
A common carrier is responsible for injuries suffered by a passenger
on account of the willful acts or negligence of other passengers or of
strangers, if the common carrier's employees through the exercise of the
diligence of a good father of a family could have prevented or stopped the
act or omission.154
4. Bill of Lading
The written acknowledgment of receipt of goods and agreement to
transport them to a specific place to a person named or to his order.
a. Three-fold character
1. It is a receipt for the goods shipped
reasonable time to see after his baggage and prepare for his departure. (La Mallorca v. CA,
17 SCRA 739 ; Abiotiz Shipping Corporation v. CA, 179 SCRA 95)
150
Maranan v. Perez
151
See d), 3rd par., below
152
Art. 1759
153
Art. 1760
154
Art. 1763

44

2. It is a contract by which the three parties, namely, the shipper,

carrier and consignee undertake specific responsibilities and assume
stipulated obligations; and
3. It is a legal evidence of the contract between the shipper and the
carrier. As evidence, its contents shall decide all disputes which may arise
with regard to their execution and fulfillment.155
b. Delivery of goods
(1) Period for delivery
Stipulated in Contract/Bill of Lading:
Carrier is bound to fulfill the contract and is liable for any delay; no
matter from what cause it may have arisen.
No stipulation:
1. Within a reasonable time.
2. Carrier is bound to forward them in the 1st shipment of the same or
similar goods which he may make to the point of delivery.156
(2)Delivery without surrender of bill of lading
In case the consignee, upon receiving the goods, cannot return the
bill of lading subscribed by the carrier, because of its loss or of any other
cause, he must give the latter a receipt for the goods delivered, this receipt
producing the same effects as the return of the bill of lading.157
(3) Refusal of consignee to take delivery
Instances when the carrier may validly refuse to accept the goods
include the ff:
1) Goods sought to be transported are dangerous objects, or
substances including dynamite and other explosives
2) Goods are unfit for transportation
3) Acceptance would result in overloading
4) Contrabands or illegal goods
5) Goods are injurious to health
6) Goods will be exposed to untoward danger like flood, capture by
enemies and the like
155

In the absence of a bill of lading, their respective claims may be determined by legal
proofs which each of the contracting parties may present in conformity with law.
156
Art. 358, Code of Commerce
157
Art. 353, 3rd.par., Code of Commerce

45

7) Goods like livestock will be exposed to disease

8) Strike
9) Failure to tender goods on time.158
In case of carriage by railway, the carrier is exempted from liability if
carriage is insisted upon by the shipper, provided its objections are stated in
the bill of lading.
However, when a common carrier accepts cargo for shipment for
valuable consideration, it takes the risk of delivering it in good condition as
when it was loaded.159
d. Period for filing claims160
a. Patent damage: shipper must file a claim against the carrier
immediately upon delivery161
b. Latent damage: shipper should file a claim against the carrier
within 24 hours from delivery.
e. Period for filing actions
Not provided by Article 366. Thus, in such absence, Civil Code rules
on prescription apply.
If despite the notice of claim, the carrier refuses to pay, action must
be filed in court.
1. No bill of lading was issued: within 6 years
2. Bill of lading was issued: within 10 years.
5. Maritime Commerce162
158

Notes and Cases on the Law on Transportation and Public Utilities, Aquino, T.& Hernando,
R.P. 2004 ed. p.68
159
PAL vs. CA
160
These rules does not apply to misdelivery of goods. (Roldan vs. Lim Ponzo)
161
it may be oral or written
The filing of notice of claim is a condition precedent for recovery.
Purpose of notice: To inform the carrier that the shipment has been damaged, and it is
charged with liability therefore, and to give it an opportunity to make an investigation and
fix responsibility while the matter is fresh.
Shorter period may be stipulated by the parties because it merely affects the shippers
remedy and does not affect the liability of the carrier. (PHILAMGEN vs. Sweetlines, Inc.)
162
Articles mentioned are under the Code of Commerce
Maritime/admiralty law
It is the system of laws which particularly relates to the affairs and business of the sea, to
ships, their crews and navigation, and to maritime conveyance of persons and property.
(Notes and Cases on the Law on Transportation and Public Utilities, Aquino & Hernando,
citing Francisco, p.254)

46

a. Charter Parties163
(1) Bareboat/Demise Charter
The charterer provides crew, food and fuel. The charterer is liable as
if he were the owner, except when the cause arises from the unworthiness
of the vessel. The shipowner leases to the charterer the whole vessel,
transferring to the latter the entire command, possession and consequent
control over the vessels navigation, including the master and the crew, who
thereby become the charters servants. It transforms a common carrier into
a private carrier.164
(2) Time Charter165
- Vessel is chartered for a fixed period of time or duration of voyage.
(3) Voyage/Trip Charter166
- The vessel is leased for one or series of voyages usually for purposes
of transporting goods for charterer.
b. Liability of Shipowners and Shipping Agents
Shipowner167
Person who has possession, control and management of the vessel and
the consequent right to direct her navigation and receive freight earned and
Maritime laws apply only to maritime trade and sea voyages. (Pandect of Commercial Law
and Jurisprudence, Justice Jose Vitug, 1997 ed.)
Arrastre service is not maritime in character. It refers to a contract for the unloading of
goods from a vessel. (ICTSI vs. Prudential Guarantee, 320 SCRA 244)
163
Charter party
A contract by virtue of which the owner or agent binds himself to transport merchandise or
persons for a fixed price.
A contract by which an entire ship, or some principal part thereof is let/leased by the owner
to another person for a specified time or use. (Planters Products, Inc. vs. CA, 226 SCRA 476)
Parties:
1. Ship owner or ship agent
2. Charterer
164
The charterer becomes the owner of the vessel pro hac vice, just for that one particular
purpose only. Because the charterer is treated as owner pro hac vice, the charterer assumes
the customary rights and liabilities of the shipowner to third persons and is held liable for
the expense of the voyage and the wages of the seamen.
165
A kind of contract of Affreightment whereby the owner of the vessel leases part or all of its
space to haul goods for others.
The shipowner retains the possession, command and navigation of the ship, the
charterer merely having use of the space in the vessel in return for his payment of the
charter hired.
166
Ibid.
167
proprietario

47

paid, while his possession continues.

Ship agent168
Person entrusted with provisioning and representing the vessel in the
port in which it may be found; also includes the shipowner.169
(1) Liability for acts of captain
All contracts of the captain, whether authorized or not, to repair,
equip and provision the vessel.170
i.. Damages to vessel and to cargo due to lack of skill and negligence;
ii. Thefts and robberies of the crew;
iii. Losses and fines for violation of laws;
iv. Damages due to mutinies;
v. Damages due to misuse of power;
vi. For deviations;
vii. For arrivals under stress;
vi. Damages due to non-observance of marine regulations. 171
(2) Exceptions to limited liability
i. When the shipowner is at fault
ii. Insurance
iii. Liability under the Labor Code
iv. Chattel Mortgage of ship172
c. Accidents and Damages in Maritime Commerce
(1) General Average173
Damages or expenses deliberately caused in order to save the vessel,
its cargo or both from real and known risk.174
168

naviero
Not a mere agent under civil law; he is solidarily liable with the ship owner.
170
Art. 586
171
Art. 618
172
Villanueva, Phil. Commercial Law, 1998 ed., pp. 28-31
173
Average - an extraordinary or accidental expense incurred during the voyage in order to
preserve the cargo, vessel or both, and all damages or deterioration suffered by the vessel
from departure to the port of destination, and to the cargo from the port of loading to the
port of consignment. (Art. 806)
The person whose property has been saved must contribute to reimburse the damage
caused or expense incurred if the situation constitutes general average.
174
Art. 811
Goods not covered by general average even if sacrificed:
1. Goods carried on deck. (Art.855)
2. Goods not recorded in the books or records of the vessel. (Art. 855 (2))
169

48

(2) Collisions
Impact of two vessels both of which are moving.175
d. Carriage of Goods by Sea Act176
(1) Application
The transportation must be:
1. Water/maritime transportation;
2. for the carriage of goods; and
3. overseas/international/foreign177
It can be applied in domestic sea transportation if agreed upon by the
parties.178
(2) Notice of Loss or Damage179
Patent damage: shipper should file a claim with the carrier
immediately upon delivery
Latent damage: shipper should file a claim with the carrier within
three days from delivery.180
(3) Period of Prescription
Action for loss or damage to the cargo should be brought within one
(1) year181 after:
3. Fuel for the vessel if there is more than sufficient fuel for the voyage. (Rule IX, YorkAntwerp Rule)
175
Allision- impact between a moving vessel and a stationary one.
176
C.A. No. 65
177
from foreign port to Philippine port
178
Clause paramount or paramount clause
179
Loss or Damage as applied to the COGSA contemplates a situation where no delivery at
all was made by the shipper of the goods because the same had perished, gone out of
commerce, or disappeared in such a way that their existence is unknown or they cannot be
recovered. Thus, it is inapplicable in case of misdelivery or conversion. (Ang vs. American
Steamship Agencies Inc.)and damage arising from delay or late delivery (Mitsui O.S.K. Lines
Ltd. vs. CA). In such instance the, Civil Code rules on prescription shall apply.
180
Sec. 3(6)
The filing of a notice of claim is not a condition precedent.
181
The one-year prescriptive period is suspended by:
1. The express agreement of the parties (Universal Shipping Lines, Inc. vs. IAC, 188 SCRA
170)
2. The filing of an action in court until it is dismissed. (Stevens & Co. vs. Nordeutscher
Lloyd, 6 SCRA 180)
The one-year period shall run from delivery of the last package and is not suspended by
extrajudicial demand. (Dole Phils.,Inc. vs. Maritime Co., 148 SCRA 118)

49

a. Delivery of the goods;182 or

b. The date when the goods should have been delivered.183
(4) Limitation of liability
Under Sec. 4(5), the liability limit is set at $500 per package or
customary freight unit unless the nature and value of such goods is declared
by the shipper. This is deemed incorporated in the bill of lading even if not
mentioned in it.184
6. The Warsaw Convention185
a. Applicability186
The transportation must be:
1. International transportation;187
2. Air transportation;188 and
The one-year period shall run from delivery to the arrastre operator and not to the
consignee. (Union Carbide Phils, Inc. vs. Manila Railroad Co., SCRA 359)
The insurer exercising its right of subrogation is bound by the one-year prescriptive period.
However, it does not apply to the claim against the insurer for the insurance proceeds. (Fil.
Merchants Ins. Co. vs. Alejandro; Mayer Steel Pipe Corp. vs. CA)
182
delivered but damaged goods
183
non-delivery (Sec. 3[6])
184
Eastern Shipping vs. IAC, 150 SCRA 463
185
As much a part of Philippine law as the Civil Code, Code of Commerce and other
municipal special laws, and the provisions therein contained, specifically on the limitation of
carriers liability, are in operation in the Philippines but only in appropriate situation (PAL vs.
CA, 255 SCRA 48)
186
When inapplicable:
1. When public policy is contradicted;
2. If the requirements under the Convention are not complied with.
187
any transportation in which the place of departure and the place of destination are
situated either:
1. Within the territories of two High Contracting Parties regardless of whether or not there
be a break in the transportation or transshipment, or
2. Within the territory of a single High Contracting Party, if there is an agreed stopping
place within a territory subject to the sovereignty, mandate or authority of another power,
even though that power is not a party to the Convention. (round trip, Am. Jur.)
Transportation to be performed by several successive air carriers shall be deemed to be one
undivided transportation, if it has been regarded by the parties as a single operation,
whether it has been agreed upon under the form of a single contract or of a series of
contracts, and it shall not lose its international character merely because one contract or a
series of contracts is to be performed entirely within a territory subject to the sovereignty,
suzerainty, mandate, or authority of the same High Contracting Party. (Art. 1 Sec.3)
188
The period during which the baggage or goods are in the charge of the carrier, whether in
an airport or on board an aircraft, or, in case of a landing outside an airport, in any place
whatsoever.
It includes any transportation by land or water outside an airport if such takes place in
the performance of a contract for transportation by air, for the purpose of loading, delivery,

50

3. Carriage of passengers, baggage or goods.

The WC shall also apply to fortuitous transportation by aircraft
performed by an air transportation enterprise.
b. Limitation of liability 189
(1) Liability to passengers
General rule:Limited to 250,000 francs per passenger
Exception:Agreement to a higher limit
(2) Liability for checked baggage
General rule:limited to 250 francs per kilogram
Exception: In case of special declaration of value and payment of a
supplementary sum by consignor, carrier is liable to not more than the
declared sum unless it proves the sum is greater than actual value.
(3) Liability for hand-carried baggage
Limited to 5,000 francs per passenger.
c. Willful Misconduct
The War Convention denies to the carrier availment of the provisions
which exclude or limit the carriers liability if the damage is caused by his
willful misconduct or by such default on his part, as, in accordance with the
law of the court seized of the case, is considered to be equivalent to willful
misconduct, of if the damage is similarly caused by any agent of carrier
acting within the scope of his management.190

G. Corporation Law
or transshipment.
189
Art. 22, as amended by Guatemala Protocol, 1971; Alitalia vs. IAC
190
Under domestic law and jurisprudence, the attendance of gross negligence (given the
equivalent of fraud or bad faith) holds the common carrier liable for all damages which can
be reasonable attributed, although unforeseen, to the non-performance of the obligation,
including exemplary damages.

51

1. The Corporation Code191

a. Corporation, defined
An artificial being created by operation of law having the right of
succession, and the powers, attributes and properties expressly authorized
by law and incident to its existence.192
b. Classification of corporations
1. As to organizers
a. public by State only; and
b.private by private persons alone or with the State.
2. As to functions
a. public government of a portion of the territory; and
b. private usually for profit-making
3. As to governing law
a. public Special Laws; and
b. private Law on Private Corporations
4. As to legal status
a. De jure corporation organized in accordance with the
requirements of law.
b. De facto corporation organized with a colorable compliance
with the requirements of a valid law. Its existence cannot be inquired
collaterally. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding.193
191

B.P. 68
Sec. 2
193
Sec. 20
Requisites:
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law;
3. Actual use or exercise in good faith of corporate powers; and
4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of
continued good faith.
The only difference between a de facto corporation and a de jure corporation is that a de
jure corporation can successfully resist a suit by a state brought to challenge its existence; a
de facto corporation cannot sustain its right to exist.
192

52

c. Corporation by estoppel group of persons that assumes to

act as a corporation knowing it to be without authority to do so, and
enters into a transaction with a third person on the strength of such
appearance. It cannot be permitted to deny its existence in an action
under said transaction.194It is neither de jure nor de facto.
d. Corporation by prescription one which has exercised
corporate powers for an indefinite period without interference on the
part of the sovereign power.195
5. As to existence of shares of stock:
a. Stock corporation a corporation 1) whose capital stock is
divided into shares and 2) which is authorized to distribute to
shareholders dividends or allotments of the surplus profits on the
basis of the shares held.196
b. Non-stock corporation does not issue stocks nor distribute
dividends to their members.
6. As to relationship of management and control
a. Holding Corporation - it is one which controls another as a
subsidiary by the power to elect management. It is one that holds
stocks in other companies for purposes of control rather than for mere
investment.
b. Subsidiary Corporation - one which is so related to another
corporation that the majority of its directors can be elected directly or
indirectly by such other corporation.197
c. Affiliates - company which is subject to common control of a
mother holding company and operated as part of the system.
d. Parent and Subsidiary Corporation - separate entities with
power to contract with each other. The board of directors of the
parent company determines its representatives to attend and vote in
the stockholders meeting of its subsidiary. The stockholders of the
parent company demand representation in the board meetings of its
subsidiary.
194

Sec. 21
e.g. Roman Catholic Church
196
Sec. 3
197
The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.
195

53

7. As to place of incorporation
a. Domestic corporation- a corporation formed, organized, or
existing under Philippine laws.
b. Foreign corporation a corporation formed, organized, or
existing under any laws other than those of the Philippines.198

c. Nationality of corporations
(1) Control test
Determined by the nationality of the controlling stockholders or
members. This test is applied in times of war. Also known as the wartime
test.
(2) Grandfather rule
Applied in determining the nationality of a corporation. It traces the
nationality of the stockholders of investor corporations so as to ascertain
the nationality of the corporation where the investment is made.199
The application of the test is limited however to resolving issues on
investments. By the Foreign Investments Act, the grandfather rule is merely
an ancillary rule to the main method of determining nationality, wherein
corporations that are 60% owned by Filipinos are automatically considered
as 100% Filipino-owned. Only when a corporation is less than
60% owned shall the grandfather rule be applied.
d. Corporate juridical personality
(1) Doctrine of separate juridical personality

198

Sec. 123
Ex: MV Corporation and AC Corporation have equal interest in XYZ Company. MV
Corporation is 60%
owned by Filipinos, while AC Corporation is 50% owned by Filipinos. By the grandfather rule,
MV Corporation would have a 30% Filipino interest in XYZ Company (60% of 50%), while AC
Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Hence, the
total Filipino interest is only 55%.
199

54

A corporation has a juridical personality separate and distinct from

that of its stockholders or members.200
(a) Liability for tort and crimes
Liability for torts a corporation is liable whenever a tortuous act is
committed by an officer or agent under the express direction or authority of
the stockholders or members acting as a body, or, generally, from the
directors as the governing body.201
Liability for crimes since a corporation is a mere legal fiction, it
cannot be held liable for a crime committed by its officers, since it does not
have the essential element of malice; in such case the responsible officers
would be criminally liable.202
(b) Recovery of damages
A corporation is not entitled to moral damages because it has no
feelings, no emotions, no senses.203
In one case,204 though, the Supreme Court recognized that
Corporations can be entitled to moral damages if their financial reputation
had been harmed.
200

Used for purposes of convenience and to subserve the ends of justice.

Consequences/significance:
1. Liability for acts or contracts obligations incurred by a corporation, acting through its
authorized agents are its sole liabilities. (Creese vs. CA, 93 SCRA 483)
2. Right to bring actions may bring civil and criminal actions in its own name in the
same manner as natural persons. (Art. 46, Civil Code)
3. Right to acquire and possess property property conveyed to or acquired by the
corporation is in law the property of the corporation itself as a distinct legal entity and not
that of the stockholders or members. (Art. 44(3), Civil Code)
4. Acquisition of court of jurisdiction service of summons may be made on the
president, general manager, corporate secretary, treasurer or in-house counsel. (Sec. 11,
Rule 14, Rules of Court).
5. Changes in individual membership remains unchanged and unaffected in its identity
by changes in its individual membership. (The Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
6. Entitlement to constitutional guaranties:
a. Due process (Albert vs. University Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136)
c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20
SCRA 383)
A corporation is not entitled to invoke the right against self-incrimination. (Bataan
Shipyard vs. PCGG)
201
PNB vs. CA, 83 SCRA 237r
202
People vs. Tan Boon Kong, 54 Phil.607
203
ABS-CBN vs. Court of Appeals
204
Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian
College of Medicine, January 17, 2005

55

The Court held that in all cases of libel, corporations can be awarded
moral damages. The Court, through Justice Antonio Carpio said:
A juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the
award of moral damages. However, the Courts statement in
Mambulao that a corporation may have a good reputation
which, if besmirched, may also be a ground for the award of
moral damages is an obiter dictum.
Nevertheless, AMECs claim for moral damages falls
under item 7 of Article 2219 of the Civil Code. This provision
expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Article 2219(7)
does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can
validly complain for libel or any other form of defamation and
claim for moral damages.
Moreover, where the broadcast is libelous per se,
the law implies damages. In such a case, evidence of an honest
mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages. Neither in such a
case is the plaintiff required to introduce evidence of actual
damages as a condition precedent to the recovery of some
damages. In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.
(2) Doctrine of piercing the corporate veil
It means that while the corporation cannot be generally held liable
for acts or liabilities of its stockholders or members, and vice versa because
a corporation has a personality
separate
and
distinct
from
its
members
or
stockholders,
however,
the corporate existence is
disregarded under this doctrine when the corporation is formed or used for
illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat
public convenience, justify wrong, evade a just and valid obligation or
defend a crime.
(a) Grounds for application of doctrine205
205

Mere ownership by a single stockholder or by another corporation of all or substantially all

of the capital stock of the corporation does not justify the application of the doctrine.
There must be other circumstances that must be present.

56

1.
The parent corporation owns all or most of the capital of the
subsidiary.
2. The parent and subsidiary corporations have common directors or
officers.
3. The parent company finances the subsidiary
4. The parent company subscribed to all the capital stock of the
subsidiary or otherwise causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6.
The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by the
parent corporation.
7.
officers,
parent
referred

The papers of the parent corporation or in the statements of its

the subsidiary is described as a department or division of the
corporation,
or
its
business
or financial responsibility is
to as the parent corporations own.

8.

The parent corporation uses the property of the subsidiary as its

own.
9.
The directors or executives of the subsidiary do no act
independently in the interest of the subsidiary but take their orders from
the parent corporation.
10. The
observed.206

formal

legal

requirements

of

the subsidiary are not

(b) Test in determining applicability

Control not mere stock control but complete domination
not only of finances, but of policy and business practice in respect to the
transaction attacked and must have been such that the corporate entity as
to this transaction had at the time no separate mind, will or existence or
existence of its own.207
206

Phil. National Bank v. Ritratto Group, Inc., 362 SCRA 216 [2001]
Such control must have been used by the defendant to commit a fraud or wrong to
perpetuate the violation of a statutory or other positive legal breach of duty, or a
dishonest and an unjust act in contravention of the plaintiffs legal right, and,
The said control and breach of duty must have proximately caused the injury or unjust
loss complained of. (PNB v. Andrada
Electric
&
Engineering Company, 381 SCRA 244
[2002], Child Learning Center Inc. v. Tagario (November 25, 2005)
207

57

e. Capital structure
(1)Number and qualifications of incorporators
1.
2.
3.
4.
5.

natural persons;
not less than 5 but not more than 15;
of legal age;
majority must be residents of the Philippines; and
each must own or subscribe to at least one share.
(2) Minimum
requirements

capital

stock

and

subscription

i. at least twenty-five percent (25%) of the authorized capital stock as

stated in the articles of incorporation must be subscribed at the time of
incorporation;
ii. at least twenty-five (25%) per cent of the total subscription must be
paid upon subscription, the balance to be payable on a date or dates fixed in
the contract of subscription without need of call, or in the absence of a fixed
date or dates, upon call for payment by the board of directors; and
iii. in no case shall the paid-up capital be less than five thousand
(P5,000.00) pesos.
(3) Corporate term
a. The term shall not exceed fifty (50) years in any one instance.
b. The amendment is effected before the expiration of corporate term,
for after dissolution by expiration of the corporate term there is no more
corporate life to extend.
c. The extension cannot be made earlier than 5 years prior to the
expiration date unless there are justifiable reasons as determined by the
SEC.
(3)Classification of shares
1. Common shares
The basic class of stock ordinarily and usually
extraordinary rights and privileges, and the owners thereof
pro rata share in the profits of the corporation and in
dissolution and, likewise, in the management of its
preference or advantage whatsoever.
2. Preferred shares
58

issued without
are entitled to a
its assets upon
affairs without

Those issued with par value, and preferences either with respect to
(a) assets after dissolution, (b) distribution of dividends, or both, and other
preferences.
3. Redeemable shares
Those which permit the issuing corporation to redeem or purchase its
own shares.
4. Treasury shares
Shares that have been earlier issued as fully paid and have thereafter
been acquired by the corporation by purchase, donation, and redemption or
through some lawful means.

5. Founders' share
Shares issued to organizers and promoters of a corporation in
consideration of some supposed right or property.
6. Voting shares
Shares with a right to vote.
7. Non-voting shares
Shares without right to vote.
8. Escrow stock
Deposited with a third person to be delivered to a stockholder or his
assign after complying with certain conditions, usually payment of full
subscription price.
9. Over-issued stock
Stock issued in excess of the authorized capital stock. It is also known
as spurious stock. Its issuance is considered null and void.
10. Watered stock
A stock issued not in exchange for its equivalent either in cash,
property, share, stock dividends, or services.
Water in the stock represents the difference between the fair
market value at the time of the issuance of the stock and the par or issued
value of said stock. Both par and no par stocks can thus be watered stocks.
11. Par value shares
Shares with a value fixed in the certificates of stock and the articles of
incorporation.
59

12. No par value shares

Shares having no par value but have issued value stated in the
certificate or articles of incorporation.
13. Street certificate
A stock certificate endorsed by the registered holder in blank and
transferee can command its transfer to his name from the issuing
corporation.
14. Convertible share
A share that is changeable by the stockholder from one class to
another at a certain price and within a certain period.
15. Fractional share
A share with a value of less than one full share.
f. Incorporation and organization
(1) Promoter
A person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives
consideration therefor.
(a) Liability of promoter
He is liable to contracts entered by him in behalf of proposed
corporation.208
(b) Liability of corporation for promoters
contracts
Contracts by the promoter for and in behalf of a proposed corporation
generally bind only him, subject to and to the extent of his representations,
and not the corporation, unless and until after these contracts are ratified,
expressly or impliedly, by its Board of Directors/Trustees.
Without ratification by a corporation after its due incorporation, a
contract entered into in behalf of a corporation yet to be organized or still in
the process of incorporation is void as against the corporation. 209
(2) Subscription contract

208
209

A promoter is an agent of the incorporators but not of the corporation.

