MERCANTILE LAW

2013 GOLDEN NOTES

UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
MANILA
 The UST GOLDEN NOTES is the annual student-edited bar review
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2013 Edition

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No. 01

Printed in the Philippines, April 2013.

 ACADEMIC YEAR 2013-2014

CIVIL LAW STUDENT COUNCIL

VICTOR LORENZO L. VILLANUEVA PRESIDENT
MARIANE TINGCHUY VICE PRESIDENT INTERNAL
RONN ROBBY ROSALES VICE PRESIDENT EXTERNAL
MARIE SYBIL TROPICALES SECRETARY
RAFAEL LORENZ SANTOS TREASURER
LUIS ALFONSO E. ARTAIZ AUDITOR
GLORIA ANASTHASIA LASAM PUBLIC RELATIONS OFFICER

TEAM: BAR-OPS
BIENVENIDO L. MABULAC II CHAIRPERSON
VICENTE JAN PLATON III VICE-CHAIRPERSON
APRIL V. ENRILE SECRETARY
ERIKA PINEDA ASST. SECRETARY
CARLO ARTEMUS V. DIAZ HEAD, FINANCE COMMITTEE
WILFREDO P. SUDIO JR. ASST. HEAD, FINANCE COMMITTEE
MHAE ANN V. RIVERA ASST. HEAD, FINANCE COMMITTEE
CLARABEL ANNE R. LACSINA HEAD, HOTEL ACCOMMODATIONS COMMITTEE
VANNESSA ANNE VIRAY ASST. HEAD, HOTEL ACCOMMODATIONS COMMITTEE
HAZEL M. NAVAREZ ASST. HEAD, HOTEL ACCOMMODATIONS COMMITTEE
ARWIN V. CABANTING HEAD, LOGISTICS COMMITTEE
NATHANIEL LIBERATO ASST. HEAD, LOGISTICS COMMITTEE

ATTY. AL CONRAD B. ESPALDON

ADVISER
 ACADEMICS COMMITTEE
ALJON D. DE GUZMAN CHAIRPERSON
MARK KEVIN U. DELLOSA VICE-CHAIR FOR ACADEMICS
ANTHONY M. ROBLES VICE-CHAIR FOR LAYOUT AND DESIGN
CLARABEL ANNE R. LACSINA MEMBER, LAYOUT AND DESIGN TEAM
RAFAEL LORENZ SANTOS MEMBER, LAYOUT AND DESIGN TEAM
JAMES BRYAN V. ESTELEYDES VICE-CHAIR FOR RESEARCH
MARIA JAMYKA S. FAMA MEMBER, RESEARCH TEAM
PAULINE BREISSEE GAYLE D. ALCARAZ MEMBER, RESEARCH TEAM
ROBBIE BAAGA MEMBER, RESEARCH TEAM
MONICA S. CAJUCOM MEMBER, RESEARCH TEAM
DOMINIC VICTOR C. DE ALBAN MEMBER, RESEARCH TEAM
OMAR DELOSO MEMBER, RESEARCH TEAM
ANNABELLA HERNANDEZ MEMBER, RESEARCH TEAM
MA. CRISTINA MANZO-DAGUDAG MEMBER, RESEARCH TEAM
WILLIAM RUSSELL MALANG MEMBER, RESEARCH TEAM
CHARMAINE PANLAQUE MEMBER, RESEARCH TEAM

MERCANTILE LAW COMMITTEE

JESSA G. BERNARDO MERCANTILE LAW COMMITTEE HEAD
ANA KARMELA B. BERNARDINO ASST. MERCANTILE LAW COMMITTEE HEAD
ANABELLA D. HERNANDEZ ASST. MERCANTILE LAW COMMITTEE HEAD
SHIENA ANGELA DR AQUINO MEMBER
MA. LANI LAURETTE P. FRANCISCO MEMBER
CLEMENTE L. REYES IV MEMBER
PAUL ANGELO F. TOMBOC MEMBER

ATTY. AMADO T. TAYAG

ATTY. JACINTO D. JIMENEZ
ADVISERS
 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS

ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAO, O.P.

DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

ATTY. AMADO E. TAYAG

SWDB COORDINATOR

LENY G. GADANIA, R.G.C.

GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR
MENTORS & INSPIRATION

DEAN NILO T. DIVINA

DEAN AMADO L. DIMAYUGA
JUDGE NOLI C. DIAZ
ATTY. IRVIN JOSEPH M. FABELLA
ATTY. ALLAN B. GEPTY
ATTY. JACINTO D. JIMENEZ
ATTY. ALBERT R. PALACIOS
ATTY. GABRIEL T. ROBENIOL
ATTY. RODOLFO P. SORIANO
ATTY. AMADO T. TAYAG

For being our guideposts in understanding the intricate

sphere of Mercantile Law.
- Academics Committee 2013
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THE RISK OF USE, MISUSE OR NON-

USE OF THIS BAR REVIEW MATERIAL
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 MERCANTILE LAW

LETTERS OF CREDIT 4. Shipping of goods by the seller

DEFINITION AND NATURE OF LETTER OF CREDIT
Q: What is a Letter of Credit (L/C)?
A: It is any arrangement, however named or
described, whereby a bank (issuing bank), acting at
the request and on the instructions of a customer
(applicant) or on its own behalf, binds itself to: PAN
1. Pay to the order of, or accept and pay drafts
drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and
pay such drafts, or
3. Authorizes another bank to Negotiate, against
stipulated documents,
Provided, the terms and conditions of the credit are
complied with (Art. 2, Uniform Customs & Practice for
Documentary Credits.)
Q: What is the nature and purpose of L/C?
5. Execution of draft and tender of documents by
the seller
6. Redemption of draft (payment) and obtaining of
documents by the issuing bank
7. Reimbursement to the bank and obtaining of
documents by the buyer
Q: What are the essential conditions of L/C?
A:
1. Issued in favor of a definite person
Note: The Uniform Commercial Practice for
Documentary Credits allows letters of credit to be
payable to the order of a person.
2. Limited to a fixed or specified amount, or to one
or more amounts, but with a maximum stated
limit (Art. 568, Ibid.).
Note: If any of these essential conditions is not present,
the instrument is merely considered as a letter of
recommendation.

A: To ensure certainty of payment. The seller is Q: Letters of Credit are financial devices in
assured of payment because the bank intervenes and commercial transactions which will ensure that the
makes the commitment to pay. This addresses seller of the goods is sure to be paid when he parts
problems arising from sellers refusal to part with his with the goods and the buyer of the goods gets
goods before being paid and the buyers refusal to control of the goods upon payment. Which
part with his money before acquiring the goods, thus, statement is most accurate? (2012 Bar Question)
facilitating commercial transactions.
a) The use of the Letter of Credit serves to reduce
Q: What is the law governing letters of credit? the risk of nonpayment of the purchase price in
a sale transaction.
A: It is the Uniform Customs and Practice (UCP) for b) The Letters of Credit can only be used
documentary Credits for International Chamber of exclusively in a sales transaction.
Commerce which governs the L/C (Metropolitan c) The Letters of Credit are issued for the benefit
Waterworks vs. Daway, G.R. No. 160723, July 21, of the seller only.
2004.). d) (a), (b) and (c) are all correct
Q: What is the duration of L/C? A: A. The use of the Letter of Credit serves to reduce
the risk of nonpayment of the purchase price in a sale
A: transaction
1. Upon the period fixed by the parties; or
2. If none is fixed: Q: What are the kinds of L/C?
a. 6 months from its date if used in the
Philippines; A:
b. 12 months if used abroad (Art 572, Code of
COMMERCIAL L/C STANDBY L/C
Commerce).
Involves the payment of
Involves non-sale
money under a contract
Q: What are the incidents in the life of an L/C? transactions.
of sale.
Payable upon the Payable upon
A: SAIS-ERR
presentation by the certification by the
1. Contract of Sale between the buyer and seller
seller-beneficiary of beneficiary of the
2. Application for L/C by the buyer with the bank
documents that show he applicants non-
3. Issuance of L/C by the bank
has taken affirmative performance of the

UNIVERSITY OF SANTO TOMAS 8

2013 GOLDEN NOTES
 LETTERS OF CREDIT
steps to comply with the agreement. The
sales agreement documents that
accompany the
beneficiary's draft must
show that the applicant
has not performed the
undertaking (Transfield
Phils., Inc. v. Luzon Hydro
Corp., G.R. No. 146717,
Nov. 22, 2004).
Q: Distinguish an irrevocable L/C from a confirmed
L/C.
A: In an irrevocable L/C, the issuing bank may not,
without the consent of the beneficiary and the
applicant, revoke its undertaking under the letter,
whereas, in a confirmed L/C, the correspondent bank
gives an absolute assurance to the beneficiary that it
will undertake the issuing banks obligation as its own
according to the terms and condition of the credit
(Prudential Bank and Trust Company v. IAC, G.R. No.
74886, Dec. 8, 1992).
Q: Can a court order the release to the applicant the
proceeds of an irrevocable letter of credit without
the consent of the beneficiary?
A: No, such order violates the irrevocable nature of
the L/C. The terms of an irrevocable letter of credit
cannot be changed without the consent of the
parties, particularly the beneficiary thereof (Phil.
Virginia Tobacco Administration v. De Los Angeles,
G.R. No. L-27829, Aug. 19, 1988).
Q: In case the buyer was not able to pay its
obligation under the letter of credit, can the bank
take possession over the goods covered by the said
L/C?
A: No. The opening of a L/C does not vest ownership
of the goods in the bank in the absence of a trust
receipt agreement. A letter of credit is a mere
financial device developed by merchants as a
convenient and relatively safe mode of dealing with
the 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
(Transfield Philippines, Inc. v. Luzon Hydro
Corporation, G.R. No. 146717, Nov. 22, 2004)
PARTIES TO A LETTER OF CREDIT
Q: Who are the parties to a Letter of Credit
transaction?
9 UNIVERSITY OF SANTO TOMAS
A:
1. Applicant/Buyer/Importer procures the letter of
credit, purchases the goods and obliges himself to
reimburse the issuing bank upon receipt of the
documents title.
2. Issuing Bank One which, whether a paying bank
or not, Issues the letter of credit 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.
3. Beneficiary/Seller/Exporter In whose favor the
instrument is executed. One who delivers the
documents of title and draft to the issuing bank to
recover payment.
Note: The number of parties may be increased. The
following additional parties may be:
a. Advising/notifying bank The correspondent
bank (agent) of the issuing bank through which it
advises the beneficiary of the L/C.
b. Confirming bank bank which, upon the request
of the beneficiary, confirms the L/C issued.
c. Paying bank bank on which the drafts are to be
drawn, which may be the issuing bank or another
bank not in the city of the beneficiary.
d. Negotiating bank bank in the city of the
beneficiary which buys or discounts the drafts
contemplated by the L/C, if such draft is to be
drawn on the opening bank not in the city of the
beneficiary.
RIGHTS AND OBLIGATIONS OF PARTIES
Q: What are the three (3) distinct but intertwined
contracts in a letter of credit transaction?
A:
1. Between the applicant/buyer/importer and the
beneficiary/seller/exporter - The applicant is the
one who procures the letter of credit while the
beneficiary is the one who in compliance with the
contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the
issuing bank to recover payment for the goods.
Their relationship is governed by the contract of
sale.
2. Between the issuing bank and the
beneficiary/seller/exporter - The issuing bank is
the one that issues the letter of credit and
FACULTY OF CIVIL LAW
 MERCANTILE LAW

undertakes to pay the seller upon receipt of the
draft and proper documents of title. On the other
hand, the beneficiary surrenders document of title
to the bank in compliance with the terms of the
L/C. Their relationship is governed by the terms of
the L/C.
3. Between the issuing bank and the
applicant/buyer/importer - The applicant obliges
himself to reimburse the issuing bank upon
receipt of the documents of title. Their
relationship is governed by the terms of the
application for the issuance of the L/C by the
bank.
bank in the place of the
beneficiary.
Q: Is an issuing bank a guarantor?
A: No, the concept of guarantee vis-a-vis the concept
of irrevocable L/C is inconsistent with each other.
L/Cs are primary obligations and not security
contracts and while they are security arrangements,
they are not converted thereby into contracts of
guaranty (MWSS v. Hon. Daway, G.R. No. 160732,
June 21, 2004).
Q: When is the bank entitled to reimbursement?

Q: What are the different roles and liabilities of the A: Once the issuing bank shall have paid the
banks involved in L/C transactions? beneficiary after the latters compliance with the
terms of the L/C. Presentment for acceptance to the
A: customer/applicant is not a condition sine qua non
ROLE LIABILITY for reimbursement (Prudential Bank v. IAC, G.R. No.
Notifying/Advising bank 74886, Dec. 8, 1992).
Serves as an agent of the Does not incur any
issuing bank; obligation more than Q: What is the consequence of payment upon an
just notifying the expired L/C?
Warrants the apparent seller/beneficiary of the
(Appearance to unaided opening of the L/C after A: An issuing bank which paid the beneficiary upon an
senses) authenticity of it has determined its expired L/C can recover the payment from the
the L/C. (Bank of apparent authority. applicant which obtained the goods from the
America NT & SA v. CA, (Bank of America NT & beneficiary to prevent unjust enrichment (Rodzssen
G.R. No. 105395, Dec. SA v. CA, G.R. No. Supply Co. v. Far East Bank and Trust Co, G.R. No.
10, 1993) 105395, Dec. 10, 1993) 109087, May 9, 2001).

Not liable for damages BASIC PRINCIPLES OF LETTER OF CREDIT

unless the document on
its face is manifestly
fake.
Confirming bank
Lends credence to the Direct obligation, as if it
L/C issued by a lesser- is the one which issued
known bank. the L/C.
Negotiating bank
Buys the sellers draft Depends on the stage of
and later on sells the negotiation, thus:
draft to the issuing bank.
1. Before negotiation
No liability with respect
to the seller. Merely
suggests its willingness
to negotiate.
2. After negotiation A
contractual relationship
will then arise, making
the bank liable.
Paying bank
May either be the Direct obligation.
issuing bank or any other
Q: Are L/Cs considered as negotiable instruments?
A: No. A L/C is not considered a negotiable
instrument. However, drafts issued in connection
with L/Cs can be considered negotiable instruments.
The presumption that the drafts drawn in connection
with the L/Cs have sufficient consideration applies
(Lee v. CA, G.R. No. 117913, Feb. 1, 2002).
DOCTRINE OF INDEPENDENCE
Q: What is the Doctrine of Independence/
Independence Principle?
A: The relationship of the buyer and the bank is
separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying the
L/C has been fulfilled or not because in transactions
involving L/C, banks deal only with documents and
not goods (BPI v. De Reny Fabric Industries, Inc., L-

UNIVERSITY OF SANTO TOMAS 10

2013 GOLDEN NOTES
 LETTERS OF CREDIT
2481, Oct. 16, 1970.). In effect, the buyer has no
course of action against the issuing bank.
Q: What is the two-fold nature of the Independence
Principle?
1. Independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying
agreement. This principle is illustrated by standby
L/C; or
2. Independence only as to the justification aspect
which is identical with the same obligations under
the underlying agreement. This principle is
illustrated by a commercial L/C or repayment
standby (Transfield v. Luzon Hydro, G.R. No.
146717, Nov. 22, 2004)
Q: What is the effect of the buyers failure to
procure an L/C to the main contract?
A: The L/C is independent from the contract of sale.
Failure of the buyer to open the L/C does not prevent
the birth of the contract of sale. The opening of the
LC is only a mode of payment. The LC is not an
essential requisite to the contract of sale (Reliance
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R.
No. 100831, Dec. 17, 1993).
Q: Can the partial payments made on the loan be
added in computing the issuing banks liability under
its own standby letter of credit?
A: No, although these payments could result in the
reduction of the actual amount, which could
ultimately be collected from the issuing bank, the
latters separate undertaking under its letters of
credit remain. The letter of credit is an absolute and
primary undertaking which is separate and distinct
from the contract underlying it (Insular Bank of Asia
& America v. IAC, Nov. 17, 1988).
Q: AAA Carmakers opened an irrevocable Letter of
Credit with BBB Banking Corporation with CCC Cars
Corporation as beneficiary. The irrevocable Letter of
Credit was opened to pay for the importation of ten
(10) units of Mercedes Benz S class. Upon arrival of
the cars, AAA Carmakers found out that the cars
were all not in running condition and some parts
were missing. As a consequence, AAA Carmakers
instructed BBB Banking Corporation not to allow
drawdown on the Letter of Credit. Is this legally
possible? (2012 Bar Question)
11
a) No, because under the "Independence
Principle", conditions for the drawdown on the
Letters of Credit are based only on documents,
like shipping documents, and not with the
condition of the goods subject of the
importation.
b) Yes, because the acceptance by the importer of
the goods subject of importation is material for
the drawdown of the Letter of Credit.
c) Yes, because under the "Independence
Principle", the seller or the beneficiary is always
assured of prompt payment if there is no breach
in the contract between the seller and the
buyer.
d) No, because what was opened was an
irrevocable letter of credit and not a confirmed
letter of credit.
A: A. Under the "Independence Principle", conditions
for the drawdown on the Letters of Credit are based
only on documents, like shipping documents, and not
with the condition of the goods subject of the
importation
FRAUD EXCEPTION PRINCIPLE
Q: What is the exception to the independence
principle?
A: The Fraud Exception Principle. It provides that
the untruthfulness of a certificate accompanying a
demand for payment under a standby letter of credit
may qualify as fraud sufficient to support an
injunction against payment.
This principle refers to fraud in relation with the
independent purpose or character of the L/C and not
only fraud in the performance of the obligation or
contract supporting the letter of credit (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
Q: What is the remedy for such fraudulent abuse
under this principle?
A: Injunction against payment is the remedy;
provided the requisites enumerated immediately
below this item are present.
Q: What are the requisites in order to enjoin the
beneficiary from drawing or collecting under the
letter of credit on the basis of fraud?
A: PAI
1. Clear Proof of fraud;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

2. Fraud constitutes fraudulent Abuse of the certain documents including a copy of the Bill of
independent purpose of the letter of credit and Lading of the importation for the bank to release the
not only fraud under the main agreement; and funds. BBB Corporation could not find the original
3. Irreparable Injury might follow if injunction is not copy of the Bill of Lading so it instead presented to
granted or the recovery of damages would be the bank a xerox copy of the Bill of Lading. Would
seriously damaged (Ibid.) you advise the bank to allow the drawdown on the
Letter of Credit? (2012 Bar Question)
DOCTRINE OF STRICT COMPLIANCE
a) No, because the rule of strict compliance in
Q: What is the doctrine of strict compliance? commercial transactions involving letters of
credit, requiring documents set as conditions for
A: The documents tendered by the seller/beneficiary the release of the fund, has to be strictly
must strictly conform to the terms of the L/C. The complied with or else funds will not be released.
tender of documents must include all documents b) Yes, because an irrevocable letter of credit
required by the letter. Thus, a correspondent bank means that the issuing bank undertakes to
which departs from what has been stipulated under release the fund anytime when claimed by the
the L/C acts on its own risk and may not thereafter be beneficiary,regardless of the kind of document
able to recover from the buyer or the issuing bank, as presented.
the case may be, the money thus paid to the c) Yes, because the issuing bank can always justify
beneficiary (Feati Bank and Trust Company v. CA, G.R. to CCC Corporation that xerox copies are
No. 940209, Apr. 30, 1991). considered as faithful reproduction of the
original copies.
Q: Distinguish the Doctrine of Strict Compliance d) Yes, because the issuing bank really has no
from the Independence Principle discretion to determine whether the documents
presented by the beneficiary are sufficient or
A: not.
DOCTRINE OF STRICT DOCTRINE OF
COMPLIANCE INDEPENDENCE A: The rule of strict compliance in commercial
Principle transactions involving letters of credit, requiring
Relationship of the buyer documents set as conditions for the release of the
Documents tendered by fund, has to be strictly complied with or else funds
and the bank is separate
the seller or beneficiary will not be released.
and distinct from the
must strictly conform to
relationship of the buyer
the terms of the letter of
and seller in the main
credit.
contract.
Consequence of the doctrine
A correspondent bank
The bank is not required
which departs from what
to investigate whether
has been stipulated and
the contract underlying
acts on its own risk may
the L/C has been fulfilled
not thereafter be able to
or not.
recover.
Payment of the beneficiary
Fraud Exception
Principle can enjoin
Beneficiary cannot draw beneficiary from drawing
on the letter of credit if or collecting under the
he did not comply with L/C if there is fraud in
its terms and conditions. relation with the
independent purpose of
the L/C.

Q: At the instance of CCC Corporation, AAA Bank

issued an irrevocable Letter of Credit in favor of BBB
Corporation. The terms of the irrevocable Letter of
Credit state that the beneficiary must present

UNIVERSITY OF SANTO TOMAS 12

2013 GOLDEN NOTES
 TRUST RECEIPTS LAW
TRUST RECEIPTS LAW (P.D. 115)
DEFINITION/CONCEPT OF A TRUST RECEIPT
TRANSACTION
Q: What is a trust receipt (TR) transaction?
A: It is any transaction between the entruster and
entrustee:
1. Whereby the entruster who owns or holds title or
security interests over certain specified goods,
documents or instrument (GDI), releases the same
to the possession of entrustee upon the latters
execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of
default,
a. to sell or otherwise dispose such GDI with the
obligation to turn over to the entruster the
proceeds to the extent of the amount owing
to it or
b. to turn over the GDI itself if not sold or
otherwise disposed of in accordance with the
terms and conditions specified in the TR.
Q: What are the subjects of a TR transaction?
A: GDI
1. Goods shall include chattels and personal
property other than: money, things in action, or
things so affixed to land as to become a part
thereof (Sec. 3 [d], PD 115.) Goods must be
object of lawful commerce.
2. Documents written or printed evidence of title
to goods (Sec. 3 [a], PD 115). E.g. are L/Cs.
3. Instruments negotiable instruments;
certificates of stock, or bod or debenture for the
payment of money issued by a corporation, or
certificates of deposit, participation certificates
or receipts, credit or investment instruments of a
sort marketed in the ordinary course of business
or finance (Sec. 3 [e], PD 115). E.g. are checks,
drafts, promissory notes, bills of exchange.
Q: Who is an entruster?
A: A lender, financer or creditor. Person holding title
over the GDI subject of a TR transaction; releases
possession of the goods upon execution of TR (Sec.
3[c], PD 115).
13
Q: Who is an entrustee?
A: A borrower, buyer, importer or debtor. He is the
person to whom the goods are delivered for sale or
processing in trust, with the obligation to return the
proceeds of sale of the goods or the goods
themselves to the entruster (Sec. 3[b], PD 115).
Q: What is NOT considered a trust receipt
transaction?
A:
1. A sale by a person in the business of selling for
profit who retains general property rights in the
GDI.
2. Where the seller retains title or other interest as
security for the payment of the purchase price
(Sec. 4, P.D. 115).
Q: What are the two views regarding TR?
A:
1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for the
entruster and to sell or otherwise dispose of GDI
with the obligation to turn over to the entruster
the proceeds if they are unsold or not otherwise
disposed of, in accordance with the terms and
conditions specified in the TR (Sec. 4, P.D. 115).
2. As a commercial transaction It is a separate and
independent security transaction intended to aid
in financing importers and retail dealers who do
not have sufficient funds (Nacu v. CA, G.R. No.
108638, Mar. 11, 1994).
Q: Can a TR be considered a negotiable instrument?
A: No. Like L/Cs, TRs are not negotiable instruments.
The presumption of consideration under the
negotiable instrument law may not necessarily be
applicable to trust receipts (Lee v. CA, supra).
LOAN/SECURITY FEATURE
Q: What are the two features of a TR transaction?
A:
1. Loan feature - is brought about by the fact that
the entruster financed the importation or
purchase of the goods under TR (Sps. Vintola vs.
Insular Bank of Asia and America, G.R. No. 73271,
May 29, 1987).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
entrustee or of some third persons to the
entruster (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, G.R. No.
137232, June 29, 2005).
Q: What are the effects of the dual features of a
trust receipt?
A:
1. The entrustee cannot absolutely be relieved of the
obligation to pay his loan just because he
surrendered the goods to the entruster and
subsequently deposited them in the custody of
the court (Sps. Vintola vs. Insular Bank of Asia and
America, ibid).
2. The entrustee cannot be relieved of his obligation
to pay the loan in favor of the entruster bank in
case of loss or destruction of the GDI (Rosario
Textile Mills Corp. v. Home Bankers Savings and
Trust Company, ibid).
3. Where the proceeds of the sale are insufficient to
satisfy the loan executed by the entrustee, the
entruster bank can institute an action to collect
the deficiency (Landl Co. v Metropolitan Bank and
Trus Co. G.R. No. 159622, July 30, 2004).
4. Repossession by the entruster of the GDI does not
amount to dacion en pago. The repossession of
the goods by the entrustee was merely to secure
the payment of its obligation to the entrustor and
not for the purpose of transferring ownership in
satisfaction of the obligation (PNB vs. Pineda, G.R.
No. L-46658 May 13, 1991).
OWNERSHIP OF THE GOODS, DOCUMENTS, AND
INSTRUMENTS UNDER A TRUST RECEIPT
Q: Who is the real owner of the articles subject of
the TR?
A: The entrustee who binds himself to hold the
designated GDI.
Q: What title does the entruster hold?
A: Entruster merely holds a security interest. If under
the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could
dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with purpose of
the trust receipt of giving a stronger security for the
loan obtained by the importer. To consider the bank
as the true owner from the inception of the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
transaction would be to disregard the loan feature
thereof (Rosario Textile Mills Corp. v. Home Bankers
Savings and Trust Company, G.R. No. 137232. June
29, 2005).
RIGHTS OF THE ENTRUSTER
The entruster has the following rights: PRC
1. To be entitled to the Proceeds from the sale of the
GDI to the extent of the amount owing to him.
2. To the Return of the GDI in case of non-sale and
enforcement of all other rights conferred to him in
the TR.
3. May Cancel the trust and take possession of the
goods, upon default or failure of the entrustee to
comply with any of the terms and conditions of
the TR (Sec. 7, P.D. 115).
VALIDITY OF THE SECURITY INTEREST AS AGAINST
THE CREDITORS OF THE ENTRUSTEE/INNOCENT
PURCHASERS FOR VALUE
Q: As between the entruster and the creditors of the
entrustee, who has a better right over the goods?
A: The entruster. His security interest in goods,
documents, or instruments pursuant to the written
terms of a TR shall be valid as against all creditors of
the entrustee for the duration of the TR agreement.
(Sec. 12, P.D. 115)
Q: Who can defeat the rights of the entruster over
the goods?
A: A purchaser in good faith. He acquires goods,
documents or instruments free from the entruster's
security interest (Sec. 11, P.D. 115).
OBLIGATIONS AND LIABILITY OF THE ENTRUSTEE
Q: What are the obligations and liabilitites of the
entrustee?
A: HR-IKRO
1. To Hold GDI in trust for the entruster and to
dispose of them strictly in accordance with the
terms of TR;
2. To Receive the proceeds of the sale for the
entruster and to turn over the same to the
entruster to the extent of amount owing to the
latter;
3. To Insure GDI against loss from fire, theft,
14
 TRUST RECEIPTS LAW
pilferage or other casualties;
4. To Keep GDI or the proceeds thereof, whether in
money or whatever form, separate and capable of
identification as property of the entruster;
5. To Return GDI to the entruster in case they could
not be sold or upon demand of the entruster; and
6. To Observe all other conditions of the TR. (Sec. 9,
P.D. 115)
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
DISPOSITION OF GOODS, DOCUMENTS OR
INSTRUMENTS
Q: Where will the proceeds of the sale of GDI be
applied?
A: SDP
1. Expenses of the Sale;
2. Expenses Derived from re-taking, keeping and
storing the GDI; and
3. Principal obligation (Sec. 7, PD 115).
Q: Is the entrustee liable for the deficiency?
A: Yes, but any excess shall belong to him (ibid).
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS
IN CASE OF NON-SALE
Q: What is the obligation of the entrustee in case
the GDI were not sold?
A: The entrustee should return the GDI to the
entruster (Sec. 4, P.D. 115).
Q: In case the entrustee fails to return the GDI, what
is he liable for?
A: The failure to turn over goods or proceeds realized
from sale thereof, as a criminal offense under Art.
315(l)(b) of RPC (estafa).
LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR
INSTRUMENTS
Q: Who shall bear the loss of GDI which are the
subject of TR?
A: The entrustee. Loss of the GDI which is the subject
of a TR, 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 (Sec. 10, P.D. 115).
15
Q: Is the principle of res perit domino a valid defense
against an entrustee in cases of loss or destruction
of the GDI secured by a TR?
A: No. For the principle of res perit domino to apply
the entrustee must be the owner of the goods at the
time of the loss. A trust receipt is a security
agreement, pursuant to which a bank acquires a
security interest in the goods. It secures an
indebtedness and there can be no such thing as
security interest that secures no obligation. If under
a trust receipt transaction, the entruster is made to
appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any
manner it wants. Thus, the ownership of the goods
remaining with the entrustee, he cannot be relieved
of the obligation to pay his/her loan in case of loss or
destruction (Rosario Textile Mills vs. Home Bankers
Association, supra).
PENAL SANCTION IF OFFENDER IS A CORPORATION
Q: What are the elements to be established in order
to validly prosecute the entrustee for estafa?
A: In order that the entrustee may be validly
prosecuted for estafa under Art. 315, paragraph 1(b)
of the RPC, in relation with Sec. 13 of PD 115, the
following elements must be established:R-MAD
1. The entrustee Received the subject goods in trust
or under the obligation to sell the same and to
remit the proceeds thereof to the entruster, or
to return the goods if not sold;
2. The entrustee Misappropriated or converted the
goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse of
confidence to the damage and prejudice of
entruster; and
4. A Demand was made on the entrustee by
entruster for the remittance of the proceeds or
the return of the unsold goods (Land Bank of the
Philippines vs. Perez, GR No. 166884, June 13,
2012).
Note: If proof as regards the delivery of GDI to the accused
(entrustee) is insufficient, estafa cannot lie (Ramos v. CA,
G.R. No. L-3992-25, Aug. 21, 1987)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What will happen to the criminal action if the
entrustee complied with his obligation under the TR
agreement?
A:
1. If compliance occurred before the criminal
charge- there is no criminal liability.
2. If compliance occurred after the charge even
before conviction- the criminal action will not be
extinguished.
Q: Does P.D. 115 violate the prohibition in the
Constitution against imprisonment for non-payment
of a debt?
A: No. What is being punished is the dishonesty and
abuse of confidence in the handling of money or
goods to the prejudice of another regardless of
whether the latter is the owner or not. It does not
seek to enforce payment of the loan. Thus, there can
be no violation of a right against imprisonment for
non-payment of a debt (People v. Nitafan, G.R. No.
81559, Apr 6, 1992).
Q: Is lack of intent to defraud a bar to the
prosecution of these acts or omissions? (2006 Bar
Question)
A: No. The mere failure to account or return gives rise
to the crime which is malum prohibitum. There is no
requirement to prove intent to defraud (Ching v.
Secretary of Justice, G.R. No. 164317, Feb. 6, 2006).
Q: Is the penal sanction available if the goods are
not intended for sale or resale?
A: No. To be a TR transaction, the goods must be
intended for sale or resale.
In Ng v. People, the Supreme Court held that the trial
court erred in ruling that the agreement in the case
was a TR transaction because the goods involved
were intended to be used in the fabrication of steel
communication towers.
The Court further ruled that, [T]he true nature of a
trust receipt transaction can be found in the
whereas clause of PD 115 which states that a trust
receipt is to be utilized as a convenient business
device to assist importers and merchants solve their
financing problems. Obviously, the State, in enacting
the law, sought to find a way to assist importers and
merchants in their financing in order to encourage
commerce in the Philippines.
The principle is of course not limited in its application
to financing importations, since the principle is
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
equally applicable to domestic
transactions. Regardless of whether the transaction is
foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts
mainly involved sales. (G.R. No. 173905, April 23,
2010)
Q: What is the penal sanction if offender is a
corporation?
A: Though the entrustee is a corporation,
nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible
for the offense, without prejudice to the civil
liabilities of such corporation and/or board of
directors, officers, or other officials or employees
responsible for the offense.
If the crime is committed by a corporation or other
juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense
shall be charged and penalized for the crime,
precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. However, a
corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the
statute prescribes both fine and imprisonment as
penalty, a corporation may be prosecuted and, if
found guilty, may be fined (Ching vs. Secretary of
Justice, GR No. 164317, Feb. 6, 2006).
Q: What is the rationale behind the accountability of
the officers of the corporation?
A: The rationale is that such officers or employees are
vested with the authority and responsibility to devise
means necessary to ensure compliance with the law
and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law (ibid).
Note: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate personality
of the corporation, where he is the actual, present and
efficient actor. Corporate officers or employees, through
whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime. The
principle applies whether or not the crime requires the
consciousness of wrongdoing (Ching vs. Secretary of Justice,
supra).
16
 TRUST RECEIPTS LAW
REMEDIES AVAILABLE
Q: What are the defenses available to negate
CRIMINAL liability of the entrustee?
A: CoCo CaCo No LP
1. Compliance with the terms of the TR either by
payment, return of the proceeds or return of the
goods (Sec. 13, PD 115.)
2. Consignment.
3. Cancellation of the TR agreement and taking into
possession of the goods by the entruster.
Note: Repossession of the goods will extinguish only the
criminal liability.
4. Compromise by parties before filing of information
in court. Compromise of estafa case arising from
TR transaction, after the case has been filed in
court does not amount to novation and does not
erase the criminal liability of the accused. (Ong v.
CA, 124 SCRA 578 [1983].)
5. Non-receipt of the goods by the entrustee or
where proof of delivery of goods to the accused is
insufficient. (Ramos v. CA, G.R. No. L-3992-25,
Aug. 21, 1987)
6. Loss of goods without fault of the entrustee.
7. The transaction does not fall under PD 115.
(Colinares v. CA, G.R. No. 90828, Sept. 5, 2000,
Consolidated v. CA, G.R. No. 114286, Apr. 19,
2001)
Note: In these cases, the execution of a TR was
made after the goods covered by it had been
purchased, making the buyer the owner thereof.
The transaction does not involve a TR but a simple
loan even though the parties denominate the
transaction as one of a TR.
Q: Can the repossession of the goods by the
entruster be considered as payment?
A: No, payment would legally result only after the
entruster has foreclosed on the securities, sold the
same and applied the proceeds thereof to the
entrustees obligation. Since the TR is a mere security
arrangement, the repossession by the entruster
cannot be considered payment of the loan/advances
given to the entrustee under the letter of credit/trust
receipt (PNB v. Pineda, G.R. No. 46658, May 13,
1991).
17
Q: In the event of default by the entrustee on his
obligation under the TR agreement, is it absolutely
necessary for the entruster to cancel the trust and
take possession of the goods to be able to enforce
his right thereunder?
A: The law uses the word "may" in granting to the
entruster the right to cancel the trust and take
possession of the goods. Consequently, the entrustee
has the discretion to avail of such right or seek any
alternative action, such as a third party claim or a
separate civil action which it deems best to protect its
right, at any time upon default or failure of the
entrustee to comply with any of the terms and
conditions of the trust agreement (South City Homes,
Inc. v. BA Finance Corporation, G.R. No. 135462, Dec.
7, 2001).
Q: BBB Banking Corporation issued a Letter of Credit
in the amount of P5Million, for the purchase of five
(5) tons of corn by X. Upon arrival of the goods, the
goods were delivered to the warehouse of X.
Thereafter he was asked to sign a Trust Receipt
covering the goods. When the goods were sold, X
did not deliver the proceeds to BBB Banking
Corporation, arguing that he will need the fund for
the subsequent importation. Is there sufficient basis
to sue for criminal action? (2012 Bar Question)
a) Yes, because X's failure to turn over the proceeds
to the bank is a violation of the Trust Receipt
Law.
b) No, because the trust receipt was signed only
after the delivery of the goods. When the trust
receipt was signed, the ownership of the goods
was already with X.
c) Yes, because violation of Trust Receipt Law is
mala prohibita, intention is irrelevant.
d) No, because X has a valid reason not to deliver
the proceeds to BBB Banking Corporation.
A: B. When the trust receipt was signed, the
ownership of the goods was already with X.
Q. Dennis failed to comply with his undertaking
under the TR he issued in favor of ABC bank. The
bank filed both criminal and civil cases against
Dennis. The court proceeded with the civil case
independently from the criminal case. Is the court
correct in proceeding independently although a
criminal case is also instituted?
A: Yes, the complaint against Dennis is based on the
failure of the latter to comply with his obligation as
spelled out in the TR. This breach of obligation is
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

separate and distinct from any criminal liability for

"misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents
or instruments released under trust receipts",
punishable under Sec. 13 of the PD 115. Being based
on an obligation ex contractu and not ex delicto, the
civil action may proceed independently of the
criminal proceedings instituted against petitioners
regardless of the result of the latter (Sarmiento vs.
CA, G.R. No. 122502, Dec. 27, 2002).

Q. What is the effect of novation of a trust

agreement?

A. Where the entruster and entrustee entered into an

agreement which provides for conditions
incompatible with the TR agreement, the obligation
under the trust receipt is extinguished. Hence, the
breach in the subsequent agreement does not give
rise to a criminal liability under P.D. 115 but only civil
liability (Philippine Bank v. Ong, G.R. No. 133176, Aug.
8, 2002).

Q: Can deposits in a savings account opened by the

buyer subsequent to the TR transaction be applied
to outstanding obligations under the TR account?

A: No, the receipt of the bank of a sum of money

without reference to the TR obligation does not
obligate the bank to apply the money received
against the trust receipt obligation. Neither does
compensation arise because compensation is not
proper when one of the debts consists in civil liability
arising from criminal (Metropolitan Bank and Trust
Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

Q: E received goods from T for display and sale in E's

store. E was to turn over to T the proceeds of any
sale and return the ones unsold. To document their
agreement, E executed a trust receipt in Ts favor
covering the goods. When E failed to turn over the
proceeds from his sale of the goods or return the
ones unsold despite demand, he was charged in
court for estafa. E moved to dismiss on the ground
that his liability is only civil. Is he correct? (2011 Bar
Question)

A: No, since his breach of the trust receipt agreement

subjects him to both civil and criminal liability for
estafa.

UNIVERSITY OF SANTO TOMAS 18

2013 GOLDEN NOTES
 WAREHOUSE RECEIPTS LAW

WAREHOUSE RECEIPTS (WHR) LAW 5. Signature of the WHM

(ACT 2137 AS AMENDED)
Q: What is a warehouse receipt (WHR)?
A: A written acknowledgment by the warehouseman
that he has received and holds certain goods therein
described in his warehouse for the person to whom
the document is issued. The warehouse receipt has
two-fold functions, that is, it is a contract and a
receipt (Telengtan Bros. & Sons v. CA, G.R. No. L-
110581, Sept 21, 1994.)
Q: Distinguish WHR Law from Documents Of Title
under Civil Code.
6. If the receipt is issued for goods of which the
Warehouseman is the owner, either solely or
jointly or in common with others, the fact of such
ownership; and
7. Description of the goods
8. A statement of the amount of advances made and
of liabilities incurred for which the warehouseman
claims a Lien.
9. Fees (Sec. 2, WH Law.)
Q: What are the effects of omission of any of the
essential terms?
A: CIV-N

A: 1. Conversion of the contract to ordinary deposit.

WAREHOUSE DOCUMENTS OF TITLE 2. Injured person can hold WHM liable for all
RECEIPTS LAW UNDER CIVIL CODE damages caused by the omission
Warehouse receipts Other receipts of 3. Validity of receipt not affected
issued by warehouses, documents issued in 4. Negotiability of receipts not affected (Gonzales v.
whether public or bailment contracts other Go Fiong & Luzon Surety Co., G.R. No. 91776, Aug.
private, bonded or than warehouse receipts 30, 1958)
not. (Art.1507-1520 NCC)
Q: What CANNOT be inserted in a WR?
Q: Who is a warehouseman (WHM)?
A: A warehouseman may insert in a receipt issued by
A: A person, natural or juridical, lawfully engaged in him, any other terms and conditions provided that
the business of storing of goods for profit (Sec. 58, such terms and conditions shall not be: C2-RMN
WRL).
1. Contrary to the Warehouse Receipts Law. (Sec. 3)
Q: What is a warehouse (WH)? 2. Contrary to law, morals, good customs, public
order or public policy.
A: The building or place where goods are deposited 3. Terms Reducing the required diligence of the
and stored for profit. warehouseman (Ibid)
4. Those exempting the warehouseman from liability
Q: Who may issue WHR? for Misdelivery or for not giving statutory notice in
case of sale of goods.
A: 5. Those exempting the warehouseman from liability
1. WHM, whether public or private, bonded or not. for Negligence.
(Sec. 1, WHR Law)
Q: What is the effect when the goods deposited are
2. A person authorized by a WHM. incorrectly described?