Cagayan Fishing Dev. Co., Inc. v. TeodoroSandiko, 65 Phil. 223[1937]

60

Any contract for the acquisition of unissued stock in an existing

corporation or a corporation still to be formed.210
The subscribed shares need not be paid in full in order that the
subscription may be valid. The subscription contract is a consensual
contract that is perfected upon the meeting of the minds of the parties. The
name of the subscriber is recorded in the stock and transfer book, and from
that time, such subscriber becomes a stockholder of record entitled to all
the rights of a stockholder. Until the stocks are fully paid, it continues to be
a subsisting liability that is legally enforceable.
(3) Pre-incorporation subscription agreements211
Subscription of shares of stock of a corporation still to be formed.
Shall be irrevocable for a period of at least 6 months from date of
subscription, unless:
1. All of the other subscribers consent to the revocation;
2. The incorporation of said corporation fails to materialize with said
period or within a longer period as may be stipulated in the contract of
subscription; provided that no pre-incorporation subscription may be
revoked after the submission of the articles of incorporation to the SEC.212
(4) Consideration for stocks
Stocks shall not be issued for a consideration less than the par or
issued price thereof.
May be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value of the stock issued;
210

Sec. 60
A person agreed to take and pay for original and unissuedshares of a corp. formed or to
be formed
211
Under Sec 60 any contract for the acquisition of unissued stock in a corporation still to be
formed shall be deemed a subscription within the meaning of the Corporation Code.
Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be
irrevocable for a period of 6 mos. from the date of subscription, unless all of the other
subscriber consent to the revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be stipulated in the contract
of subscription. However, no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to SEC
212
Sec. 61

61

3. Labor performed for or services actually rendered to the

corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.213
(5) Articles of Incorporation
The document prepared by the persons establishing a corporation and
filed with the SEC containing the matters required by the Code.
It defines the charter of corporation & the contractual relationship
between state and corporation, shareholders and state, corporation and
shareholders.
(a) Contents
1.
2.
3.
4.
5.
6.
7.

name of corporation;
purpose/s, indicating the primary and secondary purposes;
place of principal office;
term of existence;
names, citizenship and residences of incorporators;
number, names, citizenship and residences of directors or trustees;
names, nationalities, and residences of the persons who shall act as
directors or trustees until the first regular ones are elected and
qualified;
8. if a stock corporation, the amount of its authorized capital stock,
number of shares and in case the shares are par value shares, the
par value of each share;
9. names, residences, number of shares, and the amounts subscribed
and paid by each of the original subscribers which shall not be less
than 25% of authorized capital stock;

213

Sec. 62
Where the consideration is other than actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission. Shares of stock shall not be issued in exchange for promissory notes or future
service (ibid)

62

10. if non-stock, the amount of capital, the names, residences, and

amount paid by each contributor, which shall not be less than 25%
of total subscription;
11. name of treasurer elected by subscribers; and
12. if the corporation engages in a nationalized industry, a
statement that no transfer of stock will be allowed if it will reduce
the stock ownership of Filipinos to a percentage below the
required legal minimum.214
(b) Non-amendable items
Those matters referring to facts existing as of the date of the
incorporation such as:
1. Names of incorporators;
2. Names of original subscribers to the capital stock of the
corporation and their subscribed and paid up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock
corporation;
5. Date and place of execution of the articles of incorporation;
6. Witnesses to the signing and acknowledgment of the articles.
(6) Corporate name -- limitations on use of corporate
name
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing
laws.215
(7) Registration and issuance of Certificate of
Incorporation
Gives juridical personality to a corporation and places it under SEC
jurisdiction.
(8) Election of directors or trustees
a. In any form; or
b. Must be by ballot when requested by any voting stockholder or
member;
c. Voting may be in person or by proxy.
214
215

Sec. 14
Sec. 18

63

(9) Adoption of By-Laws216

(a) Requisites of valid by-laws
a. Must not be contrary to law nor with the Corporation Code
b. Must not be contrary to morals and public policy;
c. Must not impair obligations and contracts;
d. Must be general and uniform;
e. Must be consistent with the charter or articles of incorporation; and
f. Must be reasonable, not arbitrary or oppressive.
(b) Binding effects
a. As to members and corporation
They have the force of contract between the members themselves.
They are binding only upon the corporation and on its members and
those having direction, management and control of its affairs.
b. As to third persons
They are not bound to know the by-laws which are merely provisions
for the government of a corporation and notice to them will not be
presumed.217
(c) Amendments
May be amended by a majority vote of the Board of Directors and
majority vote of outstanding capital stock or a majority of the members in
non-stock corporation.218
g. Corporate powers
216

By-laws - rules of action adopted by a corporation for its internal government and for the
regulation of conduct and prescribe the rights and duties of its stockholders or members
towards itself and among themselves in reference to the management of its affairs.
Functions:
a. Supplement the articles of incorporation
b. Provide for details not important enough to be stated in the articles of incorporation
c. Continuing rule for the government of the corporation and the individuals composing it
d. Define the rights and duties of corporate officers and directors/trustees and of
stockholders/members towards the corporation and among themselves
e. Source of authority for corporate officers and agents of the corporation
217
By-laws have no extra-corporate force and are not in the nature of legislative enactments
so far as third persons are concerned.
218
Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of
the outstanding capital stock or 2/3 of the members in the case of non-stock corporation

64

(1) General powers, theory of general capacity

1. To sue and be sued in its corporate name;219
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its by-laws not contrary to law, morals, or public policy,
and to amend or repeal the same;
6. For stock corporations: issue and sell stocks to subscribers and
treasury stocks; for non-stock corporations: admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and deal with real and personal property,
securities and bonds
8. To enter into merger or consolidation with other corporations;
9. To make reasonable donations for public welfare, hospital,
charitable, cultural, scientific, civic or similar purposes, provided
that nodonation is given to any (i) political party, (ii) candidate and
(iii) partisan political activity.
10. To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees; and
11. To exercise other powers essential or necessary to carry out its
purposes as stated in the articles of incorporation.220
219

This power (Section 36(1)) is an incident to corporate existence. (De Leon 2006 at 319)
As a rule, suits are to be brought by or against the corporation in his own name.
Corporation de facto may sue or be sued but a corporation which has been dissolved
after the expiration of 3-year winding-up period ceases to exist de jure or de facto.
Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an
injured party, its power to sue is lodged with its Board of Directors. A minority stockholder
who is a member of the Board has no such power or authority to sue on the corporations
behalf. (Tam Wing Tak v. Makasiar,
350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA,
384 SCRA 548 (2002); United Paragon Mining Corp v. CA, 2006)
Where the corporation is real party-in-interest, neither administrator or a project manager
could sign the certificate against forum-shopping without being duly authorized by
resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230 [2001]),
nor the General Manager who has no authority to institute a suit on behalf of the corporation
even when the purpose is to protect corporate assets.(Central Cooperative Exchange Inc. v.
Enciso, 162 SCRA 706 [1988]).
When the power to sue is delegated by the by-laws to a particular officer, such officer
may appoint counsel to represent the corporation in a pre-trial hearing without need of a
formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993)
For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors. (BP Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles
Shipyard Corp. v. CA, 415 SCRA 573 (2003), Metro Drug Distribution Inc. v. Narciso,(2006 )
220
Sec. 36
Enumerates some of the express powers of corporations (many of which even if not
expressly provided for by law would constitute implied powers of every entity. (p. 794 of
CLVs CLR, 2007)

65

(2) Specific powers, theory of specific capacity

(a) Power to extend or shorten corporate term
Requites:
i. Approved by a majority vote of the board of directors or trustees
ii. Ratified by at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members.
iii. Written notice of the proposed action and of the time and place of
the meeting addressed to each stockholder or member at his place of
residence.
In case of extension of corporate term, any dissenting stockholder
may exercise his appraisal right.221
(b) Power to increase or decrease capital stock
or incur, create, increase bonded indebtedness
Requisites:
i. Majority vote of the members of the BoD
ii. Ratification by 2/vote of the outstanding capital stock, in a meeting
duly called for that purpose with notice previously given
iii. Certificate of said corporate act shall be signed by majority of the
members of the Board and the Chairman and Secretary of the stockholders
meeting
iv. Certificate must be accompanied by the Treasurers Affidavit
certifying compliance with the 25%-25% requirements as to stock
corporation.222
(c) Power to deny pre-emptive rights
Enumerates 10 powers that a corporation enjoys in addition to the special powers that may
be provided for in the purpose clause of the articles of incorporation, which would also
constitute express powers. (ibid., p. 795)
221
Sec. 67
222
The corporation must submit proof to the SEC that such decrease will not prejudice the
rights of creditors. (SEC Opinion no. 05-10, July 12, 2005)
A corporation cannot issue stock in excess of the amount limited by its articles of
incorporation; such issue is ultra vires and the stock so issued is void even in the hands of a
bona fide purchaser for value.
SEC has limited the term bonded indebtedness to cover only indebtedness of the
corporation which are secured by mortgage on real or personal property. Debentures are
issued on the basis of the general credit of the corporation and are not secured by
collaterals, and therefore do not constitute bonded indebtedness and will not require
approval of the stockholders. (Page 243 of CLVs Textbook)
A corporate bond is an obligation to pay a definite sum of money at a future time at a
fixed rate of interest. (Page 347 of De Leon, 2006)

66

All stockholders of a stock corporation shall enjoy pre-emptive right to

subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto. Such pre-emptive right shall not
extend to:
1. Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
2. Shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock,
in exchange for property needed for corporate purposes or in payment of a
previously contracted debt.223
(d) Power to sell or dispose of corporate assets
Requisites:
a. The sale etc. must be approved by the board ofdirectors or trustees;
b. The action of the board of directors or trustees mustbe authorized
by the vote of stockholding representing 2/3 of the outstanding capital stock
including holders of non-voting shares or 2/3 of the members as the case
may be; and
c. The authorization must be done at a stockholders ormembers
meeting duly called for that purpose after written notice. 224
223

Sec. 39
A pre-emptive right is the shareholders right to subscribe to all issues or disposition of
shares or any class in proportion to his present stockholdings, the purpose being to enable
the shareholder to retain his proportionate control in the corporation and to retain his equity
in the retained earnings and also in the net assets in the event of dissolution. (Page 832 of
CLVs CLR, 2007)
Whenever a capital stock of a corporation is increased and new shares of stocks are
issued, the new issue must be offered first to the stockholders who are such at the rime the
increase was made in proportion to their existing shareholdings and on equal terms with
other holders of the original stocks before subscriptions are received from the general
public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding
shares of the corporation, he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre- emption or pre-emptive right of
stockholders (Page 355 of De Leon, 2006)
The rule [on pre-emption] aims to safeguard the right of stockholder to preserve
unaltered and unimpaired his proportionate influence and interest in the corporation and the
relative value of his holdings. (Page 356 of De Leon, 2006)
224
No ratificatory vote needed:
a. If it is necessary in the usual and regular course of business
b. if the proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of the remaining business

67

(e) Power to acquire own shares

Instances:
a. To eliminate fractional shares out of stock dividends
b. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale and to purchase
delinquent shares sold during said sale
c. To pay dissenting stockholders
d. To acquire treasury shares
e. Redeemable shares regardless of existence of retained earnings
f. To effect a decrease of capital stock
g. In close corporations, when there is a deadlock in the management
of the business225
(f) Power to invest corporate funds in another
corporation or business
a. Approved by a majority of the board of directors or trustees; and
b. Ratified by the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or by at least two thirds (2/3) of the members
in the case of non-stock corporations;
c. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member.
Any dissenting stockholder shall have appraisal right.226
(g) Power to declare dividends
General rule: Dividends can only be declared and paid out of actual
and bona fide unrestricted retained earnings.227
225

In letters a-c, there must be unrestricted retained earnings

The other purposes for which the funds may be invested must be among those
enumerated as secondary purposes and must further comply with the requirements of
Section 42.
227
Dividends - corporate profits set aside, declared, and ordered to be paid by the directors
for distribution among shareholders at a fixed time.
Forms:
226

68

Special rules:
a.Where a corporation sold its real property, which is not being used
for business, at a gain, the income derived therefrom may be availed of for
dividend distribution.
b. Increase in the value of a fixed asset as a result of its revaluation is
not retained earnings. However, increase in the value of fixed assets as a
result of revaluation228 may be declared as cash or stock dividends
provided that the company:
i. Has sufficient income from operations from which the
depreciation on the appraisal increase was charged
ii. Has no deficit at the time the depreciation on the appraisal
increase was charged to operations; and
iii. Such depreciation on appraisal increase previously charged
to operations has not been impaired by losses.
c. Dividends can be declared out of the amount received in excess of
the par value of shares229 when:
i. Declared only as stock dividends and not cash;
ii.No creditors are prejudiced; and
iii. There is no impairment of capital.
d. Reduction surplus can be a source of dividends. Rule on paid-in
surplus is applicable.
a. Cash
b. Property
c. Stock
While cash dividends due on delinquent shares can be applied to the payment of the
unpaid balance, stock dividends cannot be applied as payment for unpaid subscription.
General Rule: Stock corporations are prohibited from retaining surplus profits in excess of
100% of their paid-in capital stock
Except:
a. When justified by definite corporate expansion projects approved by the board of
directors
b. When the corporation is prohibited under any loan agreement with any financial
institution or creditor from declaring dividends without its/his consent and such consent has
not yet been secured
c. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is a need for special reserve
for probable contingencies.
228
Revaluation surplus
229
paid-in surplus
Unlike par value shares, when no par value shares are sold at a premium, the entire
consideration paid is considered capital; hence the same cannot be declared as dividends.

69

e. No dividends can be declared out of capital except only in two

instances:
i.liquidating dividends; and
ii.dividends from investments in wasting assetcorporation.230
f. Profits realized from sale of treasury shares are part of capital and
cannot be declared as cash or stock dividend as purchase and sale of such
shares are regarded as contractions and expansions of paid-in capital.
g. Money cannot be borrowed for the payment of dividends because
indebtedness is not a retained earnings of the corporation.
h. Corporate earnings which have not yet been received even though
they consist in money which is due, cannot be included in the profits out of
which dividends may be paid.
(h) Power
contract231

to

enter

into

management

Requisites:
a. Approved by majority of the Board, by majority of the stockholders,
of both the managed and managing corporation.
b. If a stockholder of the managed corporation owns more than 1/3 of
the managing corporation, the management contract must be approved by
at least 2/3 of the stockholders of the managed corporation.
(i) Ultra vires acts
An act which is beyond the conferred powers of a corporation or the
purposes or objects for which it is created as defined by the law of its
organization.232
230

It permits corporations solely or principally engaged in the exploitation of wasting assets

to distribute the net proceeds derived from exploitation of their holdings such as mines, oil
wells, patents and leaseholds, without allowance or deduction for depletion.
231

1. Express power of a corporation

2. Management company must always be subject to the superior power of the board to give
specific directions from time to time or to recall the delegation of managerial power. (The
Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
Management contract - any contract whereby a corporation undertakes to manage or
operate all orsubstantially all of the business of another corporation.
A management contract should not be valid for more than 5 years for any one term. You
can just keep renewing it provided, that it is not for more than 5 years at any one time
232
Republic vs. Acoje Mining Co., Inc. 7 SCRA 361

70

An act done by a corporation outside of the express and implied

powers vested in it by its charter and by the law.233
i. Applicability of ultra vires doctrine
The ultra vires doctrine typically applies to a corporate body so that
any act done by the body which is beyond its capacity to act will be
considered invalid.
ii. Consequences of ultra vires acts
a. Executed contract courts will not set aside or interfere with such
contracts;
b. Executory contracts no enforcement even at the suit of either
party234
c. Part executed and part executory principle of no unjust
enrichment at expense of another shall apply; and
d. Executory contracts apparently authorized but ultra vires the
principle of estoppel shall apply.
(j) Doctrine of individuality of subscription
A subscription is one entire and indivisible whole contract. It cannot
be divided into portions
(k) Doctrine of equality of shares
Where the articles of incorporation do not provide for any distinction
of the shares of stock, all shares issued by the corporation are presumed to
be equal and enjoy the same rights and privileges and are also subject to
the same liabilities.235
(l) Trust fund doctrine
The subscribed capital stock of the corporation is a trust fund for the
payment of debts of the corporation which the creditors have the right to
look up to satisfy their credits, and which the corporation may not dissipate.
The creditors may sue the stockholders directly for the latters unpaid
subscription.236
233

Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.

void and unenforceable
235
Sec. 6
236
Application of the TFD:
1. Where the corporation has distributed its capital among the stockholders without
providing for the payment of creditors;
2. Where it had released the subscribers to the capital stock from their subscriptions;
3. Where it has transferred the corporate property in fraud of its creditors; and
234

71

(3) How exercised

(a) By the shareholders
They have residual power of fundamental corporate changes.
(b) By the Board of Directors
Board must act as a body in a meeting.237
(c) By the Officers
Via authority from (1) law, (2) corporate by-laws; and (3) authorization
from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.238
h. Stockholders and members
(1) Fundamental rights of a stockholder239
Managerial rights
a. Voting rights; and
b. Right to remove directors
Proprietary rights
a. Right to dividends;
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the capital stock represented by the
corporations legal capital.
2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation
as well as all of its property and assets.
Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a deadlock and the SEC orders the payment
of the appraised value of the stockholders share. (Sec. 104)
237
Generally, the Board of Directors alone exercises the powers of the corporation.
It is responsible for corporate policies and the general management of the business and
affairs of the corporation.
Requisites of board meetings:
1) Meeting of the Board duly assembled
2) Existence of quorum
3) Decision of the majority of the quorumduly assembled (Exception: Electionof directors
requires a vote of majority of all the members of theboard)
238
In theory, execute the policies laid down by the board.
In practice, often have wide latitude in determining the course of business operations.
239
Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed.

72

b. Right to issuance of stock certificatefor fully paid shares;

c. Proportionate participation in the distribution of assets in
liquidation;
d. Right to transfer of stocks in corporate books;
e. Right to recover stocksunlawfully sold for delinquent
payment of subscription
f. Preemptiveright
Remedial rights
a. Individual suit a suit instituted by a shareholder for his own
behalf against the corporation;
b. Representativesuit a suit filed by a shareholder in his behalf
and in behalf likewise of other stockholders similarly situated
and with a common cause against the corporation; and
c. Derivativesuit a suit filed in behalf of the corporation by its
shareholders240 upon a cause of action belonging to the
corporation, but not duly pursued by it, against any person or
against the directors, officers and/or controlling shareholders
of the corporation.241
(2) Participation in management
(a) Proxy
It must be in writing and signed by the stockholder or member 242and
filed before the scheduled meeting with the corporate secretary, and given
to another person (as agent) authorizing such person to exercise the voting
rights of the former.
Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended.
240

not creditors whose remedies are merely subsidiary such as accionsubrogatoria and
accionpauliana
241
Requisites:
(i) An existing cause of action in favor of the corporation
(ii) The stockholder/member must first make a demand upon the corporation or the
management to sue unless such a demand would be futile
(iii) The stockholder/member must be such at the time of the objectionable acts or
transactions unless the transactions are continuously injurious
(iv) The action must be brought in the name of the corporation
The number of shares of the stockholder is immaterial since he is not suing in his own
behalf
The mere trustee of shares registered in his name cannot file a derivative suit for he is not
a stockholder in his own right. (Bitong vs. CA, 292 SCRA 304)
242
as principal

73

No proxy shall be valid and effective for a longer period than five
years at any one time.243
(b) Voting trust
An agreement whereby one or more stockholders transfer their shares
of stocks to a trustee, who thereby acquires for a period of time the voting
rights244over such shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock certificates, subject,
however, to the trust agreement.245
(c) Cases
required

when

stockholders

action

is

i. By a majority vote
a. To enter into management contract if any of the two (2) instances
stated246 are absent;
b. To adopt, amend or repeal the by-laws.
ii. By a two-thirds vote
a. Power to extend or shorten corporate term;
b. Increase/Decrease Corporate Stock;
243

Sec. 58
The right to vote by proxy may be exercised in any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Stockholders or members may attend and vote in their meetings by proxy (Sec. 58);
directors cannot do so. Directors must always act in person. (Sec. 25).
244
and/or any other rights
245
Limitations:
a. Cannot be entered into for a period exceeding 5 years at any one time except when it
is a condition in a loan agreement or for the purpose of circumventing the law against
monopolies and illegal combinations
b. The agreement must not be used for purposes of fraud
c. It must be in writing and notarized and specify the terms and conditions thereof
d. A certified copy of the agreement must be filed with the corporation and with the SEC
e. The agreement shall be subject to examination by any stockholder of the corporation
f. Unless expressly renewed, all rights granted in the agreement shall automatically
expire at the end of the agreed period
246

infra

74

c. Incur, Create Bonded Indebtedness;

d. To deny pre-emptive right;
e. Sell, dispose, lease, encumber all or substantially all of corporate
assets;
f. To invest in another corporation, business other than the primary
purpose;
g. To declare stock dividends
h. To enter into management contract if (1) a stockholder or
stockholders representing the same interest of both the managing and
the managed corporations own or control more than1/3 of the total
outstanding capital entitled to vote of the managing corporation; or (2) a
majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of the
managed corporation;
i. To amend the articles of incorporation.
iii. By cumulative voting
A system of voting designed to increase the voting power of minority
stockholders in the election of corporate directors when more than one
director is to be elected.247
(3) Proprietary rights
(a) Right to dividends
General rule:
247

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.
Cumulative voting is allowed for election of members of the Board in a stock corporation.
Members of the Board in a Non-stock Corporation shall not be votedcumulatively unless
specificallyprovided for in the By-laws.
The total number of votes cast by a stockholder shall not exceed thenumber of shares
owned by him asshown in the books of the corporation multiplied by the wholenumber of
directors to be elected.
Gives the minority an opportunity to elect a representative to theBOD. Cannot itself give
theminority control of corporate affairsbut may affect and limit the extent of majoritys
control.
Theoretically, this allows theminority block to dominate theelection of BOD. However,
theminority still needs the majority inorder to constitute a quorum.
By-laws cannot provide againstcumulative voting since this right ismandated in Sec. 24
(mandatory in astock corporation statutory right of SHs).

75

As soon as the same have been lawfully declared by the BOD,

becomes a debt owing to the SH. No revocation can be made.
Exceptions:
1) not yet announced or communicated to the public, revocable before
announcement to SHs;
2) when stock dividends are declared since these are not distributions
but merely represent changes in the capital structure, may be revoked prior
to actual issuance.248
(b) Right of appraisal
The right to withdraw from the corporation and demand payment of
the fair value of his shares after dissenting from certain corporate acts
involving fundamental changes in corporate structure.249
(c) Right to inspect
1. The demand for inspection should cover only reasonable hours on
business days;

248

The right to dividends is based on duly recorded stockholdings; accordingly, the

corporation is prohibited from entitling thereto anyone else.
249
Instances wherein appraisal right may be exercised:
1. Extension or reduction of corporate term;
2. Change in the rights of stockholders, authorize preferences superior to those
stockholders, or restrict the right of any stockholder;
3. Corporation authorized the board to invest corporate funds in another business or
purpose;
4. Corporation decides to sell or dispose of all
or substantially all assets of corporation;
5. Merger or consolidation.
Exercise of appraisal right:
1. The stockholder must be a dissenting stockholder;
2. The stockholder must made a written
demand on the corporation within 30 days after the vote was taken;
3. The proposed action is any one of the instances supra;
4. The price to be paid is the fair value of the shares on the date the vote was taken;
5. The fair value shall be agreed upon but in case there is no agreement within 60 days
from the date the vote was taken, the fair value shall be determined by a majority of the 3
distinguished persons one of whom shall be named by the stockholder another by the
corporation and the third by the two who were chosen;
6. The right of appraisal is extinguished when:
a. He withdraws the demand with the corporations consent;
b. The proposed action is abandoned;
c. The SEC disapproves the action.

76

2. The
stockholder,
member,
director
or trustees demanding
the exercise of the rightis one who has not improperly used any
information secured through any previous examination of the records of
the corporation or any other corporation;
3. The demand must be accompanied with statement of the purpose of
the inspection, which must show good faith or legitimate purpose; and,
4. If the corporation or its officers contest such purpose or contend
that there is evil motive behind the inspection, the burden of proof iswith
the corporation or such officer to showthe same.
(d) Preemptive right
It is the shareholders preferential right to subscribe to all issues or
dispositions of shares of any class in proportion to their present
stockholdings.250
(e) Right to vote
Limitations on the right to vote;
1. Where the Articles of Incorporation provides for classification of
shares pursuant to Sec.6, non-voting shares are not entitled to vote except
as other provided in the said section.
2. Preferred or redeemable shares may be deprived of the right to
vote unless otherwiseprovided.
250

Purpose: to enable the shareholder to retain his proportionate control in the corporation
and to retain his equity in the surplus.
Extends to treasury shares in case of their reissuance.
If the shares preferentially offered to a stockholder are not subscribed or purchased by
him, it does not follow that said shares shall again be re-offered on a pro rata basis to
stockholders who already exercised their preemptive rights. There is no preemptive right
with respect to the share to be re-offered.
In case additional issues of originally authorized shares:
General rule: There is no preemptive right. This is on the theory that when a corporation
at its inception offers its first shares, it is presumed to have offered all of those which it is
authorized to issue.
Exception: When a corporation at its inception offers only a specified portion of its
authorized capital stock for subscription. If subsequently, it offers the remaining
unsubscribed portion, there would be preemptive right as to the remaining portion thus
offered for subscription.
When pre-emptive right not available:
a. When denied by the article of incorporation
b. Shares requiring stock offering or minimum stock ownership by the public
c. Shares to be issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes
or in payment of a previously contracted debt

77

3. Fractional shares of stock cannot be voted unless they constitute at

least one full share.
4. Treasury shares have no voting rights as long as they remain in
treasury.
5. Holders of stock declared delinquent by the board for unpaid
subscription.
6. A transferee of stock if his stock transfer is not registered in the
stock and transfer bookof the corporation.
7. A stockholder who mortgages or pledges his shares and gives
authority for creditor to vote.
(4) Remedial rights251
(a) Individual suit
(b) Representative suit
(c) Derivative suit
(5) Obligation of a stockholder
1. Liability to the corporation for unpaid subscription;
2. Liability to the corporation for interest on
unpaid subscription if so required by the by- laws;
3. Liability to the creditors o the corporation for unpaid subscription;
4. Liability for watered stock;
5. Liability for dividends unlawfully paid;
6. Liability for failure to create corporation.
(6) Meetings
(a) Regular252 or special253
i. When and where
Regular meetings of stockholders or members shall be held annually
on a date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees.

251

see Fundamental Rights of a stockholder, supra

Fixed in the by-laws at regular intervals (like monthly, weekly, quarterly, etc.).Generally,
no notice is required except if required by law.
253
Called specially at a date other than the regular meeting. Notice is required.
252

78

Special meetings of stockholders or members shall be held at any time

deemed necessary or as provided in the by-laws.254
Meetings of directors or trustees of corporations may be held
anywhere in oroutside of the Philippines, unless the by-laws provide
otherwise.255
ii. Notice
Regular meetings - written notice shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings - at least one (1) week written notice shall be sent to
all stockholders or members, unless otherwise provided in the by-laws.256
(b) Who calls the meetings
When there is no person authorized to call a meeting, the SEC, upon
petition of a stockholder or member on a showing of good cause therefor,
may issue an order to the petitioning stockholder or member directing him
to call a meeting of the corporation by giving proper notice required by this
Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at
least a majority of the stockholders or members present have been chosen
one of their number as presiding officer.257
(c) Quorum
Unless otherwise provided for in the Code or in the by-laws, a quorum
shall consist of the stockholders representing a majority of the outstanding
capital stock or a majority of the members in the case of non-stock
corporations.258
(d) Minutes of meetings
Formal records of business. They can be legal documents. In other
cases, the minutes of the meeting are more like a summary of what
happened at the meeting.
254

Sec. 50
Sec. 53
256
Ibid.
Notice is required for both regular and special meetings but such notice may be waived,
expressly or impliedly.
257
Sec. 50
258
Sec. 52
255

79

i. Board of directors and trustees259

(1) Repository of corporate powers
The board of directors or trustees is responsible for corporate policies
and general management of the business affairs of the corporation.
Unless otherwise provided in the Corp. Code, the Board of Directors
control and exercise the corporate powers of corporation, all business
conducted and all property of such corporation.260
The board exercises almost all corporate powers, lays down all
business policies and is responsible for the efficiency of management. The
stockholders have no right to interfere with the boards exercise of its
powers and functions except where the law expressly gives them the final
say, like in cases of removal of a director, amendment of articles of
incorporation, and other major changes.261
(2) Tenure, qualifications and disqualifications of
directors
Tenure:
Shall hold office for one (1) year until their successors are elected and
qualified.262
Qualifications:
1. Stock Corp. - must own at least one (1) share capital stock of the
corporation in his own name;
Non-stock Corp. - must be a member
2. Majority of the corporate directors/trustees must be residents of
the Philippines.263
3. He must be of legal age.
Disqualifications:

259

responsible for corporate policies and the general management of the business and affairs
of the corporation
260
Sec. 23
261
Secs. 6, 42 & 43
262
Ibid.
263
Ibid.

80

1. Convicted by final judgment of an offense

imprisonment for a period exceeding six (6) years, or

punishable

by

2. Violation of this Code committed within five (5) years prior to the
date of his election or appointment.264
(3) Elections
(a) Cumulative voting
Allowed for election of members of the board in a stock corporation.
Members of the board in a non-stock corporation shall not be voted
cumulatively except if otherwise provided in the articles of incorporation or
by-laws.265
(b) Quorum
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.266
(4) Removal
By a vote of the stockholders holding or representing 2/3 of the
outstanding capital stock, or if the corporation be a non-stock corporation,
by a vote of 2/3of the members entitled to vote.267
(5) Filling of vacancies
May be filled by a vote of at leasta majority of the remaining directors
or trustees, if still constituting a quorum.
In the following cases, the stockholders or members shall fill the
vacancy:
264

Sec. 27
By-laws may provide for additional qualifications/disqualifications as long as such
additionalqualifications/disqualifications shall not modify requirements as prescribed in the
corporation code or be in conflict with such prescribed requirements.
265
See also cumulative voting under Stockholders and members, supra
266
Sec. 24, 1stsen.
267
with or without cause
Such removal shall take placeeither at a regular meeting or at aspecial meeting called for
the purposeof removal of Directors or Trustees, with previous notice of the time andplace of
such meeting, as well as theintention to propose such removal. If the officers refuse to call a
meeting toconsider the removal of the Director, itmay be called at the instance of
anystockholder or member, but with duenotice.
Removal without cause may not beused to deprive minority stockholdersor members of the
right of representation to which they may beentitled to under Section 24.
The board cannot remove a director ortrustee as member of the board.

81

a. When the remaining directors or trustees do not constitute a

quorum;
b. If the vacancy is caused by the removal of a director or trustee
c. If the vacancy is caused by the expiration of term; and
d. In case of increase in the number of directors or trustees as a result
of an amendment of the articles authorizing such increase
(6) Compensation
In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such
directors, except for reasonable per diems. Any such compensation other
than per diems may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a regular
or special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten percent (10%) of
the net income before income tax of the corporation during the preceding
year.268
(7) Disloyalty
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to
the latter for all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at least twothirds (2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own funds
in the venture.269
(8) Business judgment rule
Sec 23 embodies the essence of the business judgment rule, that
unless otherwise provided in the Code, all corporate powers and
prerogatives are vested directly in the BOD.
Consequently, the rule has two consequences:

268
269

Sec. 30
Sec. 34

82

a) The resolution, contracts and transactions of the BOD, cannot be

overturned or set aside by the SHs or members and not even by the courts
under the principle that the business of the corp. has been left to the hands
of the BOD; and
b) Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the exercise of their
business judgment.270
Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation and the courts are without
authority to substitute their judgment for the judgment of the board of
directors; the board is the business manager of the corporation and so long
as it acts in good faith its orders are not reviewable by the courts or the
SEC. The directors are also not liable to the stockholders in performing
such acts.271
(9) Solidary liabilities for damages
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.272
(10) Liability for watered stocks

270

Exceptions:
a. When the Corp Code expressly provides otherwise;
b. When the directors or officers acted with fraud, gross negligence or in bad faith; and
c. When directors or officers act against the corp. in conflict-of-interest situation
General rule: Directors cannot be held liable for mistakes or errors in the exercise of their
business judgment if they acted in good faith, with due care & prudence. Contracts intra
vires entered into by the board of directors are binding upon the corp. & courts will not
interfere.
Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton
destruction of the rights of the minority.
Board of Directors has authority to modify theproposed terms of the contracts of
thecorporation for the purpose of making theterms more acceptable to the other
contractingpartiesThe test to be applied is whether theact in question is the direct and
immediatefurtherance of the corporations business, fairlyincidental to the express powers
andreasonably necessary to their exercise. If so,the corporation has the power to do
it;otherwise not. [Montelibano v. Bacolod MurciaMilling Co. (1962)
271
Phil. Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232 (1997)
272
Sec. 31, 1st par.

83

Any director or officer of a corporation consenting to the issuance of

stocks for a consideration less than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair value,
or who, having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporate secretary, shall be solidarily
liable with the stockholder concerned to the corporation and its creditors
for the difference between the fair value received at the time of issuance of
the stock and the par or issued value of the same.273
(11) Personal liabilities
Corporate officers are not personally liable for their corporate acts
unless:
a) They have exceeded their authority; or
b) Acted with bad faith or malice
(12) Responsibility for crimes
Since a corporation is a mere legal fiction, it cannot be held liable for
a crime committed by its officers, since it does not have the essential
element of malice; in such case, the responsible officers would be criminally
liable.274
While it is true that a criminal case can only be filed against the
officers and not against the corporation itself, it does not follow that the
corporation cannot be a real party-in-interest for the purpose of bringing a
civil action for malicious prosecution for the damages incurred by the
corporation for the criminal proceedings brought against its officer. 275
(13) Special fact doctrine
Conceding the absence of a fiduciary relationship in the ordinary case,
courts nevertheless hold that where special circumstances of acts are
present which make it inequitable for the director to withhold information
from the stockholder, the duty to disclose arises and concealment is fraud.276
Director takes advantage of an information by virtue of his office to
the disadvantage of the corporation.
(14) Inside information
273

Sec. 65
People vs. Tan Boon Kong, 54 Phil. 607 (1930); Sia vs. CA, 121 SCRA 655 (1983); Times,
Inc. vs. Reyes, 39 SCRA 303 (1971)
275
Cometa vs. CA
276
Strong v Repide, 1909
274

84

The fiduciary position of insiders, directors, and officers prohibits

them from using confidential information relating to the business of the
corporation to benefit themselves or any competitor corporation in which
they may have a mere substantial interest.
The liability of a director or officer guilty of using inside information is
to the corporation and not to any individual stockholder
Since loss and prejudice to the corporation is not a requirement for
liability, the corporation has a cause of action as long as there is unfair use
of inside information
It is inside information if it is not generally available to others and is
acquired because of the close relationship of the director or officer of the
corporation.277
(15) Contracts
(a) By self-dealing
corporation

directors

with

the

A contract of the corporation with one or more of its directors or

trustees or officers is voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth is absent, in the case of
a contract with a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose, provided:
(1)full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting; and
277

Secs.3.8, 23.2, 27,61, 71.2, Securities Regulation Code

General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may
deal with them at arms length. No duty to disclose facts known to the director or officer.

85

(2) the contract is fair and reasonable under the circumstances.278

(b) Between corporations with interlocking
directors
Except in cases of fraud, and provided the contract is fair and
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that
ground alone. If the interest of the interlocking director in one corporation
is substantial and his interest in the other corporation or corporations is
merely nominal, he shall be subject to the provisions of Section 32 279 insofar
as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty percent(20%) of the outstanding
capital stock shall be considered substantial for purposes of interlocking
directors.280
(16) Executive committee
(a) Creation
The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed by
the board. Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board.281
(b) Limitations on its powers
Powers that cannot be delegated to the executive committee:
1. Approval of any action requiring concurrence of stockholders;
2. Filling of vacancies in the board;
3. Adoption, amendment or repeal of by-laws;
4. Amendment or repeal of board resolution which by its terms
cannot be amended or repealed;
5. Distribution of cash dividends.282
(17) Meetings
(a) Regular or special
278

Sec. 32
supra
280
Sec. 33
281
Sec. 35, 1stsen.
282
Ibid., 2ndsen.
279

86

i. When and where

Regular meetings - shall be held monthly, unless the by-laws provide
otherwise.
Special meetings - may be held at any time upon the call of the
president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise.283

ii. Notice
Must be sent to every director or trustee at least one (1) day prior to
the scheduled meeting, unless otherwise provided by the by-laws. A director
or trustee may waive this requirement, either expressly or impliedly.284
(b) Who presides
The president shall preside at all meetings of the directors or trustee
as well as of the stockholders or members, unless the by-laws provide
otherwise.285
(c) Quorum
Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as fixed in
the articles of incorporation.286
(d) Rules on abstention
When it comes time for directors to vote on an issue, a director may
vote "yes" or "no." If a director abstains from voting, that means the
director has not voted. An abstention is a non-vote, a decision not to make a
decision.287 The president votes on all motions, not just to break ties.
283

Sec. 53
Ibid.
285
Sec. 54
Some by-laws provide that the Chairman of the board of directors or trustees presides at
board meetings.
286
Sec. 25, 2nd par.
287
Robert's Rules of Order, 10th ed., p 43
284

87

An abstention may have the practical effect of a "no" vote since the
motion may fail for lack of sufficient "yes" votes. Unless a greater number is
called for in the articles or bylaws, a matter is deemed "approved" by the
board if at any meeting at which a quorum is present at least a majority of
the required quorum of directors votes in favor of the action.
For example, if five directors are present (out of five) and there is a
motion to close the pool each day at 8:00 p.m. (from the current 10:00 p.m.)
and two directors vote "yes," two directors vote "no," and one abstains, the
motion fails. The vote needed a majority of three yes votes to pass and it
only received two. Accordingly, the pool remains open to 10:00 p.m. each
night. Under limited circumstances, a director may change his/her vote or
the matter may be reconsidered at a later date.
When the chair calls for a vote, abstentions are not called for, only the
ayes and nays.288 The burden is on an abstaining director to speak up if
he/she wants to be recorded as an abstention. If the vote is called for and
one of the directors fails or refuses to indicate "yes," "no" or "abstain," and
the chair of the meeting deems the director to have voted "yes" and the
silent director does not object, the vote is counted as a "yes" vote.
Whenever a director believes he/she has a conflict of interest, the
director should abstain from voting on the issue and make sure his/her
abstention is noted in the minutes.289 The other reason a director might
abstain is that he/she believes there was insufficient information for making
a decision. Otherwise, directors should cast votes on all issues put before
them. Failure to do so could be deemed a breach of their fiduciary duties.
j. Capital affairs
(1) Certificate of stock
(a) Nature of the certificate
Evidences of ownership of stock in a corporation. They are
transferable in the manner provided for290 but the transfer shall bind the
parties only when recorded in the books of the corporation. Shares of stock
being personal property can also be pledged.
(b) Uncertificated shares

288
289
290

Ibid.
Ibid., p. 394
See Sec. 63

88

Mutual fund shares which are maintained on the transfer agent's

records, but for which stock certificates have not been issued, also called
book shares.291
(c) Negotiability
i. Requirements for valid transfer of
stocks
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.292
(d) Issuance
i. Full payment
No certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.293
ii. Payment pro-rata
General rule: entire subscription must be paid first before the
certificates of stock can be issued. Partial payments are to be applied pro
rata to each share of stock subscribed.294
Exception: in the Baltazar vs. Lingayen Gulf Electric Power Co case, it
was the practice of the corp. to issue certificates of stock to its individual
SHs for unpaid shares of stock and to give full voting power to shares fully
paid.
(e) Stock and transfer book295
i. Contents
Record of:

291

www.investorwords.com
See Sec. 63
293
Sec. 64
294
Nava v Peers Mktg Corp and FuaCun v Summers
295
The stock and transfer book is the best evidence of the transactions that must be entered
or stated therein. However, the entries are considered prima facie evidence only and may be
subject to proof to the contrary (Lanuza v. Court of Appeals, 454 SCRA 54)
292

89

(1) All stocks in the names of the stockholders alphabetically

arranged;
(2) The installment paid and unpaid on all stock for which subscription
has been made, and the date of payment of any installment;
(3) A statement of every alienation, sale or transfer of stock made;
and
(4) Such other entries as the by-laws may prescribe.296
ii. Who may make valid entries
The corporate secretary is the officer who is duly authorized to make
entries on the stock and transfer book.297
(f) Lost or destroyed certificates
Procedure for re-issuance in case of loss, stolen or destroyed
certificates:
1. The registered owner of certificates of stock or his legal
representative shall file with the corporation an affidavit setting forth as far
as possible:
a) the circumstances as to how the certificates were lost, stolen or
destroyed;
b) the number of shares represented by each certificate, the serial
numbers of the certificates;
c) the name of the corp. which issued the same;
d) such other information and evidence which he may deem necessary.
2. The corp. shall publish a notice in a newspaper of general
circulation published in the place where the corp. has its principal office,
once a week for 3consecutive weeks at the expense of the owner of the
certificate of stock, which has been lost, stolenor destroyed.
3. After the expiration of one (1) year from thedate of the last
publication and if no contest has been presented, the corp. shall cancel in
its booksthe certificate of stock and issue in lieu thereof new certificates of
stock. The right to make such contestshallbe barred after the expiration of
the one-yearperiod.4. Even before the one year period expires, thenew
certificates may be issued if the registeredowner files a bond or other
296
297

Gokongwei v. SEC, 278 SCRA 793 (1997)

Garcia v. Jomouad, 323 SCRA 424 (2000)

90

security, running for a period of one (1) year for a sum and in such form and
with such sureties as may be satisfactory to the BOD. Provided, that if there
is a pending contest regarding the ownership of said certificates, the
issuance of new certificates shall be suspended until the final decision of the
court regarding theownership of the certificate of stock.298
(g) Situs of the shares of stock
Generally at the domicile of the owner.
For purposes of execution, attachment and garnishment, the situs of
shares of stock is the domicile of the corporation. For the purpose of
registering the chattel mortgage over the shares of stock, the situs of
shares shall be the province in which the corporation has its principal
business or office.
For purposes of taxation, it is the domicile of the corporation that is
generally controlling.
(2) Watered stocks
(a) Definition
Stocks issued gratuitously, money/property less than par value,
services less than par value, dividends where no surplus profits exist.
(b) Liability of directors for watered stocks
Any director or officer of a corporation consenting to the issuance of
stocks for a consideration less than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair value,
or who, having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation and its creditors
for the difference between the fair value received at the time of issuance of
the stock and the par or issued value of the same.299
(c) Trust fund doctrine for liability for watered
stocks
"It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look for
298

Except in cases of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against the corp. which shall have issued certificates of
stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.
299
Sec. 65

91

satisfaction of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts.300A corporation has no power to release an original
subscriber to its capital stock form the obligation of paying for his shares,
without a valuable consideration for such release; and as against creditors a
reduction of the capital stock and take place only in the manner and under
the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is
necessary.301"
Likewise, under Sec. 65 of the Corporation Code, no distinction is
made as to creditors whether they become such prior to or subsequent to
the issuance of the watered stock and fraud is not made an element. In any
event, Sec. 65 is by itself sufficient basis to hold a stockholder liable to any
corporate creditor.
The legal standing of corporate creditors against guilty stockholders
and officers for watered stock is clear in a situation when the corporation is
insolvent since then all corporate assets would be held for the satisfaction
of the claims of the creditors, before any distribution is made to the
stockholders. But when the corporation is still a "going concern" and the
watering of the stock does not actually render it insolvent, does Sec. 65
actually grant corporate creditors the legal standing to bring at that point a
suit against the involved stockholder and the guilty officers?
In the payment of property for subscribed shares, Sec. 62 of the
Corporation Code provides that "the valuation thereof shall initially be
determined incorporators or the board of directors subject to approval by
the Securities and Exchange Commission." In actual practice the watering
of stock is not supposed to happen because property consideration for
subscription is always evaluated by the Securities and Exchange
Commission which often conducts an examination of the involved properties
and appraisal reports are submitted to establish the fair value of such
properties. When the Securities and Exchange Commission approves the
valuation it may be difficult to sustain an assertion later on that there has
been watering of the shares.302
(3) Payment of balance of subscription
(a) Call by board of directors303
300

Velasco vs. Poizat, 37 Phil., 802

14 C.J., 498,620
302
Cesar L. Villanueva, The Trust fund doctrine under Philippine corporate setting
303
Call is a declaration by the board of directors that the unpaid subscriptions are due and
payable to the corporation.
The word call is capable of three meanings, namely: (a) a resolution of the BoD for the
payment of unpaid subscriptions; (b) notification of such resolution made on the
stockholders; or (c) the time when subscriptions become payable. (CLVs Textbook. P. 392)
301

92

Subject to the provisions of the contract of subscription, the board of

directors of any stock corporation may at any time declare due and payable
to the corporation unpaid subscriptions to the capital stock and may collect
the same or such percentage thereof, in either case, with accrued interest,
if any, as it may deem necessary.304
(b) Notice requirement
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the call
made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for interest
at the legal rate on such balance, unless a different rate of interest is
provided in the by-laws, computed from such date until full payment. If
within thirty (30) days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of directors
orders otherwise.305
(4) Sale of delinquent shares
(a) Effect of delinquency306
Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the balance
due on his subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at public auction to such bidder who shall
offer to pay the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor. The remaining shares,
304

Sec. 67, 1st par.

While the board may call for payment of the subscription at any time, if the subscription
contract specifies a date for payment thereof, the board must respect said contract. Thus,
unpaid subscription plus interest is payable on a date agreed upon, or upon call by the board
of directors.
305
Id., 2nd par.
306
(1) Deprives the stockholder the right:
a) To be voted for; or
b) To be entitled to vote; or
c) To representation at any stockholders meeting
(2) Delinquent stockholder shall not be entitled to any of the rights of
a stockholder but he shall still be entitled to receive dividends.
(3) Delinquent stocks shall be subject to delinquency sale

93

if any, shall be credited in favor of the delinquent stockholder who shall

likewise be entitled to the issuance of a certificate of stock covering such
shares.307
(b) Call by resolution of the board of directors
The board of directors may, by resolution, order the sale of delinquent
stock and shall specifically state the amount due on each subscription plus
all accrued interest, and the date, time and place of the sale which shall not
be less than thirty (30) days nor more than sixty (60) days from the date the
stocks become delinquent.308
(c) Notice of sale
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same
shall furthermore be published once a week for two (2) consecutive weeks
in a newspaper of general circulation in the province or city where the
principal office of the corporation is located.309
(d) Auction sale
Should there be no bidder at the public auction who offers to pay the
full amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may bid for the
same, and the total amount due shall be credited as paid in full in the books
of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may
be disposed of by said corporation in accordance with the provisions of this
Code310
(5) Alienation of shares
(a) Allowable restrictions on the sale of shares
Restrictions on the right to transfer shares must appear in the
1. Articles of incorporation
2. By-laws
307

Sec. 68, 3rd par.

Id., 1st par.
309
Id., 2nd par.
310
Id., last par.
308

94

3. Certificate of stock
Otherwise, the same shall not bebinding on any purchaser in good

faith.