Q: What is the form of a WHR and what are its A: GR: Warehouseman shall be liable for damages for
essential terms? non-existence or misdescription of goods at the time
of its issue.
A: It need not be in particular form but must embody
within its written or printed terms: LCD-DSWD-LF XPN: When the goods are described based on:
1. Series or labels upon them
1. Location of the WH 2. Statement that the goods are of certain kind.
2. Consecutive number of the receipt
3. Date of the issue
4. A statement whether the goods received will be
Delivered to bearer, to a specified person or to a
specified person or his order

19 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: To whom should the goods be delivered?
A:PDO
1. To the person lawfully entitled to the Possession
of the goods, or his agent;
2. To the person entitled to Delivery under a non-
negotiable instrument or with written authority;
or
3. To the lawful Order of a negotiable receipt.
(person in possession of a negotiable receipt) (Sec.
9, WHR Law.)
KINDS
Q: What are the kinds of WHR?
A:
1. Negotiable warehouse receipt
2. Non-negotiable warehouse receipt
Q: What is a negotiable WHR?
A: It is a receipt in which it states that the goods
received will be delivered to the bearer or to the
order of any person named in such receipt (Sec. 5,
WHR Law). It is negotiated by delivery or
indorsement plus delivery.
Note: No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if inserted, shall be
void, and the receipt shall remain negotiable. A negotiable
warehouse receipt cannot be converted into non-
negotiable (Sec. 5, WHR Law).
Q: Who may negotiate a negotiable WR?
A:
1. The owner
2. Any person to whom the possession or custody of
the receipt has been entrusted by the owner, if,
by the terms of the receipt, the goods are
deliverable to the order of the person to whom
the possession or custody of receipt has been
entrusted or in such form that it may be
negotiated by delivery (Sec. 40, WHR Law).
Q: What happens if the indorsement is necessary
but the negotiable receipt was only delivered?
A: AC - DC
1. The transferee ACquires title against the
transferor
2. There is no Direct obligation of the WHM; and
3. The transferee can Compel the transferor to
complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the time
when the indorsement is actually made.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: In case the signature of an owner of a negotiable
receipt was forged and the forger who now holds
the negotiable receipt was able to withdraw the
goods from the WHM. What are the rights of the
owner of the negotiable receipt?
A:
1. If under WHR, the goods are deliverable to the
depositor or to his order, the owner of the said
negotiable receipt may proceed against the WHM
and/or the holder.
2. Without the valid indorsement of the owner to
the holder or in blank, the WHM is liable to the
owner for conversion in the misdelivery.
3. If the goods are deliverable to bearer, the owner
may only proceed against the holder. The WHM is
not liable for conversion where the goods are
delivered to a person in possession of a bearer
negotiable instrument.
Q: What is the rule when more than one negotiable
receipt is issued for the same goods?
A: A WHM shall be liable for all damages caused by
his failure to do so to anyone who purchased the
subsequent receipt for value supposing it to be an
original, even though the purchase be after the
delivery of the goods by the WHM to the holder of
the original receipt (Sec. 6, WHR Law).
Note: The word duplicate shall be plainly placed upon the
face of every such receipt, except the first one issued (ibid.).
Q: What is a non-negotiable WHR?
A: It is a receipt in which it is stated that the goods
received will be delivered to the depositor or to any
other specified person (Sec. 4, WHR Law).
Q: What is needed to be indicated in the face of a
WHR to make it non-negotiable?
A: It shall have plainly placed upon its face by the
warehouseman issuing it non-negotiable, or not
negotiable (Sec.7, WHR Law).
Q: What is the effect of failure to place an indication
of non-negotiability in the WHR?
A: Failure to mark the WR as non-negotiable shall
entitle the holder, who purchased it for value
supposing it to be negotiable, to treat such receipt
negotiable (ibid).
20
 WAREHOUSE RECEIPTS LAW

of value.
Q: How is a non-negotiable WHR transferred? Intermediate parties are
Intermediate parties
not liable for the
become secondarily
A: A non-negotiable warehouse receipt may be warehouse mans failure
liable.
transferred by its delivery to the transferee to deliver the goods.
accompanied by a deed of assignment, donation or
other form of transfer. Q: Distinguish the rights of a holder of a negotiable
warehouse receipt from the rights of a transferee of
Q: What is the effect of indorsement of a non- a non-negotiable warehouse receipt.
negotiable WHR?
A:
A: Even if the receipt is indorsed, the transferee NEGOTIABLE WAREHOUSE NON-NEGOTIABLE
acquires no additional right (Sec. 39, WHR Law). RECEIPT WAREHOUSE RECEIPT
May be acquired through May be acquired through
Q: What are the warranties on a WHR? negotiation transfer or assignment
Rights of the holder of the Rights of transferee:
A: A person who, for value, negotiates or transfers a receipt:
receipt by indorsement or delivery, including one 1. Acquires title to the
who assigns for value a claim secured by a receipt, 1. If indorsed: goods subject to the
unless a contrary intention appears warrants: GRIT terms of any
agreement with the
a. Acquires title to
1. Receipt is Genuine transferor (Sec. 42,
the goods as the WHR Law).
2. Legal Right to negotiate or transfer it person
3. No knowledge of defects that may Impair the negotiating (Sec. 2. Acquires the right to
validity or worth of the receipt 41, WHR Law). notify the
4. That he has a right to Transfer title to the goods b. Acquires the warehouseman of
and that the goods are merchantable or fit for a direct obligation the transfer and
particular purpose whenever such warranties of the thereby acquires the
would have been to transfer without a receipt of warehouseman to direct obligation of
goods represented thereby (Sec. 44, WHR Law). the warehouseman
hold possession of
to hold possession of
the goods for him the goods for him
Note: The indorsee does NOT guarantee that the WHM will as if the
comply with his duties (Sec. 45, WHR Law). (ibid).
warehouseman
Q: Do the warranties mentioned above apply to a
directly Note: Prior to notice, the
WHR given as collateral?
contracted with title of the transferee may
him (ibid). be defeated by the levy of
A: No. A creditor receiving the WHR given as an attachment or execution
collateral makes no warranty (Sec. 46, WHR Law) upon the goods by a creditor
2. If not indorsed:
of the transferor or by a
He may compel
DISTINCTION BETWEEN A NEGOTIABLE INSTRUMENT notification to the
indorsement; other- warehouseman by the
AND A NEGOTIABLE WAREHOUSE RECEIPT
wise, he would transferor or a subsequent
acquire title as that purchaser from the
Q: Distinguish negotiable instrument from a
of an assignee (Sec. transferor of a subsequent
negotiable WHR?
43, WHR Law.). sale of the goods by the
transferor. (ibid.)
A:
Defeats the lien of the
NEGOTIABLE
NEGOTIABLE WHR seller of the goods covered Acquires the title as that of
INSTRUMENT his transferor.
thereby. (Sec. 49, WHR
Contains an Does not contain an Law.)
unconditional promise unconditional promise to Pending notification to the
Good covered cannot be
to pay a sum certain in pay a sum certain in warehouseman, goods can
garnished, attached or
money. money. be garnished, attached or
levied on execution by
The subject is levied on execution
The subject is money. unless:
merchandise. Reason: Absent such notice,
The negotiable The warehouse receipt is both the warehouseman and
1. Receipt is the sheriff have a right to
instrument is the object not the object of value.
surrendered. assume that the goods are

21 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

2. Its negotiation is still owned by the person and fees and other charges.
enjoined by the whose name appears in the
court. receipt. Q: What is the proper recourse of the
3. The goods are warehouseman if he is uncertain as to who is
impounded by the entitled to the goods? Explain. (2005 Bar Question)
court. (Sec. 25, WHR
Law.) A: Since there is a conflicting claim of ownership or
title, the warehouseman should file a complaint in
Note: This shall not apply if interpleader requiring the claimants to interplead.
the person depositing is The matter involves a judicial question as to whose
not the owner of the goods claim is valid.
or one who has no right to
convey title to the goods
Q: What is the rule where a warehouse receipt is
binding upon the owner.
transferred to secure payment of a loan by way of
The assignee only steps
Protects the purchaser in pledge or mortgage?
into the shoes of the
good faith and for value.
assignor.
A: The pledgee or mortgagee does not automatically
become the owner of the goods but merely retains
Q: Will breach of duty on the part of the person
the right to keep, and with the consent of the owner
making the negotiation or fraud, mistake or duress
to sell them so as to satisfy the obligation from the
on the owner of the receipt to entrust possession or
proceeds for the simple reason that the transaction is
custody, impair the validity of negotiation of a
not a sale but only a mortgage or pledge. Likewise, if
WHR?
the property is lost without the fault or negligence of
the mortgagee or pledgee, then said goods are to be
A: No, provided the person to whom the receipt was
regarded as lost on account of the real owner,
negotiated or a person to whom the receipt was
mortgagor or pledgor (PNB v. Sayo, Jr., G.R. No.
subsequently negotiated paid value therefor, without
129198, July 9, 1998).
notice of the breach of duty, or fraud, mistake or
duress (Sec. 47, WHR Law).
Q: Does the non-payment by the original depositors
of the purchase price render the further negotiation
Q: Coco was issued by a WHM a negotiable receipt
of the receipt invalid?
for safekeeping by the latter of his goods. Can the
judgment creditor of Coco levy by execution the
A: No, the negotiation of the warehouse receipt by
goods covered by the negotiable receipt?
the buyer of goods purchased from and deposited to
the warehouseman is valid even if the
A: The goods cannot, while in the possession of the
warehouseman who issued the negotiable warehouse
WHM, be attached by garnishment or otherwise, or
receipt was not paid by the buyer. The validity of the
be levied upon under an execution unless the receipt
negotiation cannot be impaired by the fact that the
be first surrendered to the WHM, or its negotiation
owner/warehouseman was deprived of the
enjoined. The warehouseman cannot be compelled to
possession of the same by fraud, mistake or
deliver the actual possession of the goods until the
conversion (PNB v. Noahs Ark Sugar Refinery, G.R.
receipt is surrendered to it or impounded by the
No. 107243, Sept. 1, 1993).
court.
Q: T delivers two refrigerators to the warehouse of
Q: Assuming that prior to the levy, the receipt was
W who then issues a negotiable receipt undertaking
sold to Yoyo on the basis of which he filed a claim
the delivery of the refrigerators to T or bearer. T
with the sheriff. Would Yoyo have better rights to
entrusted the receipt to B for safekeeping only. B
the goods than the creditor? Explain your answer.
negotiated it, however, to F who bought it in good
(1999 Bar Question)
faith and for value. Who is entitled to the delivery of
the refrigerators? (2011 Bar Question)
A: Yes. Yoyo, as a holder for value of the receipt, has
a better right to the goods than the creditor. It is
A: F, since he is a purchaser in good faith and for
Yoyo that can surrender the receipt which is in its
value.
possession and can comply with the other require-
ments which will oblige the warehouseman to deliver
the goods, namely, to sign a receipt for the delivery
of the goods, and to pay the warehouseman's liens

UNIVERSITY OF SANTO TOMAS 22

2013 GOLDEN NOTES
 WAREHOUSE RECEIPTS LAW
DUTIES OF A WAREHOUSEMAN
Q: What are the obligations of a warehouseman?
A: To: T D(sasusi) K
1. Take care of the goods entrusted to his
safekeeping
2. Deliver them to the holder of the receipt or
the depositor provided there is demand by the
depositor accompanied by either:
a. An offer to satisfy the warehousemans lien
b. An offer to surrender the receipt, if negotiable
with such indorsements as would be
necessary for the negotiation of the receipts
c. A readiness and willingness to sign, when
the goods are delivered, an
acknowledgement that they have been
delivered, if such signature is requested by
the warehouseman (Sec. 8, WHR Law)
3. Keep the goods separate from the goods of other
depositors, except if authorized by agreement or
by custom, fungible goods may be mingled with
other goods of the same kind and grade.
Q: When is the need for a demand by the depositor
not necessary?
A: When the warehouseman has rendered it beyond
his power to deliver the goods.
Q: When is refusal to deliver by the warehouseman
justified?
A:Sa S.B. Co(nfa) F(elvis)
1. If the warehousemans lien is not SAtisfied by
the claimants (Sec. 31, WHR Law)
2. Where the goods have already been Sold to
satisfy the warehousemans lien or because of
their perishable or hazardous nature (Sec. 34,
WHR Law)
3. If the warehouse receipt is negotiated Back to
him.
4. When the holder does not satisfy the
COnditions prescribed in Sec. 8, WHR Law:
a. Non-satisfaction of warehousemans lien.
b. Failure to surrender warehouse receipt.
c. Refusal to sign the Acknowledgement
receipt, acknowledging the receipt of the
goods from the warehouse.
23
5. The failure was not due to any Fault on the
part of the warehouseman:
a. Upon request by or on behalf of the person
lawfully Entitled (Sec. 10, WHR Law).
b. If the goods are Lost, due to a fortuitous
event exclusively.
c. If the warehouseman needs reasonable
time to ascertain the Validity of the claim if
someone other than the depositor claims
title to the goods (Sec. 18, WHR Law).
d. If he had Information that the delivery
about to be made was to one not lawfully
entitled (Sec. 10, WHR Law)
e. If Several persons claim the goods. (Sec. 17,
WHR Law.)
Q: The warehouseman, by issuing the warehouse
receipt, acknowledges that the goods are in his
possession, but he can refuse to deliver the goods to
the holder of the warehouse receipt covering the
goods if --- (2012 Bar Question)
a) the warehouse receipt covering the goods is not
presented.
b) the lien of the warehouseman is not satisfied.
c) the said holder presents a materially altered
warehouse receipt.
d) All of the above.
A: D. A WHM is bound to deliver the goods upon a
demand made if such is accompanied with (1) an
offer to satisfy the WHMs lien; (2) offer to surrender
the receipt if negotiable; and (3) readiness to sign an
acknowledgment receipt when the goods are
delivered. (Sec. 8, WHR Law.)
HOWEVER, Sec. 31 of the said Law expressly provides
that a WHM having a lien valid against the person
demanding the goods may refuse to deliver the goods
to him until the lien is satisfied.
Further, Sec. 13 provided that the alteration of a
receipt shall not excuse the WHM who issued it from
any liability if such alteration was: (1) immaterial,
(2) authorized, or (3) made without fraudulent intent.
Q: What is the remedy if the WHR is lost or
destroyed?
A: A court of competent jurisdiction may order the
delivery of the goods only:
a. Upon satisfactory proof of the loss or destruction
of the receipt; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

b. Upon the giving of a bond with sufficient sureties 4. Material alteration fraudulently made
to be approved by the court. (Sec. 14, WHR Law.) warehouseman is liable according to the
original tenor of the receipt to a purchaser of
Note: The delivery of the goods under an order of the court the receipt for value without notice, and even to
shall NOT relieve the WHM from liability to a person to the alterer and subsequent purchasers with
whom the negotiable receipt has been or shall be notice except that as regards to the last
negotiated for value without notice of the proceedings or
two, the warehousemans liability is limited only
of the delivery of the goods (ibid.).
to delivery as he is excused from any liability
Q: When does the duty to insure the goods arise?
Q: What are the instances where a WHM is
criminally liable for his acts?
A: RIEL
1. Where the warehouse receipt contains a
A: GF-DOOM-C
Representation to that effect.
1. Issuance of warehouse receipts for Good not
2. Where it was an Inducement for the depositor to
received. (Sec. 50, WHR Law)
enter into the contract;
2. Issuance of receipt containing False
3. Established practice; or
statement.(Sec. 51, WHR Law)
4. Where the Law provides
3. Issuance of Duplicate negotiable warehouse
receipt not marked as such. (Sec. 52, WHR Law)
Q: What is conversion?
4. Issuance of a negotiable warehouse receipt of
which he is an Owner without stating such fact of
A: An unathorized assumption and exercise of the
ownership. (Sec. 53, WHR Law)
right of ownership over goods belonging to another
5. Delivery of goods without Obtaining negotiable
through the alteration of their condition or the
warehouse receipt. (Sec. 54, WHR Law)
exclusion of the owners right (Bouviers Law
6. Negotiation of receipt for Mortgaged goods. (Sec.
Dictionary).
55, WHR Law)
7. Commingling of goods. (Sec. 24, WHR Law)
Q: What are the instances where a WHM is liable for
conversion?
Q: What are the other acts for which WHM is liable?
A:
A: DuMP-SICC
1. Where the delivery is made to person other than
those authorized
1. Failure to stamp Duplicate on copies of
2. Even if delivered to persons entitled, he may still
negotiable receipt (Sec.6, WHR Law)
be liable for conversion if prior to delivery:
2. Misdelivery of goods (Sec. 10, WHR Law)
a. He had been requested not to make such
3. Failure to Place non-negotiable or not-
delivery; or
negotiable on a non-negotiable receipt (Sec. 7,
b. He had received notice of the adverse claim
WHR Law)
or title of a third person.
4. Failure to give notice in case of Sale of goods to
satisfy lien (Sec. 33, WHR Law) or because the
Q: Give the effects of alteration of the receipt on the
goods are perishable or hazardous (Sec. 34, WHR
liability of the warehouseman.
Law)
5. Issuing receipt for non-existing goods or
A:
misdescribed goods (Sec.20, WHR Law)
1. Alteration immaterial whether fraudulent or
6. Failure to take Care of the goods (Sec. 21, WHR
not, whether authorized or not, the
Law)
warehouseman is liable on the altered receipt
7. Failure to effect Cancellation of a negotiable
according to its original tenor
receipt upon delivery of the goods (Sec. 11, WHR
Law)
2. Authorized material alteration the
warehouseman is liable according to the terms
of the receipt as altered

3. Material alteration innocently made the

warehouseman is liable on the altered receipt
according to its original receipt

UNIVERSITY OF SANTO TOMAS 24

2013 GOLDEN NOTES
 WAREHOUSE RECEIPTS LAW
WAREHOUSEMANS LIEN
Q: What charges are covered by a WHMs lien?
A: PMA
1. Charges for storage and Preservation of the goods
(insurance and others may be included as long as
it is stipulated)
2. Money advanced, interest, insurance,
transportation, labor, weighing, coopering and
other charges and expenses in relation to such
goods
3. Charges and expenses for notice, and
Advertisements of sale, and for sale of the goods
where default had been made in satisfying the
WHMs lien (Sec. 27, WHR Law)
Q: What are the remedies available to a WHM to
enforce his WHMs lien?
A: REC
1. By Refusing to deliver the goods until the lien is
satisfied
2. By causing the Extrajudicial sale of the property
and applying the proceeds of the value of the lien
3. By filing a civil action for Collection of the unpaid
charges or by way of counterclaim in an action to
recover the property from him or such other
remedies allowed by law for the enforcement of a
lien against personal property or to a creditor
against his debtor, for the collection from the
depositor of all the charges which the depositor
has bound himself to pay.
Q: Does the lien over the goods preclude the WHM
to avail all other remedies?
A: No.Whether a warehouseman has or has not a lien
upon the goods, he is entitled to all remedies allowed
by law to a creditor against a debtor for the collection
from the depositor of all charges and advances which
the depositor has expressly or impliedly contracted
with the warehouseman to pay (Sec 32, WHR Law).
Q: Against whose goods may the lien be enforced?
A:
1. Goods belonging to the person who is liable as
debtor; and
2. Goods belonging to others which have been
deposited at any time by the debtor with
authority to make a valid pledge (Sec. 28, WHR
Law)
25
Q: What is the effect of sale made to satisfy a
WHMs lien or in case when the goods are
perishable or hazardous in nature?
A: The WHM shall not thereafter be liable for failure
to deliver the goods to the depositor or owner of the
goods or to a holder of the receipt given for the
goods when they were deposited, even if such receipt
be negotiable (Sec. 36, WHR Law).
Q: How will the execution sale to satisfy the WHMs
lien be conducted?
A:
1. Notice of the sale
a. published once a week for two consecutive
weeks in a newspaper published in the place
where such sale is to be held; or
b. If there is no newspaper published in such
place, the advertisement shall be posted at
least ten days before such sale in not less than
six conspicuous places therein.
Which notice shall indicate the following:
i. Description of the goods to be sold;
ii. Name of the owner or person on whose
account the goods are held; and
iii. Time and place of the sale
2. Sale shall be held not less than fifteen days from
the time of the first publication.
3. In the place where the lien was acquired.
Note: The balance, if any, of the proceeds of the execution
sale shall be held by the WHM and delivered on demand to
the person to whom he would have been bound to deliver
or justified in delivering goods (Sec.31, WHR Law).
Q: What is the effect of the non-publication of the
notice of sale?
A: Where the sale was made without the publication
required and before the time provided by law, such
sale is void and the purchases of the goods acquires
no title to them.
Q: Can a person claiming right over the property
stop the execution sale of the goods?
A: Yes, at any time before the goods are so sold, any
person claiming a right of property or possession
therein may pay the WHM the amount necessary to
satisfy his lien and to pay the reasonable expenses
and liabilities incurred inserving notices and
advertising and preparing for the sale up to the time
of such payment (Sec.33, WHR Law).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: How may the WHM lose his lien?

A:
1. By surrendering possession thereof, or
2. By refusing to deliver the goods when a demand is
made with which he is bound to comply. (Sec. 29)

Note: Where a negotiable receipt is issued, with the

exception of the charges for the storage or preservation
of goods for which a negotiable receipt has been
issued, the lien exists only for other charges expressly
enumerated in the receipt so far as they are written
although the amount of the said charge isnt stated.

UNIVERSITY OF SANTO TOMAS 26

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW
NEGOTIABLE INSTRUMENTS LAW (NIL)
Q: What is a negotiable instrument (NI)?
A: It is a written contract for the payment of money
which is intended as a substitute for money and
passes from one person to another as money, in such
a manner as to give a holder in due course the right
to hold the instrument free from defenses available
to prior parties. The instrument must comply with
Sec. 1 of the NIL (Sundiang & Aquino, Reviewer on
Commercial Law, 2009 Edition, pg. 5).
Q: What are the laws which govern a negotiable
instrument?
A:
1. NIL-For instruments which meet the requisites of
negotiability.
2. New Civil Code (NCC) Applies suppletorily in
cases of assignment and demand for payment of
an NIL .
3. Code of Commerce Applies suppletorily to NIL in
cases of crossed checks.
Q: Are NIs considered legal tender?
A: No. NIs are not money but mere substitutes for
money. Nor are they legal tender (Sec. 60, New
Central bank Act [NCBA], RA 7653).
GR: Their delivery does not by itself produce the
effect of payment (Roman Catholic Bishop of
Malolos vs. Intermediate Appellate Court, 191
SCRA 411 [1990].)
XPNs: NI shall produce the effect of payment when:
1. When a check has been cashed, or when through
the fault of the creditor they have been impaired
(Art. 1249, Civil Code).
2. If a check representing demand deposit has been
cleared and credited to the account of the
creditor, such shall be equivalent to delivery to
the creditor of cash. (Sec. 60, NCBA.)
Q: Negotiable instruments are used as substitutes
for money, which means--- (2012 Bar Qustion)
a) that they can be considered legal tender.
b) that when negotiated, they can be used to pay
indebtedness.
c) that at all times the delivery of the instrument is
equivalent to delivery of the cash.
d) that at all times negotiation of the instruments
requires proper indorsement.
27
A: B. When negotiated, NIs can be used to pay
indebtedness
Q. What are the Characteristics or features of
Negotiable instrument?
A: The characteristics of a negotiable instrument are:
1) Negotiability the note may pass from hand to
hand similar to money so as to give the holder in
due course (HIDC) the right to hold the
instrument and collect the sum payable for
himself free from any infirmity in the instrument
or defect in the title of any of the prior parties or
defenses available to them among themselves.
2) Accumulation of secondary contracts a
characteristic of NI where additional parties
become involve as they are transferred from one
person to another.
(De Leon, The Philippine Negotiable Instruments
Law, 2004 Ed., pg. 4-5.)
FORMS AND INTERPRETATION
Q: What are the rules of construction in case of
ambiguities in a negotiable instrument?
A:
1. Words prevail over figures
2. Interest runs from the date of the instrument, if
date from which interest is to run is unspecified; if
undated, from the issue thereof
3. If undated, instrument is considered dated as of
the time it was issued
4. Written provisions prevail over printed
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election
6. When not clear in what capacity it was signed,
deemed signed as an indorser
7. "I promise to pay" when signed by two or more
persons is deemed to be jointly and severally
liable. (Sec. 17, NIL.)
Q: 29. A promissory note which is undated is
presumed to be--- (2012 Bar Question)
a) dated as of the date of issue;
b) dated as of the date of the first indorsement;
c) promissory note is invalid because there is no
date;
d) dated on due date.
A: A. An undated promissory note is deemed to have
been dated as of the date of issue
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
REQUISITES OF NEGOTIABILITY
Q: What are the factors to determine the
negotiability of the instrument?
A: FRI
1. Words that appear on the Face of negotiable
instrument
2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole
of the instruments
Q: What are the incidents in the life of a negotiable
instrument?
A: The following are the incidents in the life of a NI:
1. Issue
2. Negotiation
3. Presentment for acceptance (in certain kinds
BOEs)
4. Acceptance
5. Dishonor by non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Protest in case of foreign bill
10. Discharge
Q: What are the elements of a NI?
A: SUn-DOrA
1. It must be in writing and Signed by the maker or
drawer
2. Must contains an Unconditional promise or order
to pay a sum certain in money
3. Must be payable on Demand, or at a fixed or
determinable future time
4. Must be payable to Order or to bearer (so called
badges of negotiability)
5. If Addressed to a drawee, he must be named or
otherwise indicated with reasonable certainty.
(Sec. 1, NIL.)
Note: A negotiable instrument need not follow the exact
language of NIL, as long as the terms are sufficient which
clearly indicate an intention to conform to the
requirements of the law (Sec. 10, NIL).
The requirements stated in Sec. 1 must appear on the face
of the instrument otherwise the instrument would not be
negotiable.
Q: What are the provisions that do not affect the
negotiability of an instrument?
A: The following do NOT affect the negotiability of an
instrument: DVNo S. CurSECo Law
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
1. Omission of Date
2. Non-specification of Value given or that any
value had been given
3. Non-specification of place where it is drawn or
payable
4. Bears a Seal
5. Designation of particular kind of Currency in
which payment is to be made. (Sec. 6, NIL.)
Additional provisions which:
6. Authorizes the sale of collateral Securities on
default
7. Gives the holder an Election to require
something to be done in lieu of payment of
money.
8. Authorizes Confession of judgment on default
9. Waives the benefit of the Law intended for the
protection of the obligor (Sec. 5, NIL).
Q: When is a promise to pay deemed to be
unconditional?
A: The promise or order to pay must NOT be subject
to any condition or contingency. An instrument
payable upon a contingency is NOT negotiable even if
the condition thereon has been fulfilled.
An unqualified order or promise to pay is
unconditional though coupled with:
a. An indication of 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 gave rise to
the instrument. But an order or promise to pay
out of a particular fund is conditional (Sec 3, NIL).
Q: B borrowed Php1 million from L and offered to
him his BMW car worth Php 1 Million as collateral. B
then executed a promissory note that reads: I, B,
promise to pay L or bearer the amount of Php1
Million and to keep my BMW car (loan collateral)
free from any other encumbrance. Signed, B. Is this
note negotiable? (2011 Bar Question)
A: No, since it contains a promise to do an act in
addition to the payment of money.
Note: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of payment
of money.
Q: A writes a promissory note in favor of his
creditor, B. It says: Subject to my option, I promise
28
 NEGOTIABLE INSTRUMENTS LAW
to pay B Php1 Million or his order or give Php1
Million worth of cement or to authorize him to sell
my house worth Php1 Million. Signed, A. Is the
note negotiable? (2011 Bar Question)
A: No, because the exercise of the option to pay lies
with A, the maker and debtor.
Note: In order not to affect the negotiability of the
instrument, the option must be with the holder/creditor.
Q: What are the rules governing the use of phrases
in the NIs?
A:
a. As to promissory note
1. The word promise need not be used. Any
expression equivalent to a promise is sufficient
2. Mere acknowledgment of a debt is not a
promissory note.
3. Language used must indicate a written
undertaking to pay
b. As to bill of exchange
1. It must contain an order for payment as
distinguished from a mere request.
2. The order is not invalidated because it contains
words of civility. Thus, insertion of polite words
like please does not alter the character of
the instrument; as long as the language
expresses the drawers will that the money be
paid.
Note: An instrument which mentions a particular fund out
of which reimbursement is to be made is negotiable. But an
instrument payable out of a particular fund is non-
negotiable. In this latter case, the fund specified is the
direct source of payment; therefore, it is subject to the
availability of fund, hence conditional.
Q: What constitutes certainty as to sum?
A: The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:ISDEA
a. with Interest; or
b. by Stated installments; or
c. by stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due (
acceleration clause);
d. with Exchange, whether at a fixed rate or at the
current rate; or
e. with cost of collection or an Attorneys fees, in
case payment shall not be made at maturity (Sec.
2, NIL).
29
Q: Is it required that the NI be payable in Philippine
Peso?
A: No. The money referred into may be our legal
tender or foreign currency. An instrument is still
negotiable although the amount to be paid is
expressed in currency that is not legal tender so long
as it is expressed in money (PNB v Zulueta, 101 Phil
1071.)
Q: What would be the effect if a bill or note is
payable other than in money?
A: GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or
in property, the same is NOT negotiable.
XPNs: Negotiability is NOT affected if the note
contains an additional provision which: SECo Law
1. Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity; or
2. Gives the holder an Election to require
something to be done in lieu of payment of
money; or
3. Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for the
advantage or protection of the obligor. (Sec. 5,
NIL.)
Q: When is payment by installment certain?
A: Payment by installment is certain if the dates of
each installment is fixed AND the amount to be paid
for each installment is stated (Sec. 2, NIL; Sundiang,
2009, supra, pg. 19).
Q: What are the rules as to interest in the NI?
A: In the absence of a date as to which interest is to
run, it shall be from the date of instrument, or in the
absence thereof, at the date of issue. In the absence
of interest rate, it shall be the legal rate which is 12%.
Q: When is a NI payable on demand or at a fixed or
determinable future time?
A:
1. Payable on demand The holder may call for
payment any time, likewise, the maker may also pay
any time and the refusal of the holder to accept
payment shall stop the running of interest should
there be any, but obligation to pay the note subsist.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
An instrument is payable on demand:
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed.
(Sec 7, NIL.)
c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand (ibid).
2. At a fixed time a term or time instrument is
payable only upon the arrival of the time for
payment.
3. At a determinable future time -An instrument is
payable at a determinable future time which is
expressed to be payable:
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future
time specified therein; or
c. On or at a fixed period after the occurrence of
a specified event which is certain to happen,
though the time of happening be uncertain.
(Sec. 4, NIL).
Q: What is an acceleration clause? Discuss its
effects.
A: Acceleration Clause is a provision, that upon
default in payment of any installment or interest, the
whole shall become due (Sec.2[c], NIL).
Q: What are the rules governing the negotiability of
instruments with an acceleration clause?
A:
1. If the option to accelerate the maturity is on the
maker, whether such option is absolute or
conditional, it is negotiable.
2. Where acceleration is at the option of the holder
and can only be exercised upon the happening of
the specified event, still negotiable.
3. But where the holders right to accelerate is
unconditional, the time of payment is rendered
uncertain, the instrument would NOT be
negotiable.
Q: What is an extension clause? Discuss its effects.
A: Extension Clauses are provisions extending the
time of payment.
GR: An extension clause does NOT affect the
negotiability of the instrument.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
XPN: Where a note with a fixed maturity
provides that the maker has the option to extend
time of payment until the happening of a
contingency, the date is uncertain and the
instrument is non-negotiable.
Q: When is an instrument payable to order?
A: The instrument is payable to order where it is
drawn payable to the order of a specified person or to
him or to his order. It may be drawn payable to the
order of:
PaDD JoinSH
a. A Payee who is not a maker, drawer, or drawee;
b. The Drawer or maker; or
c. The Drawee; or
d. Two or more payees Jointly; or
e. One or some of Several payees; or
f. The Holder of an office for the time being (Sec. 8,
NIL).
Q: When must the drawee of a NI be named with
reasonable certainty?
A:
1. In a BOE, the drawee must be named or otherwise
designated with reasonable certainty. (Sec. 1, NIL.)
2. A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession. (Sec. 127, NIL.)Eg. An
instrument may be addressed to A and B but not
to A or B.
3. An instrument payable to the order of the
bearer has been held to be an instrument
payable to order (10 C.J.S. 575-576).
Q: When is an instrument payable to bearer?
A: ENaF PaLa
a. When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
b. When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
c. When it is payable to the order of a Fictitious
person or non-existing person, and such fact was
known to the person making it so payable; (e.g. Pay
to John Doe or order)
d. When the name of the Payee does not purport to
30
 NEGOTIABLE INSTRUMENTS LAW
be the name of any person; (Pay to cash.)
e. When the only or the Last indorsement is an
indorsement in blank. (Sec 9, NIL.)
Illustration:
BACK of NI (indorsement)
Pay to A Sgd. P
Pay to B Sgd. A
Sgd. B
Q: What is the Fictitious-Payee rule?
A: A check is a bill of exchange drawn on a bank
payable on demand. It is either an order or a bearer
instrument but when the payee is fictitious or not
intended to be the true recipient of the proceeds of
the check, the check is considered as a bearer
instrument and as such it does not require
indorsement to be validly negotiated. It is negotiable
by mere delivery (Divina, Handbook on Philippine
nd
Commercial Law, 2 Edition, pg. 9, citing PNB v.
Rodriguez, 566 SCRA 513).
Q: What is the difference of having a check payable
to a fictitious payee from that payable to a specified
payee?
A: If a check is payable to a specified payee, it is an
order instrument, which requires indorsement from
the payee or holder before it may be validly
negotiated; but it may nevertheless be considered as
a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus,
checks issued to Prinsipe Abante or Si Malakas at
si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments
because the named payees are fictitious and non-
existent (ibid., pg. 9-10).
Q: Is the application of the fictitious-payee rule
limited to those are fictitious and non-existent?
A: No. A fictitious payee is NOT limited to person
having no real existence. An actual, existing, and
living payee may also be fictitious if the maker of
the check did not intend for the payee to in fact
receive the proceeds of the check (Ibid., pg. 10, PNB
case citing Sec. 9[c], NIL).
Q: Who bears the loss in a fictitious-payee situation?
A: In a fictitious-payee situation, the drawee bank is
31
absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of
the check will bear the loss (Ibid).
Q: Is there an exception to the fictitious-payee rule?
A: Yes. There is a commercial bad faith exception to
the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee or any transferee
of the check for that matter, will work to strip it of
this defense (Ibid)
Q: A promissory note which does not have the
words "or order" or "or bearer" will render the
promissory note non-negotiable, and therefore ---
(2012 Bar Question)
a) it will render the maker not liable
b) the note can still be assigned and the maker
made liable;
c) the holder can become holder in due course;
d) the promissory note can just be delivered and
the maker will still be liable
A: B. The note can still be assigned and the maker
made liable
KINDS OF NEGOTIABLE INTRUMENTS
Q: What are the two kinds of negotiable instruments
under the law?
A:
1. Promissory notes (PN) 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 (Sec. 184, NIL).
2. Bill of exchange (BOE) An unconditional order
in writing addressed by one person to another
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future time
a sum certain in money to order or to bearer
(Sec. 126, NIL).
Note: A check is a bill of exchange drawn on a bank payable
on demand (Sec 185, NIL).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: Distinguish PN from a BOE. may treat it as either at his election (Sec. 17[e],
NIL)
A:
PROMISSORY Q: Who are the parties to a NI? Discuss their
BILL OF EXCHANGE
NOTE liabilities.
Promise to
Undertaking Order to pay
pay A:
As to PARTIES FUNCTION LIABILITY
3 parties (upon
number of 1. Maker One who makes Primarily
2 parties acceptance of the
original PN the promise and liable
drawee)
parties signs the
As to Maker is instrument.
Drawer is
liability of primarily 2. Payee The party to
secondarily liable
parties liable whom
2 presentments payment is
As to Only 1
(for acceptance originally
number of presentment
and for payment) payable.
presentmen (for payment)
are generally
ts needed is needed
needed PARTIES FUNCTION LIABILITY
Drawer The person who Secondarily
Q: Is a BOE considered an assignment of funds in the issues and draws liable, except
hands of the drawee? the bill. when
drawee
A: No, a bill of itself does not operate as an BOE refused to
assignment of the funds in the hands of the drawee accept
available for the payment thereof, and the drawee is Drawee The party upon Not liable
not liable on the bill unless and until he accepts the whom the bill is until he
same (Sec. 127, NIL). drawn. becomes
acceptor
Q: Can a BOE be addressed to more than one
drawee? Payee The party to whom The party to
payment is whom
A: Yes, it may be addressed to two or more drawees originally payable. payment is
jointly, whether partners or not; but not to two or originally
more drawees in the alternative or in succession. payable.
(Sec. 128, NIL). Acceptor The acceptor is the Primarily
drawee who liable
Q: Distinguish an Inland BOE from a Foreign BOE. accepts the bill

A: An Inland BOE is one which is, or on its face
purports to be, both drawn and payable within the
Philippines and any other bill is a foreign bill.
Note: Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (Sec. 109, NIL).
Q: When may a BOE be treated as PN?
A:
1. Where in a bill the drawer and the drawee are the
same person (Sec. 130, NIL)
2. The drawee is a fictitious person (Sec. 130, NIL)
3. The drawee does not have the capacity to
contract (Sec. 130, NIL)
4. Where the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder
Q: Who is a Referee in case of need?
A: Referee in case of need is the person named by the
drawer or indorser in the NI as the one to whom the
holder may resort in case the BOE is dishonored by
non-acceptance or non-payment.
Note: It is the option of the holder to refer to the referee in
case of need or not as he may see fit (Sec. 131, NIL.)
Q: Is the acceptance of the BOE by the drawee an
important requisite for the NIs negotiability?
A: No. The acceptance of a bill of exchange is not
important in the determination of its negotiability.
The nature of acceptance is important only in the
determination of the kind of liabilities of the parties

UNIVERSITY OF SANTO TOMAS 32

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW

involved (PBCOM v Aruego, 102 SCRA 530) Q: What is the rule when an instrument is complete
and delivered?
Q: Distinguish a drawer from a maker.
A: Without forgery and alteration, all parties are
A: bound.
DRAWER MAKER
Issues a BOE Issues a PN Q: What are the liabilities of the parties to a NI
Only secondarily liable Primarily liable where an indorsement is forged?
Can limit his liability by
putting without Cannot limit liability A:
recourse ORDER INSTRUMENTS
ORDER PROMISSORY ORDER BILL OF
COMPLETION AND DELIVERY NOTE EXCHANGE
Prior parties are not Prior parties are not
Q: What are the steps in the issuance of NI? bound. Forged signature bound. Forged signature
is wholly inoperative is wholly inoperative
A: unless estoppel sets in unless estoppel sets in
1. The mechanical act of writing the instrument with regard prior parties with regard prior parties
completely and in accordance with Sec. 1 of NIL. (cut-off rule). (cut-off rule).

2. Delivery of the complete instrument by the maker

or the drawer to the payee or holder with the Subsequent parties to Subsequent parties to
intention of giving effect to it. the forgery is bound the forgery is bound

Note: A Drawers account

Q: What is delivery?
cannot be charged by the
Drawee.
A: Delivery refers to the transfer of possession, actual
or constructive, from one person to another (Sec. The Drawer is not liable to
191, NIL), with the intent to transfer title to payee the collecting bank, since
and recognize him as holder thereof. the duty of the latter is
only to payee. Collecting
Q: When is an instrument incomplete? bank bears loss.

The Payee can recover

A: When it is wanting in any material particular. (Sec.
from either the Drawer or
14, NIL.) Collecting bank, but not
from the Drawee unless he
Q: What are the various situations involving accepts the bill.
negotiable instruments? BEARER INSTRUMENTS
BEARER PROMISSORY BEARER BILL OF
A: NOTE EXCHANGE
1. Incomplete instrument Prior parties liable. Prior parties liable
a. Delivered
i. With forgery and alteration However, the forged However, the forged
ii. Without forgery and alteration signatory is not liable to signatory is not liable to
b. Not delivered a party who is not a a party who is not a
i. With forgery and alteration holder in due course. holder in due course.
ii. Without forgery and alteration
2. Complete instrument INSERTION OF DATE
a. Delivered
i. With forgery and alteration Q: Is the date essential to make an instrument
ii. Without forgery and alteration negotiable?
b. Not delivered
i. With forgery and alteration A: GR: The date is not essential to the negotiability of
ii. Without forgery and alteration the instrument (not one of the requirements
under sec. 1).

33 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

A: The holder has a prima facie authority to complete

Note: If the NI is dated, such date is deemed a prima
facie proof that it is the true date of the making,
drawing, acceptance or indorsement of the
instrument (Sec. 11, NIL).
XPN: Date is important to determine maturity, as
when:
1. Where the instrument is payable within a
specified period after date, or after sight.
2. When the instrument is payable on demand,
date is necessary to determine whether the
instrument was presented within a reasonable
time from issue, or from the last negotiation.
3. When the instrument is an interest-bearing
one, to determine when the interest starts to
run.
Q: When may a holder insert the date in an
instrument?
it (Sec. 14, NIL).
Q: What is meant by material particular?
A: Any particular proper to be inserted in a NI to
make it complete.
Q: What serves as a prima facie authority to fill up
the blanks?
A: A signature on a blank paper delivered by the
person making the signature in order that the paper
may be converted into a NI operates as a prima facie
authority to fill it up as such for any amount (ibid).
Note: 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 (ibid).

A: Q: What is the effect if such completed instrument

1. Where an instrument expressed to be payable at a
fixed period after date is issued undated, or
2. Where the acceptance of an instrument payable
at a fixed period after sight is undated (Sec. 13,
NIL).
Q: What is the effect of insertion of wrong date?
was negotiated to a HIDC?
A: After completion, the completed instrument which
was subsequently negotiated to a HIDC, 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 (ibid).