311

(b) Sale of partially paid shares

Any unpaid balance on the subscriptionthere can be no stock
certificate on which an indorsement may be made. Shares are thus not
transferable on the books
(c) Sale of a portion of shares not fully paid
Stockholder cannot transfer part of his subscriptionindivisibility of
subscription of contract.312
(d) Sale of all of shares not fully paid
Entire subscription not fully paid may be transferred to a single
transferee.313
(e) Sale of fully paid shares
Shares of stock issued with stock certificates become personal
property and may be transferred by delivery of the certificate endorsed by
the owner.314
(f) Requisites of a valid transfer
a) delivery of the certificate or certificates; and
b) indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer.
(g) Involuntary dealings
311

Sec. 98
Said restrictions shall not be moreonerous than granting the existing stockholders or the
corporation theoption to purchase the shares of thetransferring stockholder with such
reasonable terms, conditions or periodstated therein.
If upon the expiration of said period,the existing stockholders or the corporation fails to
exercise the optionto purchase, the transferringstockholder may sell his shares to any third
person.
312
Nava and FuaCun
Difficult to determine whether or not partial payments made should be applied as full
payment.
313
Must secure the consent of the corporation since the transfer contemplates a novation of
contract.
But cannot be forced upon the corporation
314
See Sec. 63

95

Involuntary Alienation -alienation against the wishes of the transferor,

as by attachment.315
k. Dissolution316 and liquidation317
(1) Modes of dissolution
(a) Voluntary
i. Where no creditors are affected
a. A meeting must be held on the call of directors or trustees;
b. Notice of the meeting should be given to the stockholders by
personal delivery or registered mail at least 30 days prior to the meeting;
c. The notice of meeting should also be published for 3 consecutive
weeks in a newspaper published in the place;
d. The resolution to dissolve must be approved by the majority of the
directors/trustees and approved by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of members;
e. A copy of the resolution shall be certified by the majority of the
directors or trustees and countersigned by the secretary;
f. The signed and countersigned copy will be filed with the SEC and
the latter will issue the certificate of dissolution.318
ii. Where creditors are affected

315

Blacks Law dictionary

Extinguishment of the franchise of a corporation and the termination of its corporate
existence.
317
Liquidation, in corporation law, connotes a winding up or settling with creditors and
debtors. It is the winding up of a corporation so that assets are distributed to those entitled
to receive them. It is the process of reducing assets to cash, discharging liabilities and
dividing surplus or loss. (PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001)
Process by which all the assets of the corporation are converted into liquid assets in
order to facilitate the payment of obligations to creditors, and the remaining balance if any
is to be distributed to the stockholders. (Reburiano v. Court of Appeals, 301 SCRA 342 (1999)
If full liquidation can only be effected after the 3-year period and there is no trustee, the
directors may be permitted to complete the liquidation by continuing as trustees by legal
implication.
318
Sec. 118
316

96

a. Approval of the stockholders representing at least 2/3 of the

outstanding capital stock or 2/3 of members in a meeting called for the
purpose;
b. Filing a petition with the SEC signed by majority of directors or
trustees or other officers having the management of its affairs verified by
President or Secretary
or Director. Claims and demands must be stated in the petition;
c. If Petition is sufficient in form and substance, the SEC shall issue an
Order fixing a hearing date for objections;
d. A copy of the Order shall be published atleast once a week for 3
consecutive weeks in a newspaper of general circulation or if there is no
newspaper in the municipality or city of the principal office, posting for 3
consecutive weeks in 3 public places is sufficient;
e. Objections must be filed no less than 30 days nor more than 60
days after the entry of the Order;
f. After the expiration of the time to file objections, a hearing shall be
conducted upon prior 5 day notice to hear the objections;
g.
Judgment shall be rendered dissolving the corporation and
directing the disposition of assets; the judgment may include appointment
of a receiver.319
iii. By shortening of corporate term
This is done by amending the Articles of Incorporation.
(b) Involuntary
By filing a verified complaint with the SEC based on any ground
provided by law or rules.
i. By expiration of corporate term
When the period of corporate life expires, the corporation ceases to
be a body corporate for the purpose of continuing the business for which it
was organized.320
ii. Failure to organize and commence
business
within
2
years
from
incorporation
319
320

Sec. 119
PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992)

97

Non-user for 2 years321-when the corporation does not formally

organize and commence the transaction of its business or the construction
of its works within 2 years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed dissolved.322
iii. Legislative dissolution
Through appropriate laws passed by Congress.

iv. Dissolution by the SEC on grounds

under existing laws
1. Fraud or misrepresentation as to the paid-up capital of the
corporation (25%-25% requirement)
2. Misrepresentation
3. Ultra vires mala prohibita, but too numerous infractions, which
are persistent despite SEC earnings.323
4. Continuous inactivity of the corporation for at least five (5) years
5. Refusal to adopt or approve by-laws.324
(2) Methods of liquidation
(a) By the corporation itself
Liquidation by the corporation itself through its Board of directors
who have only 3 years to finish its work of liquidation.325
(b) Conveyance to a trustee within a 3-year
period
Conveyance of all corporate assets to trustees who will take charge of
liquidation. Unless the trusteeship is limited in its duration by the deed of
321

non-use of charter
automatic
323
Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58 (1967)
324
P.D. 902-A
325
After the dissolution of the corporation, it continues to exist as a body corporate, but only
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.
322

98

trust, the 3-year limitation will not apply as long as the designation of
trustees is made within said period. The Board who cant finish liquidating
in time may let trustees take over the job.326
(c)
By
management
committee
or
rehabilitation receiver
Liquidation by a receiver who may have been appointed by the SEC
upon its decreeing the dissolution of the corporation. 3-year period does
not apply because the corporation is substituted by the receiver. However,
the mere appointment of a receiver, without anything more, does not result
in the dissolution of the corporation nor bar it from the exercise of its
corporate rights.
(d) Liquidation after three years
There is nothing in Sec. 122 which bars an action for the recovery of
the debts of the corporation against the liquidator thereof, after the lapse of
the said three-year period. Is immaterial that the present action was filed
after the expiration of the three years . . . for at the very least, andassuming
that judicial enforcement of taxes may not beinitiated after said three years
despite the fact that actualliquidation has not terminated and the one in
charge thereof is still holding the assets of the corporation, obviously for
the benefit of all the creditors thereof, the assessment aforementioned,
made within the three years, definitely established the Government as a
creditor of the corporation for whom the liquidator is supposed to hold
assets of the corporation.327
l. Other corporations
(1) Close corporations

326

Anytime during the 3 year period, the corporation is authorized and empowered to convey
all of its property to trustees for the benefit of shareholders and other persons in interest.
If the 3-year extended life has expired without a trustee or receiver having been
designated, the Board of Directors itself, following the rationale of the decision in Gelano,
may be permitted to so continue as trustees to complete liquidation; and in the absence of
a Board, those having pecuniary interest in the assets, including the shareholders and the
creditors of the corporation, acting for and in its behalf, might make proper representations
with the appropriate body for working out a final settlement of the corporate concerns.
(Clemente v. Court of Appeals, 242 SCRA 717 (1995))
In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the
later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete
the corporate liquidation by continuing as trustees. Under Sec. 145 No right of remedy in
favor or against any corporation . . . 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. This provision safeguards the rights of a corporation which is dissolved
pending litigation. (Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United
Cigarette Corp., 384 SCRA 48 (2002).
327
Republic v. Marsman Dev. Co., 44 SCRA 418 (1972)

99

A special kind of stock corporation:

1. whose articles of incorporation should provide that:
a. the number of stockholders shall not exceed 20;
b. issued stocks are subject to transfer restrictions, with a right
of preemption in favor of the stockholders or the corporation; and
c. the corporation shall not be listed in the stock exchange or its
stocks should not be publicly offered; and
2. At least 2/3 of the voting stocks or voting rights should not be
owned or controlled by another corporation which is not a close
corporation.328

(a) Characteristics of a close corporation

1. Stockholders may act as directors without need of election and
therefore are liable as directors;
2. Stockholders who are involved in the management of the
corporation are liable in the same manner as directors are.
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase the number of
stockholders to more than the maximum are invalid;
5. Corporate actuations may be binding even without a formal board
meeting, if the stockholder had knowledge or ratified the informal action of
the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on the written petition
by any stockholder; and
8. Stockholder may withdraw and avail of his right of appraisal.329
328

Sec. 96
Special rules are provided for close corporations because it is essentially an incorporated
partnership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
329

100

(b) Validity of restrictions on transfer of shares

Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good
faith. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or period
stated therein. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any third person.330
(c) Issuance or transfer of stock in breach of
qualifying conditions
Effects:
1. If stock of a close corporation is issued or transferred to any person
who is not entitled under any provision of the articles of incorporation to be
a holder of record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be holders
of record thereof, such person is conclusively presumed to have notice of
the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be
holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of stock to
any person would cause the stock to be held by more than such number of
persons, the person to whom such stock is issued or transferred is
conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates the
restriction.
4. Whenever any person to whom stock of a close corporation has
been issued or transferred has, or is conclusively presumed under this
section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him would
cause the stock of the corporation to be held by more than the number of
persons permitted by its articles of incorporation to hold stock of the
corporation, or (c) that the transfer of stock is in violation of a restriction on
330

Sec. 98

101

transfer of stock, the corporation may, at its option, refuse to register the
transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the
transfer of stock, though contrary to subsections (1), (2) or (3), has been
consented to by all the stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance with
this Title.
6. The term "transfer", as used in this section, is not limited to a
transfer for value.
7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.331
(d) When board meeting is unnecessary or
improperly held
Unless the by-laws provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is
signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action
and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of all 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.
If a director's meeting is held without proper call or notice, an action
taken therein within the corporate powers is deemed ratified by a director
who failed to attend, unless hepromptly files his written objection with the
secretary of the corporation after having knowledge thereof. 332
(e) Preemptive right
The pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of treasury shares,

331
332

Sec. 99
Sec. 101

102

whether for money, property or personal services, or in payment of

corporate debts, unless the articles of incorporation provide otherwise.333
(f) Amendment of articles of incorporation
Any amendment to the articles of incorporation which seeks to delete
or remove any provision required by this Title to be contained in the articles
of incorporation or to reduce a quorum or voting requirement stated in said
articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion
of shares as may be specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.334
(g) Deadlocks
When the directors or stockholders are so divided respecting the
management of the corporations business and affairs that the votes
required for any corporate action cannot be obtained, with the consequence
that the business and affairs of the corporation can no longer be conducted
to the advantage of the stockholders generally.335
(2) Non-stock corporations
(a) Definition
A corporation organized for an eleemosynary purpose, and no part of
whose income is, during its existence, distributable as dividends to its
members, trustees, or officers, subject to the provisions of the Corporation
Code on dissolution.336
(b) Purposes
333

Sec. 102
Sec. 103
335
Sec. 104, 1st par.
Powers of the SEC in case of deadlock in close corporations:
1. Cancel or alter any provision in the articles of incorporation or bylaws
2. Cancel, alter or enjoin any resolution of the corporation
3. Direct or prohibit any act of the corporation
4. Require the purchase at their fair value of shares of any stockholder either by any
stockholder or by the corporation regardless of the availability of unrestricted retained
earnings.
5. Appoint a provisional director
6. Dissolve the corporation
7. Granting such other relief as the circumstances may warrant. (id.)
336
Sec. 87
334

103

Charitable, religious, educational, professional, cultural, recreational,

fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural.337

(c) Treatment of profits

Any profit which it may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose
or purposes for which it was organized.
(d) Distribution of assets upon dissolution
1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged or adequate provision shall be made therefor
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of
dissolution, shall be returned, transferred or conveyed in accordance with
such requirements
3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational
or similar purposes but not held upon a condition requiring return, transfer
or conveyance by reason of dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving corporation
pursuant to a plan of distribution
4. Other assets, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws
5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized for profit,
as may be specified in a plan of distribution.
The plan of distribution shall be approved by a majority vote of the
board of trustees and by 2/3 of the members having voting rights at a
meeting.338
(3) Religious corporations
337

Sec. 88
They are governed by the same rules established for stock corporations, whenever
pertinent, subject, however, to a number of special features.
338
Sec. 94

104

A corporation composed entirely of spiritual persons and which is

organized for the furtherance of a religion or for perpetuating the rights of
the church or for the administration of church or religious work or property.
It is different from an ordinary non-stock corporation organized for religious
purposes.
(a) Corporation sole
Aspecial form of corporation, usually associated with the clergy,
consisting of one person only and his successors, who is incorporated by
law to give some legal capacities and advantages.
i. Nationality
No nationality.339
A corporation sole does not have any nationality but for purposes of
applying our nationalization laws, nationality is determined not by the
nationality of its head but by the nationality of the members constituting the
sect in the Philippines even if it is headed by the Pope.340
ii. Religious societies
A non-stock corporation governed by a board but with religious
purposes. It is incorporated by an aggregate of persons, e.g. religious order,
diocese, synod, sect, etc.
(4) Foreign corporations
A corporation formed, organized or existing under any law other than
those of the Philippines, and whose laws allow Filipino citizens and
corporations to do business in its own country or state.341
(a)
Bases
of
authority
over
foreign
corporations
i. Consent

339

Republic vs. IglesianiKristo, cited in the case of Rafael Albano. Et al. vs. Court of Appeals,
et al., G.R. No. 144708, August 10, 2001
340
Roman Catholic Apostolic Church v. LRC, 1957
341
Sec. 123
The definition espouses the incorporation test and the reciprocity rule and is significant
for licensing purposes.
It is not permitted to transact or do business in the Philippines until it has secured a
license for that purpose from the SEC and a certificate of authority from the appropriate
government agency.

105

The legal standing of foreign corporations in the host state is founded

on international law on the basis of consent.342
Consent, as a requisite for jurisdiction over foreign corporations,is
founded on considerations of due process and fair play.As held in Pennoyer
v. Nef,343 the jurisdiction of courts to render judgment in personam is
grounded on their de facto power over the defendant's person. Therefore,
his presence within the territorial jurisdiction of a court is prerequisite to
its rendition of judgment personally binding him. International Shoe Co. v.
State of Washington344expanded the coverage by stating that due process
requires only that in order to subject a defendant to a judgment in
personam, if he not be present within the territory of the forum, he must
have certain minimum contacts with it such that the maintenance of the suit
does not offend "traditional notions of fair play and substantial justice."345
ii. Doctrine of "doing business"
The Corporation Code does not define the phrase doing or
transacting business.
Jurisprudential Tests346
1. Twin characterization test
a) Whether the foreign corporation is maintaining or continuing in
the Philippines the body or substance of the business for which it was
organized or whether it has substantially retired from it and turned it
over another;347 and
b) Whether there is continuity of commercial dealings and
arrangements, contemplating to some extent the performance of acts
or works or the exercise of some functions normally incident to and in
progressive prosecution of, the purpose and object of its
organization.348
2. Contract Test

342

Salonga, Private International Law, 1979 ed., p. 344.

95 U.S. 714, 733, 24 L. Ed. 565 (1877)
344
326 U.S. 310, 66 S.Ct. 154, 90 L.Ed.95 (1945).
345
Cesar L. Villanueva, Foreign Corporations and the Concept of Doing Business in the
Philippines
346
Philippine Corporate Law, Cesar Villanueva, 2001 ed.
347
Substance Test
348
Continuity Test
343

106

Whether the contracts entered into by the foreign corporation, or by

an agent acting under the control and direction of the foreign corporation,
are consummated in the Philippines.
Statutory Tests349
Acts constituting doing business:
a) Soliciting orders, service contracts, opening offices, whether
called liaison offices or branches;
b) Appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period or periods totaling 180 days or more;
c) Participating in the management, supervision or control of any
domestic business, firm or entity or corporation in the
Philippines;350 and
d) Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressiveprosecution of,
commercial gain or of the purpose of the business organization.
(b) Necessity of a license to do business
i. Requisites for issuance of a license
If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other
special laws, rules and regulations, the Commission shall issue a license to
the applicant to transact business in the Philippines for the purpose or
purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the Philippines
and continue to do so for as long as it retains its authority to act as a
corporation under the laws of the country or state of its incorporation,
unless such license is sooner surrendered, revoked, suspended or annulled
in accordance with this Code or other special laws.351
ii. Resident agent
An individual, who must be of good moral character and of sound
financial standing, residing in the Philippines, or a domestic corporation
lawfully transacting business in the Philippines, designated in a written
power of attorney by a foreign corporation authorized to do business in the
349

Foreign Investment Act of 1991 (R.A. No. 7042)

As defined under R.A. 7042
351
Sec. 126
350

107

Philippines, on whom any summons and other legal processes may be

served in all actions or other legal proceedings against the foreign
corporation.352
(c) Personality to sue
No foreign corporation transacting business in the Philippines without
a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines.353
(d) Suability of foreign corporations
Such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.354
(e)

Instances when unlicensed foreign

corporations may be allowed to sue Isolated transactions355

1. To seek redress for an isolated business transaction;

2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction, e.g. tort
that occurred in the Philippines;
4. When the parties have contractually stipulated that Philippines is
the venue of actions; and
5. When the party sued is barred by the principle of estoppel and/or
principle of unjust enrichment from questioning the capacity of the foreign
corporation.
(f) Grounds for revocation of license
1. Failure to file annual reports required by the Code;
2. Failure to appoint and maintain a resident agent;
352

Sec. 127-128
Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et al., 431 SCRA 266 (2004)
354
Ibid.
355
Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series
of transactions set apart from their common business in the sense that there is no intention
to engage in a progressive pursuit of the purpose and object of business transaction.
(EriksPte.Ltd vs. CA, 267 SCRA 567)
353

108

3. Failure to inform
resident agent;

the SEC of the change of residence of the

4. Failure to submit copy of amended articles or by-laws or articles of

merger or consolidation;
5. A misrepresentation in material matters in reports;
6. Failure to pay taxes, imposts and assessments;
7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation; and
9. Not licensed to do business in the Philippines.356
m. Merger and consolidation357
(1) Definition and concept
Merger - a union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the
combined business.
One of the constituent corporations remains as an existing juridical
person, whereas the other corporation shall cease to exist. Merger is the
disappearance of one of the corporations with the other corporation
acquiring all the assets, rights of action, and assuming all the liabilities of
the disappearing corporation.358
Consolidation - the union of two or more existing corporations to form
a new corporation called the consolidated corporation.
If there is consolidation, there will be disappearance of both the
constituent corporations with the emergence of a new corporate entity,
called the consolidatedcorporation, which shall obtain all the assets of the
disappearing corporations, and likewise shall assume all theirliabilities.
Also, thenumber of shares that will be issued to each of the stockholders

356

Sec. 134
Merger or consolidation does not become effective by mere agreement of the constituent
corporations. The approval of the SEC is required.
358
Of course, there is an arrangementas to the shares of stocks that willbe issued to the
formerstockholders of the two (2)corporations which were merged.Said stockholders are
nowstockholders of the corporationwhich survives. The proportionbetween the two (2)
corporationswill be the basis of the shares of stocks that will be issued to thestockholders
under the survivingcorporation
357

109

under the new corporation is determined by the ration between the assets
of the two (2) corporations.359
(2) Constituent v. consolidated corporation
Two or more corporations may merge into a single corporation which
shall be one of the constituent corporations or may consolidate into a new
single corporation which shall be the consolidated corporation.360
(3) Plan of merger or consolidation
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or consolidation
setting forth the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying
the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.361
(4) Articles of merger or consolidation
After the approval by the stockholders or members, articles of merger
or articles of consolidation shall be executed by each of the constituent
corporations:
1) to be signed by the president or vice-president and
2) certified by the secretary or assistant secretary of each corporation
The articles of merger or consolidation shall set forth:
359

360
361

In a merger or consolidation:
1. Sale of assets is always involved
2. There is automatic assumption of liabilities
3. There is continuance of the enterprise and of the stockholders
4. Title to the assets are transferred by operation of law
5. The constituent corporations are automatically dissolved
Sec. 76
Ibid.

110

1) The plan of the merger or the plan of consolidation;

2) As to stock corporations, the number of shares outstanding, or in
the case of non-stock corporations, the number of members; and3) As to
each corporation, the number of shares or members voting for and against
such plan, respectively
The articles of merger or consolidation shall be submitted to
theSecurities and Exchange Commission inquadruplicate for its approval.
(5) Procedure
a. The board of directors or trustees of each corporation shall approve
a plan of merger or consolidation
b. The plan shall be submitted for approval by the stockholders or
members of each of such corporation at separate corporate meetings duly
called for the purpose
c. The articles of merger or consolidation shall be executed by each of
the constituent corporations
d. Submission to the SEC for approval
e. The SEC may or may not conduct a hearing
f. Issuance of certificate of merger or consolidation by the SEC
(6) Effectivity
Upon issuance
consolidation.362

by

the

SECof

the

certificate

(7) Limitations
a. Should not create monopolies
b. Should not eliminate free and healthy competition
c. Act 3518, Sec 20 inhibits illegal combinations
(8) Effects

362

Sec. 79, 2nd se.

111

of

merger

and

1. The constituent corporations shall become a single corporation

which, in case of merger shall be the surviving corporation and, in the case
of consolidation, shall be the consolidated corporation;
2. The separate existence of the constituent corporation shall cease,
except that of the surviving corporation;
3. The surviving or consolidated corporation shall possess all rights,
privileges, immunities and powers and subject to all the duties and
liabilities of a corporation;
4. The surviving or consolidated corporation shall thereafter possess
all the rights, privileges, immunities and franchises of each of the
constituent corporations;
5. All property, real or personal, and all receivables due to, and all
other interest of each constituent corporation, shall be deemed transferred
to and vested in such surviving or consolidated corporation without further
act or deed;
6. The surviving or consolidated corporation shall be responsible for
all the liabilities and obligations of each of the constituent corporations;
7. Any claim, action or proceeding pending by or against any of the
constituent corporations may be prosecuted by or against the surviving or
consolidated corporations; and
8. The rights of the creditors or lien upon the property of any of each
constituent corporation shall not be impaired by such merger or
consolidation.363

H. Securities Regulation Code364

1. State policy
Purposes:
1. To establish a socially conscious, free market that regulates itself
2. To encourage the widest participation of ownership in enterprises
3. To enhance the democratization of wealth
363
364

Sec. 80
R.A. No. 8799

112

4. To promote the development of the capital market

5. To protect investors
6. To ensure full and fair disclosure about securities
7. To minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create distortions in
the free market.365
2. Powers and functions of the SEC
a. Regulatory
1. Supervision over corporations, partnerships, and grantees of
primary franchise;
2. Approve, reject registration statements/licensing applications;
3. Suspend, revoke, after notice and hearing primary franchise on
grounds;
4. Regulate/supervise activities of persons to ensure compliance;
5. Supervise monitor, suspend or take over, exchanges, clearing
agencies and SROs;
6. Recommend policies, advise, propose legislation to Congress on
securities market;
7. Prepare, approve, amend or repeal rules, regulations, issue
opinions
8. Enlist the aid and support of and/or deputize any and all
enforcement agencies of the Government as well as any private institution,
corporation, firm, association or person in the implementation of its
powers.366
b. Adjudicative
1. Issue cease and desist orders to prevent fraud or injury;
2. Punish for contempt of the Commission;
365
366

Sec. 2
Sec. 5

113

3. Compel the officers of any registered corporation or association to

call meetings of stockholders or members;
4. Issue subpoena ducestecum and summon witnesses to appear in
any proceedings of the Commission; and
5. Exercise such other powers as may be provided by law which are
necessary or incidental to the carrying out its express powers.367
3. Securities required to be registered
General rule:
A registration statement duly filed and approved by the SEC is
necessary before securities may be sold and offered for sale or distribution
within the Philippines. Prior to any sale, information on the securities, in
such form and substance prescribed by the SEC, shall be made available to
each prospective purchaser.368
Exceptions:
1. Exempt securities; and
2. Exempt transactions.
a. Exempt securities
1. Any security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof, or by any
person controlled by and acting as an instrumentality of said Government.
2. Any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic relations, or by any
state, province or political subdivision or agency thereof on the basis of
reciprocity.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.
4. Any security or its derivatives the sale or transfer of which, by law,
is under the supervision and regulation of the Office of the Insurance
Commission, Housing and land Use Regulatory Board, or the Bureau of
Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
367
368

Ibid.
Sec. 8

114

Any securities added by the SEC by rule or regulation after public

hearing.369
b. Exempt transactions
1. Judicial saleby
insolvency or bankruptcy.
2.

executor,

administrator,

guardian/receiver

in

Sale of pledged or mortgaged security to liquidate a bona fide

debt.
3. Sale on isolated transactions by owner.
4. Distribution of stock dividends.
5.
Sale of capital stock exclusively to stockholders where no
commission is paid.
6. The issuance of bonds or notes secured by mortgage upon real
estate or tangible personal property, where the entire mortgage are sold to
a single purchaser at a single sale.
7. Issuance of security in exchange of any security from same issuer
pursuant to right of conversion.
8. Brokers transactions
9. Pre-incorporation subscription and subscription pursuant to an
increase of the ACS.
10. Exchange of securities by issuer with
exclusively

existing security holders

11. Sale to less than 20 persons during any 12- month period
12. Sale of securities to banks, registered investment house,
insurance companies, pension fund or retirement plan maintained by the
government or other persons authorized by the BSP to engage in trust
functions.370
4. Procedure for registration of securities
All securities required to be registered under Subsection 8.1 shall be
registered through the filing by the issuer in the main office of the
369
370

Sec. 9
Sec. 10

115

Commission, of a sworn registration statement with the respect to such

securities, in such form and containing such information and document as
the Commission prescribe. The registration statement shall include any
prospectus required or permitted to be delivered under Subsections 8.2,
8.3, and 8.4.
In promulgating rules governing the content of any registration
statement (including any prospectus made a part thereof or annex thereto),
the Commission may require the registration statement to contain such
information or documents as it may, by rule, prescribe. It may dispense with
any such requirements, or may require additional information or
documents, including written information from an expert, depending on the
necessity thereof or their applicability to the class of securities sought to be
registered.
The information required for the registration of any kind, and all
securities, shall include, among others, the effect of the securities issue on
ownership, on the mix of ownership, especially foreign and local ownership.
The registration statement shall be signed by the issuers executive
officer, its principal operating officer, its principal financial officer, its
comptroller, its principal accounting officer, its corporate secretary, or
persons performing similar functions accompanied by a duly verified
resolution of the board of directors of the issuer corporation. The written
consent of the expert named as having certified any part of the registration
statement or any document used in connection therewith shall also be filed.
Where the registration statement shares to be sold by selling shareholders,
a written certification by such selling shareholders as to the accuracy of any
part of the registration statement contributed to by such selling
shareholders shall be filed.
(a) Upon filing of the registration statement, the issuer shall pay to
the Commission a fee of not more than one-tenth (1/10) of one per centum
(1%) of the maximum aggregate price at which such securities are proposed
to be offered. The Commission shall prescribe by the rule diminishing fees
in inverse proportion the value of the aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be
immediately published by the issuer, at its own expense, in two (2)
newspapers of general circulation in the Philippines, once a week for two
(2) consecutive weeks, or in such other manner as the Commission by the
rule shall prescribe, reciting that a registration statement for the sale of
such securities has been filed, and that aforesaid registration statement, as
well as the papers attached thereto are open to inspection at the
Commission during business hours, and copies thereof, photostatic or
116

otherwise, shall be furnished to interested parties at such reasonable

charge as the Commission may prescribe.
Within forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented, the
Commission shall declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration statement as
provided in Section 14 hereof. The Commission shall enter an order
declaring the registration statement to be effective if it finds that the
registration statement together with all the other papers and documents
attached thereto, is on its face complete and that the requirements have
been complied with. The Commission may impose such terms and
conditions as may be necessary or appropriate for the protection of the
investors.
Upon affectivity of the registration statement, the issuer shall state
under oath in every prospectus that all registration requirements have been
met and that all information are true and correct as represented by the
issuer or the one making the statement. Any untrue statement of fact or
omission to state a material fact required to be stated herein or necessary
to make the statement therein not misleading shall constitute fraud.371
5. Prohibitions on fraud, manipulation and insider trading
a. Manipulation of security prices
It shall be unlawful for any person acting for himself or through a
dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any
listed security traded in an Exchange of any other trading market:
(i) By effecting any transaction in such security which involves
no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of
such security with the knowledge that a simultaneous order or
orders of substantially the same size, time and price, for the sale
or purchase of any such security, has or will be entered by or for
the same or different parties; or
(iii) By performing similar act where there is no change in
beneficial ownership.

371

Sec. 12

117

(b) To affect, alone or with others, a securities or transactions in

securities that: (I) Raises their price to induce the purchase of a security,
whether of the same or a different class of the same issuer or of controlling,
controlled, or commonly controlled company by others; or (iii) Creates
active trading to induce such a purchase or sale through manipulative
devices such as marking the close, painting the tape, squeezing the float,
hype and dump, boiler room operations and such other similar devices.
(c) To circulate or disseminate information that the price of any
security listed in an Exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted for
the purpose of raising or depressing the price of the security for the
purpose of inducing the purpose of sale of such security.
(d) To make false or misleading statement with respect to any
material fact, which he knew or had reasonable ground to believe was so
false or misleading, for the purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the
purchase and/or sale of any security traded in an Exchange for the purpose
of pegging, fixing or stabilizing the price of such security; unless otherwise
allowed by this Code or by rules of the Commission.
No person shall use or employ, in connection with the purchase or sale
of any security any manipulative or deceptive device or contrivance. Neither
shall any short sale be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except in accordance
with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest for the protection of
investors.
The foregoing provisions notwithstanding, the Commission, having
due regard to the public interest and the protection of investors, may, by
rules and regulations, allow certain acts or transactions that may otherwise
be prohibited under this Section.372
b. Short sales
A sale of a security that the seller does not own or has not contracted
for at the time of sale, and that the seller must borrow to make the delivery.
Such a sale is usually made when the seller expects the securitys price to
drop. If the price does not drop, the seller can make a profit on the

372

Sec. 24

118

difference between the price of the shares sold and the lower price of the
shares bought to pay back the borrowed share.373
c. Fraudulent transactions
It shall be unlawful for any person, directly or indirectly, in connection
with the purchase or sale of any securities to:
(1)Employ any device, scheme, or artifice to defraud;
(2) Obtain money or property by means of any untrue statement of a
material fact of any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which
they were made, not misleading; or
(3) Engage in any act, transaction, practice or course of business
which operates or would operate as a fraud or deceit upon any person.374
d. Insider trading
The selling or buying of a security by an insider while in possession of
material non-public information with respect to the issuer or the security. It
is considered unlawful unless:
1. The insider proves that the information was not gained from such
relationship, or
2. If the other party selling to or buying from the insider 375is
identified, the insider proves:
a. that he disclosed the information to the other party, or
b. that he had reason to believe that the other party otherwise is
also in possession of the information.376

6. Protection of investors
a. Tender offer rule377
373

Blacks Law Dictionary

Sec. 26
375
or his agent
376
Sec. 27.1
377
Tender offer is made:
1. By filing with the SEC a declaration to make a tender offer;
374

119

A publicly announced intention by a person acting alone or in concert

with other persons to acquire equity securities of a public company.
It is mandatory to make a tender offer for equity shares of a public
company in an amount equal to the number of shares that the person
intends to acquire in the following circumstances:
a. The person intends to acquire 15% or more of the equity shares of a
public company pursuant to an agreement made between or among the
person and one or more sellers;
b. The person intends to acquire 30% or more of the equity shares of a
public company within a period of 12 months; or
c. The person intends to acquire shares that would result in ownership
of more than 50% of the equity shares of a public company.378
b. Rules on proxy solicitation
Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;
Proxies must be in writing, signed by the stockholder or his duly
authorized representative and filed with the corporate secretary before the
scheduled meeting;379 unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended; no proxy shall be valid
and effective for a period longer than 5 years at one time; 380 and a broker or
dealer cannot give a proxy in respect of any security it carries for the
account of a customer without the express written authorization of such
customer.381
The issuance and solicitation of proxies are regulated to minimize, if
not avoid, the abuse and misuse of the proxy device that may lead to the
self-perpetuation and irresponsibility of management. Management has
innate advantages in the solicitation of proxies; it has the stockholders list;
2. By furnishing the issuer or the originator of the security a statement containing such
information required under Sec. 17 of the SRC:
i. Annual Report (includes balance sheet, profit and loss statement); and
ii.
Periodical reports for interim fiscal periods; and
3. By publishing all requests or invitations for tender, or materials, making a tender
offer or requesting or inviting letters of such a security.
378
Rule 19, SRC
379
Sec. 20.2
380
Sec. 20.3
381
Sec. 20.4

120

it benefits from the usual inertia of stockholders; and ithas access to

corporate funds for the normally substantial costs of solicitation.382
c. Disclosure rule
It shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to the issuer
or the security that is not generally available to the public, unless: (a) The
insider proves that the information was not gained from such relationship;
or (b) If the other party selling to or buying from the insider (or his agent) is
identified, the insider proves: (i) that he disclosed the information to the
other party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information.383
It shall be unlawful for any insider to communicate material nonpublic
information384 about the issuer or the security to any person who, by virtue
of the communication, becomes an insider as defined in Subsection 3.8,
where the insider communicating the information knows or has reason to
believe that such person will likely buy or sell a security of the issuer whole
in possession of such information.385
It shall be unlawful where a tender offer has commenced or is about
to commence for:
(i) Any person386who is in possession of material nonpublic information
relating to such tender offer, to buy or sell the securities of the issuer that
are sought or to be sought by such tender offer if such person knows or has
reason to believe that the information is nonpublic and has been acquired
382

Fundamentals of Securities Regulation, p. 432

No solicitation of proxy shall be made unless each person solicited is furnished, concurrently
or earlier, with a written proxy statement containing the information required by the SEC
(SRC Rule 20, par. 3). The form of proxy, shall be made unless each person solicited or given
to stockholders at least 15 business days prior to the meeting date (SRC Rule 20, par. 4.f).
383
Sec. 27.1
A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8,
or such insiders spouse or relatives by affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to have been effected while in possession of
material nonpublic information if transacted after such information came into existence but
prior to dissemination of such information to the public and the lapse of a reasonable time
for market to absorb such information: Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was aware of the material
nonpublic information at the time of the purchase or sale.
384
Information is "material nonpublic" if: (a) It has not been generally disclosed to the public
and would likely affect the market price of the security after being disseminated to the
public and the lapse of a reasonable time for the market to absorb the information; or (b)
would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
385
Sec. 27.3
386
other than the tender offeror

121

directly or indirectly from the tender offeror, those acting on its behalf, the
issuer of the securities sought or to be sought by such tender offer, or any
insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, 387 and any insider of
such issuer to communicatematerialnonpublicinformation relating to the
tender offer to any other person where such communication is likely to
result in a violation of Subsection 27.4 (a)(i).388
7. Civil liability
Civil Liabilities on Account of False Registration Statement.Any person acquiring a security, the registration statement of which
or any part thereof contains on its effectivity an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make such statements not misleading, and who suffers
damage, may sue and recover damages from the following enumerated
persons, unless it is proved that at the time of such acquisition he knew of
such untrue statement or omission:
(a) The issuer and every person who signed the registration
statement:
(b) Every person who was a director of, or any other person
performing similar functions, or a partner in, the issuer at the time of
the filing of the registration statement or any part, supplement or
amendment thereof with respect to which his liability is asserted;
(c) Every person who is named in the registration statement as
being or about to become a director of, or a person performing similar
functions, or a partner in, the issuer and whose written consent
thereto is filed with the registration statement;
(d) Every auditor or auditing firm named as having certified any
financial statements used in connection with the registration
statement or prospectus.
(e) Every person who, with his written consent, which shall be
filed with the registration statement, has been named as having
prepared or certified any part of the registration statement, or as
having prepared or certified any report or valuation which is used in
connection with the registration statement, with respect to the
387

shall include any securities convertible or exchangeable into such securities or any options
or rights in any of the foregoing securities
388
Sec. 27.4 (a)

122

statement, report, or valuation, which purports to have been prepared

or certified by him.
(f) Every selling shareholder who contributed to and certified as
to the accuracy of a portion of the registration statement, with respect
to that portion of the registration statement which purports to have
been contributed by him.
(g) Every underwriter with respect to such security.
If the person who acquired the security did so after the issuer has
made generally available to its security holders an income statement
covering a period of at least twelve (12) months beginning from the
effective date of the registration statement, then the right of recovery under
this subsection shall be conditioned on proof that such person acquired the
security relying upon such untrue statement in the registration statement or
relying upon the registration statement and not knowing of such income
statement, but such reliance may be established without proof of the
reading of the registration statement by such person.389
Civil
Liabilities
Arising
in
Communications and Reports.-

Connection

With

Prospectus,

Any person who:

(a) Offers to sell or sells a security in violation of Chapter III, 390
or
(b) Offers to sell or sells a security, whether or not exempted by
the provisions of this Code, by the use of any means or instruments of
transportation or communication, by means of a prospectus or other
written or oral communication, which includes an untrue statement of
a material fact or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances under which
they were made, not misleading (the purchaser not knowing of such
untruth or omission), and who shall fail in the burden of proof that he
did not know, and in the exercise of reasonable care could not have
known, of such untruth or omission, shall be liable to the person
purchasing such security from him, who may sue to recover the
consideration paid for such security with interest thereon, less the
amount of any income received thereon, upon the tender of such
security, or for damages if he no longer owns the security.

389
390

Sec. 56
Registration of securities

123

Any person who shall make or cause to be made any statement in any
report, or document filed pursuant to this Code or any rule or regulation
thereunder, which statement as at the time and in the light of the
circumstances under which it was made false or misleading with respect to
any material fact, shall be liable to any person who, not knowing that such
statement was false or misleading, and relying upon such statement shall
have purchased or sold a security at a price which was affected by such
statement, for damages caused by such reliance, unless the person sued
shall prove that he acted in good faith and had no knowledge that such
statement was false or misleading.391
Civil Liability of Fraud in Connection with Securities Transactions.
Any person who engages in any act or transaction in violation of
Sections 19.2,392 20393 or 26,394 or any rule or regulation of the Commission
thereunder, shall be liable to any other person who purchases or sells any
security, grants or refuses to grant any proxy, consent or authorization, or
accepts or declines an invitation for tender of a security, as the case may be,
for the damages sustained by such other person as a result of such act or
transaction.395

Civil Liability for Manipulation of Security Prices.

Any person who willfully participates in any act or transaction in
violation of Section 24396 shall be liable to any person who shall purchase or
sell any security at a price which was affected by such act or transaction,
and the person so injured may sue to recover the damages sustained as a
result of such act or transaction.397
Civil Liability with Respect to Commodity Futures Contracts and Preneed Plans.
391

Sec. 57
It shall be lawful for any person to make any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made in the light of the
circumstances under which they are made, not mis-leading, or to engaged to any fraudulent,
deceptive or manipulative acts or practices, in connection with any tender offer or request or
invitation for tenders, or any solicitation for any security holders in opposition to or in favor
of any such favor of any such offer, request, or invitation. The Commission shall, for the
purposes of this subsection, define and prescribe means reasonably designed to prevent,
such acts and practices as are fraudulent, deceptive and manipulative.
393
On Proxies, supra
394
On Fraudulent transactions, supra
395
Sec. 58
396
On Manipulation of Security Prices, supra
397
Sec. 59
392

124

Any person who engages in any act or transactions in willful violation

of any rule or regulation promulgated by the Commission under Section
11398 or 16,399 which the Commission denominates at the time of issuance as
intended to prohibit fraud in the offer and sale of pre-need plans or to
prohibit fraud, manipulation, fictitious transactions, undue speculation, or
other unfair or abusive practices with respect to commodity future
contracts, shall be liable to any other person sustaining damages as a result
of such act or transaction.
As to each such rule or regulation so denominated, the Commission by
rule shall prescribe the elements of proof required for recovery and any
limitations on the amount of damages that may be imposed.400
Civil Liability on Account of Insider Trading.
Any insider who violates Subsection 27.1401 and any person in the case
of a tender offer who violates Subsection 27.4 (a)(i), 402 or any rule or
regulation thereunder, by purchasing or selling a security while in
possession of material information not generally available to the public,
shall be liable in a suit brought by any investor who, contemporaneously
with the purchase or sale of securities that is the subject of the violation,
purchased or sold securities of the same class unless such insider, or such
person in the case of a tender offer, proves that such investor knew the
information or would have purchased or sold at the same price regardless of
disclosure of the information to him.
An insider who violates Subsection 27.3 403 or any person in the case of
a tender offer who violates Subsection 27.4 (a), 404 or any rule or regulation
thereunder, by communicating material nonpublic information, shall be
jointly and severally liable under Subsection 61.1 with, and to the same
extent as, the insider, or person in the case of a tender offer, to whom the
398

Commodity Futures Contracts. - No person shall offer, sell or enter into commodity futures
contracts except in accordance with the rules, regulations and orders the Commission may
prescribe in the public interest. The Commission shall promulgate rules and regulations
involving commodity futures contracts to protect investors to ensure the development of a
fair and transparent commodities market.
399
Pre-Need Plans. No person shall sell or offer for sale to the public any pre-need plan
except in accordance with rules and regulations which the Commission shall prescribe. Such
rules shall regulate the sale of pre-need plans by, among other things, requiring the
registration of pre-need plans, licensing persons involved in the sale of pre- need plans,
requiring disclosures to prospective plan holders, prescribing advertising guidelines,
providing for uniform accounting system, reports and recording keeping with respect to such
plans, imposing capital, bonding and other financial responsibility, and establishing trust
funds for the payment of benefits under such plans.
400
Sec. 60
401
supra
402
Id.,
403
Id.,
404
Id.,

125

communication was directed and who is liable under Subsection 61.1 by

reason of his purchase or sale of a security.405
I. Banking Laws
1. The New Central Bank Act406
a. State policies
1. Maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge
of its mandated responsibilities concerning money, banking and credit.
2. The central monetary, while being a government-owned
corporation, shall enjoy fiscal and administrative autonomy.407
b. Creation of the BangkoSentralngPilipinas (BSP)
An independent central monetary authority, which shall be a body
corporate known as the BangkoSentralngPilipinas, hereafter referred to as
the BangkoSentral.
The capital of the BangkoSentral shall be Fifty billion pesos
(P50,000,000,000), to be fully subscribed by the Government of the
Republic, Ten billion pesos (P10,000,000,000) of which shall be fully paid
for by the Government upon the effectivity of this Act and the balance to be
paid for within a period of two (2) years from the effectivity of this Act in
such manner and form as the Government, through the Secretary of
Finance and the Secretary of Budget and Management, may thereafter
determine.408
c. Responsibility and primary objective
Responsibilities:
1. To provide policy directions in the areas of money, banking, and
credit;
2. To supervise bank operations

405

Sec. 61
R.A. No. 7653
407
Sec. 1
408
Sec. 2
406

126

3. To regulate the operations of finance companies and non-bank

financial institutions performing quasi-banking functions, and similar
institutions.409

Primary objectives:
1. To maintain price stability conducive to a balanced and sustainable
growth of the economy.
1. To promote and maintain monetary stability and the convertibility
of the peso.
d. Monetary Board - Powers and functions
1. To adopt, alter and use a corporate seal which shall be judicially
noticed
2. To enter into contracts
3. To lease, own, sell property
4. To sue and be sued
5. To acquire and hold such assets and incur such liabilities in
connection with its operations or as are essential to the proper conduct of
operation
6. To compromise condone or release any claim of or settled liability
to the BSP
7. To do and perform such other necessary powers
e. How the BSP handles banks in distress
(1) Conservatorship
Whenever on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the interest of
depositors and creditors; shall appoint a conservator.
(2) Closure
409

Sec. 3

127

Mandatory requirements for bank closure:

1.
Examination by the appropriate BSP department as to the
condition of the bank
2. Examination shows that the condition of the bank is one of
insolvency
3. Director shall inform the MB in writing of such fact
4. MB shall find the statement of the department to be true.410
(3) Receivership
Receivership is equivalent to an injunction to restrain the bank in any
way. Thus, the appointment of a receiver operates to suspend the authority
of the bank and of its directors and officers over its property and effects.411
(4) Liquidation
1. The condition of the bank is one of insolvency or that its
continuance would involve probable loss to its depositors and creditors.

410

Banco Filipino v. MB
Villanueva v. CA
Effects of appointment of receiver/ liquidation:
1. Suspension of operation
2. The assets under receivership or liquidation shall be deemed in custodialegis in the
hands of the receiver and shall be exempt from garnishment, levy, attachment or execution
(Sec. 30).
3. Bank is not liable to pay interest on deposits during the period of suspension of
operation (Overseas Bank v. CA)
4. The corporation retains its legal personality (Teal Motor Co. v CFI)
5. Deposits do not become preferred credits. (CB v. Morfe)
Grounds:
A. Under NCBA
1. Inability to pay liabilities as they become due in the ordinary course of business, but
not including inability to pay caused by extraordinary demands induced by financial panic in
the banking community;
2. Insufficiency of realizable assets to meet its liabilities;
3. Inability to continue 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. (Sec. 30)
B. Under GBL
1. Notification to the BSP or public announcement of a bank holiday (Sec. 53, GBL)
2. Suspension of payment of deposit liabilities continuously for more than 30 days (Sec.
53, GBL)
3. Persistence in conducting business in an unsafe or unsound manner. (Sec. 56, GBL)
411

128

2.
A determination by the MB that the bank cannot be
412
rehabilitated.
f. How the BSP handles exchange crisis
(1) Legal tender power
Legal tender
All notes and coins issued by the BangkoSentral are fully guaranteed
by the Republic and shall be legal tender in the Philippines for all debts,
both public and private.413
Legal tender power of coins
1. 25 centavos and above: In amounts not exceeding P50.00
2. 10 centavos or less: In amounts not exceeding P20.00
BSP Authority to Replace
1. Notes for any series or denomination More than 5 years old
2. Coins More than 10 years old414
(2) Rate of exchange
The Monetary Board shall determine:
412

Grounds:
1. The condition of the bank is one of insolvency or that its continuance would involve
probable loss to its depositors and creditors.
2. A determination by the MB that the bank cannot be rehabilitated.
Procedure:
1. Receiver shall file ex parte, with the proper RTC, a petition for assistance in the
liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general
application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted
by the Monetary Board.
2. He shall convert the assets of the institution to money for the purpose of paying the
debts of the institution.(Sec. 30)
3. Payment shall be in accordance with the rules on concurrence and preference of
credits
413

Sec. 52
Rules:
1. Notes and coins called in for replacement shall remain legal tender for a period of one
year from the date of call.
2. After that period, they shall cease to be legal tender during the following year or for
such longer period as MB may determine.
3. After the expiration of this latter period, the notes and coins which have not been
exchanged shall cease to be a liability of BSP and shall be demonetized (Sec. 57).
414

129

1. The exchange rate policy of the country;

2. The rates of which the BangkoSentral shall buy and sell spot
exchange;
3. Establish deviation limits from the effective exchange rate(s) as it
may deem proper; and
4. The rates for other types of foreign exchange transactions by the
BangkoSentral including purchases and sales of foreign notes and coins.
2. Law on Secrecy of Bank Deposits415
a. Purpose
1. To encourage people to deposit in banks
2. To discourage private hoarding so that banks may lend such funds
and assist in the economic development.
b. Prohibited acts
1. Examination and inquiry or looking into all deposits of whatever
nature with the banks in the Philippines including investments in bonds
issued by the Government.
2. Any disclosure by any official or employee of any bank to any
unauthorized person of any information concerning the said deposits.
c. Deposits covered
The deposits covered by law are considered as of an absolutely
confidential nature and maynotbe examined, inquired or looked into by any
person, governmental, bureau, or office.
d. Exceptions
A. From R.A. No. 1405
1. Upon written permission of the depositor;
2. In cases of impeachment;

415

R.A. No. 1405, as amended

130

3. Upon order of a competent court in cases of bribery or dereliction

of duty of public officials;
4. In cases where the money deposited or invested is the subject
matter of the litigation.416
B. From other laws
1. Anti-Graft and Corrupt Practices Act cases417
2. Inquiry by the Commissioner of Internal Revenue into bank
deposits of:
a. A decedent to determine his gross estate;
b. A taxpayer who has filed an application for compromise of his
tax liability by reason of financial incapacity to pay his tax liability. He
must file a written waiver of his privilege under RA 1405 or other
general or special laws.418
3. Inquiry or examination by the Anti-Money Laundering Council
(AMLC) of any particular deposit or investment with any banking institution
or non-bank financial institution upon order of any competent court in cases
of violation of the Anti-Money Laundering Law, when it has been established
that there is probable cause that the deposits or investments are related to
an unlawful activity or a money laundering offense, except that no court
order shall be required in the following unlawful activities:
a. Kidnapping for ransom under Art. 267 RPC;
b. Comprehensive Dangerous Drugs Act of 2002;419
c. Hijacking and other violations under RA 6235; destructive
arson and murder under RPC. Including those perpetrated by
terrorists against non-combatant persons and similar targets.420
4. Disclosure to the Treasurer of the Philippines of dormant deposits
for at least 10 years under the Unclaimed Balances Act.421
e. Garnishment of deposits, including foreign deposits
416

Sec. 2
R.A. No. 3019; added by analogy in PNB vs. Gancayco
418
Sec. 6[f], NIRC
419
R.A. No. 9165
420
Sec. 11, R.A. No. 9160, as amended by Sec. 8 of R.A. No. 9194
421
Act No. 3936
417

131

Garnishment of bank deposit of judgment debtor does not violate RA

1405. Its purpose is merely to secure information as to the name of the
depositor and whether or not the defendant had a deposit in said bank, only
for purposes of garnishment.422
f. Penalties for violation
Imprisonment of not more than 5 years or a fine not more than
P20,000or both, in the discretion of the court.