A: The insertion of a wrong date does NOT avoid the Note: Hence, the defense that the blanks were filled up
instrument in the hands of a subsequent holder in beyond the authority given and/ or beyond the reasonable
time, is not available as against a HIDC. This defense is
due course, but as to a HIDC, the date so inserted is
merely a personal one.
to be regarded as the true date (ibid.).
Q: Distinguish Sec. 14, 15 and 16, NIL from one
Note: With respect to the person who inserted the wrong
date, however, the instrument is avoided (Bank of Houston another.
v. Day, 145 Mo. Appl. 410, 122 SW 756)
A:
Q: What is the effect of ante-dating or post-dating SEC 14 SEC 15 SEC 16
of an instrument? Incomplete Incomplete and Complete
instrument which undelivered instrument but
A: The instrument is NOT invalid by that fact alone, has been instrument. undelivered.
provided it is not done for illegal or fraudulent delivered by the
purpose (Sec. 12, NIL). maker or the
drawer to the
COMPLETION OF BLANKS payee or holder.
1. Where Instrument will 1. If instrument
INCOMPLETE BUT DELIVERED INSTRUMENTS (Sec. instrument is not be a valid is not in
14) wanting in any contract in the possession of
material hands of any party who
Q: Who has the authority to fill up the blanks in an particular, the holder, if signed, a valid
incomplete but delivered instrument? person in completed and and intentional
possession has negotiated delivery by him
prima facie without is prima facie

UNIVERSITY OF SANTO TOMAS 34

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW

authority to authority. presumed. INCOMPLETE AND UNDELIVERED INSTRUMENTS

complete it by (Sec. 15)
filing up blanks 2. If holder is
therein. HIDC, valid Q: What is the rule when an instrument is
delivery by all incomplete and undelivered?
2. When the parties prior to
instrument is him so as to A: Where an incomplete instrument has not been
merely a make them delivered, the holder, whether HIDC or not, cannot
signature on liable to him is validly enforce such instrument against the party
blank paper conclusively whose signature was placed BEFORE delivery (Sec. 15,
delivered by presumed. NIL).
person making
the signature in Q: What about the party whose signature was
order that the placed after delivery?
paper may be
converted into a A: The instrument can be validly enforced against the
NI, the person in party whose signature was placed AFTER delivery like
possession has an indorser because the indorser warrants the
prima facie instrument to be genuine and in all respect what it
authority to fill purports to be.
up as such for
any amount. Q: Can a HIDC hold liable a maker for instruments
which are incomplete and undelivered supposing
Note: The holder that the note was stolen, filled-up, and was
must only act in subsequently negotiated?
accordance with
the authority A: No. The law is specific that the instrument is not a
granted him,
valid contract in the hands of any holder. The phrase
otherwise it may
be used as a any holder includes a HIDC.
defense against
him. Note: Non-delivery of an incomplete instrument is a real
defense (ibid.)

Q: Lorenzo signed several blank checks instructing
Nicky, his secretary, to fill them as payment for his
obligations. Nicky filled one check with her name as
payee, placed P30,000.00 thereon, endorsed and
delivered it to Evelyn as payment for goods the
latter delivered to the former. When Lorenzo found
out about the transaction, he directed the drawee
bank to dishonor the check. When Evelyn encashed
the check, it was dishonored. Is Lorenzo liable to
Evelyn? (2006 Bar Question)
COMPLETE BUT UNDELIVERED (Sec. 16)
Q: What is the effect if an instrument is
undelivered?
A: It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (Sec. 16,
NIL). Delivery is essential to the validity of any
negotiable instrument (Sundiang, 2009, supra, pg.
47).

A: Yes. This covers the delivery of an incomplete Note: The defense of want of delivery of a complete
instrument, under Section 14 of the Negotiable instrument is only a personal defense which means that it
is only available against a holder NOT in due course.
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
Q: When is an instrument issued?
any of the material particulars thereof. Having done
so, and when it is first completed before it is
A: The instrument is deemed issued upon the first
negotiated to a holder in due course like Evelyn, it is
delivery of the instrument, complete in form, to a
valid for all purposes, and she may enforce it within a
person who takes it as holder (Sec. 191, NIL).
reasonable time, as if it had been filled up strictly in
accordance with the authority given.

35 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: When is delivery made conditional or for a special
purpose?
A: The delivery is made conditional or for a special
purpose if it was made not for the purpose of
transferring the property (title) to the instrument. In
such case, if the instrument lands in the hands of a
HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument is
treated as if there is no condition.
If such delivery was made to a holder NOT in due
course, prior parties are not bound by the instrument
(Sec. 16, NIL).
Note: The law contemplates that the condition is orally or
verbally conveyed to the holder upon delivery, because of
the rule that the negotiability is determined only upon the
face of the instrument.
Q: What is the effect if the instrument is in the
possession of a HIDC?
A: Valid delivery is conclusively presumed (ibid)
Q: What if the instrument is in the possession of a
party other than a HIDC?
A: Possession of such party constitutes only prima
facie presumption of delivery.
Q: Who are immediate parties?
A: Persons having knowledge of the conditions or
limitations placed upon the delivery of an instrument.
It means privity, and NOT proximity.
Q: Who are remote parties?
A: Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument,
even if he is the next party physically.
SIGNATURE
Q: What constitutes as a valid signature in a NI?
A: A party may use his full name, surname, initials or
even any mark in signing a NI to indicate his intention
to bind himself.
Note: A signature maybe made in any manner as long as
the person signing has the INTENTION TO BE BOUND.
Q: Who are the persons liable on an instrument?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A: GR: Only persons whose signatures appear on an
instrument are liable thereon (Sec. 18, NIL).
XPNs: Notwithstanding the absence of their
signatures in their own names, the following
persons are deemed liable: TraP FAP
1. Person who signs in Trade or assumed name
(Sec. 18, NIL.) Party who signed must have
intended to be bound by his signature.
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is merely
signing in a representative capacity (Sec. 19, 20,
NIL).
3. Forger (Sec. 23, NIL)
4. Acceptor, who makes his acceptance of a bill on
a separate paper (Sec. 134, NIL)
5. Person, who makes a written Promise to accept
the bill before it is drawn (Sec. 135, NIL)
Note: Where a signature is so placed upon the instrument
that it is not clear in what capacity the person signed, he is
deemed to be an indorser(Sec. 17[f]), NIL), not a maker or
drawer.
Q: Juan borrowed P10,000 from Joe as evidenced by
a promissory note executed by X as a maker. All
other requisites of negotiability are present except
that Juan did not affix his usual signature thereon as
he was ailing at that time and was only able to put
X in the blank space meant for the signature of the
maker. Is the requisite that the instrument must be
signed by the maker complied with?
A: Yes. The letter X is sufficient to comply with the
requirement. It appears from the problem that such
letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
SIGNING IN TRADE NAME
Q: Is a person signing in a trade name liable?
A: Yes. As a general rule, only persons whose
signatures appear on an instrument are liable
thereon. But one who signs in a trade or assumed
name is liable as if he signed his own name (Sec. 18,
NIL.). It is necessary, however, that the party who
signed intended to be bound by his signature.
36
 NEGOTIABLE INSTRUMENTS LAW
SIGNATURE OF AGENT
Q: What are the requisites to exempt an agent from
liability?
A:
1. He is duly authorized
2. He adds words to his signature indicating that he
signs as an agent/representative and
3. He discloses the name of his principal (Sec. 20,
NIL)
Q: What are the legal effects of an agents signature
in a NI?
A: Provided that the above requisites are complied
with, the legal effects of an agents signature in a NI
are:
1. His signature will bind his principal and
2. He will be exempt from personal liability.
Q: What is meant by procuration?
A: Procuration is the act by which a principal gives
power to another to act in his place as he could
himself (Fink v. Scott, 143 S.E. 305)
Q: What is the effect of a signature by procuration?
A: It operates as notice or a warning that the agent
has but a limited authority to sign and the principal is
bound only in case the agent in so signing acted
within the actual limits of his authority (Sec. 21, NIL).
INDORSEMENT BY MINOR OR CORPORATION
Q: What are the effects of an infant or corporations
indorsement?
A:
1. MinorA contract entered into by a minor is
voidable, at the option of the minor. It is a REAL
defense that can be invoked by a minor. However, it
is not a defense which may be setup by parties other
than a minor.
2. Incapacitated person An incapacitated person
may also use as a real defense his incapacity to enter
into a contract. Contract entered into by the
incapacitated are voidable. Incapacitated persons
include a) insane or demented persons and b) deaf
and blind who does not know how to write.
37
3. Corporation - Issuance or indorsement of an
instrument by a corporation acting beyond its powers
is a REAL defense.
Q: Can a minor transfer his rights to an instrument?
A: Yes. While a minor is not bound by his
indorsement for lack of capacity, he is however not
incapacitated to transfer his rights.
Q: Can a minor be bound by his representation that
he is of legal age?
A: Yes. where he committed actual fraud by
specifically stating that he is of legal age, a minor can
be bound by his signature in an instrument (PNB v.
CA, G.R. No. L-34404, June 25, 1980).
Q: A executed a promissory note in favor of M which
reads:
I promise to pay P (16 years old) or order
P10,000.
Sgd. M
P indorsed it to A.
1) May A collect from M notwithstanding that P,
the indorser is a minor?
2) In case that A cannot collect from M, can he
collect from P?
A:
1. Yes, A can collect from M. Notwithstanding the
fact that A is a minor, the indorsement of P (the
minor) passes title to A (the holder). M cannot
invoke the defense of minority because such
defense would only be available to P.
2. No, A cannot collect from P, as he has a real
defense of minority on his part.
FORGERY
Q: What is forgery?
A: Forgery is the counterfeit making or fraudulent
alteration of any writing.
Q: When is there forgery?
A: When a signature is affixed by one who does not
claim to act as an agent and who has no authority to
bind the person whose signature he has forged (Sec.
23, NIL).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Who has the burden of proof in proving forgery?
A: Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery (Chiang Yia
Min v. CA, G.R. No. 137932, Mar. 28, 2001).
Q: What is the extent and effect of forgery?
A:
1. Only the signature forged or made without
authority is the one inoperative, the instrument
itself and the genuine signatures are valid.
2. An instrument indorsed which on its face is
payable to bearer may be enforced by the holder
to whose title over the instrument the forged
signature is not necessary.
3. The instrument can be enforced against those
who are precluded from setting up forgery.
Illustration:
Pay to P or order P10,000 30 days after sight.
(Sgd)D, (forged by P)
To X
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawers signature (See Sec. 62, NIL)
Q: Can a payee sue the collecting bank for the
amount of the checks it paid under a forged
indorsement even when the instrument has not
been delivered to him?
A: Yes. The collecting bank is liable to the payee and
must bear the loss because it is its legal duty to
ascertain that the payees indorsement (signature),
its customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings.
(Westmont Bank v. Ong, G.R. No. 132560, Jan. 30,
2002)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the effect when there is forgery?
A: GR: It DOES NOT avoid the instrument but only the
forged signature. The signature is wholly inoperative.
In other words, rights may still exist and be enforced
by virtue of such instrument as to those signatures
thereto are found to be genuine.
However, a forged indorsement prevents any
subsequent parties from acquiring any right against
any party prior to the forgery. Such forged
indorsement cuts off the rights against prior parties
to the forgery. (Cut-off rule)
XPNs:
1. If the party against whom it is sought to
enforce such right is precluded from setting up
forgery or want of authority. (Sec. 23, NIL.)
2. Where the forged signature is not necessary to
the holders title, in which case, the forgery
may be disregarded (Sec. 48, NIL.)
Q: Who are precluded from setting up the defense
of forgery?
A:
1. Those who admit/warrant the genuineness of the
signature such as indorsers, persons negotiating
by delivery and acceptor; (Sec 56, NIL.)
2. Those who by their acts, silence, or negligence,
are estopped from claiming forgery;
3. A holder of a bearer instrument who subsequently
negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary
to his title it being a bearer instrument).
Q: Discuss the legal consequences when an
indorsement is forged.
A:
INSTRUMENT EFFECT OF FORGED
INDORSEMENT
Instrument is Only the forger and the
payable to order subsequent parties thereto are
the ones liable.
instrument is The forgery of the indorser is
payable to bearer immaterial.
38
 NEGOTIABLE INSTRUMENTS LAW
Illustration
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged. C can
enforce the note against X and B but not against M, P
or A, because were it not for the forgery of X the
instrument will not reach the possession of C.
b. If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title to C
because negotiation on bearer instrument requires
only delivery.
Q: Discuss the legal consequences when a bank
honors a forged check.
A:
1. When drawer's signature is forged Drawee-
bank by accepting the check cannot set up the
defense of forgery, because by accepting the
instrument, the drawee bank admits the
genuineness of signature of drawer (BPI Family
Bank v. Buenaventura, G.R. No. 148196, Sept. 30,
2005; Sec. 23, NIL).
Unless a forgery is attributable to the fault or
negligence of the drawer himself, the remedy of
the drawee-bank is against the party responsible
for the forgery. Otherwise, drawee-bank bears
the loss. A drawee-bank paying on a forged check
must be considered as paying out of its funds and
cannot charge the amount to the drawer
(Samsung Construction Co. Phils, v. Far East Bank,
G.R. No. 129015, Aug. 13, 2004). If the drawee-
bank has charged drawer's account, the latter
can recover such amount from the drawee-bank
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996; BPI v. Case Montessori Internationale, G.R.
No. 149454, May 28, 2004).
However, the drawer may be precluded or
estopped from setting up the defense of forgery
as against the drawee-bank, when it is shown
that the drawer himself had been guilty of gross
negligence as to have facilitated the forgery
(Metropolitan Waterworks v. CA, G.R. No. L-
62943, July 14, 1986).
39
2. Drawee bank versus collecting bank When the
signature of the drawer is forged, as between the
drawee-bank and collecting bank, the drawee-
bank sustains the loss, since the collecting bank
does not guarantee the signature of the drawer.
The payment of the check by the drawee bank
constitutes the proximate negligence since it has
the duty to know the signature of its client-
drawer. (Philippine National Bank v. CA, G.R. No.
L-26001, Oct. 29, 1968).
3. Forged payee's signature When drawee-bank
pays the forged check, it must be considered as
paying out of its funds and cannot charge the
amount so paid to the account of the depositor.
In such case, the bank becomes liable since its
primary duty is to verify the authenticity of the
payee's signature (Traders Royal Bank v. Radio
Philippines Network, G.R. No. 138510, Oct. 10,
2002; Westmont Bank v. Ong, G.R. No. 132560,
Jan. 30, 2002).
4. Forged indorsement Drawer's account cannot
be charged, and if charged, he can recover from
the drawee-bank (Associated Bank v. CA, G.R. No.
107382, Jan. 31,1996).
a. The Drawer has no cause of action against
collecting bank, since the duty of collecting
bank is only to the payee (Manila Lighter
Transportation, Inc. v. CA,G.R. No. L-50373
Feb. 15, 1990).
b. Drawee-bank can recover from the collecting
bank because even if the indorsement on the
check deposited by the bank's client is forged,
collecting bank is bound by its warranties as
an indorser and cannot set up defense of
forgery as against drawee bank (Associated
Bank v. CA, G.R. No. 107382, Jan. 31, 1996,
Great Eastern Life Ins. Co. v. Hongkong &
Shanghai Bank, G.R. No. 18657, Aug. 23,
1922).
Q: X fraudulently obtained possession of the check
and forged Ps signature and then indorsed and
deposited the check with XYZ bank which honored
the check and placed the amount thereof to his
credit. Thereafter, XYZ Bank indorsed the check to
the drawee bank-ABC bank which paid it and
charged the account of the drawer. lllustrate the
liability of a drawer and a drawee-bank in an 1)
instrument payable to order and in an 2) instrument
payable to bearer in case of a forgery on payees
signature.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Pay to P or order P10,000.
(Sgd)D
To: ABC Bank
A:
1.If the instrument is payable to order,
a. The drawee bank is liable to the drawer for the
amount of the check and his account cannot be
charged because the indorsement of the payee
is a forgery. Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the
drawer for its payment.
b. XYZ Bank is however, liable to the drawee bank
because of his warranty as an indorser. (See
Sec.66)
c. D, the drawer, is not liable on the check because
its order is to pay P or his order and not to any
other person.
2. If the instrument is payable to bearer:
a. ABC Bank, the drawee-bank, may charge the
amount thereof to the account of the drawer.
Because the forged indorsement did not
prevent the transfer of title. The remedy of the
drawer is against the forger.
b. Drawer has no cause of action against collecting
bank, since the duty of collecting bank is only to
the payee (Manila Lighter Transportation, Inc. v.
CA,G.R. No. L-50373 Feb. 15, 1990). Drawee-
bank can recover from the collecting bank
because even if the indorsement on the check
deposited by the bank's client is forged,
collecting bank is bound by its warranties as an
indorser and cannot set up defense of forgery
as against drawee bank (Associated Bank v. CA,
G.R. No. 107382, Jan. 31, 1996).
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of the
sale, M wrote a promissory note promising to pay P
or his order Php5,000. P then indorsed the note to X
(who did not know about the shabu), and X to Y.
Unable to collect from P, Y then sued X on the note.
X set up the defense of illegality of consideration. Is
he correct? (2011 Bar Question)
A: No, since X, a general indorser, warrants that the
note is valid and subsisting.
Q: What is the remedy of the drawee bank in case of
a forged indorsement?
A: The drawee bank may not debit the account of the
drawer but may generally pass liability back through
the collection chain to the party who took from the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
forger and, of course, to the forger himself, if
available. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held
liable, without prejudice to the latter proceeding
against the forger.
Since a forged indorsement is inoperative, the
collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money
paid by the latter because it was paid wrongfully
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996).
Q: What is the liability of the drawee bank and the
drawer for the amount paid on checks with forged
indorsements, if the same was due to the negligence
of both the drawee bank and the drawer?
A: The loss occasioned by such negligence should be
divided equally between the drawer/depositor and
the drawee.
Q: X entrusted his check books, credit cards,
passbooks, bank statements and cancelled checks to
his secretary. He also introduced the secretary to
the bank for purposes of reconciliation of his
accounts. Subsequently, Xs secretary forged his
signature on the checks and was able to withdraw
his money. Is the drawee bank liable for the
amounts withdrawn by the secretary?
A: No, he is precluded from setting up the forgery
due to his own negligence in entrusting to his
secretary his credit cards and check book including
the verification of his statements of account (Ilusorio
v. CA, G.R. No. 139130, Nov. 27, 2002).
Q: The drawers signature was forged. There is,
however, a provision in the monthly bank statement
that if the drawers signature was forged, the
drawer should report it within 10 days from receipt
of the statement to the drawee. The drawer,
however failed to do so. What will be its effect
insofar as the drawers right is concerned?
A: The failure of the drawer to report the forgery
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
the drawer from questioning the mistake of the
drawee bank despite the provision (BPI v. CASA
Montessor, G.R. No. 149454, May 28, 2004).
Q: If forgery was committed by an employee of the
drawer whose signature was forged, does the
relationship amount to estoppel such that the
40
 NEGOTIABLE INSTRUMENTS LAW
drawer is precluded in recovering from the drawee
bank?
A: The bare fact that the forgery was committed by
an employee of the party whose signature was forged
can not necessarily imply that such partys negligence
was the cause of the forgery in the absence of some
circumstances raising estoppel against the drawer
(Samsung Construction Co. v. Far East Bank and Trust
Company, G.R. No. 129015, Aug. 13, 2004).
CONSIDERATION
Q: What is consideration?
A: It is an inducement to a contract that is the cause,
price or impelling influence, which induces a party to
enter into a contract.
Note: Every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration (Sec. 24, NIL).
Q: Who is a holder for value?
A: A holder for value is one who has given a valuable
consideration for the instrument. A holder for value is
deemed as such not only as regards the party to
whom the value has been given to by him but also in
respect to all those who became parties prior to the
time when value was given.
Note: Where the holder has a lien on the instrument arising
either from contract or by implication of law, he is deemed
a holder for value to the extent of his lien (Sec. 27, NIL).
Q: What constitutes value?
A: It is any consideration sufficient to support a
simple contract.
Note: An antecedent or pre-existing debt constitutes value
and is deemed such whether the instrument is payable on
demand or at a future time (Sec. 25, NIL).
Q: What is the difference between want or absence
of consideration and failure of consideration?
A: Absence of consideration means a total lack of any
valid consideration for the contract while failure of
consideration means the failure or refusal of one of
the parties to do, perform or comply with the
consideration agreed upon.
Q: What is the effect of want of consideration?
A: It becomes a matter of defense as against any
41
person not a holder in due course, thus, a PERSONAL
defense (Sec. 28, NIL).
Q: What is the effect of partial failure of
consideration?
A: Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise (ibid.).
Q: Will inadequacy of consideration invalidate the
instrument?
A: GR: No. Inadequacy of consideration does not
invalidate the instrument.
XPN: There has been fraud, mistake or undue
influence (Art. 1355, NCC).
Note: However, knowledge of inadequacy of consideration
would render the holder not HIDC liable (Sec. 53, NIL).
Q: X borrowed money from Y in the amount of
Php1Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
consideration. When Z deposited the check to her
account, the check was dishonored for insufficiency
of funds. Is Z a holder in due course? Explain your
answer (2012 Bar Question)
A: No. Z is NOT a HIDC. Under Sec. 52 (c), NIL, it is
expressly provided that the instrument must be
acquired in good faith and for value to consider him a
HIDC.
ACCOMODATION PARTY
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person (Sec. 29,
NIL).
Q: What are the requisites to be an accommodation
party?
A:
1. Accommodation party must sign as maker,
drawer, acceptor or indorser
2. No value is received by the accommodation party
from the accommodated party; and
3. The purpose is to lend the name.
Note: It does NOT mean, however, that one cannot be an
accommodation party merely because he has received
some consideration for the use of his name. The phrase
without receiving value therefor only means that no value
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
has been received for the instrument and not for lending thus became liable for the debt even if he had no
his name. direct personal interest in the obligation or did not
receive any benefit therefrom (Dela Rama v. Admiral
Q: What are the distinctions between an United Savings Bank, G.R. No. 154740, Apr. 16, 2008).
accommodation party and a regular party?
Q: Can a corporation be an accommodation party,
A: and if so, does the liability of an accommodation
ACCOMMODATION PARTY REGULAR PARTY party attach to a corporation?
Signs an instrument
Signs the instrument for
without receiving value A: No. The issue or indorsement of a negotiable
value (Sec. 24, NIL.)
therefor (Sec. 29, NIL.) paper by a corporation without consideration and for
Purpose of signing is to the accommodation of another is ultra vires. Hence,
lend his name to one who has taken the instrument with knowledge of
Not for that purpose
another person (Sec. 29, the accommodation nature thereof cannot recover
NIL) against a corporation where it is only an
May always show, by Cannot disclaim accommodation party (Crisologo-Jose v. CA, G.R. No.
parol evidence, that he personal liability by 80599, Sept. 15, 1989).
is only such parol evidence
Cannot avail of the Q: May a holder for value recover from an
defense of accommodation party notwithstanding his
absence/failure of May avail knowledge of such fact?
consideration against a
holder not in due course A: Yes, a holder for value may recover. This is so
May sue reimbursement because an accommodation party is liable on the
after paying the instrument to a holder for value, notwithstanding
May not sue
holder/subsequent that such holder at the time of taking the instrument
party knew him to be only an accommodation party. The
accommodation party is liable to a holder for value as
Q: Up to what extent is an accommodation party if the contract was not for accommodation. It is not a
liable? valid defense that the accommodation party did not
receive any valuable consideration when he executed
A: the instrument. Nor is it correct to say that the holder
1. Right to revoke accommodation before the for value is not a holder in due course merely because
instrument has been negotiated for value. at the time he acquired the instrument, he knew that
the indorser was only an accommodation party (Ang
2. Right to reimbursement from the accommodated Tiong v. Ting, G.R. No. L-26767, Feb. 22, 1968).
party the accommodated party is the real
debtor. Hence, the cause of action is not on the NEGOTIATION
instrument but on an implied contract of
reimbursement. Q: Define Negotiation.

3. Right to contribution from other solidary A: Negotiation is the transfer of an instrument from
accommodation maker (Sadaya v. Sevilla, G.R. No. one person to another so as to constitute the
L-17845, Apr. 27, 1967) transferee the holder thereof (Sec. 30).

Q: Can a party who signed on the note as an Note: A holder is the payee or indorsee of a bill or note,
accommodation party raise the defense of absence who is in possession of it, or the bearer thereof (Sec. 191,
or want of consideration? NIL).

A: No. An accommodation party who lends his name Q: What are the methods of transferring an
to enable the accommodated party to obtain credit instrument?
or raise money is liable on the instrument to a holder
A:
for value even if he receives no part of the
1. Issuance first delivery of the instrument
consideration. He assumes the obligation to the other
complete in form to a person who takes it as a
party and binds himself to pay the note on its due
holder.
date. By signing the note, the accommodation party

UNIVERSITY OF SANTO TOMAS 42

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW

2. Negotiation through his indorsement (once a bearer instrument,

always a bearer instrument) (Sec. 40, NIL).
3. Assignment transfer of the title to the
instrument, with the assignee generally taking Note: This rule applies only to instruments originally
only such title as his assignor has, subject to all payable to bearer. It does NOT apply to instruments
defenses available against the assignor. originally payable to order converted to bearer because the
only or last indorsement is in blank.
DISTINGUISHED FROM ASSIGNMENT
Q: A makes a promissory note payable to bearer and
delivers the same to B. B, however, endorses it to C
NEGOTIATION ASSIGNMENT
in this manner:
Non-negotiable
instrument may be
Only a negotiable "Payable to C. Signed: B."
assigned absent any
instrument may be
prohibition against
negotiated. Later, C, without indorsing the promissory note, C
assignment written on
its face. transfers and delivers the same to D. The note is
The transferee can subsequently dishonored by A. May Dennis proceed
The transferee, if he is against A for the note? (1998 Bar Question)
have no better right
a HIDC may acquire
than his transferor; he
better rights than his A: Yes. D may collect from A. The note made by A is a
merely steps into the
transferor. bearer instrument. Where an instrument, payable to
shoes of the assignor
The holder can hold bearer, is indorsed, it may nevertheless be further
The transferee has no negotiated by delivery. Despite the special
the drawer and the
right of recourse for indorsement made by Henesty, the note remained a
indorsers liable if the
payment against bearer instrument and can be negotiated by mere
party primarily liable
immediate parties. delivery. When C delivered and transferred the note
does not pay.
to D, the latter became a holder thereof. As such, D
can proceed against A.
MODES OF NEGOTIATION
Q: X executed a promissory note with a face value of
The following are the modes of negotiation:
Php50,000.00, payable to the order of Y. Y indorsed
the note to Z, to whom Y owed Php30,000.00. If X
1. If payable to bearer- it is negotiated by mere
has no defense at all against Y, for how much may Z
delivery
collect from X? (2011 Bar Question)
2. If payable to order- it is negotiated by the
A: Php 50,000.00, but with the obligation to hold
indorsement of the holder completed by delivery
Php20,000.00 for Y's benefit.
(Sec. 30, NIL).
Q: What is the effect when an order instrument was
Q: What is Delivery?
delivered without indorsement?
A: Delivery means transfer of possession, actual or
A: The transfer operates as an ordinary assignment
constructive, from one person or another (Sec. 191,
(Sec. 49, NIL). The transfer vests in the transferee
NIL)
such title as the transferor had therein and the
Note: Where the instrument is no longer in the possession
transferee acquires in addition the right to have the
of the party whose signature appears thereon, there is a indorsement of the transfereror.
prima facie presumption of a valid and intentional delivery
by him (Sec. 16, NIL). Note: For the purpose of determining whether the
transferee is a HIDC, the negotiation takes effect at the
Q: What is the effect, if any, if a BEARER instrument time when the indorsement is actually made.
is negotiated by indorsement and delivery?
Q: What is the effect when a negotiable instrument
A: A bearer instrument, even when indorsed is merely assigned?
specially, may nevertheless be further negotiated by
delivery, but the person indorsing specially shall be A: The transferee does NOT become a holder and he
liable as indorser to only such holders as make title merely steps into the shoes of the transferor. Any
defense available against the transferor is available

43 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
against the transferee (Salas v. CA, G.R. No. 76788
Jan. 22, 1990).
KINDS OF INDORSEMENTS
Q: What is an indorsement?
A: Indorsement is the signing of the name of the
indorser on the instrument with the intent to transfer
title to the same.
Q: Where indorsement should be placed?
A:
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called allonge (Sec. 31, NIL.)
Q: Can there be partial indorsement?
A: GR: No. Indorsement must be of the entire
instrument. (Sec. 32, NIL.)
XPN: When the instrument has been paid in part.
Note: Indorsement to two or more indorsees severally does
NOT operate as a negotiation of the instrument.
Q: What are the different kinds of Indorsement?
A:
1. Special (Sec. 34, NIL.)Specifies the person to
whom or to whose order the instrument is to be
payable. Also known as specific indorsement or
indorsement in full.
Note: An instrument payable to bearer indorsed
specially may nevertheless be negotiated by delivery.
(Sec. 40, NIL) (once a bearer always a bearer)
2. Blank (Sec. 34, NIL.) Specifies no indorsee.
a. Instrument is payable to bearer and may be
negotiated by delivery;
b. May be converted to special indorsement by
writing over the signature of the indorser in
blank any contract consistent with the
character of indorsement (Sec. 35, NIL.).
3. AbsoluteThe indorser binds himself to pay:
a. upon no other condition than failure of prior
parties to do so
b. upon due notice to him of such failure
4. Conditional Right of the indorsee is made to
depend on the happening of a contingent event.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Party required to pay may disregard the
conditions (Sec. 39, NIL.)
Note: The condition refers to the indorsement not on
the instrument itself.
5. Restrictive (Sec. 36, NIL.)When the instrument:
a. Prohibits further negotiation of the instrument
(it destroys the negotiability of the
instrument);
b. Constitutes the indorsee the agent of the
indorser; (Sec. 36, NIL.)
c. Vests the title in the indorsee in trust for or to
the use of some persons.
Note: But mere absence of words implying power to
negotiate does not make an instrument restrictive.
6. Qualified (Sec. 38, NIL.) constitutes the indorser
a mere assignor of the title to the instrument
made by adding to the indorsers signature words
like, without recourse, sans recourse or at the
indorsees own risk. (this serves as an ordinary
equitable assignment). (Sec. 38, NIL.)
7. Jointindorsement made payable to 2 or more
persons who are not partners (Sec. 41, NIL.)
Note: All of them must indorse unless the one indorsing
has authority to indorse for the others.
8. Irregular(Sec. 64, NIL.) A person who, not
otherwise a party to an instrument, places
thereon his signature in blank before delivery.
9. Facultative Indorser waives presentment and
notice of dishonor, enlarging his liability and his
indorsement.
10. Successive indorsement to two persons or more
in succession.
Note: Any of them can indorse to effect negotiation of
the instrument.
Q: What are the rights of an indorsee in a restrictive
indorsement?
A:
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser
could bring; and
3. To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so
(Sec. 37, NIL).
44
 NEGOTIABLE INSTRUMENTS LAW
Q: What do subsequent indorsees acquire under the
restrictive indorsement?
A: All subsequent indorsees acquire only the title of
st
the 1 indorsee (Sec. 37, NIL).
Q: What is the effect of a qualified indorsement?
A: A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that the
qualified indorser is NOT liable when the maker is
insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or non-
payment due to:
1. Forgery;
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the prior
parties; or
4. The fact that at the time of the indorsement, the
instrument was valueless or not valid at the time
of the indorsement which fact was known to him.
Q: What are the instances when the indorsements
served only as equitable assignment?
A:
1. Indorsement of only a part of the amount of the
instrument (Sec. 32, NIL)
2. In cases of qualified indorsement (Sec. 38, NIL)
3. Transfer of an instrument payable to order by
mere delivery (Sec. 49, NIL)
Q: When there is a joint indorsement, who must
indorse?
A: GR: All must indorse in order for the transaction to
operate as a negotiation (Sec. 41, NIL)
XPN: Only one of them may indorse in case the
1. Payees or indorsees are partners; and
2. Payee or indorsee indorsing has authority to
indorse for the others.
Q: When can an indorsement be stricken out?
A: The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out, and all
indorsers subsequent to him, are relieved from
liability on the instrument (Sec. 48)
Q: When can a prior party negotiate an instrument?
A: Where an instrument is negotiated back to him.
But, he is not entitled to enforce payment thereof
45
against any intervening party to whom he was
personally liable (Sec. 50).
Q: What are the limitations to renegotiation?
A: In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third person,
and it has been paid by the drawer (Sec. 121[a],
NIL)
2. Where it was made or accepted for
accommodation and has been paid by the party
accommodated (Sec. 121[b], NIL)
3. In other cases, where the instrument is discharged
when acquired by a prior party (Sec. 119[e], NIL)
Q: What is the effect of an instrument indorsed to a
person as cashier or other officers of a corporation?
A: Said NI is deemed prima facie payable to the
corporation of which said person is such an officer. It
may be negotiated further by either indorsement of
the corporation or indorsement of the officer (Sec.
42)
Q: What is the time of indorsement?
A: Except where an indorsement bears date after the
maturity of the instrument, every negotiation is
deemed prima facie to have been effected before the
instrument was overdue (Sec. 45)
Q: What is the period of negotiability of a NI?
A: GR: An instrument negotiable in origin is always
negotiable until paid, which is still true even if the NI
was dishonored or is already overdue.
XPNs:
1. When the instrument has been restrictively
indorsed;
2. When discharged by payment or otherwise
(Sec. 47, NIL)
RIGHTS OF THE HOLDER
Q: Who is a holder?
A: The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (Sec. 191, NIL).
Q: What are the classes of holders?
A:
1. Holders in general (Simple Holders). (Sec. 51, NIL.)
2. Holders for value. (Sec. 26, NIL.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Holders in due course. (Secs. 52, 57, NIL.)
Q: What are the rights of a holder in general?
A:
1. Right to sue
2. Right to receive payment (Sec. 51, NIL.)
Note: If the payment is in due course, the instrument is
discharged.
HOLDER IN DUE COURSE (HIDC)
To be considered as a HIDC, the requisites under Sec.
52 of the NIL must be complied with. A HIDC takes a
NI under the following conditions: COFI
1. That is Complete and regular upon its face;
Note: Absence of the required documentary stamp
will not make the instrument incomplete. (It is not a
requisite of negotiability under Sec. 1, NIL and it is
not a material particular under Sec. 125, NIL)
2. Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
Note: If the instrument is payable on demand, the
date of maturity is determined by the date of
presentment, which must be made within a
reasonable time after its issue, if it is a note, or after
the last negotiation thereof, if it is a bill of exchange
(Secs. 71 and 143[a], NIL).
Where the transferee receives notice of any infirmity
in the instrument of defect in the title of the person
negotiating the same before he had paid the full
amount agreed to be paid, he will be deemed a
holder in due course only to the extent of the amount
paid by him (Sec. 54, NIL).
3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or
defect in the title of the person negotiating it.
(Sec. 52, NIL)
Note: Knowledge of the agent is constructive knowledge to
the principal.
Q: Is a holder presumed to be a HIDC?
A: GR: Every holder is deemed prima facie to be a
HIDC.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective.
But this is only as regards a party who became
such after the acquisition of the defective title
(Sec.59, NIL)
Q: What constitutes payment in due course?
A: When made:
1. At or after the maturity of the instrument
2. To the holder thereof, in good faith and without
notice that his title is defective (Sec. 88, NIL).
Q: What rights are available to a party who derives
his title from a HIDC?
A: A holder who derives his title through a HIDC, 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 to all parties prior to the
latter (Sec. 58, NIL)
Specifically, a holder is entitled to the following
rights:
1. Hold the instrument free from defenses available
to parties among themselves;
2. Hold the instrument free from any defect of title
of prior parties;
3. Receive payment;
4. Enforce payment of the instrument for the full
amount thereof against all parties liable; and
5. Sue
Q: How does the shelter principle embodied in the
NIL operate to give the rights of a HIDC to a holder
who does not have the status of a HIDC? Briefly
explain. (2008 Bar Question)
A: Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not a HIDC,
transfers all his rights as such holder to the latter and
acquires the right to enforce the instrument as if he
was a holder in due course. The principle applies to a
"sheltered" holder who is not a party to any fraud or
illegality impairing the validity of the instrument.
Q: When is an instrument complete and regular
upon its face?
A: An instrument is complete when it is not wanting
in any material particular and regular when there is
no alteration apparent on the face of the instrument.
46
 NEGOTIABLE INSTRUMENTS LAW
Q: Define good faith.
A: Good faith is the holders well founded or honest
belief that the person from whom he received the
instrument was the owner thereof, with the right to
transfer it (Duran v IAC, 138 SCRA 489).
Q: What constitutes value in an instrument?
A: Value may be some right, interest, profit or benefit
to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
2007).
Q: Define infirmity. How does it differ from defect?
A: Infirmity refers to those that vitiate the instrument
itself while defect in the title of the person
negotiating the instrument refers to how he obtained
the instrument or the signature thereto, as by fraud,
duress, or force and fear, or other unlawful means, or
for an illegal consideration or when he negotiates it in
breach of faith, or under any other circumstances as
amount to a fraud. (Sec. 55, NIL.)
Q: When is the title of a person (transferor)
defective?
A:
1. In its acquisition When he obtained the
instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration.
2. In the negotiation When he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud (Sec. 55, NIL)
Q: What constitutes notice of defect (on the
transferee)?
A: The person to whom it is negotiated must have
had actual knowledge of such facts or knowledge of
other facts that his action in taking the instrument
amounted to bad faith (Sec. 56, NIL)
Q: What is the effect of notice before the full
amount is paid?
A: Transferee will be deemed a HIDC only to the
extent of the amount therefore paid by him (Sec. 54,
NIL).
Q: A drawer issued a check for the payment of a car,
which check was delivered to the agent of the owner
of the car for safekeeping. The check was then used
47
by the agent to pay the medical bills of his wife in a
clinic. The projected purchase did not materialize. Is
the clinic considered a holder in due course?
A: No, the rule that a possessor of the instrument is
prima facie a HIDC does not apply to the clinic
because he cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable to the agent or to
bearer; also the drawer had no account with the
Clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
As holders title was defective or suspicious, it cannot
be stated that the payee acquired the check without
knowledge of said defect in holders title, the
presumption that the clinic is a HIDC does not exist
(De Ocampo& Co. v. Gatchalian, G.R. No. L-
15126, Nov. 30, 1961)
Q: What is the effect of possession of a NI after
presentment and dishonor?
A: It does not make the possessor a holder for value
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992).
Q: Is a corporation to which four crossed checks
were indorsed by the payee corporation a holder in
due course and hence entitled to recover the
amount of the checks when the same had been
dishonored for the reason of payment stopped?
A: The checks were crossed checks and specifically
indorsed for deposit to payees account only. From
the beginning, the corporation was aware of the fact
that the checks were all for deposit only to payees
account. Clearly then, it could not be considered a
HIDC. (Atrium Management Corp. v. CA, G.R. No.
109491, Feb. 28, 2001)
Note: Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to
the holder.
Q: Can a payee be a HIDC?
A: Yes. There can be no doubt that a proper
interpretation of NIL as a whole leads to the
conclusion that a payee may be a holder in due
course under the circumstances in which he meets
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the requirements of Sec. 52 (De Ocampo v.
Gatchalian, supra).
Q: Can a drawee be a HIDC?
A: A drawee does NOT become a HIDC by simply by
paying a bill. A holder refers to one who has taken the
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance and
payment, strips the instrument of negotiability and
reduces it to a mere voucher or proof of payment.
Q: When is a person deemed NOT a holder in due
course?
A:
1. A holder who acquires the instrument after its
date of maturity.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue (Sec. 53, NIL).
Note: A note payable on demand is due when payment is
demanded. A check becomes overdue when it is not
presented for payment within a reasonable time, usually
6 months from date the thereof, afterewards, it becomes
a stale check.
3. Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
Note: Where indorsement is not dated, it is deemed
prima facie to have been negotiated before the
instrument was overdue (Sec. 45, NIL). An overdue
instrument is still negotiable but it is subject to the
defenses existing at the time of the transfer.
Q: What are the rights of a holder, who is NOT a
HIDC?
A: The rights of a holder not a HIDC are similar to an
assignee. The other rights are:
1. He may receive payment and if the payment is in
due course, the instrument is discharged
2. He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
negotiable
3. He may sue on the instrument in his own name
(Sec. 51, NIL.)
DEFENSES AGAINST THE HOLDER
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
The defenses available against the holder are
classified as follows:
1. Real or Absolute Defenses those that are
attached to the instrument itself and are
available against all parties, both immediate
and remote, including holders in due course.
2. Personal or Equitable Defenses defenses
which are only available against a holder NOT
in due course. Those which grow out of the
agreement or conduct of a particular person
which renders it inequitable for him, though
holding the legal title, to enforce it against the
party sought to be made liable.
Q: What are the real defenses available against a
holder?
A: IM In Ultra. AFForD PODIF.
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
concerned
4. Ultra vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
Q: What are the personal defenses available against
a holder?
2
A: InnocentS ADD FUn In Fraud
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge
of prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal
consideration
6. Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
48
 NEGOTIABLE INSTRUMENTS LAW
Note: Fraud in factum exists in those cases in which a 1. Maker of a promissory note;
person, withour negligence, has signed an instrument, but 2. Acceptor of a bill of exchange; and
was deceived as to the character of the instrument and 3. Certifier of a check
without knowledge of it, as where a note was signed by one
under the belief that he was signing as a witness to a deed.
This kind of fraud is a real defense because there is no
Q: Who are secondarily liable?
contract since the person did not know what he was
signing. Fraud in inducement relates to the quality, A:
quantity, value or character of the consideration of the 1. Drawer of a bill; and
instrument. Here, deceit is not in the character of the 2. Indorser of a note or a bill
instrument but in its amount or terms. This exists when a
person is induced to sign a note for the price of a worthless
stock which was fraudulently represented by the payee as
Q: To whom should the NI be presented?
to its value. Such type of fraud is only a personal defense
because it does not prevent a contract (De Leon, The A: NI should be presented for payment to the party
Philippine Negotiable Instruments Law, Annotated, 2010 primarily liable (Sec. 72[d], NIL.):
ed.).
1. Promissory note maker
Q: A bill of exchange has T for its drawee, U as 2. Bill of exchange drawee/acceptor
drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years old. F Q: Is the drawee liable for payment of a BOE?
wants to recover from U but the latter insists that a
notice of dishonor must first be made, the A: No. The mere issuance of a bill does not operate as
instrument being a bill of exchange. Is he correct? an assignment of the funds in the hands of a drawee.
(2011 Bar Question) The drawee must accept the instrument (thus,
becomes an acceptor) in order that he may be
A: No, since F can treat U as maker due to the primarily liable for the payment of a BOE.
minority of T, the drawee.
Q: What are the warranties and liabilities of parties
Note: Where the drawee does not have the capacity to
who are secondarily liable?
contract, the holder may treat the bill as a PN (Sec. 130,
NIL).
A:
LIABILITIES OF PARTIES ABSOLUTE LIABILITY LIMITED LIABILITY
Drawer of a BOE Qualified Indorser
Q: Distinguish between a party primarily liable from Warrants: Warrants that the:
a party secondarily liable under the NIL. a. The existence of a. Instrument is
payee and his then genuine;
A: capacity to indorse b. he has good
PRIMARILY LIABLE SECONDARILY LIABLE b. That the instrument title to it;
Unconditionally will be accepted or c. capacity to
Conditionally bound paid upon due contract of all
bound
Undertakes to pay only after presentment by the prior parties;
the ff. conditions have been party primarily and
fulfilled: liable according to d. no knowledge
1. due presentment for its tenor; and of any fact
payment or acceptance c. That if dishonored, which would
Absolutely required he will pay the party impair the
to primary party
to pay the instrument entitled to be paid. validity of the
(Sec.143, NIL);
upon maturity (Sec. 61, NIL.) instrument.
2. dishonor by such party
(Sec.70, NIL); (Sec.65, NIL.)
3. taking of proceedings
required by law Note: He is liable to all
parties who derive
(Sec.152, NIL)
their title through his
indorsement.
Q: Who are primarily liable? General indorser Person negotiating by
delivery
A: a. Warrants that: Same warranties as a

49 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

i. Instrument is qualified indorser. But treasurer above their printed names with the phrase
genuine unlike a qualified and in his personal capacity. The corporation
ii. He had good title indorser, a person failed to pay its obligation. Are the officers liable?
to it negotiating by mere
iii. All prior parties delivery is liable only to A: Yes, persons who sign their names on the face of
had capacity to his immediate promissory notes are makers and liable as such. The
contract transferee. (par. 2, Sec. officers are co-makers and as such, they cannot
iv. Instrument, at 65, NIL.) escape liability arising therefrom (Republic Planters
the time of Bank v. CA, G.R. No. 93073, Dec. 21, 1992).
indorsement, Note: Person negotiating
was valid and by mere delivery and a DRAWER
subsisting; qualified indorsers
secondary liability is The drawer, by drawing the instrument
limited, namely, to their
b. On due presentment, it
warranties
shall be accepted or paid, 1. admits the existence of the payee and his then
or both according to its capacity to indorse; and
tenor 2. engages that on due presentment the instrument
will be accepted or dishonored, and
c. if the instrument is 3. that if the necessary proceedings on dishonor be
dishonored and the duly taken, he will pay the amount thereof to the
necessary proceedings on holder, or to any subsequent indorser who may
dishonor be duly taken, be compelled to pay it (Sec. 61, NIL).
he will pay the holder.
(Sec. 66, NIL.) Q: To whom is the drawer secondarily liable?
Irregular indorser
a. In an order A:
instrument, liable to 1. The holder or
the payee and all 2. To any subsequent indorser who may be
subsequent parties compelled to pay it (ibid.)
b. If bearer instrument
or payable to order Q: Can the drawer limit his liability to the holder?
of maker or drawer,
liable to all parties A: Yes. The drawer may insert in the NI an express
subsequent to the stipulation negativing or limiting his own liability to
maker or drawer the holder (ibid.)
c. If he signs for
accommodation of Q: D draws a bill of exchange that states: One
the payee, liable to month from date, pay to B or his order
all parties Php100,000.00. Signed, D. The drawee named in
subsequent to payee. the bill is E. B negotiated the bill to M, M to N, N to
(Sec. 64, NIL.) O, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to
MAKER pay, which O did. From whom may O recover?(2011
Bar Question)
The maker of a NI, by making it,
A: D, being the drawer.
1. engages that he will pay it according to its tenor,
and ACCEPTOR
2. admits the existence of the payee and his then
capacity to indorse (Sec. 60, NIL). The acceptor, by accepting the instrument,

Note: The maker is liable the moment he makes the NI. His 1.
liability is primary and unconditional.
2.
Q: On the right bottom margin of a PN appeared the
signature of the corporations president and
engages that he will pay the NI accordingto the
tenor of his acceptance; and
admits the existence of the drawer, the
genuineness of his signature and his capacity and
authority to draw the instrument

UNIVERSITY OF SANTO TOMAS 50

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW

3. admits the existence of the payee and his then

capacity to indorse. (Sec. 62, NIL.) Q: Distinguish an irregular indorser from a general
indorser (2005 Bar Question)
Q: Who can accept the BOE?
A:
A: 1. A general indorser makes either a blank or
GR: Only the drawee may accept. A stranger or special indorsement, while an irregular indorser
volunteer is not bound by acceptance. always makes a blank indorsement;
2. A general indorser indorses the instrument after
XPN: In case of a bill which is accepted for honor its delivery to the payee, while an irregular
supra protest (Sec. 161, NIL.) indorser indorses before its delivery to the
payee; and
Note: Drawee does not become liable until he accepts the 3. A general indorser is liable only to parties
instrument in which case he becomes an acceptor. An subsequent to him, while an irregular indorser is
acceptor engages to pay according to the tenor of his liable to the payee and subsequent parties unless
acceptance, which may not be the same as the tenor of the
he signs for the accommodation of the payee in
bill itself because the acceptance may be qualified.
which case he is liable only to all parties
subsequent to the payee (Sec. 64, 66, NIL; De
Q: What is the difference between the liability of an
Leon, supra, pg. 236-237)
acceptor/ drawee-acceptor and a maker?
Q: Who is a qualified indorser?
A: While both are primarily liable, the acceptor
engages to pay the NI according to the tenor of his
A: A qualified indorser is a person who indorses
acceptance. On the other hand, the maker engages to
without recourse (Sec. 65, NIL).
pay the NI according to the tenor of the bill itself.
Q: What are the differences between an indorser
Q: X draws a check against his current account with
and a drawer?
Bonifacio Bank in favor of B. Although X does not
have sufficient funds, the bank honors the check
A:
when it is presented for payment. Apparently, X has
conspired with the bank's bookkeeper so that his INDORSER DRAWER
ledger card would show that he still has sufficient Party to either a Only to a bill
funds. bill or a note
No such Makes admission as to the
The bank files an action for recovery of the amount admission existence of the payee and
paid to B because the check presented has no his capacity to indorse
sufficient funds. Decide the case (1998 Bar Question) Has warranties Makes no warranties, but
engages to pay after certain
A: The bank cannot recover the amount paid to B for conditions are complied with
the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became Q: What is the order of liability among the
primarily and directly liable to the payee/holder B. indorsers?