3. General Banking Act423

a. Definition and classification of banks
Banks-entities engaged in the lending of funds obtained in the form of
deposits.424Entities duly authorized by the Monetary Board to engage in the
business of regularly lending funds obtained regularly from the public
through the receipt of deposits of any kind.
Classification of banks:
1. Universal banks- primarily governed by the General Banking Law
(GBL), can exercise the powers of an investment house and invest in nonallied enterprises and have the highest capitalization requirement.
2. Commercial banks- ordinary banks governed by the GBL which
have a lower capitalization requirement than universal banks and cannot
exercise the powers of an investment house and invest in non-allied
enterprises.
3. Thrift banks these are a) Savings and mortgage banks; b) Stock
savings and loan associations; c) Private development banks, which are
primarily governed by the Thrift Banks Act (R.A. 7906).
422

China Banking Corporation v. Ortega

R.A. No. 8791
424
Sec. 2
423

132

4. Rural banks mandated to make needed credit available and

readily accessible in the rural areas on reasonable terms and which are
primarily governed by the Rural Banks Act of 1992 (RA 7353).
5. Cooperative banks those banks organized whose majority shares
are owned and controlled by cooperatives primarily to provide financial and
credit services to cooperatives. It shall include cooperative rural banks.
They are governed primarily by the Cooperative Code (RA 6938).
6. Islamic banks banks whose business dealings and activities are
subject to the basic principles and rulings of Islamic Sharia, such as the Al
Amanah Islamic Investment Bank of the Philippines which was created by
RA 6848.
7. Other classification of banks as determined by the Monetary Board
of the BangkoSentralngPilipinas.425
b. Distinction of banks from quasi-banks and trust entities
Quasi-banks
Entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit
substitutes.
Entities authorized to perform universal or commercial banking
functions may also engage in quasi-banking functions.

c. Bank powers and liabilities

(1) Corporate powers
1. General/corporate/incidental
2. Necessary (Sec. 29)
3. Other powers (Sec. 55)
(2) Banking and incidental powers
1. Powers necessary to carry on the business banking such as
a. accepting drafts and issuing letters of credit;
425

Sec. 3

133

b. discounting and negotiating promissory notes, drafts, bills of

exchange, and other evidences of debt;
c. accepting or creating demand deposits
A bank other than a universal or commercial bank cannot accept or
create demand deposits except upon prior approval of, and subject to such
conditions and rules as may be prescribed by the Monetary Board.426
a. receiving other types of deposits and deposit substitutes;
b. buying and selling foreign exchange and gold or silver
bullion;
c. acquiring marketable bonds and other debt securities; and
d. extending credit.
2. Powers of an investment house as provided in existing laws and the
power to invest in non-allied enterprises as provided in this Act.
d. Diligence required of banks - relevant jurisprudence
1. The appropriate standard of diligence must be very high, if not the
highest, degree of diligence; highest degree of care.427
2. Subject to reasonable regulation under the police power of the
state.
e. Nature of bank funds and bank deposits428
426

Sec 22
PCI Bank v. CA, 350 SCRA 446; PBCom v. CA
This applies only to cases where banks are acting in their fiduciary capacity, that is, as
depository of the deposits of their depositors. (Reyes v. CA)
While an innocent mortgagee is not expected to conduct an exhaustive investigation on the
history of the mortgagors title, in case of a banking institution, it must exercise due
diligence before entering into said contract, and cannot rely upon what is or is not annotated
on the title. Reason: Before a loan is approved, representatives are sent to the premises
offered as collaterals and investigate who the real owners are. (DBP vs. CA, 331 SCRA 267)
427

The business of a bank is one affected by public interest for which reason the bank should
guard against loss due to negligence and bad faith. It is expected to ascertain and verify the
identities of the persons it transacts business with. (UCPB vs. Ramos, G.R. No. 147800,
November 11, 2003, Callejo, J.)
Due diligence required of banks extend even to persons, or institutions like the GSIS,
regularly engaged in the business of lending money secured by real estate mortgages. (GSIS
vs. Eduardo Santiago, G.R. No. 155206. October 28, 2003)
428
Types of deposit accounts
1. Individual

134

1. As debtor-creditor
a. Savings
b. Time
c. Demand429
2. As lessor-lessee
a. Safety deposit boxes
3. As trustee-trustor
a. Trust account
4. Asbailee-bailor
a. Deposit strictly for safekeeping and for specific purposes
5. As agent-principal:
a. Deposit of check for collection
b. Deposit for specific purpose
c. Deposit for safekeeping
f. Stipulation on interests
Allowed provided it is within the limits or ceiling provided for by the
Act.
g. Grant of loans and security requirements
Before granting a loan, a bank must ascertain that the debtor is
capable of fulfilling his commitments to the bank.
2. Joint
a. And account
- Co-ownership
The signature of both co-depositors are required for withdrawals.
b. And/or account
Either one of the co-depositors may deposit and withdraw from the account without
the knowledge, consent and signature of the other. And upon the death of one, the survivor
may withdraw the entire balance on deposit.(Handbook on Bank Deposits, A. Viray, 1998
ed.)
It may be deemed a survivorship agreement depending on the intention of the parties;
aleatory contract supported by a lawful consideration which is valid unless when made as a
mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to
defeat the legitime of a forced heir. (Rivera v. Peoples Bank)
429
Characteristics:
a. In the nature of irregular deposits (Serrano vs. Central Bank, 96 SCRA 96)

135

Rules:
1. A bank may demand from its applicants a statement of their assets
and liabilities and of their income and expenditures and other information.
2. Should such statements prove to be false or incorrect, the bank
may terminate any loan granted on the basis of said statements and shall
have the right to demand immediate repayment or liquidation of
obligation.430
(1) Ratio of net worth to total risk assets
Risk-based capital
The minimum ratio prescribed by the Monetary Board which the net
worth of a bank must bear to its total risk assets which may include
contingent accounts.
However, the Monetary Board may require or suspend compliance
with such ratio whenever necessary for a maximum period of one year; that
such ratio shall be applied uniformly to banks of the same category.431
(2) Single borrowers limit
1. The total amount of loans extended by a bank to any person,
partnership, association, corporation or other entity shall at no time exceed
20% of the net worth of such bank.
2. The total amount of loans may be increased by additional 10% of
the net worth of such bank provided the additional liabilities of any
borrower are adequately secured by trust receipts, shipping documents,
warehouse receipts or other similar documents transferring or securing title
covering readily marketable, non-perishable goods which must be fully
covered by insurance.432
430

Sec. 40
Sec. 34
Effect of non-compliance with the prescribed minimum ratio:
1. Distribution of net profits may be limited or prohibited and MB may require that part or
all of the net profits be used to increase the capital accounts of the bank until the minimum
requirement has been met; or
2. Acquisition of major assets and making of new investments may be restricted, except:
purchases of evidence of indebtedness guaranteed by the Government (Sec. 34).
3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under
a program approved by BSP, the MB may temporarily relieve the surviving bank,
consolidated bank, or constituent bank or corporations under rehabilitation from full
compliance with the required capital ratio.
432
The prescribed ceiling shall include:
The direct liability of the maker or acceptor of paper discounted with or sold to such bank
and the liability of a general endorser, drawer or guarantor who obtains a loan or other
431

136

(3)

Restrictions on bank exposure to DOSRI

(directors, officers, stockholders and their
related interests)433
a. No director or officer of any bank shall, directly or indirectly,
borrow from such bank nor shall be guarantor, endorser or surety for loans
from such bank to others, or in any manner be obligor or incur any
contractual liability to the bank, except with the written approval of the
majority of all the directors of the bank, excluding the director concerned.

credit accommodation from or discount paper with or sells paper to such banks;
a. In the case of an individual who owns or controls a majority interest in a
corporation,
b. partnership, association or any other entity, the liabilities of the said entities to
the bank;
c. In a case of a corporation, all liabilities to such bank of all subsidiaries in which
such corporation owns or controls a majority interest; and
d. In the case of a partnership, association, or other entity, the liabilities of the member
thereof to such bank.
Exclusions from the limits:
a. Loans secured by obligations of the BangkoSentral or the Philippine Government;
b. Loans fully guaranteed by the government;
c. Loans covered by assignment of deposits maintained in the lending bank and held in
the Philippines;
d. Loans, credit accommodations and acceptances under letters of credit to the extent
covered by margin deposits; and
e. Other loans or credit accommodations which the MB may specify as non-risk items.
433
Who are covered (BSP Circular No. 170):
1. Directors Directors of the lending bank
2. Officers Either identified in the by-laws or are generally known as such
3. Stockholders those whose stockholdings, individually and/or together with any of the
following persons, amount to 2% or more of the total subscribed capital stock of the bank:
a. His spouse or relative within the first degree of affinity/consanguinity or relative by
legal adoption.
b. A partnership in which the stockholder or his spouse or any of his relatives
mentioned above is a general partner.
c. A co-owner with the stockholder or the stockholders spouse or relative mentioned
above of property/right/interest (mortgaged, pledged or assigned to secure the loan or credit
accommodations, except when the mortgage, pledge or assignment covers only said coowners undivided interest.
4. Related Interest
a. Spouse, relatives within first degree of consanguinity or affinity, or relative by legal
adoption of a DOS.
b. Partnerships of which a DOS or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, is a general partner.
c. Co-owner with the DOS or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, of the property/interest/ right
mortgaged, pledged, assigned to secure the loans or credit accommodations, except when
the mortgage, pledge or assignment covers only said co-owners undivided interest.
d. Corporation with inter-locking directors.
e. Corporation wherein 20% of the capital stock is owned by the DOS and/or their
spouses or relatives mentioned above.

137

The written approval shall not be required for loans granted to officers
under a fringe benefit plan approved by the BangkoSentral.
b. Dealings of a bank with any of its DOSRI shall be upon terms not
less favorable to the bank than those offered to others.434
c. Loans extended to DOSRI shall be limited to an amount equivalent
to their respective unencumbered deposits and book value of their paid-in
capital contribution in the bank.435
d. The resolution approving the loan shall be entered in the records of
the bank and transmitted to the BSP
e. Waiver of secrecy of deposits of whatever nature in all banks in the
Philippines by the borrower. No waiver is required if the related interests
are the borrower
f. Information obtained from examination is strictly confidential.
h. Penalties for violations
(1) Fine, imprisonment

f. Corporation wholly or majority owned or controlled by any related entity or a group of

related entities in items (b), (d), and (e).
Requisites:
a. The borrower is director, officer, or any stockholder of a bank and related interest.
b. He contracts a loan or any form of financial accommodation
c. The loan or financial accommodation is from (1) his bank or (2) a bank that is a
subsidiary of a bank holding company of which both his bank and lending bank are
subsidiaries, (3) a bank in which a controlling proportion of the shares is owned by the same
interest that owns a controlling proportion of the shares of his bank; and
d. The loan or financial accommodation of the DOS, singly or with that of his related
interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum
amount permitted by law, whichever is lower.(BSP Circular No. 170)
434
Arms length rule
435
Except
i. Loans, credit accommodations, and guarantees secured by assets considered as non-risk
by the Monetary Board.
ii. Loans, credit accommodations, and advances to officers in the form of fringe benefits.
iii. Cooperative bank with regard to its cooperative shareholders

138

Shall be subject to Sections 34, 35, 36 and 37 436 of the New Central
Bank Act.437
(2) Suspension or removal of director or officer
If the offender is a director or officer of a bank, quasi-bank or trust
entity, the Monetary Board may also suspend or remove such director or
officer.

436

Section 34.Refusal to Make Reports or Permit Examination. - Any officer, owner, agent,
manager, director or officer-in-charge of any institution subject to the supervision or
examination by the BangkoSentral within the purview of this Act who, being required in
writing by the Monetary Board or by the head of the supervising and examining department
willfully refuses to file the required report or permit any lawful examination into the affairs of
such institution shall be punished by a fine of not less than Fifty thousand pesos (P50,000)
nor more than One hundred thousand pesos (P100,000) or by imprisonment of not less than
one (1) year nor more than five (5) years, or both, in the discretion of the court.
Section 35.False Statement. - The willful making of a false or misleading statement on a
material fact to the Monetary Board or to the examiners of the BangkoSentral shall be
punished by a fine of not less than One hundred thousand pesos (P100,000) nor more than
Two hundred thousand pesos (P200,000), or by imprisonment of not more than (5) years, or
both, at the discretion of the court.
Section 36. Proceedings Upon Violation of This Act and Other Banking Laws, Rules,
Regulations, Orders or Instructions. - Whenever a bank or quasi-bank, or whenever any
person or entity willfully violates this Act or other pertinent banking laws being enforced or
implemented by the BangkoSentral or any order, instruction, rule or regulation issued by the
Monetary Board, the person or persons responsible for such violation shall unless otherwise
provided in this Act be punished by a fine of not less than Fifty thousand pesos (P50,000) nor
more than Two hundred thousand pesos (P200,000) or by imprisonment of not less than two
(2) years nor more than ten (10) years, or both, at the discretion of the court.
Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or
unsafe manner, the Board may, without prejudice to the penalties provided in the preceding
paragraph of this section and the administrative sanctions provided in Section 37 of this Act,
take action under Section 30 of this Act.
Section 37.Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the
criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this
Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their
directors and/or officers, for any willful violation of its charter or by-laws, willful delay in the
submission of reports or publications thereof as required by law, rules and regulations; any
refusal to permit examination into the affairs of the institution; any willful making of a false
or misleading statement to the Board or the appropriate supervising and examining
department or its examiners; any willful failure or refusal to comply with, or violation of, any
banking law or any order, instruction or regulation issued by the Monetary Board, or any
order, instruction or ruling by the Governor; or any commission of irregularities, and/or
conducting business in an unsafe or unsound manner as may be determined by the
Monetary Board, the following administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate,
but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking
into consideration the attendant circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to BangkoSentralcredit facilities;

139

(3) Dissolution of bank

If the violation is committed by a corporation, such corporation may
be dissolved by quo warranto proceedings instituted by the Solicitor
General.
4. Philippine Deposit Insurance Corporation Act438
a. Basic policy
To insure the deposits of all banks which are entitled to the benefits of
insurance under this Act.
To promote and safeguard the interests of the depositing public by
way of providing permanent and continuing insurance coverage on all
insured deposits.
(c) suspension of lending or foreign exchange operations or authority to accept new
deposits or make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively suspend
any director or officer of a bank or quasi-bank pending an investigation: Provided, That
should the case be not finally decided by the BangkoSentral within a period of one hundred
twenty (120) days after the date of suspension, said director or officer shall be reinstated in
his position: Provided, further, That when the delay in the disposition of the case is due to
the fault, negligence or petition of the director or officer, the period of delay shall not be
counted in computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.
Whether or not there is an administrative proceeding, if the institution and/or the
directors and/or officers concerned continue with or otherwise persist in the commission of
the indicated practice or violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned to cease and desist from the
indicated practice or violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The cease and desist order
shall be immediately effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing
before the Monetary Board or any committee chaired by any Monetary Board member
created for the purpose, upon request made by the respondents within five (5) days from
their receipt of the order. If no such hearing is requested within said period, the order shall
be final. If a hearing is conducted, all issues shall be determined on the basis of records,
after which the Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking
institutions, for any failure to comply with the requirements of law, Monetary Board
regulations and policies, and/or instructions issued by the Monetary Board or by the
Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory until reversed, modified or lifted by the
Monetary Board on appeal.
437
Sec. 66
438
R.A. No. 3591, as amended

140

b. Concept of insured deposits

The term "insured deposit" means the amount due to any bona fide
depositor for legitimate deposits in an insured bank net of any obligation of
the depositor to the insured bank as of date of closure, but not to exceed
Five hundred thousand pesos (P500,000.00). In determining such amount
due to any depositor, there shall be added together all deposits in the bank
maintained in the same right and capacity for his benefits either in his own
name or in the name of others.439
c. Liability to depositors
(1) Deposit liabilities required to be insured with
PDIC
The deposit liabilities of any bank engaged in the business receiving
deposits are required to be insured with the PDIC.440
(2) Commencement of liability
Liability commences when an insured bank is closed by the Monetary
Board pursuant to Sec 30441 of R.A. 7653.
439

Sec. 3 (g), R.A. 9576 (April 29, 2009), amending Sec. 4 (g), R.A. 3591
Sec. 4
441
Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the BangkoSentral, to meet its
liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or
creditors; or
(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.
For a quasi-bank, any person of recognized competence in banking or finance may be
designed as receiver.
The receiver shall immediately gather and take charge of all the assets and liabilities of
the institution, administer the same for the benefit of its creditors, and exercise the general
powers of a receiver under the Revised Rules of Court but shall not, with the exception of
administrative expenditures, pay or commit any act that will involve the transfer or
disposition of any asset of the institution: Provided, That the receiver may deposit or place
the funds of the institution in non-speculative investments. The receiver shall determine as
soon as possible, but not later than ninety (90) days from takeover, whether the institution
may be rehabilitated or otherwise placed in such a condition so that it may be permitted to
resume business with safety to its depositors and creditors and the general public: Provided,
440

141

(3) Deposit accounts not entitled to payment

a) Investment products such as bonds and securities, trust accounts,
and other similar instruments;
b) Deposit accounts or transactions which are unfunded, or that are
fictitious or fraudulent;
c) Deposit accounts or transactions constituting, and/or emanating
from, unsafe and unsound banking practice/s, as determined by the
Corporation, in consultation with the BSP, after due notice and hearing, and
publication of a cease and desist order issued by the Corporation against
such deposit accounts or transactions; and

That any determination for the resumption of business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated or permitted to
resume business in accordance with the next preceding paragraph, the Monetary Board shall
notify in writing the board of directors of its findings and direct the receiver to proceed with
the liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without requirement of prior
notice or any other action, a petition for assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of quasi-banks, the liquidation plan shall be
adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against the institution, assist the
enforcement of individual liabilities of the stockholders, directors and officers, and decide on
other issues as may be material to implement the liquidation plan adopted. The receiver
shall pay the cost of the proceedings from the assets of the institution.
(2) convert the assets of the institutions to money, dispose of the same to creditors and
other parties, for the purpose of paying the debts of such institution in accordance with the
rules on concurrence and preference of credit under the Civil Code of the Philippines and he
may, in the name of the institution, and with the assistance of counsel as he may retain,
institute such actions as may be necessary to collect and recover accounts and assets of, or
defend any action against, the institution. The assets of an institution under receivership or
liquidation shall be deemed in custodialegis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or liquidation, be exempt from
any order of garnishment, levy, attachment, or execution.
The actions of the Monetary Board taken under this section or under Section 29 of this Act
shall be final and executory, and may not be restrained or set aside by the court except on
petition for certiorari on the ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for
certiorari may only be filed by the stockholders of record representing the majority of the
capital stock within ten (10) days from receipt by the board of directors of the institution of
the order directing receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a
receiver under this section shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a precondition to the designation of a
receiver.

142

d) Deposits that are determined to be the proceeds of an unlawful

activity as defined under Republic Act No. 9160, as amended.442
(4) Extent of liability
Liability covers the amount due to any depositor for deposits in an
insured bank net of any obligation of the depositor to the insured bank as of
the date of closure, but not to exceed P500,000.00. 443
(5) Determination of insured deposits
The Corporation shall commence the determination of insured
deposits upon its actual takeover of the closed bank.
In order that a claim for deposit insurance with the PDIC may prosper,
the law requires that a corresponding deposit be placed in the insured
bank. A deposit as defined in Section 3(f), may be constituted only if money
or the equivalent of money is received by a bank.
(6) Calculation of liability
(a) Per depositor, per capacity rule
The PDICs liability is up to P500,0000 per depositor / per capacity.444
(b) Joint accounts
A joint account regardless of whether the conjunction and, or or
and/or is used, shall be insured separately from an individually-owned
deposit account.
If the account is held jointly by two or more natural persons, or by two
or more juridical persons or entities, the maximum insured deposit shall be
divided into as many equal shares as there are individuals, juridical persons
or entities, unless a different sharing is stipulated in the document of
deposit.
Document of deposit referred to in the preceding paragraph pertains
to joint account agreements, account ledgers, certificate of time deposits,
passbooks or other evidence of deposits, specimen signature cards,
corporate resolutions, contracts or similar instruments, copies of which
must be in the custody or possession of the bank upon takeover by PDIC.
442

Sec. 4 (f)
Under R.A. No. 9576
444
Ibid.
443

143

If the account is held by a juridical person or entity jointly with one or

more natural persons, the maximum insured deposit shall be presumed to
belong entirely to the juridical person or entity.
The aggregate of the interests or total share of each co-owner over
several joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities, shall likewise be
subject to the maximum insured deposit of P500,000.00.
The amount of insurance due to any depositor for deposits in an
insured bank shall be net of any matured or unmatured obligation of the
depositor to the insured bank as of date of closure. In case of joint deposit
accounts where only one of the co-depositors has an obligation to the closed
bank, the following shall apply:
Where the deposit is a joint and/or or or account which is
covered by a hold-out agreement, the obligation secured by the
hold-out agreement shall be deducted from the balance of the
joint account, regardless of the fact that only one of the codepositors in the joint account is indebted to the closed bank.
b) When the deposit is a joint and account which is covered by a
hold-out agreement, the obligation secured by the hold-out
agreement shall be deducted only from the share in the joint
account of the depositor who is indebted to the closed bank,
unless his co-depositor is himself a co-signatory to the hold-out
agreement.
c) Where the deposit is either a joint and, or or and/or
account which is not covered by a hold-out agreement, the
obligation of the depositor who is indebted to the closed bank shall
be deducted only from his share in the balance of the joint deposit
account
a)

(c) Mode of payment

a. Cash
b. Transferred deposit A deposit in an insured bank made available to a
depositor by the PDIC as payment of the insured deposit of such
depositor in a closed bank and assumed by another insured bank.
(d) Effect of payment of insured deposit
1. PDIC is discharged from obligations
Payment of an insured deposit to any person by the Corporation shall
discharge the Corporation
144

Payment of a transferred deposit by the new bank or by an

insuredbank in which a transferred deposit has been made available
shalldischarge the Corporation and such new bank or other insured bank
2. PDIC is subrogated to depositors rights
The Corporation, upon payment of any depositor shall be subrogated
to all rights of the depositor against the closed bank. But the depositor shall
retain his claim for any uninsured portion of his deposit.
All payments by the Corporation of insured deposits in closed banks
partake of the nature of public funds, and must be considered a preferred
credit similar to taxes due to the National Government.
(e) Payments of insured deposits as preferred
credit under Art. 2244, Civil Code
All payments by the Corporation of insured deposits in closed banks
partake of the nature of public funds, and as such, must be considered a
preferred credit similar to taxes due to the National Government in the
order of preference under Article 2244 of the New Civil Code. This
preference shall be effective upon liquidation proceedings where no
distribution of assets have been made.445
(f) Failure to settle claim of insured depositor
Failure to settle the claim, within 6 months from the date of filing of
claim for insured deposit, where such failure was due to grave abuse of
discretion, gross negligence, bad faith, or malice, shall subject the
directors, officers or employees responsible to imprisonment from 6 months
to 1 year.
The period shall notapply if the validity of the claim requires the
resolution of issues offacts and or law by another office, body or agency.
(g) Failure of depositor to claim insured
deposits
Unless otherwise waived by the Corporation, if the depositor in the
closed bank shall fail to claim his insured deposits with the Corporation
i. within 2 years from actual takeover of the closed bank by the
receiver, or
ii. within 2 years after the two-year period to file a claim, all rights of
the depositor against the Corporation shall be barred.
445

Sec. 15, 3rd par.

145

However, all rights of the depositor against the closed bank and its
shareholders or the receivership estate to which the Corporation may have
become subrogated, shall revert to the depositor. 446
i. Examination of banks and deposit
accounts
The Corporation shall have the power:
xxx
To conduct examination of banks with prior approval of the Monetary
Board: Provided, That no examination can be conducted within twelve
(12) months from the last examination date: Provided, however, That the
Corporation may, in coordination with the BangkoSentral, conduct a special
examination as the Board of Directors, by an affirmative vote of a majority
of all of its members, if there is a threatened or impending closure of a
bank; Provided, further, That, notwithstanding the provisions of Republic
Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic
Act No. 8791, and other laws, the Corporation and/or the BangkoSentral,
may inquire into or examine deposit accounts and all information related
thereto in case there is a finding of unsafe or unsound banking practice;
Provided, finally, That to avoid overlapping of efforts, the examination shall
maximize the efficient use of the relevant reports, information, and
findings of the BangkoSentral, which it shall make available to the
Corporation.447
ii. Prohibition against splitting of
deposits448
The penalty of prision mayor or a fine of not less than P50,000 but not
more than P2,000,000 or both shall be imposed upon any director, officer,
employee or agent of a bank for :
xxx
5) splitting of deposits or creation of fictitious loans or deposit
accounts.
xxx
446

Sec. 16 (e)
Sec. 8, 8th par., as amended by R.A. 9302, 12 August 2004, R.A. 9576, April 29, 2009
448
Splitting of deposits occurs whenever a deposit account with an outstanding balance of
more than the statutory maximum amount of insured deposit maintained under the name
of natural or juridical persons is broken down and transferred into two (2) or more accounts
in the name/s of natural or juridical persons or entities who have no beneficial ownership on
transferred deposits in their names within one hundred twenty (120) days immediately
preceding or during a bank- declared bank holiday, or immediately preceding a closure order
issued by the Monetary Board of the BangkoSentralngPilipinas for the purpose of availing of
the maximum deposit insurance coverage; (As added by R.A. 9302, 12 August 2004; as
amended by R.A. 9576, June 1, 2009)
447

146

iii.Prohibition against issuances of TROs,

etc.
No court, except the Court of Appeals, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory
injunction against the Corporation for any action under this Act.
This prohibition shall apply in all cases, disputes or controversies
instituted by a private party, the insured bank, or any shareholder of the
insured bank.
The Supreme Court may issue a restraining order or injunction when
the matter is of extreme urgency involving a constitutional issue, such that
unless a temporary restraining order is issued, grave injustice and
irreparable injury will arise. The party applying for the issuance of a
restraining order or injunction shall file a bond in an amount to be fixed by
the Supreme Court, which bond shall accrue in favor of the Corporation if
the court should finally decide that the applicant was not entitled to the
relief sought.449
J. Intellectual Property Law
1. Intellectual Property Rights in general
a. Intellectual property rights
The term "intellectual property rights" consists of:
1.
2.
3.
4.
5.
6.
7.

Copyright and Related Rights;

Trademarks and Service Marks;
Geographic Indications;
Industrial Designs;
Patents;
Layout-Designs450 of Integrated Circuits; and
Protection of Undisclosed Information451
b. Differences between copyrights, trademarks and patent

Trademark, copyright and patents are different intellectual property

rights that cannot be interchanged with one another. A trademark is any

449

Sec. 22
Topographies
451
Sec. 4.1
450

147

visible sign capable of distinguishing the goods 452 or services453 of an

enterprise and shall include a stamped or marked container of goods.
In relation thereto, a trade name means the name or designation
identifying or distinguishing an enterprise. Meanwhile, the scope of a
copyright is confined to literary and artistic works which are original
intellectual creations in the literary and artistic domain protected from the
moment of their creation. Patentable inventions, on the other hand, refer to
any technical solution of a problem in any field of human activity which is
new, involves an inventive step and is industrially applicable.454
c. Technology transfer arrangements
Refers to contracts or agreements involving the transfer of systematic
knowledge for the manufacture of a product, the application of a process, or
rendering of a service including management contracts; and the transfer,
assignment or licensing of all forms of intellectual property rights, including
licensing of computer software except computer software developed for
mass market.
2. Patents
a. Patentable inventions
Any technical solution of a problem in any field of human activity
which is new, involves an inventive step and is industrially applicable shall
be patentable. It may be, or may relate to, a product, or process, or an
improvement of any of the foregoing.455
b. Non-patentable inventions
The following shall be excluded from patent protection:
1. Discoveries, scientific theories and mathematical methods;
2. Schemes, rules and methods of performing mental acts, playing
games or doing business, and programs for computers;
3. Methods for treatment of the human or animal body by surgery or
therapy and diagnostic methods practiced on the human or animal body.
This provision shall not apply to products and composition for use in any of
these methods;
452

trademark
service mark
454
Kho v. CA, et al., 379 SCRA 410 [2002]
455
Sec. 21
453

148

4. Plant varieties or animal breeds or essentially biological process for

the production of plants or animals. This provision shall not apply to microorganisms and non-biological and microbiological processes.
Provisions under this subsection shall not preclude Congress to
consider the enactment of a law providing sui generis protection of plant
varieties and animal breeds and a system of community intellectual rights
protection.
5. Aesthetic creations; and
6. Anything which is contrary to public order or morality.456
c. Ownership of a patent
(1) Right to a patent
The right to a patent belongs to the inventor, his heirs, or assigns.
When two (2) or more persons have jointly made an invention, the right to a
patent shall belong to them jointly.457
(2) First-to-file rule
If two (2) or more persons have made the invention separately and
independently of each other, the right to the patent shall belong to the
person who filed an application for such invention, or where two or more
applications are filed for the same invention, to the applicant who has the
earliest filing date or, the earliest priority date.458
(3) Inventions created pursuant to a Commission
The person who commissions the work shall own the patent, unless
otherwise provided in the contract.
In case the employee made the invention in the course of his
employment contract, the patent shall belong to:
(a) The employee, if the inventive activity is not a part of his regular
duties even if the employee uses the time, facilities and materials of the
employer.