The recourse of the bank should be against X and its A:

bookkeeper who conspired to make X's ledger show 1. Among themselves Liable prima facie in the
that he has sufficient funds. order in which they indorse (Sec. 68)
2. To the holder In any order
INDORSER
Note: Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to him
A person placing his signature upon an instrument
(Sec. 68, NIL)
otherwise than as maker or acceptor is deemed to be
an indorser, unless he clearly indicates by appropriate
Q: What is the liability of an agent or broker who
words his intention to be bound in some other
negotiates an instrument without indorsement?
capacity (Sec. 63, NIL.)
A: He incurs all the liabilities prescribed to a general
Note: A person who places his indorsement on an bearer
instrument incurs all liabilities of an indorser. (Sec. 67, NIL.) indorser unless he discloses the name of his principal

51 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
and the fact that he is acting only as an agent (Sec.
69, NIL)
Note: Parol evidence is NOT admissible to relieve an agent
or broker whose endorsement brings him within the above
liability.
Q: Can a collecting bank debit the account of the
depositor when the checks indorsed to it (bank)
were forged?
A: Yes, because the depositor of a check as indorser
warrants that it is genuine and in all respect what it
purports to be. Thus, when the checks deposited had
forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the
drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
(Jai-Alai Corporation Of The Philippines v. BPI, G.R.
No. L-29432, Aug. 6, 1975).
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When
Trude is about to encash the check, the drawee
Union Bank refused to encash it due to insufficiency
of funds. Trude sued James for payment of money.
James alleged that the suit should be dismissed
because Phebean is an indispensable party. Does
James argument hold water?
A: No. There is no privity between the drawer and
the holder. The drawer is merely secondarily liable.
As indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid,
or both, according to their tenor, and that in case
they were dishonored, she would pay the
corresponding amount. After an instrument is
dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of
the original obligor (Tuazon v. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005).
Q: X is the holder of an instrument payable to him
(X) or his order, with Y as maker. X then indorsed it
as follows: Subject to no recourse, pay to Z. Signed,
X. When Z went to collect from Y, it turned out that
Y's signature was forged. Z now sues X for collection.
Will it prosper? (2011 Bar Question)
A: Yes, because X, as a qualified indorser, warrants
that the note is genuine.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
WARRANTIES
The following are the warranties a person provides in
negotiating an instrument:
1. That the instrument is genuine and in all respects
what it purports to be
2. That he has good title to it
3. That all prior parties had capacity to contract
4. That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
Note: Indorsers liability as warrantor is distinct from his
liability to pay the instrument. Even a qualified indorser
may incur liability for breach of implied warranties. As
warrantor, his liability is unconditional.
PRESENTMENT FOR PAYMENT (PP)
Q: What is presentment for payment (PP)?
A: The presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment.
Q: How should presentment be made?
A: GR: Instrument must be exhibited to the person
from whom payment is demanded; when paid, it
must be delivered to the person paying it (Sec. 74,
NIL).
XPN: When exhibition is excused:
1. Debtor does not demand to see the
instrument and refuses payment on some
other grounds; or
2. Instrument is lost or destroyed.
Q: What is the liability of a bank paying a certificate
of deposit payable to bearer without requiring its
surrender?
A: The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without
requiring its surrender (Far East Bank & Trust
Company v. Querimit, G.R. No. 148582, Jan. 16,
2002).
Q: Can a payee claim payment for a promissory note
which was stolen and as such is not in his
possession?
A: No, because he is not a holder of the promissory
note. To make presentment for payment, it is
necessary to exhibit the instrument, which he cannot
do because he is not in possession thereof.
52
 NEGOTIABLE INSTRUMENTS LAW

Q: When must presentment for payment be made?

NECESSITY OF PRESENTMENT FOR PAYMENT
A:
Q: When is PP necessary? INSTRUMENT TIME FOR PRESENTMENT
GR: On the day it falls due (Sec.
A: PP is only necessary to charge persons secondarily 85, NIL)
liabledrawer and indorsers (Sec. 70, NIL).
XPN: If the due date falls on a
Note: PP is not necessary in order to charge the person Payable at a Saturday, presentment must be
primarily liable on the instrument. fixed or made on the next Monday
determinable
Q: When is PP not necessary to charge persons future time Note: If presentment for
secondarily liable? payment is made before
maturity; it will not result to a
A: PP is NOT necessary in the following instances: discharge of the instrument (Sec.
1. As to drawer, where he has no right to expect or 50, NIL).
require that the drawee or acceptor will pay the Promissory
instrument (Sec. 79, NIL). Within a reasonable time after
note payable
its issue.
on demand
2. As to indorser where the instrument was made Within a reasonable time after
or accepted for his accommodation and he has the last negotiation thereof (Sec.
no reason to expect that the instrument will be 71, NIL).
paid if presented (Sec. 80, NIL).
Note: Last negotiation means the
3. When dispensed with under Sec. 82, NIL such as: Bill of last transfer for value. Subsequent
a. Where, after the exercise of reasonable exchange transfers between banks for
diligence, presentment cannot be made payable on purposes of collection are not
b. Where the drawee is a fictitious person negotiations within Sec. 71.
demand
c. By waiver of presentment, express or
implied Note: Reasonable time means not
more than 6 months from the date
of issue. Beyond said period, the
Q: What is the rule if the instrument is, by its terms, check becomes stale and valueless
payable at a special place? and thus, should not be paid.

A: If the instrument is, by its terms, payable at a Every NI is payable at the time fixed therein without
special place, and the person primarily liable is able grace. The following table states the rules on PP
and willing to pay it there at maturity, such ability and when maturity date is fixed:
willingness are equivalent to a tender of payment
upon his part (Sec. 70, NIL). TIME OF MATURITY WHEN TO PRESENT
OF INSTRUMENT FOR PAYMENT
Q: What are the requisites for a sufficient PP? On a Sunday or On the next
holiday succeeding business
A: Presentment for payment, to be sufficient, must day
be made:
On a Saturday On the next
1. By the holder, or his agent authorized to receive
succeeding business
payment on his behalf; day
2. At a reasonable hour on a business day;
If instrument which Before 12:00 noon on
3. At a proper place;
falls due on a Saturday Saturday, or on
4. To the person primarily liable, or if he is absent or
is payable on demand Monday, at the option
inaccessible, to any person found at the place
of the holder
where the presentment is made (Sec. 72, NIL).
Q: When is delay in making presentment excused?

A:
1. When caused by circumstances beyond the
control of the holder; and

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2. Not imputable to his default, misconduct, or
negligence (Sec. 81, NIL).
Note: Only the delay in presentment is excused and not the
presentment itself. Hence, as soon as the cause of delay
ceases to operate, presentment must be made with
reasonable diligence (ibid.).
Q: Is the bank liable to the payee for depositing and
encashing the crossed checks to an unauthorized
person?
A: Yes. The effects of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72
of the NIL, presentment for payment, to be sufficient,
must be made by the holder or by some person
authorized to receive on his behalf. The checks here
had been crossed and issued for payees account
only. This only signifies that the drawer had
intended the same for deposit only by the person
indicated (Associated Bank v. CA, G.R. No. 89802,
May 7, 1992).
Q: What is the order of preference with regard to
the place of presentment?
A:
1. Specified place in the instrument
2. Address of the person to make the payment if
given in the instrument
3. Usual place of business or residence of the
person to make the payment
4. Wherever he can be found; or
5. At his Last known place of business or residence
(Sec. 73, NIL)
Q: When must presentment be made where the
instrument is payable at a bank?
A: Must be made during banking hours, unless the
person to make payment has no funds there to meet
it at any time during the day, in which case
presentment at any hour before the bank is closed on
that day is sufficient. (Sec. 75, NIL.)
Q: What are the requisites of payment in due
course?
A: Payment is made in due course when
MHG
a. it is made at or after the date of Maturity;
b. to the Holder thereof;
c. in Good faith and without notice that holders
title is defective. (Sec. 88, NIL.)
Note: in good faith refers to the maker or acceptor, &and
not to the holder.
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PARTIES TO WHOM PRESENTMENT FOR PAYMENT
SHOULD BE MADE
Q: Who are the parties to whom PP should be
made?
A: GR: PP must be made to the primary party; to the:
1. The maker in case of a promissory note, or
2. The acceptor in case of an accepted bill. If the bill
of exchange or check is payable on demand, the
presentment must be made to the drawee
although he is not automatically liable on the bill.
XPNs: Where the person/s primarily liable is/are:
1. Dead payment must be made to his personal
representative (Sec. 76, NIL.)
2. Liable as partners and no place of payment
specified payment may be made to any of them
though there has been a dissolution of the firm
(Sec. 77, NIL.)
3. Several persons, not partners, and no place of
payment is specified payment must be made to
all of them (Sec. 78, NIL.)
4. If the person primarily liable is absent or
inaccessible, then presentment must be made to
any person of sufficient discretion at the proper
place of presentment (Sec. 72[d], NIL).
DISPENSATION WITH PRESENTMENT OF PAYMENT
Q: What is the effect when presentment is not
made?
A: GR: Drawer and the indorsers are discharged from
their secondary liability
XPN:
1. Presentment for payment is not required to
charge drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will pay
the instrument (Sec. 79, NIL).
b. Indorser When the NI was made or accepted
for his accommodation and he has no reason
to expect that the instrument will be paid if
presented (Sec. 80, NIL).
2. When presentment for payment is dispensed
with under Sec. 82, NIL
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 NEGOTIABLE INSTRUMENTS LAW

3. When the BOE has been dishonored by non-

acceptance, since no PP for is necessary (Sec.
151, NIL).
Q: When may PP be dispensed with?
A:
1. Where, after the exercise of reasonable
diligence, presentment cannot be made;
2. Where the drawee is a fictitious person; or
3. By waiver of presentment, express or implied.
(Sec. 82, NIL.)
Q: Notice of dishonor is not required to be made in
all cases. One instance where such notice is not
necessary is when the indorser is the one to whom
the instrument is supposed to be presented for
payment. The rationale here is that the indorser
(2011 Bar Question)
A: already knows of the dishonor and it makes no
sense to notify him of it.
Q: When is a NI considered dishonored?

DISHONOR BY NON-PAYMENT A:
For BOE,
Q: When is an instrument dishonored by non- 1. if not accepted when presented for acceptance;
payment? or
2. if presentment for acceptance is excused and the
A: bill is not accepted (Sec. 149, NIL)
NON-PAYMENT UPON NON-PAYMENT
DUE PRESENTATION W/OUT For PN,
PRESENTATION 1. Not paid when presented for payment at
The instrument is duly Presentment is maturity; or
presented for excused and the 2. Where presentment is excused or waived and
payment to party instrument is overdue the instrument is overdue and unpaid (Sec. 83,
primarily liable and it and unpaid (Sec. 83, NIL)
is either refused or NIL)
cannot be obtained Q: What is the liability of a person secondarily liable
when the instrument dishonored?
Q: What is the effect of dishonor by non-payment?
A: After the necessary proceedings for dishonor had
A: When the instrument is dishonored by non- been duly taken, an immediate right of recourse to all
payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the
parties secondarily liable thereon accrues to the holder (Sec. 84)
holder (Sec. 84, NIL).
Q: When and where should the notice be given?
NOTICE OF DISHONOR
A:
A notice of dishonor is a notice given by the holder to 1. GR: As soon as instrument was dishonored (Sec.
the parties secondarily liable, drawer and each 102, NIL.)Party is allowed one entire day for
indorser, that the instrument was dishonored by non- the purpose of giving notice.
payment or non-acceptance by the drawee/maker.
XPN: Delay is excused (Sec. 113, NIL.)
Note: Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored the Note: An instrument cannot be dishonored by
instrument. non-payment until afterthe maturity.

Q: What are the purposes for requiring notice of 2. Parties reside in the same place
dishonor?
a. Place of business Before close of business
A: hours on the day following
1. To inform parties secondarily liable that the b. Residence Before the usual hours of rest
maker or acceptor has failed to meet his on the day following
engagement. c. By mail Deposited in the post office in time
2. To advise them that they are required to make to reach him in the usual course on the day
payment. following (Sec. 103, NIL)

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3. Parties reside in different places
a. By mail Deposited in the post office in time
to go by mail (actual departure in the course
of mail from the post office in which the
notice was deposited) the day following the
day of dishonor.
b. If no mail At a convenient hour (of the
sender) on that day, by the next mail
thereafter
c. Other than by post office (e.g. personal
messenger) Within the time that notice
would have been received in due course of
mail, if it has been deposited in the post
office within the time specified in (a) (Sec.
104, NIL.)
4. Time of notice to antecedent parties Same time
for giving notice that the holder has after the
dishonor (Sec. 107, NIL.)
Note: Actual receipt of the party within the time specified
by law is sufficient though not sent in the places specified
above (Sec. 108, NIL).
PARTIES TO BE NOTIFIED
Q: To whom must notice be given?
A: Notice of dishonor should be given to:
1. The drawer; or
2. Indorser; or
3. His agent (Sec. 97, NIL)
4. Where party is dead to a personal
representative or sent to the last residence or
last place of business of the deceased (Sec. 98,
NIL)
5. When the parties to be notified are partners
notice to any one partner though there has been
a dissolution (Sec. 99, NIL)
6. Notice to joint parties who are not partners must
be given to each of them (Sec. 100, NIL)
7. Where a party has been adjudged a bankrupt
to the party himself or to his trustee or assignee
(Sec. 101, NIL)
Q: The instrument was dishonored in the hands of
the agent. To whom and when may he give notice?
A:
1. To the parties secondarily liable Within the
time fixed by Secs. 102-104, and 107, otherwise,
they are discharged
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. To his principal The principal must give notice
to parties secondarily liable as if his agent were
an independent holder (Sec. 94, NIL).
Note: A party who receives notice of dishonor is entitled to
give notice of such dishonor to prior parties within the
same period of time that the holder has after the dishonor
as if he were the said holder (Sec. 107, NIL).
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
Q: Who gives the notice?
A:
1. Holder
2. Another in behalf of the holder
3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
would have a right to reimbursement from the
party to whom notice is given (Sec. 90, NIL)
EFFECT OF NOTICE
Q: What is the effect of notice of dishonor if given by
or on behalf of the holder?
A: Notice of dishonor inures to the benefit of:
1. All holders subsequent to the holder who has
given notice; and
2. All parties prior to the holder but subsequent to
the party to whom notice has been given and
against whom they may have a right of recourse
(Sec. 92, NIL)
Q: What is the effect of notice of dishonor if given by
party entitled thereto?
A: Notice of dishonor inures to the benefit of:
1. The holder; and
2. All parties subsequent to the party to whom
notice is given (Sec. 93, NIL).
Q: What is the effect of failure to give notice of
dishonor?
A: Any drawer or indorser to whom such notice is not
given is discharged (Sec. 89, NIL)
Note: Holder is not required to notify all indorsers, he may
select to hold only one or more indorsers. Indorsers who
are discharged from liability by reason that no notice of
dishonor was given to them is still liable for breach of
warranties as to the NI.
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 NEGOTIABLE INSTRUMENTS LAW
FORM OF NOTICE
Q: What is the form and contents of a notice of
dishonor?
A:
1. Oral; or
2. In writing
3. It may be given by personal delivery, or by mail
(Sec. 96, NIL)
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary, notice
must also contain a statement that it has been
protested).
c. Statement that the party giving the notice
intends to look for the party addressed for
payment.
Note: A written notice need not be signed, and an
insufficient notice may be supplemented or validated by
verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby (Sec. 95, NIL).
WAIVER
Q: What is meant by waiver of notice?
A: It is the willingness on the part of the drawer or
indorser to be bound as such even without due notice
of dishonor.
Q: When may waiver of notice be given?
A:
1. Before the time of giving notice has arrived; or
2. After the omission to give due notice (Sec. 109,
NIL)
Q: What are the ways to give a waiver of notice?
A: It can either be:
1. Express; or
2. Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission of
liability after dishonor) (Sec. 109, NIL).
Q: Who are affected by the waiver of notice?
A:
1. All parties (if embodied on the face of the
instrument); or
2. Particular indorser (if written above the signature
of such indorser) (Sec. 110, NIL)
57
Q: What is a waiver of protest?
A: It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee and
the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
presentment and notice of dishonor (Sec. 111, NIL).
DISPENSATION WITH NOTICE
Q: When is notice of dishonor not necessary?
A:
1. Waiver of notice (Sec. 109, NIL)
2. Waiver of protest (Sec. 111, NIL)
3. When notice is dispensed with when after
exercise of reasonable diligence, notice cannot be
given or does not reach the parties sought to be
charged (Sec. 112, NIL)
4. Drawer in cases under Sec. 114, NIL.
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-acceptance
has been given (notice of dishonor by non-
payment not necessary). (Sec. 116, NIL.)
Q: With regard to the drawer, when can a notice of
dishonor be dispensed with?
A:
1. When drawer and drawee is the same person
2. Drawee is fictitious or does not have the capacity
to contract
3. Drawer is the person to whom the instrument is
presented for payment (he is the one who
dishonored the instrument)
4. Drawer has no right to expect or require that the
drawee or acceptor will honor the instrument.
5. Drawer has countermanded the payment (e.g.
stop payment order) (Sec. 114, NIL.)
Q: P authorized A to sign a negotiable instrument in
his (Ps) name. It reads: Pay to B or order the sum
of Php1 million. Signed, A (for and in behalf of P).
The instrument shows that it was drawn on P. B
then indorsed to C, C to D, and D to E. E then treated
it as a bill of exchange. Is presentment for
acceptance necessary in this case? (2011 Bar
Question)
A: No, since the drawer and drawee are the same
person.
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y
UNIVERSITY OF SANTO TOMAS
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 MERCANTILE LAW
negotiated the check to S. When Juben failed to sell
the jewelry, he withdrew all his funds from the
drawee bank. After dishonor, Juben contends that
the holder failed to give him a notice of dishonor. Is
notice of dishonor necessary?
A: No. He was responsible for the dishonor of his
checks, hence, there was no need to serve him notice
of dishonor. (State Investment House, Inc. v. CA, G.R.
No. 101163, Jan. 11, 1993)
Q: When is it not necessary to give a notice of
dishonor to the indorser?
A:
1. Drawee is fictitious or has no capacity to contract,
and indorser was aware of these facts at the time
he indorsed the instrument;
2. Indorser is person to whom the instrument is
presented for payment; or
3. Instrument was made or accepted for his
accommodation (Sec. 115, NIL.)
EFFECT OF FAILURE TO GIVE NOTICE
Q: What is the effect of omission of a previous
holder to give notice of dishonor by non-
acceptance?
A: It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify
the drawer and indorsers if acceptance is refused.
(Sec. 117, NIL)
Q: What is the effect of failure to give notice of
dishonor?
A: GR: Any person to whom such notice is not given is
discharged, but he will still be liable for
breach of warranties pertaining to the
instrument.
XPNs:
1. Waiver (Sec. 109, NIL)
2. Notice is dispensed with (Sec. 112, NIL)
3. Not necessary to drawer (Sec. 114, NIL)
4. Not necessary to indorser (Sec. 115, NIL)
Q: What is the effect of lack of notice of dishonor on
the instrument which is payable in installments?
A:
1. No acceleration clause Failure to give notice of
dishonor on a previous installment does not
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2013 GOLDEN NOTES
discharge drawers and indorsers as to succeeding
installments.
2. With acceleration clause It depends upon
whether the clause is automatic or optional.
a. Automatic failure to give notice of dishonor
as to a previous installment will discharge the
persons secondarily liable as to the succeeding
installments;
b. Optional if not exercised, the rule would be
the same as if there is no acceleration clause. If
exercised, the rule would be the same as if the
installment contains an automatic acceleration
clause (Town Savings Bank v. CA, G.R. No.
106011, June 17, 1993).
DISCHARGE OF NEGOTIABLE INSTRUMENT
Q: What is meant by discharge of an instrument?
A: It is the 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.
DISCHARGE OF NEGOTIABLE INSTRUMENT
Q: What are the methods for discharge of
instrument?
A:
1. Payment by principal debtor:
a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice that the
holders title is defective
2. Payment by accommodated party
3. Intentional cancellation of instrument by the
holder (by expressly stating it in the instrument
or when the instrument is torn up, burned or
destroyed)
4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
NCC specifically remission, novation, and merger.
Note: Loss of the negotiable instrument will not
extinguish liability; compensation is not available so
long as an obligation is evidenced by a negotiable
instrument (Commercial Law Review, Villanueva, 2009
Edition).
5. Reacquisition by principal debtor in his own right.
Reacquisition must be:
a. By the principal debtor
b. In his own right
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 NEGOTIABLE INSTRUMENTS LAW
c. At or after date of maturity (instrument is
discharged; if made before, it may be
renegotiated) (Sec. 119, NIL).
DISCHARGE OF PARTIES SECONDARILY LIABLE
Q: What are the methods of discharge of secondary
parties?
A: ACS TReE
1. Any Act which discharges the instrument;
2. Intentional Cancellation of his signature by the
holder
3. Discharge of prior party which may be made
when signature is Stricken out
4. Valid Tender of payment by a prior party;
5. Release of the principal debtor, unless holder
expressly reserves his right of recourse against
the said subsequent parties
6. Extension of time of payment, unless:
a. Extension is consented to by such party
b. Holder expressly reserves his right of recourse
against such party (Sec. 120, NIL)
Q: The rule is that the intentional cancellation of a
person secondarily liable results in the discharge of
the latter. With respect to an indorser, the holder's
right to cancel his signature is: (2011 Bar Question)
A: limited to the case where the indorsement is not
necessary to his title.
Q: What are the effects of payment by persons
secondarily liable?
A:
1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3. GR: Instrument may be renegotiated
XPN:
a. Where it is payable to the order of a third
person, and has been paid by the drawer;
and
b. Where it is paid by the accommodated party
Note: (a) and (b) has the same effect as payment by the
party primarily liable.
4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his
own and all subsequent indorsements (Sec. 121,
NIL)
59
RIGHTS OF A PARTY WHO DISCHARGED
INSTRUMENT
Q: What are the rights of a party who discharged the
instrument?
A: GR: The party so discharging the instrument is
remitted to his former rights as regards all prior
parties, and he may strike out his own and all
subsequent indorsements, and again negotiate the
instrument.
XPNs:
1. Where it is payable to the order of a third
person, and has been paid by the drawee;
and
2. It was made or accepted for
accommodation, and has been paid by the
party accommodated.
RENUNCIATION BY HOLDER
Q: What is renunciation?
A: The act of surrendering a claim or right with or
without recompense (a PERSONAL defense).
Q: How is renunciation by holder made?
A:
1. Must be written
2. If oral, the instrument must be surrendered to
the person primarily liable (Sec. 122, NIL).
Q: What are the effects of renunciation?
A:
1. Made in favor of principal debtor made at or
after the maturity (made absolutely and
unconditionally) of the instrument discharges
the instrument (Sec. 122, NIL.)
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity
discharges only the secondary parties and all
subsequent to him (Sec. 122, NIL)
3. Renunciation does not affect the rights of a
holder in due course without notice (Sec. 120,
NIL)
Q: What is the rule regarding cancellation of an
instrument?
A: It is presumed intentional. It is inoperative if
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 MERCANTILE LAW
unintentional, or under a mistake or without the
authority of the holder. But where an instrument or
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the
cancellation was made unintentionally, or under a
mistake or without authority (Sec. 123, NIL)
MATERIAL ALTERATION
CONCEPT
Q: What is a material alteration?
A: Any change in the instrument which affects or
changes the liability of the parties in any way.
Q: What constitutes a material alteration?
A: Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is
specified
7. Any other change or addition which alters the
effect of the instrument (Sec. 125, NIL.)
Note: The change in the date of indorsement is not
material where the date is not necessary to fix the
maturity of the instrument.
Q: What is spoliation?
A: It refers to material alteration of an instrument
done by a stranger. It has the same effect as
alteration.
EFFECT OF MATERIAL ALTERATION
Q: What is the effect of material alteration of a NI
without the assent of all parties liable thereon?
A:
1. Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to
the alteration (because of their warranties).
2. If negotiated to a HIDC, he may enforce the
payment thereof according to its original tenor
against the person not a party to the alteration.
He may also enforce payment thereof against the
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2013 GOLDEN NOTES
party responsible for the alteration for the altered
amount.
3. If negotiated to a holder not a HIDC, he cannot
enforce payment against the person not a party
prior to the alteration. He may, however enforce
payment according to the altered tenor from the
person who caused the alteration and from the
indorsers (Sec. 124 NIL)
Q: Can a drawee who accepts a materially altered
check recover from the holder and the drawer?
(2011 Bar Question)
A: No, he cannot recover from either of them.
Q: Is there material alteration when the serial
number of a check had been altered?
A: No. An alteration is said to be material if it alters
the effect of the instrument. It means an
unauthorized change in an instrument that purports
to modify in any respect the obligation of a party or
an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to
the obligation of a party. The alteration of the serial
number of a check did not change the relations
between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check
is not a material alteration (International Corporate
Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).
Q: A material alteration of an instrument without
the assent of all parties liable thereon results in its
avoidance, EXCEPT against a: (2011 Bar Question)
A: Party who has made, authorized or assented to the
alteration and subsequent indorser.
ACCEPTANCE
DEFINITION
Q: What is acceptance of a bill?
A: A signification by the drawee of his assent to the
order of the drawer (Sec. 132, NIL).
Q: What are the requisites for acceptance?
A:
1. In writing, except constructive acceptance and to
a foreign bill payable in another state (unless the
other state requires for written acceptance);
2. Signed by the drawee (without it, he is not
liable);
60
 NEGOTIABLE INSTRUMENTS LAW
3. Must express a promise to pay money (not
goods);
4. Delivered to the holder (before delivery or
notification, acceptor may revoke or cancel his
acceptance).
Q: What is the effect of acceptance?
A: Upon acceptance, the bill, in effect becomes a
note. The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser.
Q: A bill of exchange states on its face: One (1)
month after sight, pay to the order of Mr. R the
amount of Php50,000.00, chargeable to the account
of Mr. S. Signed, Mr. T. Mr. S, the drawee, accepted
the bill upon presentment by writing on it the words
I shall pay Php30,000.00 three (3) months after
sight. May he accept under such terms, which
varies the command in the bill of exchange? (2011
Bar Question)
A: Yes, since a drawee is allowed to effect a qualified
acceptance in which case he shall be liable according
to the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the words:
Accepted, with promise to make payment within
two days. Signed, X. The drawer questioned the
acceptance as invalid. Is the acceptance valid?
A: Yes, because the acceptance is in reality a clear
assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed (Sec. 141 [d], NIL).
MANNER
Q: Where should acceptance be made?
A:
Acceptance may be made
1. On the bill itself,
2. On a separate paper; and if on a separate paper
a. it may be acceptance as to an existing bill; or
b. it may be acceptance as to a non-existing
bill.
If the bill is non-existent, the acceptance on a
separate paper must comply with following
requirements:
i. The contemplated drawee shall describe the
bill to be drawn and promise to accept it.
61
ii. Bill shall be drawn within a reasonable time
after such promise is written; and
iii. The holder shall take the bill upon the credit
of the promise.
Q: What are the kinds of acceptance?
A: Either general or qualified.
Q: What is general acceptance?
A: It assents without qualification to the order of the
drawer (Sec. 139, NIL).
Q: What is qualified acceptance?
A: An acceptance which in express terms varies the
effect of the bill as drawn (ibid.).
Note: A holder may refuse to accept a qualified acceptance
and if he does not obtain an unqualified acceptance, he
may treat the bill as dishonored by non-acceptance. (Sec.
142, NIL.)
Q: What are the kinds of qualified acceptance?
A:
1. Conditional makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated.
2. Partial an acceptance to pay part only of the
amount for which the bill is drawn.
3. Local an acceptance to pay only at a particular
place.
4. Qualified as to time a bill is accepted to be paid
on or after a specified date.
5. As to drawee - acceptance of some one or more of
the drawees but not of all. (Sec. 141, NIL.)
Q: What are the other kinds of acceptance?
A:
1. Constructive/implied (Sec. 137, NIL.)
Drawee to whom the bill is delivered for
acceptance destroys it; or
Drawee refuses, within 24 hours after such
delivery, or within such time as is given him,
to return the bill accepted or non-accepted
2. Extrinsic the acceptance is written on a paper
other than the bill itself. To be binding upon the
acceptor:
Acceptance must be shown to the person
to whom the instrument is negotiated;
and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Such person must take the bill for value on
the faith of such acceptance (Sec. 134,
NIL).
3. Virtual
Unconditional promise in writing to accept
a bill
Promise made before it is drawn
Any person who, upon faith thereof,
receives the bill for value (Sec. 135, NIL).
TIME FOR ACCEPTANCE
Q: What is the time allowed for the drawee to make
the acceptance?
A: The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation (Sec. 136, NIL).
Note: Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is presented for
payment, not acceptance.
RULES GOVERNING ACCEPTANCE
Q: What is the effect of accepting an instrument
with a qualified acceptance?
A: GR: When the holder takes a qualified acceptance
the drawer and indorsers are discharged from
liability on the bill.
XPNs:
1. When they have expressly or impliedly
authorized the holder to take a qualified
acceptance, or
2. Subsequently assent thereto
3. Implied assent (when they did not express
their dissent to the holder within a
reasonable time when they received a notice
of qualified acceptance) (Sec. 142, NIL)
Q: When may an incomplete bill be accepted?
A: Acceptance may be made before the bill has been
signed by the drawer or while otherwise incomplete,
or after it is overdue, or even after it has been
dishonored by non-acceptance or non-payment (Sec.
138, NIL)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the effect of the certification by the
drawee bank?
A: Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction and that they
shall be so applied whenever the check is presented
for payment. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to
acceptance (Secs. 187, 189, NIL; New Pacific Timber v.
Seneris, G.R. No. L-41764, Dec. 19, 1980).
PRESENTMENT FOR ACCEPTANCE
Q: What is presentment for acceptance (PA)?
A: Production or exhibition of a bill of exchange to
the drawee for his acceptance or payment (also
includes presentment for payment).
Q: Is presentment for acceptance necessary?
A: GR: It is not necessary to render any party to the
bill liable. (par. 2, Sec. 143, NIL)
XPN:
1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument
2. When bill expressly stipulates that it shall be
presented for acceptance; or
3. Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee (par. 1, Sec. 143, NIL.)
Note: The holder must either present it for acceptance or
negotiate it within a reasonable time, otherwise, the
drawer and all indorsers are discharged (Sec. 144, NIL).
TIME/PLACE/MANNER OF PRESENTMENT
Q: What constitutes proper presentment for
acceptance?
A: It must be made:
1. By or on behalf of the holder
2. At a reasonable hour on a business day
3. Before the bill is overdue; and
4. To the drawee or some person authorized to
accept or refuse to accept on his behalf. (Sec.
145, NIL); and
62
 NEGOTIABLE INSTRUMENTS LAW

WHEN PRESENTMENT MUST BE MADE DISHONOR BY NON-ACCEPTENCE

TO
Bill addressed to Them all unless one has Q: When is a bill dishonored by non-acceptance?
2 or more authority to accept or refuse
drawees who are acceptance for all, in which case A:
not partners presentment may be made to 1. When it is duly presented for acceptance and
him only. (Sec. 145, [a], NIL.) such an acceptance is refused or cannot be
Drawee is dead Drawee's personal obtained; or
representative. (Sec. 145, [b], 2. When presentment for acceptance is excused,
NIL.) and the bill is not accepted. (Sec. 149, NIL.)
Note: Presentment is merely
permissive since it is excused by Note: It is not sufficient that presentment for acceptance is
Sec.148a) excused, it is also necessary that the bill remains not
Drawee is To drawee or his accepted.
adjudged a trustee/assignee (Sec 145, [c],
bankrupt or NIL.) Q: What is the duty of the holder where bill is not
insolvent or has accepted?
made an
assignment for A: If within 24 hours after due presentment, the bill is
the benefit of not accepted, the person presenting it must treat the
creditors bill as dishonored by non-acceptance otherwise he
will lose the right of recourse against the drawer and
EFFECT OF FAILURE TO MAKE PRESENTMENT indorsers (Sec. 150, NIL)

Q: What is the effect of failure to make PP of a check Q: What are the rules when a bill is dishonored by
within a reasonable time? non-acceptance?

A: Failure to make such presentment will discharge A:

the drawer from liability or to the extent of the loss
caused by the delay (Sec. 186, NIL; Republic of the
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961)
Q: When may delay in presentment be excused?
A: Where the holder of a bill drawn payable
elsewhere than at the place of business or the
residence of the drawee has no time with the
exercise of reasonable diligence, to present the bill
for acceptance before presenting it for payment on
the day that it falls due. (Sec. 147, NIL.)
Q: When is presentment excused?
A:
1. Drawee is dead, or has absconded, or is a fictitious
person not having capacity to contract bybill;
2. After exercise of reasonable diligence,
presentment cannot be made; or
3. Although presentment has been irregular,
acceptance has been refused on some other
ground. (Sec. 148, NIL.)
1. Right of recourse against all secondary party
accrues to the holder.
2. No presentment for payment is necessary since
dishonor of the instrument by non-payment is to
be expected.
3. If the instrument is accepted after it has been
dishonored by non-acceptance presentment for
payment is necessary upon maturity.
4. In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.
Q: What are the rights of a holder when bill is not
accepted?
A: When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment
for payment is necessary (Sec. 151, NIL).
Q: What is acceptance for honor?
A: It is an undertaking by a stranger to a bill after
protest for the benefit of any party liable thereon or
for the honor of the person for whose account the bill
is drawn which acceptance inures to the benefit of all
parties subsequent to the person for whose honor it
is accepted, and conditioned to pay the bill when it

63 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

becomes due if the original drawee does not pay it 8. Title-retaining Note an instrument used to
(Sec. 161, NIL). secure the purchase price of goods. It ordinarily
provides that title to the goods shall remain in
Q: What are the requisites of acceptance for honor? payees name until the note is paid in full.

A: WIS 9. Collateral Note it is used when the maker

1. Must be in Writing pledges securities to the payee to secure the
2. Must Indicate that it is an acceptance for honor payment of the amount of the note
3. Must be Signed by the acceptor for honor (Sec.
162, NIL) 10. Judgment Note this is a note to which a power
of attorney is added enabling the payee to take
PROMISSORY NOTES judgment against the maker without the
formality of a trial if the note is not paid on its
Q: What is a promissory note? due date.(De Leon, supra, pg. 375.)

A: An unconditional promise in writing made by one CHECKS

person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future DEFINITION
time, a sum certain in money to order or to bearer
(Sec. 184, NIL). Q: What is a check?
Q: What are the special types of promissory notes? A: It is a bill of exchange drawn on a bank and
payable on demand (Sec. 185, NIL)
A:
1. Certificate of deposit a written
Q: What are the essential characteristics of checks?
acknowledgment by a bank of the receipt of
money on deposit on which the bank promises to
A: There are 2 essential distinct characteristics of
pay to the depositor or to him or his order or to
checks:
some other person or to him or his order, or to a
specified person or bearer, on demand or on a
1. they are drawn on a bank; and
fixed date, often with interest.
2. payable instantly on demand.
2. Bonds an evidence of indebtedness issued by a
Q: Distinguish between a Check and a BOE.
public or private corporation which constitutes a
promise, under seal, to pay money. It runs for a
A:
longer period of time than a PN.
Checks BOE
3. Registered bond one payable only to the Drawee Always drawn on May or may not
person whose name appears on the face of the a bank or banker be drawn on a
certificate. against a bank and need
previous deposit not be drawn
4. Coupon bond one to which are attached of funds against a deposit
coupons which entitle the holder to interest Payability Always payable Either payable
when due. on demand on demand or at
a fixed or
5. Bank Note instrument issued by a bank for determinable
circulation as money payable to bearer on future time
demand. (Sec.4)
Function Ordinarily Intended for
6. Due Bill - PN which shows on its face that one intended for circulation as
person acknowledges his indebtedness to immediate instrument of
another. The word due is commonly used. payment credit
Presentment Must be Must be
7. Mortgage Note an instrument secured by for Payment presented for presented for
either a real (REM) or personal property payment within a payment within
(Chattel). reasonable time a reasonable
after its time after its last

UNIVERSITY OF SANTO TOMAS 64

2013 GOLDEN NOTES
 NEGOTIABLE INSTRUMENTS LAW

issue(Sec.186, negotiation
NIL) (Sec. 171, NIL) 4. Crossed Check Done by writing 2 parallel lines
on the left top portion of the check. The marking
signifies that the bank should pay only with the
intervention of the company only.
Discharge of When a check is They remain
Liability accepted or liable despite 5. Memorandum Check A check with
certified, the acceptance Memorandum written on its face. The writing
drawer & (Sec. 84, NIL) signifies that the drawer engages to pay the bona
indorsers are fide holder absolutely, without any condition
discharged from concerning its presentment
liability thereon
(Sec. 188, NIL) 6. Travelers Checks Instruments purchased from
banks or express companies which can be used
Effect of the Death of the Death of the
like cash upon the second signature by the
Death of the drawer of a check drawer of an
purchaser (De Leon, supra, pg. 380-385.)
Drawer with the ordinary bill
knowledge of the does not revoke
Q: What is a crossed check? What are the effects of
bank revokes the the authority of
crossing a check? Explain. (2005 Bar Question)
authority of the the drawee to
bank to pay. pay.
A: A crossed check is a check with two (2) parallel
Presentment Need not be Must be
lines, written diagonally on the upper right corner
for presented for presented for
thereof. It is a warning to the drawee bank that
Acceptance acceptance (Sec. acceptance in
payment must be made to the right party; otherwise
185, NIL.) certain cases
the bank has no authority to use the drawer's funds
(Sec. 143, NIL.)
deposited with the bank.
Q: A check was dishonored due to material
To be assured that it will avoid any mistake in paying
alteration. The creditor then filed an action against
to the wrong party, banks adopted the policy that
drawee bank for the amount. Will the action
crossed checks must be deposited in the payee's
prosper?
account. When withdrawal is made, the banks can be
sure that they are paying to the right party. The
A: No. If a bank refuses to pay a check
crossing becomes a warning also to whoever deals
(notwithstanding the sufficiency of funds), the payee-
with the said instrument to inquire as to the purpose
holder cannot, as provided under Sections 185 and
of its issuance. Otherwise, if something wrong
189 of the NIL, sue the bank. The payee should
happens to the payment thereof, that person cannot
instead sue the drawer who might in turn sue the
claim to be a holder in due course. Hence, he is
bank. This is so because no privity of contract exists
subject to the personal defense on the part of the
between the drawee-bank and the payee (Villanueva
drawer that there is breach of trust committed by the
v. Nite, G.R. No. 148211, July 25, 2006).
payee in not complying with the drawer's instruction.
KINDS
Hence, the effects of crossing a check are:
Q: What are the special types of checks?
1. That the check may not be encashed but only
deposited in the bank;
A:
2. That the check may be negotiated only once- to
1. 1.Cashiers Check a BOE drawn by the bank
one who has an account with a bank;
upon itself and is accepted at its issuance. It is
3. That the act of crossing the check serves as a
usually signed by the cashier of the bank.
warning to the holder that the check has been
issued for definite purpose so that he must inquire
2. Managers Check a BOE drawn by the bank
if he has received the check pursuant to the
upon itself and is accepted at its issuance and
purpose. Otherwise, he is not a HIDC (State
signed by a manager on behalf of a bank.
Investment House v. IAC, 175 SCRA 310).
3. Certified Check Drawn by a depositor upon
funds to his credit in a bank which an officer of a
bank certifies will be paid on presentation.

65 UNIVERSITY OF SANTO TOMAS

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Q: What is the purpose of crossing a check?
A: To insure payment to the payee. It can only be
deposited but may not be converted into cash by the
drawer. Crossing a check does not destroy its
negotiability but the check may be negotiated only
once to one who has an account with the bank (De
Ocampo v. Gatchalian, 3 SCRA 596)
Q: What is a stale check?
A: A check which has not been presented for
payment within a reasonable time after its issue. It is
valueless and thus, should not be paid. A check
becomes stale 6 months from date of issue.
Q: When will the delivery of a check produce the
effect of payment even if the same had not been
encashed?
A: If the debtor was prejudiced by the creditor's
unreasonable delay in presentment. Acceptance of a
check implies an undertaking of due diligence in
presenting it for payment. If no such presentment
was made, the drawer cannot be held liable
irrespective of loss or injury sustained by the payee.
Payment will be deemed effected and the obligation
for which the check was given as conditional payment
will be discharged (Pio Barretto Realty Corp. v. CA,
supra.).

Q: What is the effect of a stale check?

A: The drawer and all indorsers are discharged from

liability thereon (Sec. 186, NIL)

Q: What is a memorandum check?

A: A memorandum check is an evidence of debt

against the drawer and although may not be intended
to be presented, has the same effect as an ordinary
check and if passed on to a third person, will be valid
in his hands like any other check (People v. Nitafan,
G.R. No. 75954, Oct. 22, 1992).

PRESENTMENT FOR PAYMENT

TIME

A check must be presented for payment within a

reasonable time after its issue. (Sec. 186, NIL.)

EFFECT OF DELAY

The following are the effects of the delay in PP:

1. The drawer will be discharged from liability

thereon to the extent of the loss caused by the
delay. (ibid.)

2. The indorser shall be discharged from liability.

(PNB vs. Seeto, G.R. No. L-4388, August 13,
1952.)

Note: PP is not dispensed with by Sec. 186 of the NIL.

Hence, if there is no PP, the drawer cannot be held
irrespective of the loss or injury suffered by the payee. (Pio
Barretto Realty Corp. v. CA, G.R. No. 132362, June 28,
2001).

UNIVERSITY OF SANTO TOMAS 66

2013 GOLDEN NOTES
 INSURANCE CODE
INSURANCE CODE
The laws governing contracts of insurance in the
Philippines are the following:
1. Insurance Code of the Philippines 1978
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Q: What is a contract of insurance?
A: It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event (Sec. 2[1], Insurance Code).
Note: A contract of insurance, to be binding from the date
of application, must have been a completed contract (Perez
vs. CA, GR No. 112329, January 28, 2000.). Thus, it must
have all the essential elements of a valid contract as
enumerated in Art. 1318 of the New Civil Code
1. Subject matter in which the insured has an insurable
interest;
2. Consideration, which is the premium paid by the
insured, for the insurers promise to indemnify
the former upon the happening of the event or
peril insured against;
3. Meeting of minds of the parties.
Q: What is meant by doing an insurance business
or transacting an insurance business?
A: It is: (ISRA)
1. making or proposing to make, as Insurer, any
insurance contract;
2. making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;
3. doing any kind of business, including a
reinsurance business, specifically Recognized as
constituting the doing of an insurance business.
4. doing or proposing to do any business in
substance equivalent to Any of the foregoing in a
manner designed to evade the provisions of the
Insurance Code. (Sec. 2[2], ibid.)
Note: In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the making of
the insurance contracts, agreements or transactions or that
no separate or direct consideration is received therefor,
shall NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an
insurance business. (Ibid.)
67
Q: What is a contract of insurance as an Uberrimae
Fidei Contract?
A. The contract of insurance is one of perfect good
faith (uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for the
latter, since its dominant bargaining position carries
with it stricter responsibility (Qua Chee Gan vs. Law
Union and Rock Insurance, Co. Ltd., GR No. L-4611,
December 17, 1955).
It requires the parties to the contract to
communicate that which a party knows and ought to
communicate, that is, the duty to disclose in good
faith all facts material to the contract.
Q: Why are insurance contracts called contracts of
adhesion?
A: While generally, stipulations in a contract come
about after deliberate drafting by the parties thereto,
there are certain contracts almost all the provisions
of which have been drafted only by one party, usually
a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party
is the signing of his signature or his 'adhesion'
thereto. Insurance contracts fall into this category
(Sweet Lines, Inc. vs. Teves, GR No. L-37750, May 19,
1978)
An illustration of a contract of adhesion is when the
insurer used fine print letters in conditions stated in
a contract of insurance (Ibid).
Q: What are the rules in the construction/
interpretation of insurance contracts?
A: By reason of the exclusive control of the insurance
company over the terms and phraseology of the
contract, the ambiguity must be held strictly against
the insurer and liberally in favor of the insured (Qua
Chee Gan v Law Union and Rock Insurance, supr.).
However, if the terms, which the parties themselves
have used, are clear and unambiguous, they must be
taken and understood in their plain, ordinary and
popular sense (Sun Life Office, Ltd. vs. CA, 195 SCRA
193).
Q: Who are parties in an insurance contract?
A:
1. Insurer party who assumes or accepts the risk
of loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Insured person in whose favor the contract is
operative and is indemnified against.
Note: The insured is not always the person to whom
the proceeds are paid.
3. Assured/Beneficiary- a person designated by the
terms of the policy to receive the proceeds of the
insurance. He may be the insured or a third party
in the contract for whose benefit the policy is
issued and to whom the loss is payable.
Q: Who may be an insurer?
A: Every person, partnership, association, or
corporation duly authorized (by the Insurance
Commission) to transact insurance business may be
an insurer (Sec. 6, Insurance Code.).
Q: Who may be insured?
A: Anyone except a public enemy may be insured
(Sec. 7, Insurance Code.).
Note: A public enemy is a nation at war with the Philippines
and every citizen or subject of such nation. It does not
include mobs, thieves or robbers (Bouviers Law Dictionary).
Note: If majority of the stockholders of the respondent
corporation were German subjects who became an enemy
corporation upon the outbreak of the war between the
United States and Germany, it stands to reason that an
insurance policy ceases to be allowable as soon as an
insured becomes a public enemy. The respondent having
become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by a
Philippine corporation had ceased to be valid and
enforceable, and since the insured goods were burned after
December 10, 1941, and during the war, the respondent
was not entitled to any indemnity under said policy from
the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require
that the premium paid by the respondent for the period
covered by its policy from December 11, 1941, should be
returned by the petitioner (Filipinas Compana de Seguros v.
Christern, Huenfeld and Co., Inc., G.R. No. L-2294 May 25,
1951).
Q: What is the subject matter of a contract of
insurance?
A: Anything having an appreciable pecuniary value,
which is subject to loss or deterioration or of which
one may be deprived so that his pecuniary interest is
or may be prejudiced.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the event or peril insured against?
A: It is any contingent or unknown event, whether
past or future, which may damnify a person having an
insurable interest, or create a liability against him
subject to the provisions of Chapter I of the Insurance
Code. (Sec. 3, Insurance Code.)
Q: Can a minor enter into an insurance contract?
A: No. Minors can no longer enter into insurance
contracts. The exception under the (Sec. 3) Insurance
Code is no longer controlling because the age of
majority is now 18 years (RA No. 6809). (Sundiang
and Aquino, Reviewer on Commercial Law, 2009 Ed.,
pg. 90.)
Q: Can games of chances be insured?
A: No. An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized (Sec. 4,
Insurance Code).
ELEMENTS OF CONTRACT OF INSURANCE
Q: What are the elements of a contract of
insurance?
A:SPEAR
1. Scheme to distribute losses Such assumption of
risk is part of a general scheme to distribute actual
losses among a large group or substantial number
of persons bearing a similar risk.
2. Payment of premium As consideration for the
insurers promise, the insured makes a ratable
contribution called premium, to a general
insurance fund.
3. Existence of insurable interestThe insured
possesses an interest of some kind susceptible of
pecuniary estimation, known as insurable
interest.
Note: In general (except in life insurance policies), a
person is deemed to have an insurable interest in the
subject matter insured where he has a relation or
connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation and
will suffer pecuniary loss from its destruction or injury by
the happening of the event insured against.
Note: A life insurance policy may be taken by the creditor
on the life of the debtor to the extent of the debt owed
by the debtor
68
 INSURANCE CODE
4. Assumption of Risk The insurer assumes that risk
of loss for a consideration.
5. Risk of loss The insured is subject to a risk of loss
through the destruction or impairment of that
interest by the happening of designated peril.
Note: The inherent uncertainty of events is normally
described in terms of risk. A contract possessing only the
last three elements enumerated above is a risk-shifting
device, but NOT a contract of insurance which is a risk-
distributing device (De Leon, The Insurance Code of the
Philippines Annotated, 2006 Ed., pg. 22.).
Consequently, however, the existence of insurance could
have the perverse effect of increasing the probability of
loss. This is when the insured, having in mind the
indemnification for loss or damage caused by the
happening of the event insured against, would have
reduced incentive to take steps to protect himself or his
property, subject of insurance. This phenomenon is
called moral hazard (ibid, pg. 28.).
CHARACTERSITICS AND NATURE OF AN INSURANCE
CONTRACT
Q: What are the characteristics of an insurance
contract?
A:
1. Consensual It is perfected by the meeting of
the minds of the parties as to the object, cause
and consideration of the insurance contract.
There should be acceptance of the application
for insurance.
2. Voluntary The parties may incorporate such
terms and conditions as they may deem
convenient: Provided they do not contravene
any provision of law and are not opposed to
public policy, law morals, good customs, or
public order.
GR: The taking out of an insurance contract is
not compulsory.
XPN: Liability insurance may be required by law
in certain instances (E.g. compulsory
motor vehicle liability insurance, or
employees under Labor Code, or as a
condition to granting a license to
conduct a business or calling affecting
the public safety or welfare).
3. Aleatory Liability of the insurer depends
upon some contingent event.
Note: An aleatory contract is a contract where one
or both of the parties reciprocally bind themselves
69
to give or do something upon the happening of an
event which is uncertain, or which is to occur at an
indeterminate time (Art. 2010, NCC).
4. Unilateral It imposes legal duties only on
insurer who promises to indemnify in case of
loss.
Note: It is executed as to the insured after the
payment of the premium, and executory on the part
of the insurer in the sense that it is not executed
until payment for a 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 Recovery is
commensurate with the amount of the loss
suffered.
GR: The insurer promises to make good only
the loss of the insured.
XPN: The principle is not applicable to life and
accident insurance where the result is death
because life is not capable of pecuniary
estimation. The only situation where the
principle of indemnity is applicable to life
insurance is when the interest of a person
insured is capable of exact pecuniary
measurement. An example would be in a case
where a creditor insures the life of his debtor
to the extent of the latters debt to the
former.
7. Personal Each party having in view the
character, credit and conduct of the other.
8. Property Since insurance is a contract, it is
property in legal contemplation.
9. Risk-distributing device Insurance serves to
distribute the risk of economic loss among as
many as possible of those who are subject to
the same kind of loss.
10. Onerous there is a valuable consideration
called the premium.
CLASSES OF INSURANCE
1. Life insurance
a. Individual life (Secs. 179-183, 227.)
b. Group life (Sec. 50, last par., 228.)
c. Industrial life (Secs. 229-231.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Non-Life Insurance
a. Marine (Secs. 99-166.)
b. Fire (Secs. 167- 173.)
c. Casualty (Sec. 174.)
3. Contracts of suretyship or bonding. (Secs. 175-
178) (De Leon, supra).
4. Compulsory Motor Vehicle Liability Insurance
MARINE INSURANCE
Q: What does marine insurance include?
A: It includes:
1. Insurance against loss or damage to:
a. Vessels, craft, aircraft, vehicles, goods, freights,
cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, evidences of debts,
valuable papers, bottomry,
respondentia interests and all other kinds of
property and intersts therein, in respect to,
appertaining to or in connection with any
and all risks or perils of navigation, transit or
transportation, or while being assembled,
packed, crated, baled, compressed or
similarly prepared for shipment or while
awaiting shipment, or during any delays,
storage, transshipment, or reshipment
incident thereto, including war risks, marine
builders risks and all personal property
floater risks;
b. Person or property in connection with or
appertaining to a marine, inland marine,
transit or transportation insurance, including
liability for loss of or damage arising out of
or in connection with the construction,
repair, operation, maintenance or use of the
subject matter of such insurance (but not
including life insurance or surety bonds nor
insurance against loss by reason of bodily
injury to any person arising out of
ownership, maintenance or use of
automobiles);
c. Precious stones, jewels, jewelry, precious
metals, whether in course of transportation
or otherwise;
d. Bridges, tunnels and other instrumentalities
of transportation and communication
(excluding buildings, their furniture and
furnishings, fixed contents and supplies held
in storage); piers, wharves, docks and slips,
and other aids to navigation and
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
transportation, including dry docks and
marine railways, dams and appurtenant
facilities for the control of waterways.
2. Marine protection and indemnity insurance. (Sec.
99, Insurance Code.)
Note: From the foregoing enumeration, marine insurance
now includes, not only risks connected with marine
navigation, but which are otherwise connected therewith
such as insurance of aircraft, goods while being packed or
assembled, injury to passengers, precious stones, jewels,
jewelry whether in the course of transportation or not.
(Perez, Quizzer and Reviewer on Commercial Laws, Vol. 1,
2010 ed.).
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 ship owner or not (Roque v. IAC, GR No.
L-66935, Nov. 11, 1985).
Q: What is meant by Marine protection and
indemnity insurance?
and
A: Insurance against legal liability of the insured for
loss, damage, or expense incident to ownership,
operation, chartering, maintenance, use, repair, or
construction of any vessel, craft or instrumentality in
use of ocean or inland waterways, including liability
of the insured for personal injury, illness or death or
for loss of or damage to the property of another
person (Sec. 99, [2], Insurance Code).
Q: What are the two major divisions of Marine
insurance?
A:
1. Ocean marine insurance covers primarily sea
perils of ships and cargoes. Scope: GELS
a. Goods or cargoes
b. Earnings such as freight, passage money
c. Liability incurred by reason of maritime
perils
d. Ships or hulls
Note: The insurer is liable only for such losses or
damages proximately caused by the perils insured
against (De Leon, supra, pg. 312.).
2. Inland marine insurance covers primarily the
land or over the land transportation perils of
property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It
also covers risks of lake, river, or the other inland
waterway transportation and other waterborne
perils outside of those risks that fall definitely
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 INSURANCE CODE
within the ocean marine category. Classes: Pit-
BaFF
a. Property In Transit Provides protection to
the property frequently exposed to loss
while it is being transported from one
location to another.
b. Bailee liability Provides protection to
persons who have temporary custody of the
goods or personal property of others, such
as carriers, laundrymen, warehousemen, and
garagekeepers.
c. Fixed transportation property Covers
bridges, tunnels and other instrumentalities
of transportation and communication,
although as a matter of fact they are fixed
property. They are so insured because they
are held to be an essential part of
transportation system.
d. Floater Provides insurance to follow the
insured property wherever it may be located
subject always to the territorial limits of the
contract. (De Leon, supra, pg.317.)
Q: What is the risk insured against in marine
insurance?
A: GR: In the usual form of a marine policy, the risks
insured against are only perils of the sea.
Note: The insured is bound to prove that the
cause of the loss is a peril of the sea.
XPN:When the insurance is an all risk policy and
thus covers even perils of the ship.
XPN to XPN: When the risks are expressly excepted by
the all risk policy.
Note: The burden rests on the insurer to prove that
the loss is caused by a risk that is excluded (Sundiang,
supra. Pg. 136, citing Go Tiaco Y Hermanos vs. Union
Insurance Society of Canton, 40 Phil. 40;Filipino
Merchants Ins. Co. vs. CA, 179 SCRA 638; and Choa
Tiek Seng vs. CA, 183 SCRA 223 [1990].).
Q: What does the phrase perils of the sea or perils
of navigation mean?
A: It includes only those casualties due to the: WiN
1. Unusual violence or extraordinary action of WInd
and wave, or
2. Other extraordinary causes connected with
Navigation. (De Leon, supra, pg.310.)
71
Q: What does perils of the ship mean?
A: It is a loss which, in the ordinary course of events,
results from the: NON
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship;
3. Negligent failure of the ships owner to provide
the vessel with proper equipment to convey the
cargo under ordinary conditions.
Q: A marine insurance policy on a cargo states that
the insurer shall be liable for losses incident to
perils of the sea. During the voyage, seawater
entered the compartment where the cargo was
stored due to the defective drainpipe of the ship.
The insured filed an action on the policy for recovery
of the damages caused to the cargo. May the
insured recover damages? (1998 Bar Question)
A: No. The proximate cause of the damage to the
cargo insured was the defective drainpipe of the ship.
This is peril of the ship, and not peril of the sea. The
defect in the drainpipe was the result of the ordinary
use of the ship. To recover under a marine insurance
policy, the proximate cause of the loss or damage
must be peril of the sea.
Q: What is an all risks marine insurance policy?
A: GR: It is that which insures against allcauses of
conceivable loss or damage.
XPN:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the
part of the insured. (Choa Tiek Seng v. CA.)
Note: An all risks policy grants greater protection than
that afforded by the perils clause (De Leon, supra, pg.
313).
The insured under an "all risks insurance policy" has the
initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was
damaged when unloaded from the vessel; thereafter, the
burden then shifts to the insurer to show the exception to
the coverage (Filipino Merchants Insurance Co. vs. CA, 179
SCRA 638).
Q: What is the extent of the insurable interest of the
following?
A:
1. Ship owner
a. Over the value of the vessel, even when it
has been chartered by one who covenants to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
pay him its value in case of loss. In such a
case, the insurer shall be liable for only that
part of the loss which the insured cannot
recover from the charterer. (Sec. 100,
Insurance Code.)
b. If hypothecated by a bottomry loan, the
insurable interest is only the excess of the
value of the vessel over the amount secured
by bottomry. (Sec. 101, Insurance Code.)
c. He also has an insurable interest on
expected freightage. (Sec. 103, Insurance
Code.)
2. Cargo owner over the cargo and expected
profits. (Sec. 105, Insurance Code.)
3. Charterer over the vessel, to the extent that he
is liable to be damnified by its loss. (Sec. 106,
Insurance Code.)
4. Creditor/lender over the amount of the loan.
Q: What is a loan on bottomry or respondentia?
A: A loan in which under any condition whatever, the
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of
the goods on which it is made or of the price they
may receive in case of accident. (Art. 719, Code of
Commerce.)
Q: What is difference between a loan on bottomry
and respondentia?
A: They are basically the same. The only distinction is,
a loan on bottomry involves a vessel as a security,
while a respondentia has cargo as its security. (Perez,
supra, pg. 153.)
Q: What is freightage?
A: It signifies all the benefits derived by the owner,
either from the chartering of the ship or its
employment for the carriage of his own goods or
those of others. (Sec. 102, Insurance Code.)
Q: When does insurable interest in expected
freightage in a charter party exist?
A: It exists from the time the vessel has broken
ground on the chartered voyage (Sec. 104, Insurance
Code).
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2013 GOLDEN NOTES
Q: When is insurable interest in expected freightage
if there is no charter party?
A: When there is no charter party and the price is to
be paid for the carriage of goods, from the time said
goods are actually on board the vessel, or if there is
some contract for putting them on board, from the
time both ship and goods are ready for the specified
voyage (ibid)
Q: What are the instances when there is no
insurable interest in freight?
A:
1. When there is no contract and no part of the
goods expected to be carried are on board,
although there are goods ready for shipment or
the master is provided with funds for the
purpose of purchasing a cargo.
2. Where the vessel is a mere seeking ship, the
owner has no insurable interest in freight to be
earned on goods not loaded.
Note: A seeking ship is a vessel looking for cargo to
be transported (De Leon, supra, pg. 323.)
Q: When does insurable interest in expected profits
exist?
A:
1. When the interest in the thing involved is based
on a legal right.
2. When the interest in thing involved is based on
valuable consideration.
Q: What are the special marine insurance contracts
and clauses?
A:
1. All-risks policy
2. Barratry clause a clause which provides that
there can be no recovery on the policy in case
of any willful misconduct on the part of the
master or crew in pursuance of some unlawful
or fraudulent purpose without the consent of
the owner and to the prejudice of owners
interest. It requires an intentional and willful
act in its commission. No honest error or
judgment or mere negligence, unless criminally
gross, can be barratry. (Roque v. IAC, G.R. No.
L- 66935, Nov. 11, 1985.)
3. Inchmaree clause a clause which makes the
insurer liable for loss or damage to the hull or
machinery arising from the:
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 INSURANCE CODE

a. Negligence of the captain, engineers, 5. The use of false and simulated papers. (Sec. 110)
etc.
b. Explosion, breakage of shafts; and Q: What are the distinctions on concealment in
c. Latent defect of machinery or hull. marine insurance and other property insurance?
(Thames and Mersey Marine Insurance
Co v. Hamilton Fraser and Co [1887] 12 A:
AC 484.) OTHER PROPERTY
MARINE INSURANCE
INSURANCE
4. Sue and labor clause a clause which makes The information or belief
the insurer liable for The information or the
rd
of a 3 party is not
a. all the expenses attendant upon a loss belief or expectation of 3
rd
material and need not be
which forces the ship into port to be persons in reference to a communicated, unless it
repaired; and material fact is material proceeds from an agent
b. expenses incurred, where it is stipulated in and must be of the insured whose
the policy that the insured shall labor for communicated. duty is to give
the recovery of the property. (Sec. 163, information.
Insurance Code.)
The concealment of any
fact in relation to any of Concealment of any
Note: Insurer is liable for such expense, in either
the matters stated in Sec. material fact will vitiate
case, being in addition to a total loss, if that
afterwards occurs (ibid.) 110 does not vitiate the the entire contract,
entire contract but merely whether or not the loss
Q: What is concealment in marine insurance? exonerates the insurer results from the risk
from a risk resulting from concealed.
A: It is the failure to disclose any material fact or the fact concealed.
circumstance which in fact or law is within, or which
ought to be within the knowledge of one party and of Q: What is the effect of falsity of a representation by
which the other has no actual or presumptive the insured?
knowledge. (De Leon, supra, pg. 328.)
A: It depends:
Note: Information of the belief or expectation of a third
person, in reference to a material fact, is material. (Sec. 1. Promissory Representation: If a representation by
108, Insurance Code.) the insured is intentionally false in any material
respect or in respect of any fact on which the
Q: When is the insured presumed to have character and nature of the risk depends, the
knowledge of a prior loss in marine insurance? insurer may rescind the entire contract. (Sec. 111,
Insurance Code.)
A: The insured is presumed to have knowledge of a
prior loss at the time of insuring,if the information 2. Representation of Expectation: The eventual
might possibly have reached him in the usual mode of falsity of a representation as to expectation does
transmission and at the usual rate of communication. not, in the absence of fraud, avoid a contract of
(Sec. 109) marine insurance. (Sec. 112, Insurance Code.)

Note: Presumption is rebuttable. Q: What are the implied warranties in marine

Q: What matters, when concealed, do not vitiate
the entire insurance contract, but merely exonerates
the insurer from a loss resulting from the risk
concealed?
A:
1. National character of the insured;
2. The liability of the thing insured to capture and
detention;
3. The liability to seizure from breach of foreign
laws of trade;
4. The want of necessary documents; and
insurance?
A: SINAI
1. Seaworthiness. (Sec. 113 to 119)
2. Non-engagement from Illegal venture.
3. Warranty of Neutrality The ship will carry the
requisite documents too show the nationality or
neutrality of the ship or its cargo and will not
carry any documents that cast reasonable
suspicion on it if the nationality or neutrality of

73 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
the ship or its cargo is expressly warranted. (Sec.
120)
4. Non-deviation from the Agreed voyage. (Secs.
123, 124, 125)
5. Presence of Insurable interest
Q: When is a ship seaworthy?
A: A ship is seaworthy when reasonably fit to perform
the service and to encounter the ordinary perils of
the voyage contemplated by the parties to the policy.
(Sec. 114, Insurance Code.)
Q: What is the scope of the seaworthiness of a
vessel?
A: A warranty of seaworthiness extends not only to
the condition of the structure of the ship itself, but
requires that it be properly laden, and provided with
a competent master, a sufficient number of
competent officers and seamen, and the requisite
appurtenances and equipment, such as ballasts,
cables and anchors, cordage and sails, food, water,
fuel and lights, and other necessary or proper stores
and implements for the voyage. (Sec. 116, Insurance
Code.)
Q: When is the warranty of seaworthiness complied
with?
A: GR: It is complied with if the ship is seaworthy at
the time of the commencement of the risk. (Sec. 115,
Insurance Code.)
XPN:
1. In the case of time policy- the ship must be
seaworthy at the commencement of every
voyage she may undertake. (Sec. 115, [a])
2. In the case of cargo policy- each vessel upon
which cargo is shipped or transshipped must
be seaworthy at the commencement of each
particular voyage. (Sec. 115, [b])
3. In the case of voyage policy contemplating a
voyage in different stages- the ship must be
seaworthy at the commencement of each
portion of the voyage. (Sec. 117, Insurance
Code.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the effect of the admission of
seaworthiness by the insurer?
A: If the policy provides that the seaworthiness of the
vessel as between insured and insurer is admitted,
the issue of seaworthiness cannot be raised by the
insurer without showing concealment or
misrepresentation by the insured (Phil. American
General Insurance Co. v. CA, G.R. No. 116940, June 11,
1997)
Q: When is seaworthiness admitted by the insurer?
A: It is when:
1. The warranty of seaworthiness is to be taken as
fulfilled; or
2. The risk of unseaworthiness is assumed by the
insurer. (ibid.)
Q: What is the effect if unseaworthiness is unknown
to the owner of the cargo?
A: It is immaterial in ordinary marine insurance and
may not be used by him as a defense in order to
recover on the marine insurance policy. It becomes
the obligation of a cargo owner to look for a reliable
common carrier, which keeps its vessels in seaworthy
conditions. The shipper may have no control over the
vessel but he has control in the choice of the
common carrier that will transport his goods (Roque
v. IAC, G.R. No. L- 66935, Nov. 11, 1985)
Q: What is the effect when the ship becomes
unseaworthy during the voyage?
A: An unreasonable delay in repairing the defect
exonerates the insurer on ship or shipowner's
interest from liability from any loss arising therefrom.
(Sec. 118., Insurance Code.)
Q: What is the express warranty as to nationality
and neutrality?
A:
1. As to nationality imports that the vessel
belongs to the subject of a particular country.
2. As to neutrality imports that the property
insured is neutral in fact, that is it belongs to
neutrals and that no act of insured or his agent
shall be done which can legally compromise its
neutrality.
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 INSURANCE CODE

Q: What is the rule regarding voyage in marine

insurance? Q: What are the distinctions between actual and
constructive loss?
A: When the voyage contemplated by a marine
insurance policy is described by the places of A:
beginning and ending, the voyage insured in one CONSTRUCTIVE TOTAL
which conforms to the course of sailing fixed by ACTUAL TOTAL LOSS
LOSS
mercantile usage between those places. (Sec. 121, It exists when the It is one which the loss,
Insurance Code.) subject matter of the although not actually total,
insurance is wholly is of such a character that
Note: If the course of sailing is not fixed by mercantile
destroyed or lost or the insured is entitled, if he
usage, the voyage insured is that way between the places
specified, which to a master of ordinary skill and discretion, when it is so damaged thinks fit, to treat it as total
would mean the most natural, direct and advantageous. as no longer to exist in by abandonment. (Sec. 131,
(Sec. 122, Insurance Code.) its original character. Insurance Code.)
Abandonment by the
The insured has the
Q: What is deviation? insured is necessary in
right to claim the whole
order to recover for a total
insurance without
A: It is a departure from the course of the voyage loss (Sec. 138, Insurance
notice of abandonment.
insured, mentioned in Sec. 121 and Sec. 122, or an Code.) in the absence of
(Sec. 135, Insurance
unreasonable delay in pursuing the voyage or the any provision to the
Code.)
commencement of an entirely different voyage. (Sec. contrary in the policy.
123, Insurance Code.)
Q: What constitutes actual total loss?
Q: When is a deviation proper?
A:
A: A deviation is proper: 1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by
1. When caused by circumstances over which being broken up;
neither the master nor the owner of the ship has 3. Any damage to the thing which renders it
any control; valueless to the owner for the purpose for which
2. When necessary to comply with a warranty, or to he held it; or
avoid a peril, whether or not peril is insured 4. Any other event which effectively deprives the
against; owner of the possession, at the port of
3. When made in good faith, and upon reasonable destination, of the thing insured. (Sec. 130,
grounds of belief in its necessity to avoid a peril; Insurance Code.)
or
4. When made in good faith, for the purpose of Note: Complete physical destruction is not essential to
saving human life or relieving another vessel in constitute actual total loss.
distress. (Sec. 124, Insurance Code.)
An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss, which
Q: When is deviation improper? necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
A: Every deviation not specified in Sec. 124 is insured. (Sec. 137, Insurance Code.)
improper. (Sec. 125, Insurance Code.)
Q: What is constructive total loss?
Note: In improper deviation, an insurer is not liable for any
loss happening to the thing insured subsequent to an A: Constructive total loss is when
improper deviation. (Sec. 126, Insurance Code.)
1. More than thereof in value is actually lost, or
Q: What are the kinds of losses?
would have to be expended to recover it from
the peril
A:
2. The thing insured is injured to such extent as to
1. Total, which may be:
reduce its value more than
a. Actual total loss
3. The thing insured is a ship, and the contemplated
b. Constructive total loss
voyage cannot be lawfully performed without
2. Partial

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FACULTY OF CIVIL LAW
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incurring either an expense to the insured of

more than the value of the thing abandoned or
a risk which a prudent man would not take under
the circumstances; or
4. The thing insured, being cargo or freightage, and
the voyage cannot be performed, nor another
ship procured by the master, within a reasonable
time and with reasonable diligence, to forward
the cargo, without incurring the like expense or
risk mentioned in no. (3). But freightage cannot
in any case be abandoned (and thus declared
constructively lost) unless the ship is also
abandoned. (Sec. 131 and 139, Insurance Code.)
Q: When is actual loss presumed?
A: It may be presumed from the continued absence
of a ship without being heard of. The length of time
which is sufficient to raise his presumption depends
on the circumstances of the case (Sec. 132, Insurance
Code).
Q: In case of reshipment, what happens the liability
of the insurer as regards the cargo?
A: When a ship is prevented, at an intermediate port,
from completing the voyage, by the perils insured
against, the liability of a marine insurer on the cargo
continues after they are thus reshipped. The insurer
may, however, require additional premium if the
hazard be increased by his extension of liability (Sec.
133, Insurance Code).
Q: What are the additional liabilities of the insurer
of goods referred to in the reshipment of cargo?
A: The marine insurer is bound for:
1. Damages;
2. Expenses of discharging;
3. Storage;
4. Reshipment;
5. Extra freightage; and
6. All other expenses incurred in saving cargo
reshipped. (Sec. 134, Insurance Code.)
Note: Nothing in Sec. 134 and Sec. 133 shall render a
marine insurer liable for any amount in excess of the
insured value or, if there be none, of the insurable value.
Q: What are kinds of average?
A:
1. Gross or general averages damages or
expenses which are deliberately caused by the
master of the vessel or upon his authority, in
order to save the vessel, her cargo or both at the
same time from a real and known risk. (Art. 811,
ibid.); and
Note: This kind of average must be borne equally by all
of the interests concerned in the venture. (De Leon,
supra, pg. 351.)
2. Simple or particular averages they include all
damages and expenses caused to the vessel or to
her cargo which have not inured to the common
benefit and profit of all the persons interested in
the vessel and her cargo. (Art. 809, ibid.).
Note: This kind of average is suffered by and borne
alone by the owner of the cargo or of the vessel, as the
case may be. (De Leon, supra, pg. 351.)
Q: What is the liability of the insurer as to averages?
A: GR: The marine insurer is liable both for general
average and particular average loss.
XPN: When there is Free From Particular
Average Clause in the policy making the insurer
liable only for general average.
XPN to XPN: When particular average loss has
the effect of depriving the insured of the
possession at the port of destination of the
whole of the thing insured. (Sec. 136, Insurance
Code.)
Q: What is Free From Particular Average Clause
(FFPA Clause)?
A: A clause agreed upon in a policy of marine
insurance in which it is stated that the insurer shall
not be liable for a particular average.
Q: What is abandonment?

Q: What is average? A: It is the act of the insured by which, after a

constructive total loss he declared the relinquishment
A: It is any extraordinary or accidental expense to the insurer of his interest in the thing insured (Sec.
incurred during the voyage for the preservation of 138, ibid.).
the vessel, cargo, or both and all damages to the
vessel and cargo from the time it is loaded and the
voyage commenced until it ends and the cargo
unloaded. (Art. 806, Code of Commerce.)

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2013 GOLDEN NOTES
 INSURANCE CODE
Q: What is the effect of a valid abandonment?
A: It is equivalent to a transfer by the insured of his
interest, to the insurer, with all the chances of
recovery and indemnity (Sec. 146, ibid.)
Q: What are the requisites for the validity of
abandonment?
A:
1. There must be an actual relinquishment by the
person insured of his interest in the thing
insured. (Sec. 138, ibid.)
2. There must be a constructive total loss. (Sec. 139,
ibid.)
3. The abandonment must neither be partial nor
conditional. (Sec. 140, ibid.)
4. It must be made within a reasonable time after
receipt of reliable information of the loss (Sec.
141, ibid.)
5. It must be factual. (Sec. 142, ibid.)
6. It must be made by giving notice thereof to the
insurer which may be done orally or in writing;
Provided, that if the notice be done orally, a
written notice of such abandonment shall be
submitted within 7 days from such oral notice.
(Sec. 143, ibid.)
7. The notice of abandonment must be explicit and
must specify the particular cause of
abandonment. (Sec. 144, ibid.)
Note: Such notice must state only enough to show that
there is probable cause for abandonment, but need not be
accompanied with proof of interest or of loss.
Q: Who may make notice of abandonment?
A: The abandonment need not necessarily be made
by the insured but may be made by an authorized
agent, and an agent having an authority to insure has
prima facie an authority to abandon (De Leon, supra,
pg. 361.)
Q: To whom may notice of abandonment be made?
A: To the insurer or his authorized agent or the
broker who is the agent for both parties (ibid.)
Q: What are the forms of acceptance of
abandonment?
A:
1. Express
2. Implied from the conduct of the insurer
77
3. Mere silence of the insurer for unreasonable
length of time after notice. (Sec. 150, Insurance
Code.)
Q: What are the effects of acceptance of
abandonment?
A:
1. The insurer becomes at once liable for the whole
amount of the insurance and also becomes
entitled to all rights which insured possessed in
the thing insured. (Sec. 146, ibid.)
2. It fixes the rights of the parties; whether express
or implied, is conclusive upon them, (Sec. 151,
ibid.) and irrevocable. (Sec. 152, ibid.)
3. It stops the insurer to rely on any insufficiency in
the form, time, or right, of abandonment.(Sec.
143, 141, 139, ibid.) Whether the insured has a
right to abandon is immaterial where the
abandonment is accepted and there is no fraud.
(New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US]
378.)
4. On accepted abandonment of a ship, the
freightage earned subsequent to the loss belongs
to the insurer of the ship; but freightage earned
previously belongs to the insurer of said
freightage who is subrogated to the rights of the
insured up to the time of the loss. (Sec. 153, ibid.)
XPN: Where the ground upon which it was made
proves to be unfounded. (Sec. 152, ibid.) Under Sec.
145, abandonment can be sustained only upon the
ground specified in the notice thereof.
Q: What is the effect of the insurers refusal to
accept a valid abandonment?
A: If the insurer refuses to accept a valid
abandonment, he is liable as upon an actual total
loss, deducting from the amount any proceeds of the
thing insured which may have come to the hands of
the insured. (Sec. 154, ibid.)
Note: However, if the abandonment was improper, the
insured may nevertheless recover to the extent of the
damage proved (De Leon, supra, pg. 366).
Q: What is the effect of insureds failure to make
abandonment?
A: The insured has an election to abandon or not, and
cannot be compelled to abandon although
abandonment is proper. If the insured fails to
abandon, he may nevertheless recover his actual loss
(Sec. 155, Insurance Code.).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What is the measure of indemnity?
A:
1. Valued policy the parties are bound by the
valuation, if the insured had some interest at risk and
there is no fraud (Sec. 156, ibid.)
2. Open policy the following rules shall apply in
estimating a loss:
i. Value of the ship- value at the beginning of the
risk
ii. Value of the cargo- actual cost to the insured,
when laden on board, or where that cost
cannot be ascertained, its market value at the
time and place of shipment. The expected
profits from the cargo are not considered since
they can be covered by a separate insurance.
iii. Value of freightage- gross freightage exclusive
of primage, which is a small compensation paid
by a shipper to the master of the vessel for his
care and trouble bestowed on the shippers
goods and which the master is entitled to
retain in the absence of an agreement to the
contrary with the owners of the vessels.
iv. Cost of insurance the cost of insurance is
always added in calculating the value of the
ship, cargo, or freightage or other subject
matter in an open policy. (De Leon, supra, pg.
372-373.)
Q: What is co-insurance?
A: Co-insurance is a form of insurance in which the
person who insures his property for less than the
entire value is understood to be his own insurer for
the difference which exists between the true value of
the property and the amount of insurance.
In such a case, a marine insurer is liable upon a partial
loss only for such proportion of the amount insured
by him as the loss bears to the value of the whole
interest of the insured in the property insured. (Sec.
157, Insurance Code.).
Q: What are the requisites for co-insurance?
A: There is co-insurance when the following requisites
concur:
1. The loss is partial; and
2. The amount of insurance is less than the value of
the property insured. (Sundiang, supra, pg. 140.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the difference between co-insurance in
Marine Insurance and in Fire Insurance?
A: In Marine Insurance, there is co-insurance by
virtue of Section 157 of the Insurance Code, as long
as the above-enumerated requisites are present.
Meanwhile, in fire insurance, there has to be an
express stipulation to that effect. (ibid.)
Q: What is the Formula to determine the amount
recoverable in co-insurance?
A:
(Partial) Loss X Amount of Insurance = Amount of recovery
(Insurers Liability)
Value of thing
Insured
Illustration:
If a vessel valued at P1M is insured for only P800, 000
and is damaged to the extent of P400, 000, the
insurer will be required to pay only 80% of the loss
suffered, or P320,000; the other 20% or P80,000
being borne by the insured himself.
P400,000 or 2/5 X P800,000 = P320, 000
P1M
The insured is considered a co-insurer as to the
uninsured portion of P200,000. (1M 800,000).
Note: If the loss is total, the insurer is liable for the full
amount of P800,000. On the other hand, if the property is
insured to its full value, the insured is entitled to recover
the full amount of the partial loss of P400,000.
Q: In case of loss, how much is the insured entitled
to recover if profits to be realized are separately
insured?
A: Where profits are separately insured in a contract
of marine insurance, the insured is entitled to
recover, in case of loss, a proportion of such profits
equivalent to the proportion which the value of the
property lost bears to the value of the whole. (Sec.
158, Insurance Code.)
Q: When is the loss of profits conclusively
presumed?
A: When profits are valued and insured by a contract
of marine insurance, a loss of them is conclusively
presumed from a loss of the property out of which
they were expected to arise, and the valuation fixes
their amount. (Sec. 160, Insurance Code.)
78
 INSURANCE CODE

insures materials in a
Q: What does the phrase port of refuge expenses shipyard for use in
mean? constructing vessels.