456

Sec. 22
Sec. 28
458
Sec. 29
457

149

(b) The employer, if the invention is the result of the performance of

his regularly-assigned duties, unless there is an agreement, express or
implied, to the contrary.459
(4) Right of priority
An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty,
convention, or law affords similar privileges to Filipino citizens, shall be
considered as filed as of the date of filing the foreign application: Provided,
That: (a) the local application expressly claims priority; (b) it is filed within
twelve (12) months from the date the earliest foreign application was filed;
and (c) a certified copy of the foreign application together with an English
translation is filed within six (6) months from the date of filing in the
Philippines.460
d. Grounds for cancellation of a patent
Any interested person may, upon payment of the required fee, petition
to cancel the patent or any claim thereof, or parts of the claim, on any of the
following grounds:
(a) That what is claimed as the invention is not new or patentable;
(b)That the patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out by any
person skilled in the art; or
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or
parts of the claim, cancellation may be effected to such extent only.461
e. Remedy of the true and actual inventor
Such person may, within three (3) months after the decision has
become final:
(a) Prosecute the application as his own application in place of the
applicant;
(b) File a new patent application in respect of the same invention;
459

Sec. 30
Sec. 31
461
Sec. 61
460

150

(c) Request that the application be refused; or

(d) Seek cancellation of the patent, if one has already been issued.462
f. Rights conferred by a patent
A patent shall confer on its owner the following exclusive rights:
(a) Where the subject matter of a patent is a product, to restrain,
prohibit and prevent any unauthorized person or entity from making, using,
offering for sale, selling or importing that product;
(b) Where the subject matter of a patent is a process, to restrain,
prevent or prohibit any unauthorized person or entity from using the
process, and from manufacturing, dealing in, using, selling or offering for
sale, or importing any product obtained directly or indirectly from such
process.
Patent owners shall also have the right to assign, or transfer by
succession the patent, and to conclude licensing contracts for the same.463
g. Limitations of patent rights
The owner of a patent has no right to prevent third parties from
performing, without his authorization, the acts referred to in Section 71
hereof in the following circumstances:
Using a patented product which has been put on the market in the
Philippines by the owner of the product, or with his express consent, insofar
as such use is performed after that product has been so put on the said
market;
Where the act is done privately and on a non-commercial scale or for
a non-commercial purpose: Provided, That it does not significantly prejudice
the economic interests of the owner of the patent;
Where the act consists of making or using exclusively for the purpose
of experiments that relate to the subject matter of the patented invention;
Where the act consists of the preparation for individual cases, in a
pharmacy or by a medical professional, of a medicine in accordance with a
medical prescription or acts concerning the medicine so prepared;
462
463

Sec. 67
Sec. 71

151

Where the invention is used in any ship, vessel, aircraft, or land

vehicle of any other country entering the territory of the Philippines
temporarily or accidentally: Provided,That such invention is used
exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not
used for the manufacturing of anything to be sold within the Philippines.464
(1) Prior user
Notwithstanding Section 72 hereof, any prior user, who, in good faith
was using the invention or has undertaken serious preparations to use the
invention in his enterprise or business, before the filing date or priority date
of the application on which a patent is granted, shall have the right to
continue the use thereof as envisaged in such preparations within the
territory where the patent produces its effect.
The right of the prior user may only be transferred or assigned
together with his enterprise or business, or with that part of his enterprise
or business in which the use or preparations for use have been made.465
(2) Use by the government
A Government agency or third person authorized by the Government
may exploit the invention even without agreement of the patent owner
where:
(a) the public interest, in particular, national security, nutrition, health
or the development of other sectors, as determined by the
appropriate agency of the government, so requires; or
(b) A judicial or administrative body has determined that the manner
of exploitation, by the owner of the patent or his licensee, is anticompetitive.
The use by the Government, or third person authorized by the
Government shall be subject, mutatis mutandis, to the conditions set forth
in Sections 95 to 97 and 100 to 102.
h. Patent infringement466
464

Sec. 72
Sec. 73
466
Only the patentee or his successor-in-interest may file an action for infringement.
Moreover, there can be no infringement of a patent until a patent has been issued, since
whatever right one has to the invention covered by the patent arises alone from the grant of
patent. In short, a person or entity who has not been granted letter of patent over an
invention and has not acquired any rights or title thereto either as an assignee or a licensee,
has no cause of action for infringement because the right to maintain an infringement suit
465

152

1) Tests in patent infringement

(a) Literal infringement
In using literal infringement as a test, resort must be had in the first
instance to the words of the claim. To determine whether the particular
item falls within the literal meaning of the patent claims, the court must
juxtapose the claims of the patent and the accused product within the
overall context of the claims and specifications, to determine whether there
is exact identity of all material elements.467
(b) Doctrine of equivalents
Under this doctrine, an infringement also occurs when a device
appropriates a prior invention by incorporating its innovative concept and,
albeit with some modification and change, performs substantially the same
function in substantially the same way to achieve substantially the same
result.468
(2)Civil and criminal action
1. Civil Action
The making, using, offering for sale, selling, or importing a patented
product or a product obtained directly or indirectly from a patented
process, or the use of a patented process without the authorization of the
patentee constitutes patent infringement.
Any patentee, or anyone possessing any right, title or interest in and
to the patented invention, whose rights have been infringed, may bring a
civil action before a court of competent jurisdiction, to recover from the
infringer such damages sustained thereby, plus attorneys fees and other
expenses of litigation, and to secure an injunction for the protection of his
rights.
If the damages are inadequate or cannot be readily ascertained with
reasonable certainty, the court may award by way of damages a sum
equivalent to reasonable royalty.
The court may, according to the circumstances of the case, award
damages in a sum above the amount found as actual damages sustained:
depends upon the existence of a patent. (Creser Precision Systems, Inc. v. CA, et al., 286
SCRA 13 [1998])
467
Godines v. CA, 226 SCRA 576 [1993]
468
Ibid.

153

Provided,That the award does not exceed three (3) times the amount of such
actual damages.
The court may, in its discretion, order that the infringing goods,
materials and implements predominantly used in the infringement be
disposed of outside the channels of commerce or destroyed, without
compensation.
Anyone who actively induces the infringement of a patent or provides
the infringer with a component of a patented product or of a product
produced because of a patented process knowing it to be especially adopted
for infringing the patented invention and not suitable for substantial noninfringing use shall be liable as a contributory infringer and shall be jointly
and severally liable with the infringer.469
2. Criminal Action
If infringement is repeated by the infringer or by anyone in
connivance with him after finality of the judgment of the court against the
infringer, the offenders shall, without prejudice to the institution of a civil
action for damages, be criminally liable therefor and, upon conviction, shall
suffer imprisonment for the period of not less than six (6) months but not
more than three (3) years and/or a fine of not less than One hundred
thousand pesos (P100,000) but not more than Three hundred thousand
pesos (P300,000), at the discretion of the court. The criminal action herein
provided shall prescribe in three (3) years from date of the commission of
the crime.470
(3) Prescriptive period
No damages can be recovered for acts of infringement committed
more than four (4) years before the institution of the action for
infringement.471
(4) Defenses in action for infringement
In an action for infringement, the defendant, in addition to other
defenses available to him, may show the invalidity of the patent, or any

469
470
471

Sec. 76
Sec. 84
Sec. 79

154

claim thereof, on any of the grounds on which a petition of cancellation can

be brought under Section 61472 hereof.473
i. Licensing
(1) Voluntary
To encourage the transfer and dissemination of technology, prevent or
control practices and conditions that may in particular cases constitute an
abuse of intellectual property rights having an adverse effect on
competition and trade, all technology transfer arrangements shall comply
with the provisions of this Chapter.474
The following provisions shall be included in voluntary license
contracts:
That the laws of the Philippines shall govern the interpretation of the
same and in the event of litigation, the venue shall be the proper court in
the place where the licensee has its principal office;
Continued access to improvements in techniques and processes
related to the technology shall be made available during the period of the
technology transfer arrangement;
In the event the technology transfer arrangement shall provide for
arbitration, the Procedure of Arbitration of the Arbitration Law of the
Philippines or the Arbitration Rules of the United Nations Commission on
International Trade Law (UNCITRAL) or the Rules of Conciliation and
Arbitration of the International Chamber of Commerce (ICC) shall apply and
the venue of arbitration shall be the Philippines or any neutral country; and
The Philippine taxes on all payments relating to the technology
transfer arrangement shall be borne by the licensor. 475
(2) Compulsory
472

Any interested person may, upon payment of the required fee, petition to cancel the
patent or any claim thereof, or parts of the claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or Patentable;
(b) That the patent does not disclose the invention in a manner sufficiently clear and
complete for it to be carried out by any person skilled in the art; or
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or parts of the claim,
cancellation may be effected to such extent only.
473
Sec. 81
474
Sec. 85.
475
Sec. 88

155

If the invention protected by a patent, hereafter referred to as the

"second patent," within the country cannot be worked without infringing
another patent, hereafter referred to as the "first patent," granted on a
prior application or benefiting from an earlier priority, a compulsory license
may be granted to the owner of the second patent to the extent necessary
for the working of his invention, subject to the following conditions:
1. The invention claimed in the second patent involves an important
technical advance of considerable economic significance in relation to the
first patent;
2. The owner of the first patent shall be entitled to a cross-license on
reasonable terms to use the invention claimed in the second patent;
3. The use authorized in respect of the first patent shall be nonassignable except with the assignment of the second patent; and
4. The terms and conditions of Sections 95, 96 and 98 to 100 of this
Act.476
j. Assignment and transmission of rights
An assignment may be of the entire right, title or interest in and to the
patent and the invention covered thereby, or of an undivided share of the
entire patent and invention, in which event the parties become joint owners
thereof. An assignment may be limited to a specified territory. 477
The assignment must be in writing, acknowledged before a notary
public or other officer authorized to administer oath or perform notarial
acts, and certified under the hand and official seal of the notary or such
other officer.478

3. Trademarks
a. Definitions of marks, collective marks, trade names
"Mark" means any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall include a
stamped or marked container of goods;

476

Sec. 97
Sec. 104
478
Sec. 105; Sec. 52, id.
477

156

"Collective mark" means any visible sign designated as such in the

application for registration and capable of distinguishing the origin or any
other common characteristic, including the quality of goods or services of
different enterprises which use the sign under the control of the registered
owner of the collective mark;479
"Trade name" means the
distinguishing an enterprise.480

name

or

designation

identifying

or

b. Acquisition of ownership of mark

The rights in a mark shall be acquired through registration made
validly in accordance with the provisions of this law.481
c. Acquisition of ownership of trade name
Prior use is the basis for ownership of trade names.
d. Non-registrable marks
A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous matter, or matter
which may disparage or falsely suggest a connection with persons,
living or dead, institutions, beliefs, or national symbols, or bring
them into contempt or disrepute;
(b) Consists of the flag or coat of arms or other insignia of the
Philippines or any of its political subdivisions, or of any foreign
nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular
living individual except by his written consent, or the name,
signature, or portrait of a deceased President of the Philippines,
during the life of his widow, if any, except by written consent of
the widow;
(d) Is identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date, in
respect of:
1) The same goods or services, or
2) Closely related goods or services, or
479

Sec. 40
Sec. 121
481
Sec. 122
480

157

3) If it nearly resembles such a mark as to be likely to deceive

or cause confusion;
(e) Is identical with, or confusingly similar to, or constitutes a
translation of a mark which is considered by the competent
authority of the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services:
Provided, That in determining whether a mark is well-known,
account shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including knowledge
in the Philippines which has been obtained as a result of the
promotion of the mark;
(f) Is identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance with
the preceding paragraph, which is registered in the Philippines
with respect to goods or services which are not similar to those
with respect to which registration is applied for: Provided, That
use of the mark in relation to those goods or services would
indicate a connection between those goods or services, and the
owner of the registered mark: Provided further, That the interests
of the owner of the registered mark are likely to be damaged by
such use;
(g) Is likely to mislead the public, particularly as to the nature,
quality, characteristics or geographical origin of the goods or
services;
(h) Consists exclusively of signs that are generic for the goods or
services that they seek to identify;
(i) Consists exclusively of signs or of indications that have become
customary or usual to designate the goods or services in everyday
language or in bona fide and established trade practice;
(j) Consists exclusively of signs or of indications that may serve in
trade to designate the kind, quality, quantity, intended purpose,
value, geographical origin, time or production of the goods or
rendering of the services, or other characteristics of the goods or
services;
(k) Consists of shapes that may be necessitated by technical factors
or by the nature of the goods themselves or factors that affect
their intrinsic value;
(l) Consists of color alone, unless defined by a given form; or
158

(m) Is contrary to public order or morality.482

e. Prior use of mark as a requirement
The applicant or the registrant shall file a declaration of actual use of
the mark with evidence to that effect, as prescribed by the Regulations
within three (3) years from the filing date of the application. Otherwise, the
application shall be refused or the mark shall be removed from the Register
by the Director.483
f. Tests to determine confusing similarity between marks
(1) Dominancy test
Infringement is determined by the test of dominancy rather than by
differences or variations in the details of one trademark and of another.
Similarity in size, form and color, while relevant, is not conclusive. If the
competing trademark contains the main or essential or dominant features of
another, and confusion is likely to result, infringement takes place.484
(2) Holistic test
To determine whether a trademark has been infringed, we must
consider the mark as a whole and not as dissected. If the buyer is deceived,
it is attributable to the marks as a totality, not usually to any part of it. The
court therefore should be guided by its first impression, for the buyer acts
quickly and is governed by a casual glance, the value of which may be
dissipated as soon as the court assumed to analyze carefully the respective
features of the mark.485
g. Well-known marks
Identical with, or confusingly similar to, or constitutes a translation of
a mark which is considered by the competent authority of the Philippines to
be well-known internationally and in the Philippines, whether or not it is
registered here, as being already the mark of a person other than the
applicant for registration, and used for identical or similar goods or
services: Provided, That in determining whether a mark is well-known,
account shall be taken of the knowledge of the relevant sector of the public,

482

Sec. 123.1
Sec. 124.2
484
Asia Brewery v. CA and San Miguel, 224 SCRA 437 [1993]
485
Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990]
483

159

rather than of the public at large, including knowledge in the Philippines

which has been obtained as a result of the promotion of the mark.486
Identical with, or confusingly similar to, or constitutes a translation of
a mark considered well-known in accordance with the preceding paragraph,
which is registered in the Philippines with respect to goods or services
which are not similar to those with respect to which registration is applied
for: Provided, That use of the mark in relation to those goods or services
would indicate a connection between those goods or services, and the
owner of the registered mark: Provided further, That the interests of the
owner of the registered mark are likely to be damaged by such use.487
The exclusive right of the owner of a well-known mark defined in
Subsection 123.1(e)488 which is registered in the Philippines, shall extend to
goods and services which are not similar to those in respect of which the
mark is registered: Provided, That use of that mark in relation to those
goods or services would indicate a connection between those goods or
services and the owner of the registered mark: Provided, further, That the
interests of the owner of the registered mark are likely to be damaged by
such use.489
h. Rights conferred by registration
The owner of a registered mark shall have the exclusive right to
prevent all third parties not having the owners consent from using in the
course of trade identical or similar signs or containers for goods or services
which are identical or similar to those in respect of which the trademark is
registered where such use would result in a likelihood of confusion shall be
presumed.
The exclusive right of the owner of a well-known mark which is
registered in the Philippines shall extend to goods and services which are
similar to those in respect of which the mark is registered; provided that
use of the mark in relation to those goods or services would indicate a
connection between those goods and services and the owner of the
registered mark; provided further that the interest of the owner of the
registered mark are likely to be damaged by such use.490
i. Use by third parties of names, etc. similar to registered
mark
486
487
488
489
490

Sec. 123.1(e)
Id.,(f)
supra
Sec. 147.2
Sec. 147

160

Any subsequent use of the trade name by a third party, whether as a

trade name or a mark or collective mark, or any such use of a similar trade
name or mark, likely to mislead the public, shall be deemed unlawful.491
j. Infringement and remedies
Any person who shall, without the consent of the owner of the
registered mark:
1. Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant feature
thereof in connection with the sale, offering for sale, distribution,
advertising of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services on or in connection
with which such use is likely to cause confusion, or to cause mistake, or to
deceive;492 or
2. Reproduce, counterfeit, copy or colorably imitate a registered mark
or a dominant feature thereof and apply such reproduction, counterfeit,
copy or colorable imitation to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used in commerce upon or in
connection with the sale, offering for sale, distribution, or advertising of
goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive, shall be liable in a civil action
for infringement by the registrant for the remedies hereinafter set forth:
Provided, That the infringement takes place at the moment any of the acts
stated in Subsection 155.1.493or this subsection are committed regardless of
whether there is actual sale of goods or services using the infringing
material.494
(1) Trademark infringement
To establish trademark infringement, the following elements must be
shown: [1] the validity of the mark; [2] the plaintiffs ownership of the mark;
and [3] the use of the mark or its colorable imitation by the alleged infringer
results in likelihood of confusion. Of these, it is the element of likelihood
of confusion that is the gravamen of trademark infringement. Two types of
confusion arise from the use of similar or colorable imitation marks, namely,
confusion of goods495and confusion of business.496 While there is confusion
of goods when the products are competing, confusion of business exists
491

Sec. 165 (b)

Sec. 155.1
493
supra
494
Id., (2)
495
product confusion
496
source or origin confusion
492

161

when the products are non-competing but related enough to produce

confusion of affiliation.497
A crucial issue in any trademark infringement case is the likelihood of
confusion, mistake or deceit as to the identity, source or origin of the goods
or identity of the business as a consequence of using a certain mark.
Likelihood of confusion is admittedly a relative term, to be determined
rigidly according to the particular (and sometimes peculiar) circumstances
of each case. In determining likelihood of confusion, the court must
consider: [a] the resemblance between the trademarks; [b] the similarity of
the goods to which the trademarks are attached; [c] the likely effect on the
purchaser; and [d] the registrants express or implied consent and other fair
and equitable considerations.498
(2) Damages
The owner of a registered mark may recover damages from any
person who infringes his rights, and the measure of the damages suffered
shall be either the reasonable profit which the complaining party would
have made, had the defendant not infringed his rights, or the profit which
the defendant actually made out of the infringement, or in the event such
measure of damages cannot be readily ascertained with reasonable
certainty, then the court may award as damages a reasonable percentage
based upon the amount of gross sales of the defendant or the value of the
services in connection with which the mark or trade name was used in the
infringement of the rights of the complaining party.499
(3) Requirement of Notice
In any suit for infringement, the owner of the registered mark shall
not be entitled to recover profits or damages unless the acts have been
committed with knowledge that such imitation is likely to cause confusion,
or to cause mistake, or to deceive. Such knowledge is presumed if the
registrant gives notice that his mark is registered by displaying with the
mark the words "Registered Mark" or the letter R within a circle or if the
defendant had otherwise actual notice of the registration.500

497

McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., 437 SCRA 10 [2004]
Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473 [2004]
499
Sec. 156.1.
500
Sec. 158
498

162

k. Unfair competition501
A person who has identified in the mind of the public the goods he
manufactures or deals in, his business or services from those of others,
whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will be
protected in the same manner as other property rights.502
Any person who shall employ deception or any other means contrary
to good faith by which he shall pass off the goods manufactured by him or in
which he deals, or his business, or services for those of the one having
established such goodwill, or who shall commit any acts calculated to
produce said result, shall be guilty of unfair competition, and shall be
subject to an action therefor.503
In particular, and without in any way limiting the scope of protection
against unfair competition, the following shall be deemed guilty of unfair
competition:
(a) Any person, who is selling his goods and gives them the general
appearance of goods of another manufacturer or dealer, either as
to the goods themselves or in the wrapping of the packages in
which they are contained, or the devices or words thereon, or in
any other feature of their appearance, which would be likely to
501

Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990]

The following are the distinctions between infringement of trademark and unfair
competition:
1. Infringement of trademark is the unauthorized use of a trademark, whereas unfair
competition is the passing off of ones goods as those of another.
2. In infringement of trademark, fraudulent intent is unnecessary, whereas in unfair
competition fraudulent intent is essential.
3. In infringement of trademark the prior registration of the trademark is a prerequisite to
the action, whereas in unfair competition registration is not necessary.
The law on unfair competition is broader and more inclusive than the law on trademark
infringement. The latter is more limited but it recognizes a more exclusive right derived
from the trademark adoption and registration by the person whose goods or business is first
associated with it. Hence, even if one fails to establish his exclusive property right to a
trademark, he may still obtain relief on the ground of his competitors unfairness or fraud.
Conduct constitutes unfair competition if the effect is to pass off on the public the goods of
one man as the goods of another (Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473
[2004])
The elements of an action for unfair competition are: [1] confusing similarity in the
general appearance of the goods, and [2] intent to deceive the public and defraud a
competitor. The confusing similarity may or may not result from similarity in the marks, but
may result from other external factors in the packaging or presentation of the goods. The
intent to deceive and defraud may be inferred from the similarity in appearance of the goods
as offered for sale to the public. Actual fraudulent intent need not be shown. (McDonalds
Corporation v. L.C. Big Mak Burger, Inc., et al., 437 SCRA 10 [2004])
502
Sec. 168.1
503
Id., 2

163

influence purchasers to believe that the goods offered are those of

a manufacturer or dealer, other than the actual manufacturer or
dealer, or who otherwise clothes the goods with such appearance
as shall deceive the public and defraud another of his legitimate
trade, or any subsequent vendor of such goods or any agent of any
vendor engaged in selling such goods with a like purpose;
(b) Any person who by any artifice, or device, or who employs any
other means calculated to induce the false belief that such person
is offering the services of another who has identified such services
in the mind of the public; or
(c) Any person who shall make any false statement in the course of
trade or who shall commit any other act contrary to good faith of a
nature calculated to discredit the goods, business or services of
another.504
l. Trade names or business names
A name or designation may not be used as a trade name if by its
nature or the use to which such name or designation may be put, it is
contrary to public order or morals and if, in particular, it is liable to deceive
trade circles or the public as to the nature of the enterprise identified by
that name.505
Notwithstanding any laws or regulations providing for any obligation
to register trade names, such names shall be protected, even prior to or
without registration, against any unlawful act committed by third parties.506
m. Collective marks
(a) An application for registration of a collective mark shall designate
the mark as a collective mark and shall be accompanied by a copy of the
agreement, if any, governing the use of the collective mark.
(b) The registered owner of a collective mark shall notify the Director
of any changes made in respect of the agreement referred to in paragraph
(a).

504
505
506

Id., 3
Sec. 165.1
Id., 2 (a)

164

In addition to the grounds provided in Section 149, 507 the Court shall
cancel the registration of a collective mark if the person requesting the
cancellation proves that only the registered owner uses the mark, or that he
uses or permits its use in contravention of the agreements referred to in
Subsection 166.2 or that he uses or permits its use in a manner liable to
deceive trade circles or the public as to the origin or any other common
characteristics of the goods or services concerned.
The registration of a collective mark, or an application therefor shall
not be the subject of a license contract.508
n. Criminal penalties for infringement, unfair competition,
false designation of origin, and false description or
misrepresentation
A criminal penalty of imprisonment from two (2) years to five (5) years
and a fine ranging from Fifty thousand pesos (P50,000) to Two hundred
thousand pesos(P200,000), shall be imposed on any person who is found
guilty of committing any of the acts mentioned.509
4. Copyrights
a. Basic principles
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.510

507

Assignment and Transfer of Application and Registration. An application for registration of a mark, or its registration, may be assigned or
transferred with or without the transfer of the business using the mark. (n)
Such assignment or transfer shall, however, be null and void if it is liable to mislead the
public, particularly as regards the nature, source, manufacturing process, characteristics, or
suitability for their purpose, of the goods or services to which the mark is applied.
The assignment of the application for registration of a mark, or of its registration, shall be
in writing and require the signatures of the contracting parties. Transfers by mergers or
other forms of succession may be made by any document supporting such transfer.
Assignments and transfers of registration of marks shall be recorded at the Office on
payment of the prescribed fee; assignment and transfers of applications for registration
shall, on payment of the same fee, be provisionally recorded, and the mark, when
registered, shall be in the name of the assignee or transferee.
Assignments and transfers shall have no effect against third parties until they are
recorded at the Office.
508
Sec. 167
509
Sec. 170
510
Sec. 172.2
Protection extends only to the expression of an idea, not the idea itself.