A: These are the additional expenses incurred in Also where a policy

repairing the damages suffered by a vessel because of insures against fire, a
the perils insured against as well as those incurred for vessel while moored and
saving the vessel from such perils, such as the in use as a hospital.
expense of launching or raising the vessel or of (De Leon, supra, pg. 380)
towing or navigating it into port for her safety. These
are items to be borne by the insurer in addition to a Q: Why is the distinction between marine and fire
total loss if that afterwards takes place. (Sec. 163, insurance important?
Insurance Code.)
A:
FIRE INSURANCE 1. In marine insurance, the rules on constructive
total loss (Secs. 13.1, 139, Insurance Code) and
Q: What is fire insurance? abandonment (Sec. 138, ibid.) apply but not in
fire insurance;
A: It is a contract of indemnity by which the insurer,
for a consideration, agrees to indemnify the insured 2. In case of partial loss of a thing insured for less
against loss of or damage by fire, lightning, than its actual value, the insured in a marine
windstorm, tornado or earthquake and other allied policy is a co-insurer of the uninsured portion
risks, when such risks are covered by extension to fire (Sec. 157, ibid.), while the insured may only
insurance policies or under separate policies. (Sec. become a co-insurer in fire insurance if expressly
167, ibid.) agreed upon by the parties. (Sec. 172, ibid.). (De
Leon, supra, pg. 380.)
Note: The liability of an insurer is to pay for direct loss only.
The insurer may be liable to pay for consequential or Q: What are the requisites in order that the insurer
indirect losses if covered by extension to such fire policies may rescind a fire insurance policy on the ground of
or insured under separate policy (De Leon, supra, pg. 379)
alteration made in the use or condition of the thing
insured?
Q: What are indirect losses?
A:
A:
1. The use or condition of the thing is specially
1. Physical damage caused to other property.
limited or stipulated in the policy;
2. Loss of earnings due to the interruption of
2. Such use or condition is altered;
business by damage to the insureds property.
3. The alteration is made without the consent of the
3. Additional expenses incurred by the insurer
insurer;
following the damage to the property or
4. The alteration is made by means within the
contents by an insured peril (ibid., pg. 379-380.)
control of the insured; and
5. The alteration increases the risk. (Sec. 168,
Q: What are the distinctions of ocean marine and
Insurance Code.)
fire policies? 6. There must be a violation of a material policy
provision. (Sundiang, supra, pg. 147.)
A:
OCEAN MARINE FIRE INSURANCE Note: A contract of fire insurance is not affected by
A policy of insurance on Where the hazard is fire any act of the insured subsequent to the execution of
a vessel engaged in alone and the subject is the policy, which does not violate its provisions even
navigationis a contract an unfinished vessel, though it increases the risk and is the cause of the
of marine insurance never afloat for a voyage, loss. (Sec. 170, Insurance Code.)
although it insures the contract to insure is a
against fire risks only. fire risk, especially in the Q: What is the effect when the insured has no
absence of an express control or knowledge of the alteration?
agreement that it shall
have the incidents of A: GR: The insurer is not relieved from liability if the
marine policy, or where it acts or circumstances by which the risk is increased

79 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
are occasioned by accident, or a cause over which the
insured has no control.
XPN:
1. Actually known to the insured or
2. Insured is presumed to know of the alteration
when the acts or circumstances permanently and
substantially affects the conditions of the property
so as to constitute an increase in risk. (De Leon,
supra, pg. 383-384.)
Q: What is the measure of indemnity in open and
valued policies in fire insurance?
A:
OPEN POLICIES VALUED POLICIES
The expense it would be to the The parties are
insured at the time of the bound by the
commencement of the fire to valuation, in the
preplace the thing lost or absence of fraud.
injured in the condition in
which it was at the time of the
injury.
Q: What is the reason for a co-insurance clause in
fire policies?
A: The co-insurance clause is a clause requiring the
insured to maintain insurance to an amount equal to
the value or specified percentage of the value of the
insured property under penalty of becoming co-
insurer to the extent of such deficiency. This is to
prevent the property owners from taking out such
small amount of insurance, and thereby reducing the
premium payments and thereby increasing the rates
of premium for all. (De Leon, supra, pg. 388-389.)
Q: Can a co-insurance exist in fire insurance even if
without stipulation to that effect?
A: No. The insured is not a co-insurer under fire
policies in the absence of stipulation.
Q: What is an option to rebuild clause?
A: It gives the insurer the option to rebuild the
destroyed property instead of paying the amount of
the loss or damage, notwithstanding a fixed valuation
in the policy. (Sec. 172, Insurance Code.) This clause
serves to protect the insurer against unfairness in the
appraisal and award rendered by a packed board of
arbitrators, or in the proof of loss.
Note: The insurer must exercise his option to rebuild within
the time stipulated in the policy, or in the absence of
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
stipulation, within a reasonable time. The choice by the
insurer shall produce no effect except from the time it has
been communicated to the insured. (Article 1201, Civil
Code.)
Unless the policy has limited the cost of rebuilding to the
amount of the insurance, the insurer, after electing to
rebuild, can be compelled to perform his undertaking, even
though the cost may exceed the original amount of
insurance. (De Leon, supra, pg. 390.)
Q: Can the insured pledge, hypothecate, or transfer
a fire insurance policy or rights thereunder?
A: Yes. He may do so after a loss has occurred and
even without the consent of, or notice to, the insurer.
(Secs. 21 and 83, Insurance Code.) In such a case, it is
not the personal contract which is being assigned, but
a claim under or a right of action on the policy against
the insurer. (De Leon, supra, pg. 390.)
Q: Is this right of the insured subject to any
limitation?
A: Yes. Section 173 of the Insurance Code prohibits
the exercise of this right in the case where the
pledging, hypothecating, or transferring is made to
any person, firm or company who acts as agent for or
otherwise represents the insurer.
Note: Any such pledge, etc. shall be void and of no effect
insofar as it may affect other creditors of the insured. (ibid.)
CASUALTY INSURANCE
Q: What is casualty insurance?
A: It is an insurance covering loss or liability arising
from accident or mishap, excluding certain types of
loss which by law or custom are considered as falling
exclusively within the scope of other types of
insurance such as fire or marine. (Sec. 174, Insurance
Code.)
Q: What does a casualty insurance cover?
A:
1. Employer's liability insurance
2. Workmens compensation insurance
3. Public liability insurance
4. Motor vehicle liability insurance
5. Plate glass insurance
6. Burglary and theft insurance
7. Personal accident and health insurance as written
by non-life insurance companies, and
8. other substantially similar kinds of insurance
(ibid.)
80
 INSURANCE CODE
Q: What are the two divisions of casualty insurance?
A:
1. Accident or health insurance Insurance against
specified perils which may affect the person
and/or property of the insured. (E.g. personal
accident, robbery/theft insurance)
2. Third party liability insurance (TPL) Insurance
against specified perils which may give rise to
liability on the part of the insured of claims for
injuries or damage to property of others. (De
Leon, supra, pg. 392.)
Q: What are some rules on TPL?
A:
1. Insurable interest is based on the interest of the
insured in the safety of the persons, and their
property, who may maintain an action against him
in case of their injury or destruction respectively.
(ibid, pg. 394.)
2. In a TPL insurance contract, the insurer assumes
the obligation by paying the injured third party to
whom the insured is liable. Prior payment by the
insured to the injured third person is not necessary
in order that the obligation of the insurer may
arise. The moment the insured becomes liable to
third persons, the insured acquires an interest in
the insurance contract which may be garnished like
any other credit. (Perla Compania de Seguros, Inc.
vs. Ramolete, 203 SCRA 487 [1991].)
3. In burglary, robbery and theft insurance, the
opportunity to defraud the insurer (moral hazard)
is so great that insurer have found it necessary to
fill up the policies with many restrictions designed
to reduce the hazard. The purpose of the exception
is to guard against liability should theft be
committed by one having unrestricted access to
the property. (Fortune Insurance & Surety Co. vs.
CA, 244 SCRA 308 [1995].)
4. The right of the person injured to sue the insurer of
the party at fault (insured), depends on whether
the contract of insurance is intended to benefit
third persons also or only the insured. (Eulogio vs.
Del Monte, GR No. L-22042, August 17, 1967.) If the
contract provides for:
a. Indemnity against third party liability The
third persons to whom the insured is liable,
can sue directly the insurer upon the
81
occurrence of the injury or event upon which
the liability depends.
The purpose is to protect the injured person
against the insolvency of the insured who
causes such injury and to give him a certain
beneficial interest in the proceeds of the
policy. It is as if the injured person were
especially named in the policy. (Shafer vs. RTC
Judge, 167 SCRA 386 [1986].)
.
b. Indemnity against actual loss or payment The
third persons cannot proceed against the
insurer, the contract being solely to reimburse
the insured for liability actually discharged by
him through payment to third persons, said
third persons recourse being thus limited to
the insured alone. (Guingon vs. Del Monte, 20
SCRA 1043 [1967].) Prior payment by the
insured is necessary to give rise to the
obligation of the insurer.
Q: What is the source of liability of TPL insurance?
A: The insurers liability is based on contract; that of
the insured is based on tort. (Malayan Insurance Co.
vs. CA, 165 SCRA 136 [1988].)
Q: Lawrence, a boxer, is a holder of an accident
insurance policy. In a boxing match, he died after
being knocked out by the opponent. Can his father
who is a beneficiary under said insurance policy
successfully claim indemnity from the insurance
company? (1990 Bar Question)
A: Yes. Clearly, the proximate cause of death was the
boxing contest. Death sustained in a boxing contest is
an accident. (De la Cruz v. Capital Insurance & Surety
Co.,G.R. No. L-21574, June 30, 1966)
Q: Distinguish between the liability of the insurer
and that of the insured in case for indemnity in TPL?
A:
INSURER INSURED
The liability is direct but Liability is direct and can
the insurer cannot be be held liable with all the
held solidarily liable with parties at fault.
the insured and other
parties at fault.
Liability is based on Liability is based on tort.
contract
The third-party liability The liability extends to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

is only up to the extent the amount of actual and
of the insurance policy other damages. (Heirs Poe
and that required by law v. Malayan Insurance,
G.R. No. 156302, Apr. 7,
2009)
Q: While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the latter,
Roberto sued Cesar and the third party liability
insurer for damages and/or insurance proceeds. The
insurance company moved to dismiss the complaint,
contending that the liability of Cesar has not yet
been determined with finality. Is the contention of
the insurer correct? (1996 Bar Question)
A: No, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
determining Cesars liability with finality before the
third party liability insurer could be sued. The
occurrence of the injury to Roberto immediately gave
rise to the liability of the insurer under its policy.
Where an insurance policy insures directly against
liability, the insurers liability accrues immediately
upon the occurrence of the injury or event upon
which the liability depends. (Shafer vs. RTC Judge,
supra.)
accidental character of whatever followed from
the known danger. (De Leon, supra, pg. 400-401.)
3. The insureds beneficiary has the burden of proof
in demonstrating that the cause of death is due
to the covered peril. Once that fact is
established, the burden shifts to the insurer to
show any excepted peril that may have been
stipulated by the parties. (Vda. De Gabriel vs. CA,
264 SCRA 137 [1996].)
SURETYSHIP
Q: What is a contract of suretyship?
A: It is an agreement whereby a party called the
surety guarantees the performance by another party
called the principal or obligor of an obligation or
undertaking in favor of a third party called the
obligee. It includes official recognizances, stipulations
bonds or undertakings issued by any company by
virtue and under the provisions of Act No. 536, as
amended by Act No. 2206. (Sec. 175, Insurance Code.)
Q: What is the nature of liability of surety?
A: The liability of the surety or sureties shall be:

Q: What is a no action clause? 1. Solidary Joint and several with the obligor and

A: It is a requirement in a policy of liability insurance 2. Limited or fixed Limited to the amount of the
which provides that suit and final judgment be first bond (It cannot be extended by implication.).
obtained against the insured, that only thereafter can
the person injured recover on the policy. It expressly 3. Contractual It is determined strictly by the
disallows suing the insurer as co-defendant. (Guingon terms of the contract of suretyship in relation to
v. Del Monte, G.R. No. L-21806, Aug. 17, 1967) the principal contract between the obligor and
the obligee. (Sec. 176, ibid.)
Note: A no action clause must yield to the provisions of
the Rules of Court regarding multiplicity of suits. (Shafer v.
Q: What are the distinctions between suretyship and
RTC Judge, supra.)
property insurance?
Q: What are some rules in accident insurance?
A:
SURETYSHIP PROPERTY
A:
1. For death or injury to be covered by the policy, INSURANCE
such should not be the natural or probable result It is an accessory contract. The principal contract
of the insureds voluntary act, or if something itself.
unforeseen occurs in the doing of the act which There are three parties: the There are only two
produces the injury, which may result to death. surety, obligor/debtor, and parties: insurer and
(Dela Cruz vs. Capitol Insurance & Surety Co., the obligee/creditor. insured
supra.) More of a credit Generally a contract of
accommodation with the indemnity
2. Suicide and willful exposure to needless peril are surety assuming primary
in pari matere because they both signify a liability
disregard for ones life. Voluntary exposure to a Surety is entitled to No right of recovery
known danger is generally held to negate the reimbursement from the for the loss the insurer
principal and his guarantors may sustain except

UNIVERSITY OF SANTO TOMAS 82

2013 GOLDEN NOTES
 INSURANCE CODE

for the loss it may suffer when the insurer is protection of the owner against a possible default
under the contract. entitled to by the contractor or his possible failure to pay
subrogation. material, men, laborers and sub-contractors.
A bond may be cancelled by May be cancelled
or with the consent of the unilaterally either by The position of surety, therefore, is to answer for
obligee or by the the insured or by the a failure of the principal to perform in
commissioner or by the insurer on grounds accordance with the terms and specifications of
court. provided by law. the contract.
Requires acceptance of the Does not need
obligee before it becomes acceptance of any There may be two bonds:
valid and enforceable. third party.
A risk-shifting device, the A risk-distributing a. Performance bond One covering the faithful
premium paid being in the device, the premium performance of the contract; and
nature of a service fee. paid being considered
a ratable contribution b. Payment bond One covering the payment of
to a common fund. (De laborers and material men.
Leon, supra, pg. 409.)
2. Fidelity bonds They pay an employer for loss
Q: What are the rules of payment of premiums in growing out of a dishonest act of his employee.
suretyship?
For the purposes of underwriting, they are
A: classified as:
1. The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and a. Industrial bond One required by private
delivered to the obligor (Sec. 77, ibid.) employers to cover loss through dishonesty of
employees; and
2. The contract of suretyship or bonding shall not be
valid and binding unless and until the premium b. Public official bond One required of public
therefore has been paid. officers for the faithful performances of their
duties and as a condition of entering upon the
3. Where the obligee has accepted the bond, it shall duties of their offices.
be valid and enforceable notwithstanding that the
premium has not been paid; (Philippine Pryce 3. Judicial bonds They are those which are required
Assurance Corp. v. CA, G.R.No. 107062, February in connection with judicial proceedings. (ibid pg.
21, 1994.) 413-414.)

4. If the contract of suretyship or bond is not LIFE INSURANCE

accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount; Q: What is life insurance?

5. If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by the
surety; and
6. In the case of continuing bond (for a term longer
than one year or with no fixed expiration date), the
obligor shall pay the subsequent annual premium
as it falls due until the contract is cancelled. (Sec.
177, Insurance Code.) (De Leon, supra, pg. 411.)
A: It is insurance on human lives and insurance
appertaining thereto or connected therewith. (Sec.
179, Insurance Code.) It is made payable on the death
of the person, or on his surviving a specified period,
or otherwise contingently on the continuance or
cessation of life. (Sec. 180, ibid.)
Q: Is a life insurance also a contract of indemnity?
A: No. This is because of the following reasons:

Q: What are the types of surety bonds? 1. The liability in life insurance is absolutely certain
2. Amount of life insurance generally is without
A: limit
1. Contract bonds These are connected with 3. The policy is a valued policy
construction and supply contracts. They are for the

83 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. There is no direct pecuniary loss required. (De
Leon, supra, 417-418.)
Q: What are the kinds of life insurance policies?
A:
1. Ordinary life, general life or old line policy Insured
pays a premium every year until he dies. Surrender
value after 3 years.
2. Limited payment Insured pays premium for a
limited period. If he dies within the period, his
beneficiary is paid; if he outlives the period, he
does not get anything.
3. Endowment insured pays premium for specified
period. If he outlives the period, the face value of
the policy is paid to him; if not, his beneficiaries
receive the benefit.
4. Term insurance insured pays premium only once,
and he is insured for a specified period. If he dies
within the period, his beneficiaries benefit. If he
outlives the period, no person benefits from the
insurance.
5. Industrial life entitles the insured to pay
premiums weekly, or where premiums are payable
monthly or oftener (Sundiang, supra, pg. 156-157).
Q: What is the contract of life annuity?
A: It is a contract to pay the insured, or a named
person or persons, a sum or sums periodically during
life or certain period (Perez, supra, pg. 185).
Q: What is themeasure of indemnity under a policy
of insurance upon life or health?
A: GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
policy.
XPN: The interest of a person insured is susceptible
of exact pecuniary measurement (Sec. 183,
Insurance Code)
Q: When is the insurer liable in case of suicide?
A:
1. The suicide is committed after the policy has
been in force for a period of 2 years from the
date of its issue or of its last reinstatement.
2. The suicide is committed within a shorter period
provided in the policy.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
3. The suicide is committed in the state of insanity
regardless of the date of commission, unless
suicide is an excepted risk. (Sec. 180-A, ibid.)
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: the company shall not be
liable in respect of bodily injury consequent upon
the insured person who willfully exposes himself to
needless peril except in an attempt to save human
life". Tan designated his wife, Beverly as beneficiary.
One evening, Tan, while playing with his hand gun,
suddenly stood in front of his secretary and pointed
the gun at her. Startled, she pushed the gun aside
and said that it may be loaded. Thus, Tan, to assure
her that it was not loaded, pointed it at his temple.
The next moment, there was an explosion and Tan
slumped to the floor lifeless.
Beverly, then claimed the proceeds from Sun
Insurance, but the latter rejected her claim on the
ground that the death of Henry was not accidental.
Beverly sued the insurer. Will Beverlys claim
prosper?
A: Beverly can recover the proceeds of the policy
from the insurer. The death of the insured was not
due to suicide or willful exposure to needless peril
which are excepted risks. The insureds act was purely
an act of negligence which is covered by the policy
and for which the insured got the insurance for his
protection. In fact, he removed the magazine from
the gun and when he pointed the gun to his temple
he did so because he thought that it was safe for him
to do so. He did so to assure his sister that the gun
was harmless. There is none in the policy that would
relieve the insurer of liability for the death of the
insured since the death was an accident (Sun
Insurance v CA, G.R. Nos. 79937-38, February 13,
1989)
Q: X, in January 30, 2009, or two (2) years before
reaching the age of 65, insured his life for
Php20Million. For reason unknown to his family, he
took his own life two (2) days after his 65th
birthday. The policy contains no excepted risk.
Which statement is most accurate? (2012 Bar
Question)
a. The insurer will be liable.
b. The insurer will not be liable.
c. The state of sanity of the insured is relevant in
cases of suicide in order to hold the insurer
liable.
84

d. The state of sanity of the insured is irrelevant in
cases of suicide in order to hold the insurer
liable.
A: A. The insurer will be liable under Sec. 180-A of the
Insurance Code. The suicide is committed after the
policy has been in force for a period of 2 years from
the date of its issue.
Q: What are the distinctions between life insurance
and fire/marine insurance?
A:
LIFE INSURANCE
It is a contract of
investment not contract of
indemnity.
Always regarded as valued
policy.
May be transferred or
assigned to any person
even if he has no insurable
interest.
The consent of the insurer
is not essential to the
validity of the assignment
of a life policy unless
expressly required.
Insurable interest in the life
or health of the person
insured need not exist after
the insurance takes effect
or when loss occurs.
Insurable interest need not
have any legal basis.
Contingency that is
contemplated is a certain
event, the only uncertainty
being the time when it will
take place.
The liability of the insurer
to make payment is
certain, the only uncertain
element being when such
payment must be made.
May be terminated by the
insured but cannot be
cancelled by the insurer
and is usually a long term
contract.
The loss to the
beneficiary caused by the
death of the insured can
seldom be measured
accurately in terms of cash
INSURANCE CODE
FIRE/MARINE INSURANCE
It is a contract of
indemnity.
May be open or valued.
The transferee or assignee
must have an insurable
interest in the thing
insured.
Consent, in the absence of
waiver by the insurer, is
essential in the
assignment of the policy.
Insurable interest in the
property insured must
exist not only when the
insurance takes effect but
also when the loss occurs.
Insurable interest must
have a legal basis.
The contingency insured
against may or may not
occur.
Liability is uncertain
because the happening of
the peril insured against is
uncertain.
May be cancelled by
either party and is usually
for a term of one year
The reverse is generally
true of the loss of
property, i.e., it is capable
of pecuniary estimation.
85
value.
The beneficiary is under no
The insured is required to
obligation to prove actual
submit proof of his actual
financial loss as a result of
pecuniary loss as a
the death of the insured in
condition precedent to
order to collect the
collecting the insurance.
insurance.
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
Q: What is motor vehicle liability insurance?
A: It is a protection coverage that will answer for legal
liability for losses and damages for bodily injuries or
property damage that may be sustained by another
arising from the use and operation of a motor vehicle
by its owner. (Compulsory Motor Vehicle Liability
Insurance, pg.3, prepared and distributed by the
Insurance Commission).
Q: What is the purpose of motor vehicle liability
insurance?
A: To give immediate financial assistance to victims of
motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial
capability of motor vehicle owners of operators
responsible for the accident sustained. (First
Integrated Bonding Insurance Co., Inc. v. Hernando,
G.R. No. L-51221, July 31, 1991.
Note: The insurers liability accrues immediately upon the
occurrence of the injury or event upon which the liability
depends, and does not depend on the recovery of
judgment by the injured party against the insured (Shafer v.
Judge, RTC, 167 SCRA 386)
Q: What is a motor vehicle?
A: Any vehicle propelled by any power other than
muscular power using the public highways, but
excepting road rollers, trolleys cars, street sweepers,
sprinklers, lawn mowers, bulldozers, graders, forklifts,
amphibian trucks, and cranes if not used in public
highways, vehicles which run only on rails or tracks,
and tractors, trailers and traction engines of all kinds
used exclusively for agricultural purposes (Sec. 3[a] of
RA 4136).
Note: Trailers having any number of wheels, when
propelled or intended to be propelled by attachment to a
motor vehicle shall be classified as separate motor vehicle
with no power rating (ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Who is a passenger?
A: Any fare-paying person being transported and
conveyed in and by a motor vehicle for transportation
of passengers for compensation, including persons
expressly authorized by law or by the vehicles
operator or his agents to ride without fare (Sec. 373,
[b], Insurance Code).
Q: Who is a third-party?
A: Any person other than a passenger as defined in
this section (ibid.) and shall also exclude a member of
the household, or a member of the family within the
second degree of consanguinity or affinity, of a motor
vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of
death, bodily injury, or damage to property arising
out of and in the course of employment. (Sec. 373,
[c], ibid.)
Q: Who are required to maintain a compulsory
motor vehicle liability insurance (CMVLI) policy to
operate motor vehicle/s in public highways?
A:
1. Motor vehicle owner (MVO)
2. Land transportation operator (LTO) (Sec. 374,
ibid.)
Q: Who is an owner or motor vehicle owner
(MVO)?
A: Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land
Transportation Office (Sec. 373, [d], ibid).
Q: Who is a land transportation operator (LTO)?
A: The owner or owners of motor vehicles for
transportation of a passenger for compensation,
including school buses (Sec. 373, [e], ibid).
Q: What is the scope of coverage required for
CMVLI?
A:
1. For MVOs, the coverage must be comprehensive
against third party liability for death or bodily
injuries. If the private motor vehicle is being used
to transport passengers for compensation, the
coverage shall include passenger liability.
2. For LTOs, coverage must be comprehensive
against both passenger and third-party liabilities
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
for death or bodily injuries. (Ins. Memo. Cir. No.
3-81.)
Q: Are there any substitutes for a compulsory motor
vehicle liability insurance policy?
A: Instead of a CMVLI policy, MVOs or LTOs may
either:
1. Post a surety bond with the Insurance
Commissioner who shall be made the obligee or
creditor in the bond in such amount or amounts
required as limits of indemnity to answer for the
same losses sought to be covered by a CMLVI
policy; or
2. Make a cash deposit with the Insurance
Commission in such amount or amounts required
as limits of indemnity for the same purpose.(Sec.
377, ibid.)
Note: After the cash deposit or surety bond has been
proceeded against by the Insurance Commissioner, such
cash deposit shall be replenished or such surety bond shall
be restored by the MVO or LTO in the right amount/s
required as limit of liability within 60 days after impairment
or expiry, otherwise, he shall secure a CMLVI required.
(ibid.)
Q: What are the duties of MVO or LTO in
contemplation of the cancellation of the policy?
A: Contemplating the cancellation of the policy, the
MVO or LTO shall:
1. Give to the insurance or surety company
concerned a written notice of his intention to
cancel;
2. Secure, before the insurance policy or surety
bond ceases to be effective, another similar
policy or bond to replace that one cancelled;
3. Without making any replacement, make a cash
deposit in sufficient amount with the Insurance
Commissioner and secure a certification from the
Insurance Commissioner regarding the deposit
made for presentation to and filing with the Land
Transportation Office. (CMVLI, supra pg. 12) (Sec.
380-381, Insurance Code.)
Q: What are the effects of the cancellation of the
policy?
A: GR: Upon receipt of the notice of such
cancellation, the Land Transportation Office shall
order the immediate confiscation of the plates of the
motor vehicle concerned.
86
 INSURANCE CODE
XPN: No confiscation will be ordered if said Office
receives any of the following:
1. An evidence or proof of a new and valid CMVLI
cover which may be either an insurance policy or
guaranty in cash or surety bond;
2. A signed duplicate of an endorsement or
addendum issued by the insurance company
concerned showing revival or continuance of the
CMVLI cover; or
3. A certification issued by the Insurance
Commissioner to the effect that a cash deposit in
the amount required as limit of indemnity has
been made with him by the MVO or LTO. (CMVLI,
supra, p. 12, Sec. 380, Insurance Code.)
Q: What is a no fault indemnity clause? (1994 Bar
Question)
A: It is a clause where the insurer is required to pay a
third party injured or killed in an accident without the
necessity of proving fault or negligence on the part of
the insured. There is a stipulated maximum amount
to be recovered.
Q: What are the rules under the no fault indemnity
clause?
A:
1. The total indemnity in respect of any one person
shall not exceed P15,000 for all motor vehicles (Ins.
Memo. Circ. No. 4-2006)
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
c. Medical report and evidence of medical or
hospital disbursement. (Sec. 378 [ii], Insurance
Code.)
3. Claim may be made against one motor vehicle only.
(Sec. 378 [iii], ibid.)
4. In case of an occupant of a vehicle,the claim shall
lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from.
(ibid.)
5. In any other case, claim shall lie against the insurer
of the directly offending vehicle. (ibid.)
6. In all cases, the right of the party paying the claim
to recover against the owner of the vehicle
responsible for the accident shall be maintained.
(ibid.)
87
Note: The claimant is not free to choose from which insurer
he will claim the "no fault indemnity," as the law, by using
the word "shall, makes it mandatory that the claim be
made against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from. That
said vehicle might not be the one that caused the accident
is of no moment since the law itself provides that the party
paying may recover against the owner of the vehicle
responsible for the accident. (Perla Compania de Seguros,
Inc. v. Ancheta, G.R. No. L-49599, Aug. 8, 1988.).
This no-fault claim does NOTapply to property damage. If
the total indemnity claim exceeds P15, 000 and there is
controversy in respect thereto, the finding of fault may be
availed of by the insurer only as to the excess. The first P15,
000 shall be paid without regard to the fault. (CMVLI, supra,
pg.13)
Q: X is a passenger of a jeepney for hire being driven
by Y. The jeepney collided with another passenger
jeepney being driven by Z who was driving
recklessly. As a result of the collision, X suffered
injuries. Both passenger jeepneys are covered by
Comprehensive Motor Vehicular Insurance
Coverage. If X wants to claim under the "no fault
indemnity clause", his claim will lie (2012 Bar
Question)
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. Article 378
(iii) of the Insurance Code states that in the case of an
occupant of a vehicle, the claim shall lie against the
insurer of the vehicle in which the occupant is riding,
mounting or dismounting from.
Q: What is the authorized driver clause?
A: It indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to:
1. The insured himself; or
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in
accordance with the law, and is not disqualified.
(Villacorta v. Insurance Commissioner, G.R. No.
54171, October 28, 1980.)
Note: The main purpose of this clause is to require a person
other than the insured, who drives the car on the insureds
order or with his permission, to be duly licensed drivers and
have no disqualification to drive a motor vehicle. (Villacorta
v. Insurance Commission, G.R. No. L-54171, Oct. 28, 1980)
Q: What is the theft clause?
A: It is that which includes theft as among the risks
insured against. Where a car is unlawfully and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

wrongfully taken without the knowledge and consent

of the owner, such taking constitutes theft and it is
the theft clause, not the authorized driver clause
which should apply (Perla Compania de Seguros, Inc.
v. CA, 208 SCRA 487 [1992]).
Note: The existence of insurable interest is a matter of
public policy and is not susceptible to the principle of
estoppel. The existence of an insurable interest gives a
person the legal right to insure the subject matter of the
policy of insurance (ibid.)

Q: What are the limitations with respect to CMVLI

Q: When is the insured deemed to have insurable
cover solicitation?
interest over something?
A:
A: GR: A person is deemed to have an insurable
1. No government office or agency having the
interest in the subject matter insured where he has a
duty of implementing the provisions of the
relation or connection with or concern in it that he
Insurance Code on CMVLI shall act as agent
will derive pecuniary benefit or advantage from its
in procuring the insurance policy or surety
preservation and will suffer pecuniary loss from its
bond required;
destruction or injury by the happening of the event
insured against.
2. No official or employee of such office or
agency shall similarly act as such agent; and
XPN: To have an insurable interest in the life of a
person, the expectation of benefit from the
3. The commission of an agent procuring the
continued life of that person need not necessarily
corresponding insurance policy or surety
be of pecuniary nature. (De Leon, supra, pg. 83.)
bond shall in no case exceed 10% of the
amount of premiums therefore. (Sec. 387,
Q: Differentiate insurable interest in life insurance
Insurance Code).
and insurable interest in property insurance.
Q: When a passenger jeepney, insured but with an
A:
authorized drivers clause and was driven by a
INSURABLE INSURABLE
driver who only holds a Traffic Violation Report
INTEREST IN INTEREST IN
(TVR) because his license was confiscated, met an
LIFE PROPERTY
accident, may the owner of the jeepney claim from
As to extent GR: Every Limited to the
the insurance company? (2003 Bar Question)
person has an actual value of the
unlimited property
A: Yes. The fact that the driver was merely holding a
insurable
TVR does not violate the condition that the driver
interest in his
should have a valid and existing drivers license.
own life. (De
Besides, such a condition should be disregarded
Leon, supra, pg.
because what is involved is a passenger jeepney, and
85.)
what is involved here is not own damage insurance
XPN: Where life
but third party liability where the injured party is a
insurance is
third party not privy to the contract of insurance.
taken out by a
creditor on the
INSURABLE INTEREST
life of the
debtor,
Q: What is insurable interest?
insurable
interest is
A: An insurable interest is that interest which a
limited to the
person is deemed to have in the subject matter
amount of debt
insured, where he has a relation or connection with
or concern in it, such that the person will derive When must Must exist at the GR:Must exist both
pecuniary benefit or advantage from the preservation insurable time the policy at the time the
of the subject matter insured and will suffer interest exist takes effect and policy takes effect
pecuniary loss or damage from its destruction, need not exist and the time of
termination, or injury by the happening of the event thereafter. (Sec. loss, but need not
insured against. (Violeta R. Lalican vs. The Insular Life 19, Insurance exist in the period
Assurance Company Limited, G.R. No. 183526, August Code.) in between. (Sec.
25, 2009) 19, ibid.)

UNIVERSITY OF SANTO TOMAS 88

2013 GOLDEN NOTES
 INSURANCE CODE

liability (Perez, supra, pg. 43, citing Florea vs. Iowa

XPN: Secs. 21-24; State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).
25, ibid.
As to the The beneficiary The beneficiary Q: Is mere hope or expectancy insurable?
beneficiarys need not have must have
interest insurable insurable interest A: No. A mere contingent or expectant interest in
interest over the over the thing order to be insurable must be founded on an actual
life of the insured. (Sundiang, right to the thing, or upon any valid contract for it.
insured if the supra, pg. 97.) (Sec. 16, ibid.)
insured himself
secured the Q: Does the insured have the right to change the
policy. However, beneficiary he designated?
if the life
insurance was A: GR: Yes. The insured shall have the right to change
obtained by the the beneficiary he designated in the policy
beneficiary, the
latter must have XPN: If the insured expressly waived this right in
insurable the said policy.
interest over the
life of the Note: Under Sec. 64 of the Family Code, the innocent
insured. spouse is allowed to revoke the designation of the other
(Sundiang, spouse as irrevocable beneficiary after legal separation.
supra, pg. 97.)
Q: What is the effect of the irrevocability of the
designation of the beneficiary to the assignment of
Q: For both the Life Insurance and Property
the policy?
Insurance, the insurable interest is required to be
(2012 Bar Question)
A: The insured cannot assign the policy if the
designation of the beneficiary is irrevocable. The
A: Existing at the time of perfection and at the time of
irrevocable beneficiary has a vested right (Sundiang,
loss for property insurance but only at the time of
supra, pg. 91).
perfection for life insurance (Sec. 19, ibid.)
IN LIFE/ HEALTH
Q: X owned a house and lot. X insured the house.
The house got burned. Then he sold the partially Q: What are the two general classes of life policies?
burnt house and the lot to Y. Which statement is
most accurate? (2012 Bar Question) A:
a. X is not anymore entitled to the proceeds of the 1. Insurance upon ones life are those taken out
insurance policy because he already sold the by the insured upon his own life (Section 10[a],
partially burnt house and lot. Insurance Code.) for the benefit of himself, or of
b. X is still entitled to the proceeds of the his estate, in case it matures only at his death,
insurance policy because what is material is that for the benefit of third person who may be
at the time of the loss, X is the owner of the designated as beneficiary.
house and lot.
c. No one is entitled to the proceeds because The question of insurable interest is immaterial
ownership over the house and lot was already where the policy is procured by the person
transferred. whose life is insured. A person who insures his
d. Y will be the one entitled to the proceeds own life can designate any person as his
because he now owns the partially burnt house beneficiary, whether or not the beneficiary has
and lot. an insurable interest in the life of the insured
subject to the limits under Article 739 and 2012
A: B. X is still entitled to the proceeds of the of the New Civil Code. (De Leon, supra, pg. 84.)
insurance policy because what is material is that at
the time of the loss, X is the owner of the house and 2. Insurance upon life of another are those taken
lot. After the loss occurs, the right of the insured out by the insured upon the life of another.
under the policy becomes fixed and a subsequent Where a person names himself beneficiary in a
conveyance by the insured cannot affect the insurers policy he takes on the life of another, he must

89 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
have insurable interest in the life of the latter.
(De Leon, supra, pg. 84.) This class includes the
following:
a. His spouse and of his children.
b. Any person on whom he depends wholly or
in part for education or support, or in whom
he has a pecuniary interest.
c. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance.
d. Of any person upon whose life any estate or
interest vested in him depends. (Sec. 10,
Insurance Code.).
Note: In paragraph (a) of Section 10 of the Insurance Code,
mere relationship is sufficient while the rest (pars. b, c, and
d) requires pecuniary interest. Thus, the interest of the
creditor over the life of the debtor ceases upon full
payment. (Sundiang, supra, pg. 93.)
Q: Who are prohibited from being designated as
beneficiaries?
A: Under the Article 739 of the Civil Code, the
following are prohibited designation of beneficiaries:
1. Those made between persons who were guilty
(finding of guilt in a civil case is sufficient) of
adultery or concubinage at the time of donation
2. Those made between persons found guilty of the
same criminal offense, in consideration thereof
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
Note: The designation of the above-enumerated persons is
void but the policy is binding. The estate will get the
proceeds. (Sundiang, supra, pg. 91.)
Q: What is the extent of the creditors recovery from
the insurance he procured upon the life of the
debtor, if the latter dies?
A: It is limited only to the extent of the amount of the
debt at the time of debtors death and the cost of
carrying the insurance on the debtors life.
Q: Is the consent of the person insured essential to
the validity of the policy?
A: No. So long as it could be proved that the insured
has an insurable interest at the inception of the policy,
the insurance is valid even without such consent.
(Sec. 10, Insurance Code.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the effect if the beneficiary willfully
brought about the death of the insured?
A:
GR: The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is
the principal, accomplice; accessory in willfully
bringing about the death of the insured, in which
event, the nearest relative of the insured shall
receive the proceeds of said insurance, if not
otherwise disqualified (Sec. 12, ibid).
XPN:
1. The beneficiary acted in self-defense;
2. The insureds death was not intentionally
caused (e.g., thru accident);
3. Insanity of the beneficiary at the time he
killed the insured.
Q: X is the common law wife of Y. Y loves X so much
that he took out a life insurance on his own life and
made her the sole beneficiary. Y did this to ensure
that X will be financially comfortable when he is
gone. Upon the death of Y, - (2012 Bar Question)
A: Despite the designation of X as the sole
beneficiary, the proceeds of the life insurance will go
to the estate of Y. Common-law spouses are,
definitely, barred from receiving donations from each
other. In essence, a life insurance policy is no
different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the
same consideration: liberality. A beneficiary is like a
donee, because from the premiums of the policy
which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in
Article 739 of the new Civil Code should equally
operate in life insurance contracts. The mandate of
Article 2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as
beneficiary in the life insurance policy of the person
who cannot make the donation (Insular Life
Assurance, Co. vs. Ebrado, GR No. L-44059, October
28, 1977).
IN PROPERTY
Q: What is insurable interest in property?
A: Every interest in property, whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that contemplated
90
 INSURANCE CODE
peril might directly damnify the insured, is insurable
interest. (Sec. 13, Insurance Code.)
Q: What consists an insurable interest in property?
A:
1. An existing interest The existing interest in the
property may be legal or equitable title or
Examples of insurable interest arising from legal title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased (De Leon, supra,
pg. 107-108.)
Examples of insurable interest arising from equitable
title:
a. Purchaser of property before delivery or
before he has performed the conditions of
the sale
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which
redemption is allowed (De Leon, supra, pg.
108.)
2. An inchoate interest founded on an existing
interest or
Example: A stockholder has an inchoate interest in the
property of the corporation of which he is a
stockholder, which is founded on an existing
interest arising from his ownership of shares in the
corporation. (De Leon, supra, pg. 108.)
3. An expectancy coupled with an existing interest in
that out of which the expectancy arises.
Q: What is the measure of insurable interest in
property?
A: The extent to which the insured might be
damnified by loss or injury thereof. (Sec. 17).
Insurable interest in property does not necessarily
imply a property interest in, or lien upon, or
possession of, the subject matter of the insurance,
and neither title nor a beneficial interest is requisite
to the existence thereof. It is sufficient that the
insured is so situated with reference to the property
that he would be liable to loss should it be injured or
destroyed by the peril against which it is insured.
Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer
loss from its destruction. (Gaisano Cagayan, Inc. v.
91
Insurance Company of North America, G.R. No.
147839, June 8, 2006.)
Q:What is the extent of insurable interest of a
common carrier or depository in a thing held by
him?
A: To the extent of his liability but not to exceed the
value thereof (Sec. 15, Insurance Code) because the
loss of the thing by the carrier or depository may
cause liability against him to the extent of its value.
Q: What is the change of interest that suspends an
insurance contract?
A: The change of interest contemplated by law is an
absolute one.
Q: What is the effect of change of interest in any
part of a thing insured unaccompanied by a
corresponding change of interest in the insurance?
A: GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change in
interest in the insurance suspends the insurance to an
equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same
person. (Sec. 20 &Sec.58, ibid.)
Note: Change of interest contemplated by law is an
absolute transfer of the insureds entire interest in the
property insured to one not previously interested or
insured. (Perez, supra, pg. 41.)
XPNs:
1. When there is a prohibition against alienation or
change of interest without the consent of the
insurer in which case the policy is not merely
suspended but avoided. (ibid., citing Curtis vs.
Girard Fire and Marine Ins., 11 SE 3, 190 Ga.
954.)
2. In life, accident, and health insurance. (Sec. 20,
Insurance Code.)
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss
does NOT affect the right of the insured to
indemnity for loss. (Sec. 21, ibid.)
4. A change of interest in one or more distinct
things, separately insured by one policy does
NOT avoid the insurance as to the others. (Sec.
22, ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

5. A change of interest by will or succession, on the
death of the insured, does NOT avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured. (Sec. 23, ibid.)
6. A transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to the othersdoes NOT avoid an
insurance even though it has been agreed that
the insurance shall cease upon an alienation of
the thing insured. (Sec. 24, ibid.)
7. When the policy is so framed that it will inure to
the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured. (Sec. 57, ibid.)
Q: What are other void stipulations in an insurance
contract?
Note: A provision in the policy that prohibits double
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed. (ibid.)
Q: What is the nature of the liability of the several
insurers in double insurance? Explain. (2005 Bar
Question)
A: In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he
is liable under his contract. This is known as the
principle of contribution or contribution clause
(Sec. 94 [e], ibid).
Q: What is over-insurance?
A: There is over-insurance whenever the insured
obtains a policy in an amount exceeding the value of
his insurable interest (Perez, supra, pg. 133).