165

Notwithstanding the provisions of Sections 172 and 173, 511 no

protection shall extend, under this law, to any idea, procedure, system
method or operation, concept, principle, discovery or mere data as such,
even if they are expressed, explained, illustrated or embodied in a work.512
The copyright is distinct from the property in the material object
subject to it. Consequently, the transfer or assignment of the copyright shall
not itself constitute a transfer of the material object. Nor shall a transfer or
assignment of the sole copy or of one or several copies of the work imply
transfer or assignment of the copyright.513
b. Copyrightable works
(1) Original works
Literary and artistic works, hereinafter referred to as "works", are
original intellectual creations in the literary and artistic domain protected
from the moment of their creation and shall include in particular:

511
512
513

(a)

Books, pamphlets, articles and other writings;

(b)
(c)

Periodicals and newspapers;

Lectures, sermons, addresses, dissertations prepared for oral
delivery, whether or not reduced in writing or other material
form;

(d)

Letters;

(e)

Dramatic or dramatico-musical compositions;

works or entertainment in dumb shows;

(f)

Musical compositions, with or without words;

(g)

Works of drawing, painting, architecture, sculpture, engraving,

lithography or other works of art; models or designs for works of
art;

(h)

Original ornamental designs or models for articles of

manufacture, whether or not registrable as an industrial design,
and other works of applied art;

(i)

Illustrations, maps, plans, sketches, charts and three-dimensional

works relative to geography, topography, architecture or science;

infra
Sec. 175
Sec. 181

166

choreographic

(j)

Drawings or plastic works of a scientific or technical character;

(k)

Photographic works including works produced by a process

analogous to photography; lantern slides;

(l)

Audiovisual works and cinematographic works and works

produced by a process analogous to cinematography or any
process for making audio-visual recordings;

(m) Pictorial illustrations and advertisements;

(n)

Computer programs; and

(o)

Other literary, scholarly, scientific and artistic works.514

(2) Derivative works

The following derivative works shall also be protected by copyright:

(a) Dramatizations,
translations,
adaptations,
abridgments,
arrangements, and other alterations of literary or artistic works;
and
(b) Collections of literary, scholarly or artistic works, and
compilations of data and other materials which are original by
reason of the selection or coordination or arrangement of their
contents.515
The works referred to in paragraphs (a) and (b) of Subsection 173.1 516
shall be protected as a new works: Provided however, That such new work
shall not affect the force of any subsisting copyright upon the original works
employed or any part thereof, or be construed to imply any right to such use
of the original works, or to secure or extend copyright in such original
works.517
c. Non-copyrightable works
No copyright shall subsist in any work of the Government of the
Philippines. However, prior approval of the government agency or office
wherein the work is created shall be necessary for exploitation of such work
for profit. Such agency or office may, among other things, impose as a
514

Sec. 172.1.
Sec. 173.1.
516
supra
517
Sec. 173.2.
515

167

condition the payment of royalties. No prior approval or conditions shall be

required for the use of any purpose of statutes, rules and regulations, and
speeches, lectures, sermons, addresses, and dissertations, pronounced,
read or rendered in courts of justice, before administrative agencies, in
deliberative assemblies and in meetings of public character. 518
The Author of speeches, lectures, sermons, addresses, and
dissertations mentioned in the preceding paragraphs shall have the
exclusive right of making a collection of his works.519
Notwithstanding the foregoing provisions, the Government is not
precluded from receiving and holding copyrights transferred to it by
assignment, bequest or otherwise; nor shall publication or republication by
the government in a public document of any work in which copy right is
subsisting be taken to cause any abridgment or annulment of the copyright
or to authorize any use or appropriation of such work without the consent of
the copyright owners.520
d. Rights of copyright owner
Subject to the provisions of Chapter VIII,521 copyright or economic
rights shall consist of the exclusive right to carry out, authorize or prevent
the following acts:
1. Reproduction of the work or substantial portion of the work;
2. Dramatization, translation, adaptation, abridgment, arrangement or
other transformation of the work;
3. The first public distribution of the original and each copy of the
work by sale or other forms of transfer of ownership;
4. Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound recording, a computer
program, a compilation of data and other materials or a musical work in
graphic form, irrespective of the ownership of the original or the copy which
is the subject of the rental; (n)
5. Public display of the original or a copy of the work;
6. Public performance of the work; and
7. Other communication to the public of the work522
518
519
520
521
522

Sec. 176.1
id., 2
Id., 3
Limitations on Copyright
Sec. 177

168

e. Rules on ownership of copyright

1. In the case of original literary and artistic works, copyright shall
belong to the author of the work;
2. In the case of works of joint authorship, the co-authors shall be the
original owners of the copyright and in the absence of agreement, their
rights shall be governed by the rules on co-ownership. If, however, a
work of joint authorship consists of parts that can be used separately and
the author of each part can be identified, the author of each part shall be
the original owner of the copyright in the part that he has created;
3. In the case of work created by an author during and in the course
of his employment, the copyright shall belong to:
(a) The employee, if the creation of the object of copyright is not a
part of his regular duties even if the employee uses the time,
facilities and materials of the employer.
(b) The employer, if the work is the result of the performance of his
regularly-assigned duties, unless there is an agreement,
express or implied, to the contrary.
4. In the case of a work-commissioned by a person other than an
employer of the author and who pays for it and the work is made in
pursuance of the commission, the person who so commissioned the work
shall have ownership of work, but the copyright thereto shall remain with
the creator, unless there is a written stipulation to the contrary;
5. In the case of audiovisual work, the copyright shall belong to the
producer, the author of the scenario, the composer of the music, the film
director, and the author of the work so adapted. However, subject to
contrary or other stipulations among the creators, the producers shall
exercise the copyright to an extent required for the exhibition of the
work in any manner, except for the right to collect performing license
fees for the performance of musical compositions, with or without words,
which are incorporated into the work; and
6. In respect of letters, the copyright shall belong to the writer subject
to the provisions of Article 723523 of the Civil Code.524
f. Limitations on copyright
523

Letters and other private communications in writing are owned by the person to whom
they are addressed and delivered, but they cannot be published or disseminated without the
consent of the writer or his heirs. However, the court may authorize their publication or
dissemination if the public good or the interest of justice so requires.
524
Sec. 178

169

Notwithstanding the provisions of Chapter V,525 the following acts

shall not constitute infringement of copyright:
(a) the recitation or performance of a work, once it has been lawfully
made accessible to the public, if done privately and free of charge
or if made strictly for a charitable or religious institution or
society;
(b) The making of quotations from a published work if they are
compatible with fair use and only to the extent justified for the
purpose, including quotations from newspaper articles and
periodicals in the form of press summaries: Provided, That the
source and the name of the author, if appearing on the work, are
mentioned;
(c)

The reproduction or communication to the public by mass media

of articles on current political, social, economic, scientific or
religious topic, lectures, addresses and other works of the same
nature, which are delivered in public if such use is for
information purposes and has not been expressly reserved:
Provided, That the source is clearly indicated;

(d) The reproduction and communication to the public of literary,

scientific or artistic works as part of reports of current events by
means of photography, cinematography or broadcasting to the
extent necessary for the purpose;

525

(e)

The inclusion of a work in a publication, broadcast, or other

communication to the public, sound recording or film, if such
inclusion is made by way of illustration for teaching purposes and
is compatible with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are mentioned;

(f)

The recording made in schools, universities, or educational

institutions of a work included in a broadcast for the use of such
schools, universities or educational institutions: Provided, That
such recording must be deleted within a reasonable period after
they were first broadcast: Provided, further, That such recording
may not be made from audiovisual works which are part of the
general cinema repertoire of feature films except for brief
excerpts of the work;

Copyright or Economic Rights

170

(g) The making of ephemeral recordings by a broadcasting

organization by means of its own facilities and for use in its own
broadcast;
(h) The use made of a work by or under the direction or control of
the Government, by the National Library or by educational,
scientific or professional institutions where such use is in the
public interest and is compatible with fair use;
(i) The public performance or the communication to the public of a
work, in a place where no admission fee is charged in respect of
such public performance or communication, by a club or
institution for charitable or educational purpose only, whose aim
is not profit making, subject to such other limitations as may be
provided in the Regulations;
(j)

Public display of the original or a copy of the work not made by

means of a film, slide, television image or otherwise on screen or
by means of any other device or process: Provided, That either
the work has been published, or, that original or the copy
displayed has been sold, given away or otherwise transferred to
another person by the author or his successor in title; and

(k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a legal
practitioner.
The provisions of this section shall be interpreted in such a way as to
allow the work to be used in a manner which does not conflict with the
normal exploitation of the work and does not unreasonably prejudice the
right holder's legitimate interest.526
(1) Doctrine of fair use
The fair use of a copyrighted work for criticism, comment, news
reporting, teaching including multiple copies for classroom use, scholarship,
research, and similar purposes is not an infringement of copyright.
Decompilation, which is understood here to be the reproduction of the code
and translation of the forms of the computer program to achieve the interoperability of an independently created computer program with other
programs may also constitute fair use. In determining whether the use
made of a work in any particular case is fair use, the factors to be
considered shall include:

526

Sec. 184

171

(a) The purpose and character of the use, including whether such
use is of a commercial nature or is for non-profit education
purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in relation to
the copyrighted work as a whole; and
(d) The effect of the use upon the potential market for or value of the
copyrighted work.
The fact that a work is unpublished shall not by itself bar a finding of
fair use if such finding is made upon consideration of all the above
factors.527
(2) Copyright infringement
Infringement consists in the doing by any person, without the consent
of the owner of the copyright, of anything the sole right to do which is
conferred by statute on the owner of the copyright. The act of lifting from
anothers book substantial portions of discussions and examples and the
failure to acknowledge the same is an infringement of copyright. For there
to be substantial reproduction of a book it does not necessarily require that
the entire copyrighted work, or even a large portion of it, be copied. If so
much is taken that the value of the original work is substantially diminished,
there is an infringement of copyright and to an injurious extent, the work is
appropriated. It is no defense that the pirate did not know whether or not
he was infringing any copyright; he at least knew that what he was copying
was not his, and he copied at his peril. In cases of infringement, copying
alone is not what is prohibited. The copying must produce an injurious
effect.528

(a) Remedies
1. Civil Action
Any person infringing a right protected under this law shall be liable:
(a) To an injunction restraining such infringement. The court may
also order the defendant to desist from an infringement,
527
528

Sec. 185
Habana, et al., v. Robles, et al., 310 SCRA 511 [1999]

172

among others, to prevent the entry into the channels of

commerce of imported goods that involve an infringement,
immediately after customs clearance of such goods.
(b) Pay to the copyright proprietor or his assigns or heirs such
actual damages, including legal costs and other expenses, as
he may have incurred due to the infringement as well as the
profits the infringer may have made due to such infringement,
and in proving profits the plaintiff shall be required to prove
sales only and the defendant shall be required to prove every
element of cost which he claims, or, in lieu of actual damages
and profits, such damages which to the court shall appear to
be just and shall not be regarded as penalty.
(c) Deliver under oath, for impounding during the pendency of the
action, upon such terms and conditions as the court may
prescribe, sales invoices and other documents evidencing
sales, all articles and their packaging alleged to infringe a
copyright and implements for making them.
(d) Deliver under oath for destruction without any compensation
all infringing copies or devices, as well as all plates, molds, or
other means for making such infringing copies as the court
may order.
(e) Such other terms and conditions, including the payment of
moral and exemplary damages, which the court may deem
proper, wise and equitable and the destruction of infringing
copies of the work even in the event of acquittal in a criminal
case.
In an infringement action, the court shall also have the power to order
the seizure and impounding of any article which may serve as evidence in
the court proceedings.529
2. Criminal Action
Any person infringing any right secured by provisions of Part IV530 of
this Act or aiding or abetting such infringement shall be guilty of a crime
punishable by:
(a) Imprisonment of one (1) year to three (3) years plus a fine
ranging from Fifty thousand pesos (P50,000) to One hundred
fifty thousand pesos (P150,000) for the first offense.
(b)Imprisonment of three (3) years and one (1) day to six (6) years
plus a fine ranging from One hundred fifty thousand pesos
529
530

Sec. 216
Works Not Protected

173

(P150,000) to Five hundred thousand pesos (P500,000) for the

second offense.
(c) Imprisonment of six (6) years and one (1) day to nine (9) years
plus a fine ranging from Five hundred thousand pesos
(P500,000) to One million five hundred thousand pesos
(P1,500,000) for the third and subsequent offenses.
(d)In all cases, subsidiary imprisonment in cases of insolvency.
In determining the number of years of imprisonment and the amount
of fine, the court shall consider the value of the infringing materials that the
defendant has produced or manufactured and the damage that the
copyright owner has suffered by reason of the infringement.
Any person who at the time when copyright subsists in a work has in
his possession an article which he knows, or ought to know, to be an
infringing copy of the work for the purpose of:
(a) Selling, letting for hire, or by way of trade offering or exposing
for sale, or hire, the article;
(b)Distributing the article for purpose of trade, or for any other
purpose to an extent that will prejudice the rights of the
copyright owner in the work; or
(c) Trade exhibit of the article in public, shall be guilty of an offense
and shall be liable on conviction to imprisonment and fine as
above mentioned.531
K. Special Laws
A. Anti-Money LaunderingLaw532
a. Policy of the law
1. To protect and preserve the integrity and confidentiality of bank
accounts, to ensure that the Philippines shall not be used as a site for
unlawful money laundering activities; and

531

Sec. 217
RA 9160, as amended by RA 9194
Anti-Money Laundering
- A crime whereby the proceeds of an unlawful activity are translated thereby
making them appear to have originated from legitimate sources.
532

174

2. To pursue States foreign policy to extend cooperation in

transnational investigations and prosecution on money laundering activities.
b. Covered institutions
a. Banks
b. Non-banks
c. Quasi-banks
d. Trust entities; and
e. All other institutions, their subsidiaries and affiliates supervised or
regulated by the BSP
c. Obligations of covered institutions
To report transactions being coursed through them that may have telltale signs of money laundering, which transactions are called "covered
transactions.533
d. Covered transactions
Transaction, in cash or other equivalent monetary instrument in
excess of P500,000, within one banking day
e. Suspicious transactions
Transactions with covered institutions regardless of the amounts
involved, where any of the following circumstances exists:
a. There is no underlying legal or trade obligation.
b. Client is not properly identified
c. Amount involved is not commensurate with the business or financial
capacity
d. Taking into account all known circumstances, it may be perceived
that the clients transaction is structured in order to avoid being the subject
of reporting requirements under the Act.
e. Any circumstances relating to the transaction which is observed to
deviate from the profile and/ or the clients past transactions with the
covered institution.
f. Transaction is in any way related to an unlawful activity or offense
under this Act that is about to be, is being or has been committed.
533

See Sec. 9

175

g. Analogous transactions to any of the foregoing.534

f. When is money laundering committed
Crime of money laundering:
1. Knowledge that any monetary instrument or property represents,
involved or relates the proceeds of any unlawful activity, transact or
attempts to transact said monetary instrument or property
2. Knowledge that any monetary instrument or property involves
proceeds of any unlawful activity, performs or fails to perform any act as a
result of which he facilitates the offense of money laundering
3. Knowledge that any monetary instrument or instrument is required
to be disclosed and filed with AMLC535 fails to do so.
g. Unlawful activities or predicate crimes
1. drug trafficking or violation of RA No. 9165536
2. kidnap for ransom
3. anti-graft and corrupt practices act
4. plunder
5. robbery and extortion
6. juetengandmasiao ( illegal gambling)
7. piracy on the high seas
8. qualified theft
9. swindling
10. smuggling537
11. violations of E-commerce Act of 2000
534

Sec. 2, R.A. 9194

infra
536
Comprehensive Dangerous Act of 2002
537
under RPC and R.A. Nos. 455 & 1937
535

176

12. hijacking
h. Anti-Money Laundering Council (AMLC)
Composition:
1. Governor of BangkoSentralngPilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security & Exchange Commissioner
AMLC is a collegial body where Chairman & members of AMLC are
entitled to one vote each.538
i. Functions
1. To require and receive covered or suspicious transaction reports
from covered institution
2. All covered transactions and suspicious transactions shall be
reported to AMLC within 5 working days from occurrence thereof, unless
the Supervising Authority prescribes a longer period not exceeding 10
working days.
3. To issue orders addressed to the appropriate supervising authority
or the covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction or
suspicious transaction report or request for assistance from a foreign state,
or believed by the council, on the basis of substantial evidence, to be in
whole or in part, wherever located representing, involving, or related to,
directly or indirectly, in any manner or by any means, the proceeds of an
unlawful activity.
4. To institute civil forfeiture proceedings and all other remedial
proceedings through the Office of the Solicitor General.
538

General Rule:
AMLC acts unanimously in discharge of functions.
Exception:
In case of incapacity, absence or disability, any member to discharge his functions, the
officer designated shall act in his stead.
General Rule:
Members of AMLC, Executive Director, all members of Secretariat, on detail, on secondment
shall not reveal in any manner any information by reason of their office
Exception:
Under any orders of the court, Congress, or any government offices authorized by law.

177

5. To cause the filing of complaints with the Department of Justice or

the Ombudsman for the prosecution of money laundering offenses.
6. To investigate suspicious transactions deemed suspicious after an
investigation by the AMLC, money laundering activities, and other violations
of this Act.
7. To apply before the Court of Appeals, ex parte, for the freezing of
any monetary instrument or property alleged to be the proceeds of any
unlawful activity.539
8. To implement such measures as may be necessary and justified
under the law to counteract money laundering.
9. To receive and take action in respect to any request from foreign
states for assistance in their own anti-money laundering operations.540
10. To develop educational programs on the pernicious effects of
money laundering, the methods and techniques used in money laundering,
the viable means of preventing money laundering and the effective ways of
prosecuting and punishing offender.541
11. To enlist the assistance of any branch, department, bureau, office,
agency or instrumentality of the government including government-owned
and controlled corporations in undertaking any and all anti-money
laundering operations, which may include the use of its personnel, facilities
and resources for the more resolute prevention, detection and investigation
of money laundering offense and prosecution of offenders
12. To impose administrative sanctions for the violation of laws, rules,
regulations and orders and resolutions.
539

effective immediately upon determination of probable cause

shall be for a period of 20 days unless extended by the court
540
through conventions, resolutions & other directives of any organizations of which
Philippines is a member. However, AMLC may refuse to comply with such request, when:
a. it contravenes provision of Constitution
b. it prejudices national interest of the Philippines
Requirements for requests for mutual assistance from foreign sates:
a. investigation/prosecution
b. grounds
c. identity of said person
d. covered institution believed to have been any information which may be of assistance
to the investigation
e. all particulars necessary for the issuance of the order/processes
f. other information
541
through nationwide information campaigns
to heighten awareness of the public of their civic duty

178

j. Freezing of monetary instrument or property542

k. Authority to inquire into bank deposits
Inquire into or examine any particular deposit or investment with any
banking institution or non-bank financial institution upon order of any
competent court in cases of violation of the law, when it has been
established that there is probable cause that the deposits or investments
are related to an unlawful activity or a money laundering offense except
that no court is needed for cases qualified by the law.
5. Foreign Investments Act543
a. Policy of the law
It is the policy of the State to attract, promote and welcome
productive investments from foreign individuals, partnerships, corporations,
and governments, including their political subdivisions, in activities which
significantly contribute to national industrialization and socioeconomic
development to the extent that foreign investment is allowed in such activity
by the Constitution and relevant laws. Foreign investments shall be
encouraged in enterprises that significantly expand livelihood and
employment opportunities for Filipinos; enhance economic value of farm
products; promote the welfare of Filipino consumers; expand the scope,
quality and volume of exports and their access to foreign markets; and/or
transfer relevant technologies in agriculture, industry and support services.
Foreign investments shall be welcome as a supplement to Filipino capital
and technology in those enterprises serving mainly the domestic market.
As a general rule, there are no restrictions on extent of foreign
ownership of export enterprises. In domestic market enterprises, foreigners
can invest as much as one hundred percent (100%) equity except in areas
included in the negative list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to undertake measures that will
gradually increase Filipino participation in their businesses by taking in
Filipino partners, electing Filipinos to the board of directors, implementing
transfer of technology to Filipinos, generating more employment for the
economy and enhancing skills of Filipino workers.544
b. Definition of terms
(1) Foreign investment
542
543
544

See i. Functions, No. 7, supra

R.A. No. 7042
Sec. 2

179

Equity investment made by a non-Philippine national in the form of

foreign exchange and/or other assets actually transferred to the Philippines
and duly registered with the Central Bank which shall assess and appraise
the value of such assets other than foreign exchange.545
(2) "Doing business" in the Philippines
Include soliciting orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in
the country for a period or periods totalling one hundred eighty (180) days
or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any
other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of
the business organization: Provided, however, That the phrase "doing
business: shall not be deemed to include mere investment as a shareholder
by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee director
or officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account.546
(3) Export enterprise
An enterprise which produces goods for sale, or renders services to
the domestic market entirely or if exporting a portion of its output fails to
consistently export at least sixty percent (60%) thereof. 547
(4) Domestic market enterprise
An enterprise which produces goods for sale, or renders service or
otherwise engages in any business in the Philippines.548
c. Registration of investments of non-Philippine nationals
Without need of prior approval, a non-Philippine national, as that term
is defined in Section 3 a), and not otherwise disqualified by law may upon
registration with the Securities and Exchange Commission (SEC), or with
the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the
545
546
547
548

Sec. 3
Ibid.
Ibid.
Sec. 1 (k), Implementing Rules & Regulations of the Foreign Investments Act of 1991

180

Department of Trade and Industry in the case of single proprietorships, do

business as defined in Section 3 (d) of this Act or invest in a domestic
enterprise up to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or
limited to a smaller percentage by existing law and/or limited to a smaller
percentage by existing law and/or under the provisions of this Act. The SEC
or BTRCP, as the case may be, shall not impose any limitations on the extent
of foreign ownership in an enterprise additional to those provided in this
Act: Provided, however, That any enterprise seeking to avail of incentives
under the Omnibus Investment Code of 1987 must apply for registration
with the Board of Investments (BOI), which shall process such application
for registration in accordance with the criteria for evaluation prescribed in
said Code: Provided, finally, That a non-Philippine national intending to
engage in the same line of business as an existing joint venture in his
application for registration with SEC. During the transitory period as
provided in Section 15 hereof, SEC shall disallow registration of the
applying non-Philippine national if the existing joint venture enterprise,
particularly the Filipino partners therein, can reasonably prove they are
capable to make the investment needed for they are competing applicant.
Upon effectivity of this Act, SEC shall effect registration of any enterprise
applying under this Act within fifteen (15) days upon submission of
completed requirements.549
d. Foreign investments in export enterprises
Foreign investment in export enterprises whose products and services
do not fall within Lists A and B of the Foreign Investment Negative List
provided under Section 8 hereof is allowed up to one hundred percent
(100%) ownership.
Export enterprises which are non-Philippine nationals shall register
with BOI and submit the reports that may be required to ensure continuing
compliance of the export enterprise with its export requirement. BOI shall
advise SEC or BTRCP, as the case may be, of any export enterprise that fails
to meet the export ratio requirement. The SEC or BTRCP shall thereupon
order the non-complying export enterprise to reduce its sales to the
domestic market to not more than forty percent (40%) of its total
production; failure to comply with such SEC or BTRCP order, without
justifiable reason, shall subject the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties provided in Section 14 hereof.550
e. Foreign investments in domestic market enterprises
Non-Philippine nationals may own up to one hundred percent (100%)
of domestic market enterprises unless foreign ownership therein is
549
550

Sec. 5
Sec. 6

181

prohibited or limited by existing law or the Foreign Investment Negative

List under Section 8 hereof.
A domestic market enterprise may change its status to export
enterprise if over a three (3) year period it consistently exports in each year
thereof sixty per cent (60%) or more of its output.551
f. Foreign Investment Negative List
The Foreign Investment Negative List shall have three (3) component
lists: A, B, and C:
a) List A shall enumerate the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws.
b) List B shall contain the areas of activities and enterprises pursuant
to law:
1) Which are defense-related activities, requiring prior
clearance and authorization from Department of National Defense
(DND) to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal weapons,
military ordnance, explosives, pyrotechnics and similar materials;
unless such manufacturing or repair activity is specifically authorized,
with a substantial export component, to a non-Philippine national by
the Secretary of National Defense; or
2) Which have implications on public health and morals, such as
the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beerhouses, dance halls; sauna and
steambath houses and massage clinics.
Small and medium-sized domestic market enterprises with paid-in
equity capital less than the equivalent of five hundred thousand US dollars
(US$500,000) are reserved to Philippine nationals, unless they involve
advanced technology as determined by the Department of Science and
Technology. Export enterprises which utilize raw materials from depleting
natural resources, with paid-in equity capital of less than the equivalent of
five hundred thousand US dollars (US$500,000) are likewise reserved to
Philippine nationals.
Amendments to List B may be made upon recommendation of the
Secretary of National Defense, or the Secretary of Health, or the Secretary
of Education, Culture and Sports, indorsed by the NEDA, or upon
recommendation motupropio of NEDA, approved by the President, and
promulgated by Presidential Proclamation.
551

Sec. 7

182

c) List C shall contain the areas of investment in which existing

enterprises already serve adequately the needs of the economy and the
consumer and do not require further foreign investments, as determined by
NEDA applying the criteria provided in Section 9 of this Act, approved by
the President and promulgated in a Presidential Proclamation.

183