A: Every stipulation in an insurance contract: Q: What are the distinctions between double
1. For the payment of loss whether the person insurance and over insurance?
insured has or does not have any insurable
interest in the subject-matter of insurance, or A:
2. That the policy shall be received as proof of such DOUBLE INSURANCE OVER INSURANCE
interest, and There may be no over
When the amount of
3. Every policy executed by way of gaming or insurance as when the sum
the insurance is beyond
wagering is VOID. (Sec. 25, ibid.) total of the amounts of the
the value of the
policies issued does not
insureds insurable
DOUBLE INSURANCE AND OVER INSURANCE exceed the insurable
interest.
interest of the insured.
Q: When does double insurance exist? There may be only one
insurer, with whom the
A: Double insurance exists where the same person is Two or more insurers. insured takes insurance
insured by several insurers separately, in respect to beyond the value of his
the same subject and interest. (Sec. 93, ibid.) insurable interest.

Q: Give the requisites of double insurance. Q: What are the rules governing double insurance?

A: STRIP A:
1. Subject matter is the same 1. The insured, unless the policy otherwise
2. Two or more insurers insuring separately provides, may claim payment from the insurers
3. Risk or peril insured against is the same in such order as he may select, up to the amount
4. Interest insured is the same which the insurers are severally liable under their
5. Person insured is the same respective contracts.

Q: Is double insurance prohibited by law?
A: No. It is not contrary to law and hence, in case of
double insurance, the insurers may still be made
liable up to the extent of the value of the thing
insured but not to exceed the amount of the policies
issued (Perez, supra, pg. 130).
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 policyhe must give credit, as

UNIVERSITY OF SANTO TOMAS 92

2013 GOLDEN NOTES
 INSURANCE CODE
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 and the other insurers, to contribute
ratably to the loss in proportion to the amount
for which he is liable under his contract. (Sec. 94,
ibid.)
Q: What is additional or other insurance clause?
A: A clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer (Pioneer
Insurance and Surety Corp vs. Yap, 61 SCRA 426).
Q: Can an insurer provide that the insured may not
procure additional insurance?
A: Yes, the insurer may insert an other insurance
clause which will prohibit double insurance. The
rationale is to prevent the danger that the insured
will over insure his property and thus avert the
possibility of perpetration of fraud (ibid). It is lawful
and specifically allowed under Sec. 75 of the
insurance Code which provides that a policy may
declare that a violation or a specified provision
thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid it.
Q: What is the effect of non-disclosure of the
existence of other insurances covering the subject
matter of the insurance being applied for, if the
applicant is required to do so?
A: The insured cannot recover from the insurance
because he is guilty of violation of warranty/
condition.
MULTIPLE OR SEVERAL INTERESTS ON SAME
PROPERTY
Q: What are the instances where more than one
insurable interest may exist in the same property?
A:
1. In trust, both trustor and trustee have insurable
interest over the property in trust.
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2. In a corporation, both the corporation and its
stockholders have insurable interest over the
assets.
3. In partnership both the firm and partners have
insurable interest over its assets.
4. In assignment both the assignor and assignee
have insurable interest over the property
assigned.
5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
6. In mortgage, both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
Q: Is the insurable interest of mortgagor and
mortgagee in case of a mortgaged property the
same?
A: Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure to
the benefit of the other. The same is not open to
objection that there is double insurance (RCBC vs. CA,
289 SCRA 292 [1989], Sec. 8, Insurance Code).
Q: What is the extent of insurable interest of
mortgagor and mortgagee?
A:
1. Mortgagor The mortgagor of property, as
owner, has an insurable interest to the extent of
its value even though the mortgage debt equals
such value.
2. Mortgagee The mortgagee as such has an
insurable interest in the mortgaged property to
the extent of the debt secured; such interest
continues until the mortgage debt is extinguished
(Sundiang, supra, pg. 100-101).
Note: In case of an insurance taken by the mortgagee alone
and for his benefit, the mortgagee, after recovery from the
insurer, is not allowed to retain his claim against the
mortgagor but it passes by subrogation to the insurer to the
extent of the insurance money paid (De Leon, supra, pg. 74-
75).
Q: How can the mortgagee be made a beneficial
payee?
A: Through any of the following:
1. He may become the assignee of the policy with
the consent of the insurer
2. He may be the mere pledgee without such
consent
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. A rider making the policy payable to the
mortgagee as his interest may appear may be
attached
4. A standard mortgage clause containing a
collateral independent contract between the
mortgagee and the insurer may be attached
5. The policy, though, by its terms payable
absolutely to the mortgagor; may have been
procured by a mortgagor under a contract duty
to insure for the mortgagees benefit, in which
the mortgagee acquires an equitable lien upon
the proceeds (ibid., pg. 75).
Q: What are the effects of insurance by mortgagor
for benefit of mortgagee, or policy assigned to
mortgagee?
A:
1. The contract is deemed to be upon the interest
of the mortgagor; hence he does not cease to be
party to the contract
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of
the mortgagee;
3. Any act which under the contract of insurance is
to be performed by the mortgagor may be
performed by the mortgagee with the same
effect
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time of
loss and
5. Upon recovery by the mortgagee to the extent of
his credit, the debt is extinguished. (ibid., pg. 76,
citing Sec. 8, Insurance Code
Note: The rule on subrogation by the insurer to the
right of the mortgagee does not apply in this case.
Q: What is a standard or union mortgage clause?
A: It is a clause that states that the acts of the
mortgagor do not affect the mortgagee. The purpose
of the clause is to make a separate and distinct
contract of insurance on the interest of the
mortgagee (De Leon, supra, pg. 77).
Q: What is an open or loss-payable mortgage
clause?
A: It is a clause which provides for the payment of
loss, if any, to the mortgagee as his interest may
appear and under it, the acts of the mortgagor affect
the mortgagee (ibid).
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
PERFECTION OF A CONTRACT
Q: What is a policy of insurance?
A: It is the written instrument in which the contract of
insurance is set forth (Sec. 49, Insurance Code.). It is
the written document embodying the terms and
stipulations of the contract of insurance between the
insured and insurer.
Q: What is the form of an insurance contract?
A: May be verbal or in writing, or partly in writing and
partly verbal. However, the law provides that no
policy of insurance shall be issued or delivered unless
in the form previously approved by the Insurance
Commission.
OFFER AND ACCEPTANCE/CONSENSUAL
Q: When is the insurance contract perfected?
A: When the assent or consent is manifested by the
meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the
contract. Mere offer or proposal is not contemplated.
(De Lim v. Sun Life Assurance Co., G.R. No. L-15774,
Nov. 29, 1920)
Note: Mere submission of the application without the
corresponding approval of the policy does not result in the
perfection of the contract of insurance.
Insurance contracts through correspondence follow the
cognition theory wherein an acceptance made by letter
shall not bind the person making the offer except from the
time it came to his knowledge (Enriquez v. Sun Life
Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920.).
Q: On June 1, 2011, X mailed to Y Insurance Co. his
application for life insurance. On July 21, 2011, the
insurance company accepted the application and
mailed, on the same day, its acceptance plus the
cover note. It reached X's residence on August 11.
On August 4, 2011, X figured in a car accident. He
died a day later. May X's heirs recover on the
insurance policy? (2011 Bar Question)
A. No, since X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the cognition theory.
Q. How offer is made in property and liability
insurance?
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 INSURANCE CODE
A. It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-
offer. The offer is usually accepted by an insurance
agent on behalf of the insurer. (De Leon, supra, pg.
174.)
Q. How offer is made in Life and Health Insurance?
A. It depends upon whether the insured pays the
premium at the time he applies for insurance.
1. If he does not pay the premium, his application is
considered an invitation to the insurer to make
an offer, which he must then accept before the
contract goes into effect.
2. If he pays the premium with his application, his
application will be considered an offer. (ibid., pg.
174-175.)
DELAY IN ACCEPTANCE
Q. What kind of acceptance must be given?
A. The acceptance of an insurance policy must be
unconditional, but it need not be by a formal act (De
Leon, supra, pg. 173)
Q. What is the effect of delay?
A. Unreasonable delay in returning the premium
raises the presumption of acceptance of the
insurance application (Gloria v. Philippine American
Life Ins. Co., [CA}73 O.G. [No.37] 8660.)
DELIVERY OF POLICY
Q: Is delivery necessary in the formation of the
contract of insurance?
A: No. The mere delivery of an insurance policy to
someone does not give rise to the formation of a
contract in the absence of proof that he had agreed
to be insured.
Q: What are the 2 types of delivery?
A:
1. Actual delivery to the person of the insured.
2. Constructive
a. By mail If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is considered
constructively delivered if insured died before
receiving the policy.
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b. By agent If delivered to the agent of the
insurer, whose duty is ministerial, or delivered
to the agent of the insured, the policy is
considered constructively delivered. (De Leon,
supra, pg. 175.)
Q: What is the importance of delivery?
A:
1. It becomes the evidence of the making of a
contract and of its terms;
2. It is considered as communication of the insurers
acceptance of the insureds offer;
3. It becomes the determination of policy period;
4. It marks the end of insurers opportunity to
decline coverage. (ibid.)
PREMIUM PAYMENT
Q: What is premium?
A: It is an agreed price for assuming and carrying the
risk that is, the consideration paid an insurer for
undertaking to indemnify the insured against a
specified peril. (ibid., pg. 232.)
Q: What is the difference between premium and
assessment?
A: Premium is levied and paid to meet anticipated
losses, while assessment are collected to meet actual
losses. Also, while premium is not a debt, assessment
properly levied, unless otherwise expressly agreed, is
a debt. (ibid., pg. 233.)
Q: When does payment of premium become a debt
or obligation?
A:
1. In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as the
risk attaches.
2. In life insurance, the premium becomes a debt
only when, in the case of the first premium, the
contract has become binding, and in the case of
subsequent premiums, when the insurer has
continued the insurance after maturity of the
premium, in consideration of the insureds
express or implied promise to pay. (ibid., pg. 233-
240.)
Q: Does non-payment of balance of premiums
cancel the policy?
A: No, a contrary rule would place exclusively in the
hands of the insured the right to decide whether the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
contract should stand or not. (Philippine Phoenix
Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R.
No. L-22684, Aug. 31, 1967)
Q: What are the effects of non-payment of
premiums?
A: Non-payment of the first premium unless waived,
prevents the contract from becoming binding
notwithstanding the acceptance of the application or
the issuance of the policy. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
Non-payment of the subsequent premiums does not
affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that
event be suspended or shall lapse. (De Leon, supra,
pg. 241.)
Note: in case of individual life or endowment insurance and
group life insurance, the policyholder is eneitled to a grace
period of either 30 days or 1 month within which the
payment of any premium after the first may be made.
(Secs. 227[a], 228[a], Insurance Code.)
In case of industrial life insurance, the grace period is 4
weeks, where premiums are payable monthly, either 30
days or 1 month. (Sec. 230 [a], Insurance Code.)
Q: If the applicant failed to pay premium and
instead execute a promissory note in favor of the
insurer payable within 30 days which was accepted
by the latter, is the insurer liable in case of loss?
A: Yes, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted
the promise of the applicant to pay the insurance
premium within thirty 30 days from the effective date
of policy. By so doing, it has implicitly agreed to
modify the tenor of the insurance policy and in effect,
waived any provision therein that it would only pay
for the loss or damage in case the same occurs after
the payment of the premium.
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered. (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
No. L-22375, July 18, 1975)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Can fortuitous event excuse the insured from not
paying the premiums?
A: GR: No, non-payment of premiums does not
merely suspend but put an end to an insurance
contract since the time of the payment is peculiarly of
the essence of the contract. (De Leon, supra, pg. 241)
XPN:
1. The insurer has become insolvent and has
suspended business, or has refused without
justification a valid tender of premiums.
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188,
Oct. 29, 1952)
2. Failure to pay was due to the wrongful
conduct of the insurer.
3. The insurer has waived his right to demand
payment. (De Leon, supra pg. 242.)
Note: But the insurer will not be deemed to have
waived his privilege of forfeiture by mere inaction or silence
if the ground be default in the payment of premiums, going
as it does to the whole consideration inducing the insurer
to enter into the contract. (ibid pg. 242)
While the insured has the privilege of continuing the policy
in force by making premium payments, the insurer cannot
ordinarily force the insured to make these payments. (Ibid,
pg. 242)
Q: What is the effect of acceptance of premium?
A: Acceptance of premium within the stipulated
period for payment thereof, including the agreed
grace period, merely assures continued effectivity of
the insurance policy in accordance with its terms.
(Stoke v. Malayan Insurance Co., Inc., G.R. No. L-
34768, Feb. 28, 1984)
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v.
Arnalo 154 SCRA 672 and areola v. CA 236 SCRA 643).
If an insurance company delivers a policy to an
insurance broker, it is deemed to have authorized
him to receive the payment of the premium. (Sec.
306, South Sea v. CA 244 SCRA 744; American Home
Assurance v. Chua 309 SCRA 250)
An acknowledgment in a policy of the receipt of the
premium is conclusive evidence of its payment for
the purpose of making the policy binding despite a
stipulation that it will not be binding until the
premium is actually paid. (Sec. 78; American Home v.
Chua, supra)
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 INSURANCE CODE
Q: What is the effect of payment of premium by
post-dated check?
A: Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Article 1249 of the Civil Code.
Note: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even if
it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor.
Q: What if there was no premium paid, may the
insurer recover the unpaid premium from the
insured?
A: No, the continuance of the insurers obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy, the
contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Q: Is the insurance company liable when a car,
bought on installment basis, met an accident but the
car is not yet fully paid? (2006 Bar Question)
A: Yes, when insured and insurer have agreed to the
payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
Q: What is the cash and carry rule? (2003 Bar
Question)
A: GR: No policy or contract of insurance issued by
an insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
XPN: A policy is valid and binding even when there
is non-payment of premium:
1. In case of life or industrial life policy whenever
the grace period provision applies.
2. When there is acknowledgment in a policy of
a receipt of premium, which the law declares
97
to be conclusive evidence of payment, even if
there is stipulation therein that it shall not be
binding until the premium is actually paid.
This is without prejudice however to right of
insurer to collect corresponding premium.
(Sec. 77)
3. When there is an agreement allowing the
insured to pay the premium in installments
and partial payment has been made at the
time of loss (Makati Tuscany Condominium
Corp. v. CA, G.R. No. 95546, Nov. 6, 1992).
4. When there is an agreement to grant the
insured credit extension for the payment of
the premium. (Art. 1306, NCC), and loss
occurs before the expiration of the credit
term. (UCPB General Insurance v. Masagana
Telemart, G.R. No. 137172, Apr. 4, 2001).
5. When estoppel bars the insurer to invoke
non-recovery on the policy.
6. When the public interest so requires, as
determined by the Insurance Commissioner
E.g.: In compulsory motor vehicle insurance, if
the policy was issued without payment of
premium by the vehicle owner, the insurer
will still be held liable. To rule otherwise
rd
would prejudice the 3 party victim.
Q: What is the effect of acknowledgment of receipt
of premium in policy?
A: Conclusive evidence of its payment, in 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).
When the policy contains such written
acknowledgment, it is presumed that the insurer has
waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption is
however, extended only to the question of the
binding effect of the policy.
As far as the payment of the premium itself is
concerned, the acknowledgment is only a prima facie
evidence of the fact of such payment. The insurer
may still dispute its acknowledgment but only for the
purpose of recovering the premium due and unpaid.
Whether payment was indeed made is a question of
fact.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Q: What are the devices used to prevent the
forfeiture of a life insurance after the payment of
the first premium?
A:
1. Grace period After the payment of the first
premium, the insured is entitled to a grace
period of 30 days within which to pay the
succeeding premiums. (Sec. 227,(a)).
2. Cash surrender value The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it.
rd
(Cyclopedia Law Dictionary, 3 ed., 1077)
3. Extended insurance It is where the insured is
given a right, upon default, after payment of at
least three full annual premiums (see Sec. 227 [f])
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. (De
Leon, The Insurance Code of the Philippines
Annotated, 2006)
4. Paid up Insurance The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued in
force from the date of default for the whole
period of the insurance without further payment
of premiums.(ibid.) It results to a reduction of
the original amount of insurance, but for the
same period originally stipulated.(6 Couch 2d.,
355; 37 C.J.S. 364)
5. Automatic Loan Clause A stipulation in the
policy providing that upon default in payment of
premium, the same shall be paid from the loan
value of the policy until that value is consumed.
In such a case, the policy is continued in force as
fully and effectively as though the premiums had
been paid by the insured from funds derived
from other sources.(6 Couch 2d., 383)
6. Reinstatement Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at anytime within 3 years from the date
of default in the payment of premium, unless the
cash surrender value has been paid, or the
extension period expired, upon production of
evidence of insurability satisfactory to the
company and the payment of all overdue
premiums and any indebtedness to the company
upon said policy. (Sec. 227, (j)).
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
REINSTATEMENT OF A LAPSED POLICY OF LIFE
INSURANCE
Q. What is purpose of the Reinstatement Provision?
A. The purpose of the provision is to clarify the
requirements for restoring a policy to premium-
paying status after it has been permitted to lapsed.
Q. Within what period shall the holder of the policy
be entitled to reinstatement of the contract?
A. The law requires that the policy owner be
permitted to reinstate the policy, subject to the
violations specified, any time within three (3) years
from the date of default of premium payment. A
longer period, being more favorable to the insured,
may be used.
Q. Is reinstatement of a lapsed policy an absolute
right of the insured?
A. Reinstatement is not an absolute right of the
insured, but discretionary on the part of the insurer,
which has the right to deny reinstatement if it were
not satisfied as to the insurability of the insured, and
if the latter did not pay all overdue premiums and
other indebtedness to the insurer. (McGuire vs.
Manufacturers Life Ins. Co., 87 Phil. 370).
Q. What does Evidence of Insurability includes?
A. Evidence of Insurability is broader phrase than
Evidence of Good Health and includes such other
factors as the insureds occupation, habits, financial
condition, and other risk selection factors.
Q. A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums. Subsequently,
the insured died. Was the insurer liable?
A. The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy (Andres vs.
Crown Life Ins. Co., 55 O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after it
lapsed. Eulogio paid the premiums due on the first
two months. However, he failed to pay subsequent
premiums.
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 INSURANCE CODE
One month after the policy lapsed, he filed an
application for the reinstatement of his policy. He
deposited the overdue premiums and signed a
reinstatement policy stating that the payment
deposit only and shall not bind the Company until
this application is finally approved. Hours later,
Eulogio died of electrocution.
The insurance company denied the claim of his
beneficiaries stating that the policy was never
approved. Is the contention of the insurance
company valid?
A: Yes. The stipulation in a life insurance policy giving
the insured the privilege to reinstate it upon written
application does not give the insured absolute right
to such reinstatement by the mere filing of an
application. The insurer has the right to deny the
reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other indebtedness
to the insurer. After the death of the insured the
insurance Company cannot be compelled to
entertain an application for reinstatement of the
policy because the conditions precedent to
reinstatement can no longer be determined and
satisfied.
Eulogios death, just hours after filing his Application
for Reinstatement and depositing his payment for
overdue premiums and interests does not constitute
a special circumstance that can persuade to consider
the policy reinstated. Said circumstance cannot
override the clear and express provisions of the
Policy Contract and Application for Reinstatement,
and operate to remove the prerogative of Insular Life
thereunder to approve or disapprove the Application
for Reinstatement. (Violeta R. Lalican vs. The Insular
Life Assurance Company Limited, supra)
REFUND OF PREMIUMS
Q: When is the insured entitled to recover premiums
already paid or a portion thereof?
A:
1. Whole:
a. When no part of the thing insured has been
exposed to any of the perils insured against
(Sec. 79)
b. When the contract is voidable because of the
fraud or misrepresentations of the insurer of
his agent (Sec.81).
c. When the insurance is voidable because of
the existence of facts of which the insured
was ignorant without his fault (Sec.81).
99
d. When the insurer never incurred any liability
under the policy because of the default of
the insured other than actual fraud (Sec. 81).
e. When rescission is granted due to insurers
breach of contract (Sec. 74).
2. Pro rata:
a. When the insurance is for a definite period
and the insured surrenders his policy
beforethe termination thereof; (Sec. 79 [b]);
except:
i. Policy not made for a definite period of
time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is over-insurance. The premiums
to be returned shall be proportioned to the
amount by which the aggregate sum insured
in all the policies exceeds the insurable value
of the thing at risk. (Sec. 82)
i. In case of over-insurance by double
insurance, the insurer is not liable for the
total amount of the insurance taken, his
liability being limited to the property
insured. Hence, the insurer is not entitled
to that portion of the premium
corresponding to the excess of the
insurance over the insurable interest of
the insured.
ii. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing
insured (Sec. 82).
Illustration:
Where there is a total over insurance of P500,000.00
in an aggregate P2,000,000.00 policy (P1,500,000.00
is only the insurable value), 25% (proportion of P500k
to P2M) of the premiums paid to the several insurers
should be returned.
Q: When insured not entitledto return of premiums
paid?
A:
1. The risk has already attached and the risk is
entire and indivisible;
2. In life policies;
3. If contract is void ab initio because of fraud by
the insured;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. If contract is illegal and the parties are in pari
delicto.
RESCISSION OF INSURANCE CONTRACTS
Q. What are the instances wherein a contract of
insurance may be rescinded?
A.
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
CONCEALMENT
Q: What is concealment?
A: Concealment is a neglect to communicate that
which a party knows and ought to communicate.
(Sec. 26)
Q: What are the requisites in concealment?
A:
1. A party knows a fact which he neglects to
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose
such fact to the other
3. Such party concealing makes no warranty as to
the fact concealed
4. The other party has no means of ascertaining the
fact concealed
5. The fact must be material
Q: What is the test of materiality?
A: It is 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 disadvantages of the
proposed contract, or in making his inquiries. (Sec.
31)
Note: As long as the facts concealed are material,
concealment, whether intentional or not, entitles the
injured party to rescind (Sec.27).
Q: How does it differ from materiality in marine
insurance?
A: Rules on concealment are stricter since the insurer
would have to depend almost entirely on the matters
communicated by the insured. Thus, in addition to
material facts, each party must disclose all the
information he possesses which are material or the
information of the belief or expectation of a third
person, in reference to a material fact. But a
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
concealment in a marine insurance in any of the
following matters enumerated under Section 110,
(Sec. 108). Insurance Code does not vitiate the entire
contract, but merely exonerates the insurer from a
loss resulting from the risk concealed.
Q: What is the test in ascertaining the existence of
concealment?
A: If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that circumstance,
though unasked.
Q: What are the matters that need not be disclosed?
A: GR: The parties are not bound to communicate
information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care, the
other ought to know and of which, the former
has no reason to suppose him ignorant
3. Those of which the other waives communication
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty, and
which are not otherwise material
5. Those which relate to a risk excepted from the
policy and which are not otherwise material;
6. The nature or amount of the interest of one
insured (except if he is not the owner of the
property insured, Sec. 34).
XPN: In answer to inquiries of the other. (Sec. 30)
Note: Neither party is bound to communicate, even
upon inquiry, information of his own judgment, because
such would add nothing to the appraisal of the
application. (Sec.35)
The parties are bound to know all the general causes
which are open to his inquiry, equally with the other,
and all general usages of trade. (Sec.32)
Q: What are the matters that must be disclosed
even in the absence of inquiry?
A:
1. Those material to the contract
2. Those which the other has no means of
ascertaining
3. Those as to which the party with the duty to
communicate makes no warranty
Note: Matters relating to the health of the insured are
material and relevant to the approval of the issuance of the
life insurance policy as these definitely affect the insurers
100
 INSURANCE CODE
action to the application. It is well-settled that the insured
need not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed
insurance policy or in making inquiries (Sunlife Assurance
Company of Canada v. CA, G.R. No. 105135, June 22, 1995).
Information as to the nature of interest need not be
disclosed except In property insurance, if the insured is not
the owner. If somebody is insuring properties of which he is
not the owner, he must disclose why he has insurable
interest that would entitle him to ensure it, and the extent
thereof. [Sec.34 & Sec.51(e)]
Q: May the right to information of material facts be
waived?
A: Yes.
1. By the terms of the contract
2. By the failure to make an inquiry as to such facts,
where they are distinctly implied in other facts
from which information is communicated. (Sec.
33)
Q: What are the effects of concealment?
A:
1. If there is concealment under Section 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
2. The party claiming the existence of concealment
must prove that there was knowledge of the fact
concealed on the part of the party charged with
concealment.
3. Good faith is not a defense in concealment.
Concealment, whether intentional or
unintentional entitles the injured party to rescind
the contract of insurance. (Sec. 27)
4. The matter concealed need not be the cause of
loss. (Sec.31)
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
Q: When should concealment take place in order
that the policy may be avoided?
A: At the time the contract is entered into and not
afterwards. The duty of disclosure ends with the
completion of the contract. Waiver of medical
examination in a non-medical insurance contract
renders even more material the information required
of the applicant concerning previous condition of
health and diseases suffered, for such information
necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether
to issue the policy or not. Failure to communicate
101
information acquired after the effectivity of the policy
will not be a ground to rescind the contract.
Reason: Information is no longer material as it will no
longer influence the other party to enter into such
contract.
Q: Joanna applied for a non-medical life insurance.
Joanna did not inform the insurer that one week
prior to her application for insurance, she was
examined and confined at St. Lukes Hospital where
she was diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable
considering that the fact concealed had no bearing
with the cause of death of the insured? Why? (2001
Bar Question)
A: No. The concealed fact is material to the approval
and issuance of the insurance policy. It is well settled
that the insured need not die of the disease she failed
to disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his
estimate of the risks of the proposed insurance policy
or in making inquiries (Sun Life v. CA, supra.).
Q: What are the instances whereby concealment
made by an agent procuring the insurance binds the
principal?
A.
1. Where it was the duty of the agent to acquire
and communicate information of the facts in
question;
2. Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
Note: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
MISREPRESENTATION/OMMISSIONS
Q: What is representation?
A: An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
Q: What are the kinds of representation?
A:
1. Oral or written; (Sec. 36)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Affirmative; (Sec. 42) or
3. Promissory. (Sec. 39)
Q: What is an affirmative representation?
A: Any allegation as to the existence or non-existence
of a fact when the contract begins. (e.g. the
statement of the insured that the house to be insured
is used only for residential purposes is an affirmative
representation).
Q: What is a promissory representation?
A: Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Q: When should representation be made, altered or
withdrawn?
A: It may be made at the time of, or before, issuance
of the policy. (Sec. 37). It may be altered or
withdrawn before the insurance is effected. (Sec.41)
Q: What is misrepresentation?
A: It is an affirmative defense. To avoid liability, the
insurer has the duty to establish such a defense by
satisfactory and convincing evidence. (Ng Gan Zee v.
Asian Crusader Life Assn. Corp., G.R. No. L- 30685,
May 30, 1983. [See also sec.44 (when the facts fail to
correspond to the assertions or stipulations.)]
Note: In the absence of evidence that the insured has
sufficient medical knowledge to enable him to do
distinguish between peptic ulcer and tumor, the
statement of deceased that said tumor was associated
with ulcer of the stomach should be considered an
expression in good faith. Fraudulent intent of insured must
be established to entitle insurer to rescind the insurance
contract. Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved. (Ng Gan Zee v.
Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30,
1983)
Q: What are the requisites misrepresentation?
A:
1. The insured stated a fact which is untrue;
2. 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;
3. Such fact in either case is material to the risk.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Note: A representation cannot qualify an express provision
in a contract of insurance but it may qualify an implied
warranty. (Sec.40)
Q: How is a representation as to a future
undertaking treated?
A: A representation as to the future is to be deemed
a promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge. (Sec.39)
Q: Will an erroneous opinion or belief avoid the
insurance policy?
A: No. The statement of an erroneous opinion, belief
or information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
Q: What is the test of materiality?
A: It is to be determined not by the event, but solely
by the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (similar
with concealment). (Sec. 46)
Q: What are the effects of misrepresentation?
A:
1. It renders the insurance contract voidable at the
option of the insurer, although the policy is not
thereby rendered void ab initio. The injured party
entitled to rescind from the time when the
representation becomes false;
2. When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of such right;
3. There is no waiver of the right of rescission if the
insurer had no knowledge of the ground therefor
at the time of acceptance of premium payment.
Q: What is the effect of collusion between the
insurers agent and the insured?
A: It vitiates the policy even though the agent is
acting within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so the insurer is not estopped
from avoiding the policy.
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 INSURANCE CODE
Q: What are the characteristics of representation?
A:
1. Not a part of the contract but merely a collateral
inducement to it
2. Oral or written
3. Made at the time of, or before issuing the policy
and not after
4. Altered or withdrawn before the insurance is
effected but not afterwards
5. Must be presumed to refer to the date the
contract goes into effect. (Sec. 42)
Q: What are the similarities of concealment and
representation?
A:
1. Both refer to the same subject matter and both
take place before the contract is entered.
2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is
rescission or cancellation.
3. The test of materiality is the same. (Secs. 31, 46)
4. The rules of concealment and representation are
the same with life and non-life insurance.
5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on
ground of concealment or false representation.
6. Since the contract of insurance is said to be one
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and
representation apply likewise to the insurer.
Q: How does concealment differ from
misrepresentation?
A: In concealment, the insured withholds the
information of material facts from the insurer,
whereas in misrepresentation, the insured makes
erroneous statements of facts with the intent of
inducing the insurer to enter into the insurance
contract.
Q: How is concealment and misrepresentation
applied in case of loss or death?
A: GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or
death, the insurer can refuse to pay.
XPN: The incontestability clause under paragraph 2 of
Section 48.
XPN to XPN: (i.e., when the contract may be
rescinded evev beyond the incontestability period)
103
1. Non-payment of premiums. (Secs. 77, 22 [b],
228 [b], 203 [b])
2. Violation of condition. (Secs. 227 [b], 228 [b])
3. No insurable interest
4. Cause of death was excepted or not covered
5. Fraud of a vicious type
6. Proof of death was not given. (Sec. 242)
7. That the conditions of the policy relating to
military or naval service. (Secs. 227 [b], 228 [b])
8. That the action was not brought within the time
specified. (Sec. 63)
Q: What is the remedy of the injured party in case of
misrepresentation?
A: If there is misrepresentation, the injured party is
entitled to rescind from the time when the
representation becomes false.
Q: When should the right to rescind the contract be
exercised?
A: The right to rescind must be exercised previous to
the commencement of an action on the contract. (the
action referred to is that to collect a claim on the
contract). (Sec.48, par.1)
Q. What is Omission?
A. The failure to communicate information of matters
proving or tending to prove the falsity of warranty.
Q. What is the effect of Omission?
A. The contract of insurance may be rescinded.
BREACH OF WARRANTIES
Q: What are warranties?
A: Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in
any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or non-
fulfillment render the policy voidable by the insurer.
Q: What is the purpose of warranties?
A: To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: What is the basis of warranties? Q: What are the effects of breach of warranty?

A: The insurer took into consideration the condition A:

of the property at the time of effectivity of the policy. 1. Material

Q: What are the kinds of warranties?
A:
1. Express an agreement contained in the policy or
clearly incorporated therein as part thereof
whereby the insured stipulates that certain facts
relating to the risk are or shall be true, or certain
acts relating to the same subject have been or shall
be done.
2. Implied It is deemed included in the contract
although not expressly mentioned.
GR: Violation of material warranty or of material
provision of a policy will entitle the other party to
rescind the contract.
XPN:(with regard to promissory warranties)
a. Loss occurs before the time of
performance of the warranty;
b. The performance becomes unlawful at the
place of the contract; and
c. Performance becomes impossible. (Sec.73)
2. Immaterial

Peculiar only to marine insurance, and therefore GR: It will not avoid the policy.
is deemed included in the contract, although not
expressly mentioned: XPN: When the policy expressly provides or
declares that a violation thereof will avoid it.
a. That the ship will not deviate from the agreed
voyage unless deviation is proper For instance, an Other Insurance Clause which
b. That the ship will not engage in illegal venture is a condition in the policy requiring the insured
c. Warranty of neutrality, that the ship will carry to inform the insurer of any other insurance
the requisite documents of nationality or coverage of the property. A violation of the
neutrality where such nationality or neutrality is clause by the insured will not constitute a breach
warranted unless there is an additional provision stating
d. Presence of insurable interest that the violation thereof will avoid the policy.
e. That the ship is seaworthy at the time of the (Sec. 75)
commencement of the insurance contract.
Q: What is the effect of a breach of warranty
Q: What are the distinctions between warranty and without fraud?
representation?
A: The policy is avoided only from the time of breach
A: (Sec. 76)and the insured is entitled:
WARRANTY REPRESENTATION 1. To the return of the premium paid at a pro rata
Considered parts of Collateral inducement to the from the time of breach or if it occurs after the
the contract. contract. inception of the contract; or
Always written on the 2. To all premiums if it is broken during the
May be written in a totally inception of the contract.
face of the policy,
disconnected paper or may
actually or by
be oral. CLAIMS SETTLEMENT AND SUBROGATION
reference.
Must be strictly Only substantial proof is
complied with. required. NOTICE AND PROOF OF LOSS
Its falsity or non-
Its falsity renders the policy Q: What is loss in insurance?
fulfillment operates as
void on the ground of fraud.
a breach of contract.
Insurer must show its A: The injury, damage or liability sustained by the
Presumed material. insured in consequence of the happening of one or
materiality in order to defeat
an action on the policy. more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive in Marine Insurance.

UNIVERSITY OF SANTO TOMAS 104

2013 GOLDEN NOTES
 INSURANCE CODE

Q: What is notice of loss? Q: When is delay in the presentation of notice or

proof of loss deemed waived?
A: It is the more or less formal notice given the
insurer by the insured or claimant under a policy of A: If caused by:
the occurrence of the loss insured against.
1. Any act of the insurer; and
Q: What are the conditions before the insured may 2. By failure to take objection promptly and
recover on the policy after the loss? specifically upon that ground. (Sec. 91)

A: Q: What is proof of loss?

1. The insured or some person entitled to the
benefit of the insurance, without unnecessary A: It is the more or less formal evidence given the
delay, must give notice to the insurer; (Sec. 88) company by the insured or claimant under a policy of
2. When required by the policy, insured must the occurrence of the loss, the particulars thereof and
present a preliminary proof loss which is the best the data necessary to enable the company to
evidence he has in his power at the time. (Sec. determine its liability and the amount thereof.
89)
Q: What is the time for payment of claims?
Q: What are the purposes of notice of loss?
A:
A: LIFE POLICIES NON-LIFE POLICIES
1. To give insurer information by which he may 1. Maturing upon the
determine the extent of his liability; expiration of the term
2. To afford the insurer a means of detecting any the proceeds are
fraud that may have been practiced upon him; immediately payable to
and the insured, except if
3. To operate as a check upon extravagant claims. proceeds are payable The proceeds shall be paid
in installments or within 30 days after the
Q: What is the effect of failure to give notice of annuities which shall receipt by the insurer of
loss? be paid as they become proof of loss and
due ascertainment of the loss or
A: damage by agreement of
FIRE INSURANCE OTHER TYPES OF INSURANCE 2. Maturing at the the parties or by arbitration
Failure to give notice will not death of the insured, but not later than 90 days
Failure to give occurring prior to the from such receipt of proof of
exonerate the insurer, unless
notice defeats the expiration of the term loss, whether or not
there is a stipulation in the
right of the insured stipulated the ascertainment is had or
policy requiring the insured to
to recover. proceeds are payable made. (Sec. 243)
do so.
to the beneficiaries
Q: What are the instances when the defects in the within 60 days after
notice or proof of loss are considered waived? presentation of claim
and filing of proof of
A: When the insurer: MaJoR-DeW death (Sec. 242)

1. Writes to the insured that he considers the policy GUIDELINES ON CLAIMS SETTLEMENT
null and void as the furnishing of notice or proof
of loss would be useless;
Q. What is Claim Settlement?
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy A. Claim settlement is the indemnification of the
4. Joins in the proceedings for determining the suffered by the insured. The claimant may be the
amount of the loss by arbitration, making no insured or reinsured, the insurer who is entitled to
objections on account of notice and preliminary subrogation, or a third party who has a claim against
proof; or the insured.
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.

105 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q. What is the purpose of the rule?
A. To eliminate unfair claim settlement practices.
Q. What are the rules in Claim Settlement?
A.
1. No insurance company doing business in the
Philippines shall refuse, without justifiable cause,
to pay or settle claims arising under coverages
provided by its policies, nor shall any such
company engage in unfair claim settlement
practices.
2. Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioners complaint experience with other
insurance companies writing similar lines of
insurance shall be admissible in evidence in an
administrative or judicial proceeding brought
under this section (Sec. 241)
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Q. What constitutes unfair settlement practices?
A: MAI-GL
1. Knowingly misrepresenting to claimants pertinent
facts or policy provisions relating to coverage at
issue;
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
4. Not attempting in good faith to effectuate prompt,
fair and equitable settlement of claims submitted
in which liability has become reasonably clear; or
5. 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.
Q. What is the sanction for the insurance companies
which engaged to unfair settlement practices?
A. The suspension or revocation of an insurance
companys certificate of authority. (Sec 241)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q. What is the obligation of the insurer with regard
to the insureds decision to compromise third party
claim?
A. Where a policy gives the insurer a control of the
decision to settle claim or to litigate it, the insurer
nevertheless is required to observe a certain measure
of consideration for the interest of the insured.
The rule has come to be generally accepted that
while the express terms of the policy do not impose
of the insurer the duty to claim settle the claim at all
costs, there is an implied duty on his part to give due
consideration to the interest of the insured in its
exercise of the option to reject a compromise
settlement and proceed with litigation. In insurance
contracts, the law requires strict observance of the
standards of good faith and fair dealing on the part of
the insurer.
Q: What is the effect of refusal or failure to pay the
claim within the time prescribed?
A: The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board (12% per
annum CB No. 416) or 24% per annum interest on the
proceeds of the insurance from the date following
the time prescribed in Secs. 242 or 243 until the claim
is fully satisfied (Prudential Guarantee and Assurance,
Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No.
151890, June 20, 2006)
Note: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such refusal
or failure to pay is based on the ground that the claim is
fraudulent.
PRESCRIPTION OF ACTIONS
Q: What are the rules on the prescriptive for filing
an insurance claim?
A:
1. The parties to a contract of insurance may validly
agree that an action on the policy should be
brought within a limited period of time, provided
such period is not less than 1 year from the time
the cause of action accrues. If the period agreed
upon is less than 1 year from the time the cause of
action accrues, such agreement is void. (Sec. 63)
a. The stipulated prescriptive period shall begin to
run from the date of the insurers rejection of the
claim filed by the insured or beneficiary and not
from the time of loss.
b. In case the claim was denied by the insurer but
the insured filed a petition for reconsideration,
106
 INSURANCE CODE
the prescriptive period should be counted from
the date the claim was denied at the first
instance and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. CA, GR.
No. 89741, Mar 13, 1991)
2. If there is no stipulation or the stipulation is void,
the insured may bring the action within 10 years in
case the contract is written.
3. In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim must
be filed within 6 months from the date of the
accident; otherwise, the claim is deemed waived
even if the same is brought within 1 year from its
rejection. (Vda. De Gabriel vs. CA, GR No. 103883,
Nov 14, 1996)
4. The suit for damages, either with the proper court
or with the Insurance Commissioner, should be
filed within 1 year from the date of the denial of
the claim by the insurer, otherwise, claimants right
of action shall prescribe. (Sec. 384)
Q. From what time shall the period of prescription
be computed in case the insured asked for
reconsideration of the denial of claim? (1996 Bar
Question)
A: In case the claim was denied by the insurer but the
insured file a petition for reconsideration, the
prescriptive period should be counted from the date
the claim was denied at the first instance and not
from the denial of the reconsideration. To rule
otherwise would give the insured a scheme or devise
to waste time until any evidence which may be
considered against him is destroyed (Sun life Office,
Ltd. vs. CA, 195 SCRA 193; Asked, V [a}).
Q. What is the prescriptive period of prescription in
motor vehicle insurance?
A. It is one year from denial of the claim and not from
the date of the accident.
SUBROGATION
Q. What is the Principle of Subrogation?
A. If the plaintiffs property has been insured, and he
has received indemnity from the insurance company
for the injury or loss arising out of wrong or breach of
contract complained of, the insurance company shall
be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the
contract. (Art. 2207, NCC)
107
Q: Should there be a contract before the insurer be
subrogated?
A: The principle of subrogation 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 Insurance Co., Inc. v. CA,
G.R. No. L-36413, Sept. 26, 1988)
Note: Incapacity of the insured will not affect the capacity
of the subrogee because capacity is personal to the holder
(Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724,
June 8, 2004).
Q: What are the rules on indemnity?
A:
1. Applies only to property insurance except when the
creditor insures the life of his debtor
2. Insurance contracts are not wagering contracts or
gambling contracts.
Q: What are the purposes of subrogation?
A:
1. To make the person who caused the loss legally
responsible for it
2. To prevent the insured from receiving double
recovery from the wrongdoer and the insurer
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy
Q: What are the rules on subrogation?
A:
1. Applicable only to property insurance the value
of human life is regarded as unlimited and
therefore, no recovery from a third party can be
deemed adequate to compensate the insureds
beneficiary.
2. The right of insurer against a third party is limited
to the amount recoverable from latter by the
insured.
Q: What if the amount paid by the insurance
company does not fully cover the injury or loss?
A: The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
(Art. 2207, NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: What are the instances where the right of

subrogation does not apply?

A:
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
2. The insurer loses his rights against the wrongdoer
since the insurer can only be subrogated to only
such rights as the insured may have
3. Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or
risk not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance
coverage.

UNIVERSITY OF SANTO TOMAS 108

2013 GOLDEN NOTES
 TRANSPORTATION LAW

TRANSPORTATION LAW services on a an occasional, episodic or unscheduled

Q: What laws govern contracts of transportation?
A: Contracts of transportation, whether by land, sea
or air, if WITHIN THE PHILIPPINES or if the
transportation of goods be FROM A FOREIGN
COUNTRY TO THE PHILIPPINES shall be governed by
the following laws, arranged by order of application:
basis. Neither does Article 1732 distinguish between
a carrier offering its services to the general public,
i.e., the general community or population, and one
who offers services or solicits business only from a
narrow segment of the general population. Article
1733 deliberately refrained from making such
distinctions. (Perez, Quizzer and Reviewer on
Commercial Laws Vol. IV, 2009 ed., citing Caltex
[Phils.] vs. CA, GR No. 131166, September 30, 1999.)

1. Provisions of the New Civil Code on Common Q: What is a private carrier?

Carriers;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by the Sea
(COGSA); Salvage Law; Public Service Act; Land
Transportation and Traffic Code; Tariff and
Customs Code; and Civil Aeronautics Act.
(Articles 1735 and 1766, New Civil Code;
American President Lines, Ltd. Vs. Klepper, GR
No. L-15671, November 29, 1960.)
Note: In the case of international carriage in Air
Transportation, Warsaw Convention applies. (ibid.)
If the goods are to be transported of goods FROM
PHILIPPINES TO FOREIGN COUNTRY, the law of the latter
country shall govern the transportation contract. (ibid.)
A: A carrier which does not qualify under the
requisites of a common carrier is deemed a private
carrier. (National Steel Corporation v CA, G.R. No.
112287. December 12, 1997.)
A private carrier is one who, without making the
activity a vocation, or without holding himself or itself
out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire. (Spouses Perena vs. Spouses
Zarate, GR No. 157917, August 29, 2012.)

COMMON CARRIERS

Q: What are the requisites for an entity to be

classified as a common carrier?

A: PBL-FP
1. Must be a Person, corporation, firm or
association
2. Must be engaged in the Business of carrying
or transporting passengers or goods or both
3. The carriage or transport must either be by
Land, water or air
4. The service is for aFee
5. The service is offered to the Public. (Article
1732, New Civil Code [NCC].)

Q: To be a common carrier, is it required that the

carriers principal activity is carriage of persons or
goods?

A: No. Article 1732 makes no 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 (in local idiom, as
a sideline). Article 1732 also carefully avoids
making any distinction between a person or
enterprise offering transportation service on
a regular or scheduled basis and one offering such

109 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: What are the distinctions between a common carrier from a private carrier?

A:
COMMON CARRIER PRIVATE CARRIER
To whom does Undertakes to carry passengers or goods for the Carriage is generally undertaken by special
the carrier public. (First Philippine Industrial Pipeline vs. CA, agreement and it does not hold itself out to
cater its 300 SCRA 661.) carry goods for the general public.
service (Loadmasters Customs Services, Inc. vs.
Glodel Brokerage G.R. No. 179446, January
10, 2011)
Governing Civil Provisions on Common Carriers, Public Service Civil Code provisions on Ordinary Contracts
laws Act, and other special laws relating to (ibid.)
transportation. (Spouses Perena vs. Spouses
Zarate, supra.)
Degree of Extraordinary diligence (Art. 1733, NCC.) Ordinary diligence or diligence of a good
Diligence father of the family (Spouses Perena vs.
required Spouses Zarate, supra.)
Presumption 1. If the goods are lost, destroyed or No presumption as to negligence (Planters
of Negligence deteriorated. Products vs. CA, GR No. 101503, Sept. 15,
2. In case of death of or injuries to passengers. 1993.)
(Art. 1735 and 1756, NCC.)
Whether Subject to regulation by a regulatory agency NOT subject to regulation by a regulatory
subject to agency
regulation or
not

Q: What is a public utility?

Q: What is a Certificate of Public Convenience (CPC)?
A: A business or service engaged in supplying the
public with some commodity or service of public A: An authorization issued for the operation of public
consequence, or essential to the general public. services for which no franchise, either municipal or
(Perez, supra, pg. 280, citing Albano vs. Reyes, 175 legislative, is required by law, such as a common
SCRA 264; KMU Labor Center vs. Garcia, 239 SCRA carrier.
386.)
Under the PSA, a CPC can be sold by the holder
Q: What is a public service? thereof because it has considerable material value
and is considered a valuable asset (Raymundo v.
A: Every person that may own, operate, manage, Luneta Motor Co., G.R. No. 39902, November 29,
control in the Philippines, for hire/compensation, 1933).
with general/limited clientele whether permanent,
occasional or accidental, and done for general Q: What is the difference between CPC and
business purposes, any common carrier, with or Certificate of Public Convenience and Necessity
without fixed route and whatever may be its [CPCN]?
classification, engaged in the transportation of
passengers or freight or both, canal, irrigation system, A:
gas, electric light, heat and power, water supply CPC CPCN
power, petroleum, sewerage system, wire or wireless Issued whenever the Issued upon approval of
communication systems, wire or wireless Public Service any franchise or privilege
broadcasting stations and stations and other similar Commission granted by any political
public services. (Sec. 13 [b], Public Service Act [PSA].) (Commission) finds that subdivision of the
the operation of the Philippines when in the
Note: The terms public utility and public service are proposed public service judgment of the political
used interchangeably. (Perez, supra, pg. 281.) will promote the public subdivision of the

UNIVERSITY OF SANTO TOMAS 110

2013 GOLDEN NOTES
 TRANSPORTATION LAW
interests in a proper and Philippines when in the
suitable manner, for judgment of the
which a municipal or Commission such
legislative franchise is franchise or privilege will
NOT necessary. (Sec. 16 properly conserve the
[a], PSA.) public interest. (Sec. 16
[b], PSA.)
Q: What are the requirements for the grant of CPC?
A: COPS
1. Applicant must be a Citizen of the Philippines. If
the applicant is a Corporation, 60% of its capital
must be owned by Filipinos
2. Applicant must prove the Operation of proposed
public service will promote public interest in a
proper and suitable manner
3. Applicant must prove Public necessity
4. Applicant must have Sufficient financial
capability to undertake proposed services and
meeting responsibilities incidental to its
operation.(KMU Labor Center vs. Garcia, supra)
Q: May a 100% foreign corporation own facilities
and equipment of a public utility such as EDSA LRT
III?
A: Yes. While the Constitution requires that a
franchise is needed for the operation of public utility
and that no franchise shall be granted to corporation
without at least 60% of its capital owned by Filipinos,
it does not require however, a franchise before one
can own the facilities needed to a public utility. The
right to operate a public utility may exist
independently and separately from the ownership of
the facilities thereof. One can own facilities without
operating them as a public utility, or conversely one
may operate a public utility without owning the
facilities. (Tatad et al. v Sec. Garcia and EDSA LRT
Corp Ltd., April 16, 1995.)
Q: What are the grounds that oppositors may raise
to the application for a CPC?
A:
1. The area has already a well-established operator
prior operator rule.(Mandbusco, Inc. vs.
Francisco, 32 SCRA 405.)
Note: The prior operator must first be given the
opportunity to extend its service in order to meet
public needs in the matter of transportation. (ibid.)
111
On the other hand, under the Third Operator
Rule, where two operators are more than serving
the public there is no reason to permit a third
operator to engage in competition with them.
The fact that it is only one trip and of little
consequence is not sufficient reason to grant the
application. (Yangco v. Esteban, G.R. No. 38586,
Aug. 18, 1933)
2. Where there are various applicants for a public
utility over the same territory, all conditions
being equal, priority in the filing of the
application for CPC becomes a factor prior
applicant rule.
3. Interpose an objection stating that the grant of
the application would result to a ruinous
competition. (Halili vs. Ice and Cold Storage
Industries, Inc., 77 Phil. 823.) One of the purposes
of PSA is to protect and conserve the
investments which have already been made for
that purpose by public service operators
Protection of Investment rule. (Batangas Trans.
Co. vs. Orlanes, 52 Phil. 455.)
Note: Mere possibility of reduction in the income of an
existing operator holding a public service permit does
not, of itself, establish that issuing a permit to another
to operate within the same territory will result in
ruinous competition. To prove the latter, it should be
shown that the oppositor will not obtain sufficient
profits to pay a dividend or reasonable interest upon
invested capital. (Halili vs. Ice and Cold Storage
Industries, Inc., supra.)
4. Attack the citizenship of the applicant (Sec. 11,
Art. XII of the 1987 Constitution prohibits the
granting of franchise or certificate for the
operation of public utility in favor of non-Filipino
citizens); or
5. The applicant does NOT have the necessary
financial capacity. (KMU Labor Center vs. Garcia,
supra.)
Q: Does the CPC confer upon the holder any
proprietary right or interest in the route covered
thereby?
A: No. (Luque v. Villegas, G.R. No. L-22545, November
28, 1969.) However, with respect to other persons
and other public utilities, a CPC as property, which
represents the right and authority to operate its
facilities for public service, cannot be taken or
interfered with without due process of law.
Appropriate actions may be maintained in courts by
the holder of the certificate against those who have
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
not been authorized to operate in competition with
the former and those who invade the rights which the
former has pursuant to the authority granted by the
Commission (A.L. Animen Transportation Co. v.
Golingco, G.R. No. 17151, April 6, 1922.)
Q: What are the exceptions to the application of
prior operator rule or protection of investment
rule?
A:
1. Where public interest would be better served by
the new operator. (Intestate Estate of Teofilo
Tiongson vs. Commission, 36 SCRA 241.)
2. Where the old operator has failed to make an
offer to meet the increase in traffic. (Manila
Yellow Taxicab Co., Inc. vs. Castelo, GR No. L-
131910, May 30, 1960.)
3. Where the certificate of public convenience
granted to the new operator is a maiden
certificate, which does not overlap with the
entire route of the old operator but only a short
portion thereof as a convergence point.
(Mandbusco, Co. vs. Francisco, supra.)
4. If the application of the rule will be conducive to
monopoly of the service, and contrary to the
principle that promotes healthy competition.
(Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc.,
5 SCRA 234.)
5. If the old operator unjustifiably abandoned his
service for two or three years by not registering
the necessary equipment forfeits his right to said
equipment and the service authorized to him.
(Farias vs. Estate of Florencio Buan, GR No.
12306-7, November 29, 1961.)
6. The service of the prior operator is inefficient
7. The prior operator denies that there is a need to
expand his service
8. The prior operator has abandoned his service
9. The prior operation is operating less units than
he was authorized.
10. The prior operator was given the opportunity to
expand his service and failed to do so.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Cite instances where a certificate of public
convenience is NOT necessary?
A: WAR-PIPA
1. Warehouses
2. Animal-drawn vehicles or banca powered by oar
or by sail; tug boats and lighters
3. Radio companies, except as to fixing of rates
4. Public market
5. Ice plants
7. Public utilities operated by the national
government or Political subdivision except as to
rates.
8. Airships except as to fixing rates
Q: Is the approval by the Commission of the sale,
encumbrance or lease of property a condition
precedent to the validity of a contract?
A: No.While in the old law the sale without the
approval of the Public Utility Commission was
declared null and void, under PSA, the new law, the
sale may not only be negotiated but completed
before said approval.
In other words, the approval by the Commission is
not a condition precedent to the validity of the
contract. The approval is only necessary to protect
public interest (Darang vs. Belizar, G.R. No. L-19487,
January 31, 1967.)
Q: Is Certificate of Public Convenience (CPC)
necessary before a carrier can be considered a
common carrier?
A: No. A person or entity is a common carrier even if
he did not secure CPC. Its liability as a common
carrier arises as soon as it acted as a common carrier,
without regard as to whether or not such carrier has
complied with the requirements of the applicable
regulatory statute and implementing regulations and
has been granted a certificate of public convenience
or other franchise. (De Guzman v CA. 168 SCRA 612
[1988].)
DILIGENCE REQUIRED
Q: What is the diligence required of common
carriers?
A: Extraordinary diligence. (Art. 1733, NCC.) The
nature of the business of common carriers and the
exigencies of public policy demand that they observe
extraordinary diligence. (Martin, Commentaries and
112
 TRANSPORTATION LAW
Jurisprudence on the Phil. Commercial Laws, 1989 Ed.,
pg. 3.)
Q: What is meant by extraordinary diligence?
A: It is that extreme measure of care and caution
which persons of unusual prudence and
circumspection use for securing and preserving their
own property or rights. The law requires common
carriers to render service with the greatest skill and
utmost foresight. (Loadmasters Services vs. Glodel
Brokerage, supra.)
Q: When does the duty to observe extraordinary
diligence by the common carrier commence and
cease in connection to the transfer of goods?
A: It lasts from the time the goods are unconditionally
placed in the possession of, and received by the
carrier for transportation until the same are
delivered, actually or constructively, by the carrier to
the consignee, or to the person who has a right to
receive them. (Art. 1736, NCC.)
Note: Thus, this duty remains in full force and effect even
when they are temporarily unloaded or stored in transit,
unless the shipper or owner had made use of the right or
stoppage in transit.(Art. 1737, NCC.)
However, this extraordinary liability 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 been reasonable opportunity thereafter to remove
them or otherwise dispose of them. (Art. 1738, NCC.)
Q: When does the duty to exercise extraordinary
diligence commence and cease with respect to
transport of passengers?
A: The duty of the common carrier commence from
the moment the person who purchases the ticket
from the carrier presents himself at the proper place
and in a proper manner to be transported.The
relation of carrier and passenger continues until the
passenger has been landed at the port of destination
and has left the vessel owner's dock or premises.
Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to leave
the carrier's premises. (Aboitiz Shipping Corp. v. CA,
G.R. No. 84458, Nov. 6, 1989)
Q: X, while driving his Toyota Altis, tried to cross the
railway tract of Philippine (xxx line 2 unread text
xxx) approached Blumentritt Avenida Ext., applied
113
its horn as a warning to all the vehicles that might
be crossing the railway tract, but there was really
nobody manning the crossing. X was listening to his
lpod touch, hence, he did not hear the sound of the
horn of the train and so his car was hit by the train.
As a result of the accident, X suffered some injuries
and his car was totally destroyed as a result of the
impact. Is PNR liable? (2012 Bar Question)
A: PNR is liable because Railroad companies owe to
the public a duty of exercising a reasonable degree of
care to avoid injury to person and property at railroad
crossings which means a flagman or a watchman
should have been posted to warn the public at all
times.
LIABILITIES OF COMMON CARRIER
Q: When is the common carrier presumed to be
negligent in the carriage of goods?
A: In all cases other than those mentioned in Nos. 1,
2, 3, 4, and 5 of Article 1734 of the NCC, if the goods
are lost, destroyed or deteriorated, common carriers
are presumed to have been at fault or to have acted
negligently.(Art. 1735, NCC.)
Q: When is the common carrier presumed to be
negligent in the transportation of passengers?
A: In case of death of or injuries to passengers,
common carriers are presumed to have been at fault
or to have acted negligently. (Art. 1756, NCC.)
Q: In the above instances, is the presumption of
negligence rebuttable?
A: Yes. Both articles 1735 and 1756 of the NCC
provides that such presumption may be refuted by
proving observance of extraordinary diligence as
prescribed by article 1733 of the NCC.
Q: May moral damages be recovered in breach of
contract of transportation?
A: GR: No. Moral damages are not recoverable in
breach of contract of transportation because such
contract cannot be considered included in the
analogous cases used in Article 2219 of the NCC.
This is likewise to consider that Art. 2176 of the NCC
expressly excludes the cases where there is a pre-
existing contractual relation between the parties.
(Versoza vs. Baytan, et al., 107 Phil. 1010.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: Moral damages may be recovered even in
case of breach of contract of transportation in
the following cases:
1. Where the mishap results in the death of the
passenger (M. Ruiz Highway Transit, Inc. vs.
CA, 11 SCRA 98.)
2. Where it is proved that the carrier was guilty
of fraud or bad faith, even if death does not
result. (Rex Taxicab Co. vs. Bautista, GR No.
L-15392, September 30, 1960.)
Note: Although the relation of passenger and
carrier is "contractual both in origin and nature"
nevertheless the act that breaks the contract
may be also a tort"when said act is done with
gross negligence or with bad faith. (Air France v
Carrascoso, G.R. No. L-21438, September 28,
1966.)
Q: What is the so-called boundary system?
A: Under this system the driver is engaged to drive
the owner/operators unit and pays the latter a fee
commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his
income. (Paguio Transport Corp. v. NLRC, G.R. No.
119500, August 28, 1998). The gasoline consumed by
the jeep is for the account of the driver (National
Labor Union v. Dinglasan, G.R. No. L-14183, Nov. 4,
1993)
Q: What kind of relationship exists between the
owner of the vehicle and the driver under a
"boundary system" arrangement?
A: The relationship between jeepney owners/
operators on one hand and jeepney drivers on the
other under the boundary system is that of employer-
employee and not of lessor-lessee. (Martinez v. NLRC,
G.R. No. 117495, May 29, 1997).
Q: Is the owner of the public vehicle operating under
the boundary system exempt from liability in a
case of injury to or death of passengers?
A: No. To exempt from liability the owner of a public
vehicle who operates it under the boundary system
on the ground that he is a mere lessor would be not
only to abet flagrant violations of the PSA, but also to
place the riding public at the mercy of reckless and
irresponsible drivers. Moreover, due care in the
selection of employees is called for by Article 2180 of
the Civil Code. Failing on this, the owner of the
vehicle, who is likewise the employer, shall not be
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
exempt from liability. (Hernandez vs. Dolor, 435 SCRA
668, July 30, 2004.)
Q: What is the so-called kabit system?
A: The kabit system is an arrangement whereby a
person who has been granted a CPC allows other
persons who own motor vehicles to operate them
under his license, sometimes for a fee or percentage
of the earnings (Lim v CA, G.R. No. 125817. January
16, 2002).
Note: Although not outrightly penalized as a criminal
offense, the kabit system is invariably recognized as being
contrary to public policy and therefore, void and inexistent
under Art. 1409 of the New Civil Code. It is a fundamental
principle that the court will not aid either party to enforce
an illegal contract, but will leave them both where it finds
them. (Lita Enterprises, Inc. v. IAC, G.R. No. 64693, April 27,
1984.)
Q: May the registered owner of the vehicle be
allowed to prove that there is already a transfer of
ownership to another person under the kabit
system?
A: No. One of the primary factors considered in the
granting of a CPC for the business of public
transportation is the financial capacity of the holder
of the license, so that liabilities arising from accidents
may be duly compensated. The kabit system renders
illusory such purpose and, worse, may still be availed
of by the grantee to escape civil liability caused by a
negligent use of a vehicle owned by another and
operated under his license.
If a registered owner is allowed to escape liability by
proving who the supposed owner of the vehicle is, it
would be easy for him to transfer the subject vehicle
to another who possesses no property with which to
respond financially for the damage done. (Lim v. CA,
supra.)
Q: Can the grantee of CPC engaged in a kabit
system be held liable for damages arising from the
crime of reckless imprudence resulting to the death
and injuries to third persons, to which the driver
was convicted?
A: Yes. The driver, the operator, and the real owner
of the vehicle are jointly and severally liable for
damages. However, the registered owner or operator
has the right to be indemnified by the real or actual
of the amount that he may be required to pay as
damage for the injury caused. Recovery by the
registered owner or operator may be made in any
formeither by a cross-claim, third party complaint,
114
 TRANSPORTATION LAW
or an independent action, and the result is the same.
(Perez, supra, pg. 310-311, citing Jereos vs. CA, 117
SCRA 395l Zamboanga Trans. Co. vs. CA, 30 SCRA
718.)
Q: X owns a passenger jeepney covered by
Certificate of Public Convenience. He allowed Y to
use its Certificate of Convenience for a
consideration. Y therefore was operating the
passenger jeepney under the same Certificate of
Public Convenience (Kabit System) under the name
of X. The passenger jeepney met an accident. Who
will be liable? (2012 Bar)
A: X and Y will be jointly and severally liable
Q: X owns a fleet of taxicabs. He operates it through
what is known as boundary system. Y drives one of
such taxicabs and pays X a fixed amount of Php1
,000 daily under the boundary system. This means
that anything above Php1 ,000 would be the
earnings of Y. Y, driving recklessly, hit an old lady
crossing the street. Which statement is most
accurate? (2012 Bar Question)
a. X as the owner is exempt from liability because
he was not the one driving.
b. X as the owner is exempt from liability because
precisely the arrangement is one under the
"boundary system".
c. X will not be exempt from liability because he
remains to be the registered owner and the
boundary system will not allow the
circumvention of the law to avoid liability.
d. Y is the only one liable because he drove
recklessly.
A: C. X will not be exempt from liability because he
remains to be the registered owner and the boundary
system will not allow the circumvention of the law to
avoid liability
VIGILANCE OVER GOODS
EXEMPTING CAUSES
Q: What is the presumption on the loss, destruction,
or deterioration of goods?
A: GR: The common carrier is presumed to have been
at fault or to have acted negligently when the
goods transported are lost, destroyed or
deteriorated. (Art. 1735, NCC.)
XPN: When the same is due to any of the
2
following causes only: F A C O
1. Fortuitous events (Flood, storm, earthquake,
lightning or other natural disaster or
115
calamity). Provided, the following conditions
are present:
a. Natural disaster was the proximate and
only cause;
b. Carrier exercised due diligence to prevent
or minimize loss before, during and after
the occurrence of the natural disaster;
and
c. The common carrier has not negligently
incurred delay in transporting the goods.
(Art. 1739-1740, NCC)
d. The common carrier exercised due
diligence to prevent or minimize the loss
before, during or after its occurence
2. Act of the public enemy in war, whether
international or civil, provided:
a. Act was the proximate and only cause;
and
b. Carrier exercised due diligence to prevent
or minimize loss before, during and after
the act (Art. 1739-1740, NCC)
3. Act or omission of the shipper or owner of the
goods, provided:
a. If proximate and only cause exempting
b. If contributory negligence mitigating
4. The Character of the goods or defects in the
packing or in the containers; provided, carrier
exercised due diligence to forestall or prevent
loss (Art 1742).
Note: If the fact of improper packing is known to
the carrier or its servants, or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not relieved
from responsibility for loss or injury resulting
therefrom. (Southern Lines Inc., v. CA, GR No. L-
16629, January 31, 1962.)
5. Order or act of competent authority;
provided, the authority is with power to issue
the order (Art. 1743). If the officer acts
without legal process, the common carrier
will be held liable. (Ganzon vs. CA, GR No. L-
48757, May 30, 1988).
Note: In all cases other than those enumerated above,
there is presumption of negligence even if there is an
agreement limiting the liability of the common carrier in
the vigilance over the goods.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

REQUIREMENT OF ABSENCE OF NEGLIGENCE account the surrounding circumstances of the

case. Thus, the common carrier will still be liable.
Q: What are the requisites of a fortuitous event? (Arada v. CA, G.R. No. 98243, July 1, 1992)

A: FEU - I Q: Is fire considered a natural disaster?

1. The debtor must be Free from any
participation in or aggravation of the injury A: No. This must be so as it arises almost invariably
to the creditor. from some act of man or by human means. It does
2. The Event must be such as to render it not fall within the category of an act of God UNLESS
impossible for the debtor to fulfill his caused by lightning or by other natural disaster or
obligation in a normal manner. calamity. It may even be caused by the actual fault or
3. The event must be Unforeseen or privity of the carrier (Eastern Shipping Lines v. IAC, GR
unavoidable. No. L-69044, May 29, 1987).
4. The cause of the breach of obligation must
be Independent of the will of the debtor. Note: In case that the goods have been already deposited
(Real vs. Belo, GR No. 146224, January 26, in the warehouse of Bureau of Customs then the goods was
2007.) destroyed by fire, the carrier is not anymore liable
(Servando vs. Philippine Steam Navigation, GR No. L-36481-
2, October 23, 1982).
Q: Are mechanical defects considered fortuitous
events? Give illustrations.
Q: Is a common carrier liable for the acts of
strangers or criminals?
A: No. Mechanical defects in the carrier are NOT
considered a caso fortuito that exempts the carrier
A:
from responsibility. (Sweet Lines, Inc. v. CA, GR No. L-
GR: A common carrier is liable even for acts of
46340, Apr. 29, 1983). Other SC decisions on the
strangers like thieves or robbers.
matter are:
XPN: Where such thieves or robbers acted "with
1. Tire blowout of a jeep is not a fortuitous event
grave or irresistible threat, violence or force." The
where there exists a specific act of negligence by
common carrier is not liable for the value of the
the carrier consisting of the fact that the jeepney
undelivered merchandise which was lost because of
was overloaded and speeding at the time of the
an event that is beyond his control. (De Guzman v.
incident. (Juntilla v. Fontanar, GR No. L-45637, May
CA, supra.)
31, 1985)
ABSENCE OF DELAY
2. Defective brakes cannot be considered fortuitous in
character. (Vergara v. CA, G.R. No. 77679,
Q: What are the rules regarding the time of delivery
September 30, 1987)
of goods and delay?
Q: Is the occurrence of a typhoon a fortuitous
A:
event?
1. If there is an agreement as to time of delivery
delivery must be within the time stipulated in the
A: GR: Yes, if all the elements of a natural disaster or
contract or bill of lading.
calamity concur and there was no contributory
2. If there is no agreement delivery must be
negligence or delay. This holds true especially if the
within a reasonable time. (Saludo, Jr. v. CA, G.R.
vessel was seaworthy at the time it undertook that
No. 95536, March 23, 1992)
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would permit
Q: If there is delay in the delivery of goods, what is
safe travel of the vessel to its destination.(Philippine
the liability of the carrier?
American General Insurance Co., Inc. v. MGG Marine
Services, Inc., G.R. No. 135645, March 8, 2002)
A: The carrier shall be liable for damages immediately
and proximately resulting from such neglect of duty.
XPN: If a vessel sank due to a typhoon, and there
(ibid.; Art. 1170, NCC.)
was failure to ascertain the direction of the storm
and the weather condition of the path they would
be traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into

UNIVERSITY OF SANTO TOMAS 116

2013 GOLDEN NOTES
 TRANSPORTATION LAW
Q: What is the effect to the limited liability of an
unjust delay in the transportation or goods or a
deviation from stipulated or usual route?
A: If the common carrier, without just cause, delays
the transportation of the goods or changes the
stipulated or usual route, the contract limiting the
common carriers liability cannot be availed of in case
of the loss, destruction, or deterioration of the goods;
(Art. 1747, NCC.)
Q: Is a stipulation limiting the common carriers
liability for delay on account of riots valid?
A: Yes. An agreement limiting the common carriers
liability for delay on account of strikes or riots is valid.
(Art. 1748, NCC.)
DUE DILIGENCE TO PREVENT LOSS
Q: What is the duty of the common carrier before,
during and after the natural disaster or acts of a
public enemy as contemplated under Article 1734 of
the NCC?
A: The common carrier must exercise due diligence to
prevent or minimize loss before, during and after the
occurrence of flood, storm or other natural disaster
or an act of a public enemy in order that the common
carrier may be exempted from liability for the loss,
destruction or deterioration of the goods. (Art. 1739,
NCC.)
Note: This exemption from liability also requires that the
common carrier must prove that the natural disaster or the
act of the public enemy is the proximate and only cause of
the loss. (ibid.). Further, if the common carrier negligently
incurs delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility. (Art. 1740,
NCC.)
Q: If the loss, destruction, or deterioration of the
goods was caused by the character of the goods, or
the faulty nature of the packing or the containers,
what is duty of the common carrier?
A: The common carrier must exercise due diligence to
forestall or lessen the loss.
CONTRIBUTORY NEGLIGENCE
Q: What is contributory negligence?
A: Contributory negligence is the failure of a person
who has been exposed to injury by the fault or
negligence of another, to use such degree of care for
his safety and protection an ordinarily prudent man
117
would use under the circumstances. (Martin, supra,
pg. 14, citing Rakes vs. Atlantic Gulf Co., 7 Phil. 359.)
Q: What is the rule if there is contributory
negligence on the part of the shipper?
A: 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 for
damages, which however, shall be equitably reduced.
(Art. 1741, NCC.)
DURATION OF LIABILITY
DELIVERY OF GOODS TO A COMMON CARRIER
Q: When does the extraordinary responsibility of the
common carrier begin and when does it end?
A: It lasts from the time the goods are unconditionally
placed in the possession of, and received by the
carrier for transportation until the same are
delivered, actually or constructively, by the carrier to
the consignee or to the person who has a right to
receive them. (Art. 1736, NCC.)
Q: What does the law mean with unconditionally
placed in the possession of, and received by the
carrier for transportation?
A: It is the delivery of the goods to the carrier for
immediate transportation, that is, as soon as the
delivery is complete so as to place on the carrier the
exclusive duty of seeing after their safety (Perez,
supra, pg. 38, citing Charles J. Webb & Sons vs.
Central R. Co. of NJ, 36 F. 2d 702.)
Note: When the goods are unconditionally placed in the
possession and control of the common carrier, and upon
their receipt by the carrier for transportation, the contract
of carriage was deemed perfected. The fact that part of the
shipment had not been loaded on board the lighter did not
impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit
still unloaded (Ganzon vs. CA, supra).
Q: Is the execution of a receipt or bill of lading
required to commence the responsibility to observe
extraordinary diligence?
A: No. The requirement to observe extraordinary
diligence begins with the actual delivery of the goods
for transportation, and not merely with the formal
execution of a receipt or bill of lading; the issuance of
a bill of lading is not necessary to complete delivery
and acceptance by the carrier. (Compania Maritima v.
Insurance Co. of North America, G.R. No. L-18965,
October 30, 1964)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
ACTUAL OR CONSTRUCTIVE DELIVERY
Q: To whom should delivery be made?
A: It must be delivered, actually or constructively, to
the consignee or to the person who has a right to
receive them.(Art.1736, NCC.)
Note: Delivery of the cargo to the customs authorities is not
delivery to the consignee, or to the person who has a right
to receive them. (Lu Do & Lu Ym Corp. v. Binamira, GR No.
L-9840, April 22, 1957.)
Q: What is constructive delivery?
A: There is constructive delivery when delivery is
effected not by actually transferring the possession of
thing to the vendee (in this case, the other party,
either the carrier or the consignee) but by legal
formalities or by symbolic tradition. (Pineda, Sales
and Other Special Contracts, pg. 56.)
Q: Who is liable for the misdelivery by a carrier who
was chosen by the buyer?
A: Misdelivery of the goods is attributable to the
carrier and not to the seller. And, since the carrier
was chosen and authorized to make the delivery by
the buyer itself, the seller cannot be held responsible
for such misdelivery. (Smith, Bell & Co. [Phils.] vs.
Gimenez, 8 SCRA 407 [1963].)
TEMPORARY UNLOADING OR STORAGE
Q: What is the right of stoppage in transitu?
A: It is the right exercised by the seller by stopping
the delivery of the goods to a certain buyer or
consignee (because of insolvency) when such goods
are already in transit. (Art. 1530, NCC.)
Q: How is this right exercised?
A: The seller may exercise this right either by
obtaining actual possession of the goods or by giving
notice of his claim to the carrier or other bailee in
whose possession the goods are. Such notice may be
given either to the person in actual possession of the
goods or to his principal. In the latter case, the notice,
to be effectual, must be given at such time and under
such circumstances that the principal, by the exercise
of reasonable diligence, may prevent a delivery to the
buyer. (Art. 1532, NCC.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the rule as to unloading, storage and
stoppage in transitu?
A: GR: The common carriers duty to observe
extraordinary diligence in the vigilance over the
goods remains in full force and effect even when they
are temporarily unloaded or stored in transit.
XPN: When the shipper or owner has made use of
the right of stoppage in transitu.(Art. 1737, NCC.)
Q: What is the diligence required in exercising the
right of stoppage in transitu?
A: Ordinary diligence because of the following:
a. It is holding the goods in the capacity of an
ordinary bailee or warehouseman and not as a
carrier
b. There is a change of contract from a contract of
carriage to a contract of deposit. (Art. 1737,
NCC.)
Q: What further obligation is required of the
common carrier in case of stoppage in transitu?
A: When notice of stoppage in transitu is given by the
seller to the carrier, he must redeliver the goods to,
or according to the directions of, the seller. The
expenses of such delivery must be borne by the
seller. (Art. 1532, NCC.)
Note: If the seller instructs to deliver it somewhere else, a
new contract of carriage is formed and the carrier must be
paid accordingly.
STIPULATION FOR LIMITATION OF LIABILITY
Q: What are the valid stipulations that a common
carrier of goods may indicate in a contract in order
to escape liability?
A:
1. A stipulation limiting the liability of the common
carrier for the loss, destruction, or deterioration
of the goods to a degree less that extraordinary
diligence, provided it be:
a. In writing, signed by the shipper or owner,
b. Supported by a valuable consideration other
than the service rendered by the common
carrier, and
c. Reasonable, just and not contrary to public
policy.
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 TRANSPORTATION LAW
2. An agreement limiting the common carrier's
liability for delay on account of strikes or riots.
(Art. 1748, NCC.)
3. 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. (Art. 1749, NCC.)
4. A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction,
or deterioration of the goods (Art. 1750, NCC.)
Q: Notwithstanding these valid stipulations, can
common carriers be held liable for the loss, or
destruction or deterioration of the goods?
A: Yes. If the common carrier, without just cause,
delays the transportation of the goods or changes the
stipulated or usual route, the contract limiting the
common carrier's liability cannot be availed of in case
of the loss, destruction, or deterioration of the
goods.(Art. 1747, NCC.)
Q: May a stipulation limiting the common carriers
liability be annulled by the shipper or owner?
A: Yes, if the common carrier refused to carry the
goods unless the shipper or owner agreed to such
stipulation. (Art. 1746, NCC.)However, under this
provision, annulment of the agreement limiting the
carriers liability is still necessary (Martin, supra., pg.
18).
Q: What is the effect of the agreement on limiting
the liability to the presumption of negligence of the
carrier?
A: Even if there is an agreement limiting the liability
of the common carrier in the vigilance over the
goods, the common carrier is still disputably
presumed to have been negligent in case of its loss,
destruction or deterioration.(Art. 1752, NCC.)
VOID STIPULATIONS
Q: What are the void stipulations in a contract of
carriage of goods?
2
A:CR UELED
1. That the common carrier need not observe any
diligence in the Custody of the goods
2. That the goods are transported at the Risk of the
owner or shipper.
119
3. That the common carriers liability for acts
committed by thieves, or of Robbers who do not
act with grave or irresistible threat, violence or
force, is dispensed with or diminished
4. Any similar stipulation that is Unreasonable,
unjust and contrary to public policy.
5. That the common carrier shall Exercise a degree
of diligence less than that of a good father of a
family, or a man of ordinary prudence in the
vigilance over the movables transported
6. That the common carrier will not be liable for any
Loss, destruction, or deterioration of the goods
7. That the common carrier shall not be responsible
for the acts or omissions of his or its Employees.
8. That the common carrier is not responsible for
the loss, destruction or deterioration of goods on
account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used
in the contract of carriage. (Art. 1745, NCC.)
LIMITATION OF LIABILITY TO FIXED AMOUNT
Q: What are the requirements in order that a
stipulation limiting the liability of common carriers
in the carriage of goods be valid?
A: A contract fixing the sum that may be recovered
for the loss, destruction, and deterioration of goods is
binding provided that it is:
a. just and reasonable under the circumstances and
b. it has been fairly and freely agreed upon. (Art.
1750, NCC.)
LIMITATION OF LIABILITY IN ABSENCE OF
DECLARATION OF GREATER VALUE
Q: What is the extent of the liability of the common
carrier in case there is a stipulation fixingspecified
amount?
A: GR: Theliability of the common carrier shall not
exceed thestipulation in a contract of carriage even if
the loss or damage results from the carrier's
negligence (Eastern and Australian Shipping Co. v
Great American Insurance Co., GR No. L-37604,
October 23, 1981)
XPN: Where the shipper or owner of the goods
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
declares a greater value and pays corresponding
freight. (Art. 1749, NCC.).
Q: What are the requirements in order that a
common carriers extent of liability be increased?
A: The common carriers liability may be extended
beyond the specified amount mentioned if;
1. the shipper or owner of the goods declares a
greater value and
2. pays corresponding freight. (Art. 1749, NCC).
LIABILITY FOR BAGGAGE OF PASSENGERS
CHECKED-IN BAGGAGE
Q: What rule will apply on checked-in baggage of
passengers?
A: The provisions of Articles 1733 to 1753 of the NCC
shall apply (Art. 1754, NCC)
BAGGAGE IN POSSESSION OF PASSENGERS
Q: What rule will apply when the baggage is in the
personal custody of the passengers of their
employees?
A: The rules in articles 1998 and 200 to 2003
concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable. (ibid.):
1. The common carrier shall be responsible for
shippers baggage as depositaries, provided that
notice was given to them, or to their employees,
of the effects brought by the guests and that, on
the part of the shipper, they take the precautions
which said common carriers or their substitutes
advised relative to the care and vigilance of their
effects. (Art. 1998, NCC)
2. The responsibility shall include the loss of, or
injury to the personal property of the shipper
caused by the employees of the common carrier
as well as strangers; but not that which may
proceed from any force majeure. (Art. 2000,
NCC)
3. The act of a thief or robber, who has entered the
carrier is not deemed force majeure, unless it is
done with the use of arms or through an
irresistible force. (Art. 2001, NCC)
4. The common carrier is not liable for
compensation if the loss is due to the acts of the
shipper, his family, or servants, or if the loss
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
arises from the character of the things brought
into the carrier. (Art. 2002, NCC)
5. The common carrier cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the passenger. Any stipulation between the
common carrier and the shipper whereby the
responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished
shall be void. (Art. 2003, NCC)
Q: Can a common carrier be held liable for the loss
of a valuable item stolen by other passenger when
the victim told the driver that he has valuable item?
(1997 Bar Question)
A: Yes. Ordinarily, the common carrier is not liable for
acts of other passengers. But the common carrier
cannot relieve itself from liability if the common
carriers employees could have prevented the act or
omission by exercising due diligence. In this case, the
passenger asked the driver to keep an eye on the bag
which was placed beside the drivers seat. If the
driver exercised due diligence, he could have
prevented the loss of the bag.
SAFETY OF PASSENGERS
Q: What is the extent of the extraordinary diligence
of common carrier to passengers?
A: A common carrier is bound to carry the passengers
safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons,
with a due regard for all the circumstances.(Art 1755,
NCC.)
Q: Who are not considered passengers?
A: WAMU
1. One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting,
is injured by the carrier
2. Invited guests and Accommodation passengers
3. 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
4. One who remains on a carrier for an
Unreasonable length of time after he has been
afforded every safe opportunity to alight
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 TRANSPORTATION LAW
Note: The carrier is thus NOT obliged to exercise
extraordinary diligence but only ordinary diligence in these
instances.
VOID STIPULATIONS
Q: Are stipulations limiting the liability of common
carrier in case of injury or death valid?
A: GR: The responsibility of a common carrier for the
safety of passengers cannot be dispensed with or
lessened by stipulation, by posting of notices, by
statements on tickets, or otherwise. (Art. 1757, NCC.)
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carriers liability for
negligence is valid. (Art. 1758, NCC.)
Note: The passenger must be carried gratuitously. If it is
only a reduction of fare, then any limitation of the
common carriers liability is not justified (ibid.).
XPN to the XPN: Notwithstanding the exception,
common carriers will be liable nevertheless forwillful
acts or gross negligence. (ibid.)
Q: What is assumption of risk on the part of
passengers?
A: Passengers must take such risks incident to the
mode of travel. The passenger must observe the
diligence of a good father of a family to avoid injury
to himself. (Art. 1761, NCC.)
Note: Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to perform
certain duties to the public as the law imposes, and holds
itself liable for any breach thereof. (Pilapil v. CA, G.R. No.
52159, Dec. 22, 1989)
DURATION OF LIABILITY
Q: When does the duty of the common carrier to
observe extraordinary diligence over passengers
exist?
A: The duty exists from the moment the person offers
to be transported places himself in the care and
control of the common carrier who accepts him as
such passenger.The duty continues until the
passenger has, after reaching his destination, safely
alighted from the carriers conveyance or has had a
reasonable opportunity to leave the carriers
premises and to look after his baggage and prepare
for his departure. (La Mallorca vs. CA, GR No. L-
20761, July 27, 1966; Aboitiz Shipping, supra.)
121
WAITING FOR CARRIER OR BOARDING OF CARRIER
Q: What is the duty of the common carriers in
boarding of passengers?
A: It is the duty of common carriers of passengers,
including common carriers by railroad train, streetcar,
or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an
opportunity to board and enter, and they are liable
for injuries suffered by boarding passengers resulting
from the sudden starting up or jerking of their
conveyances while they are doing so (Dangwa vs.
CA,G.R. No. 95582, October 7, 1991.).
Q: When a Public Utility Vehicle is not in motion, is
there a necessity for a person who wants to ride the
same to signal his intention to board?
A: No. When the bus is not in motion there is no
necessity for a person who wants to ride the same to
signal his intention to board. A public utility bus, once
it stops, is in effect making a continuous offer to bus
riders. Hence, it becomes the duty of the driver and
the conductor, every time the bus stops, to do no act
that would have the effect of increasing the peril to a
passenger while he was attempting to board the
same. The premature acceleration of the bus in this
case was a breach of such duty. (ibid.)
Q: May a common carrier be held liable to a
passenger who died while trying to board their
vehicle?
A: Yes. It is the duty of common carriers of
passengers to afford passengers an opportunity to
board and enter, and they are liable for injuries
suffered by boarding passengers resulting from the
sudden starting up or jerking of their conveyances
while they are doing so. The victim, by stepping and
standing on the platform of the bus, is already
considered a passenger and is entitled all the rights
and protection pertaining to such a contractual
relation. (ibid.)
Q: Is a person mere stepping on the platform of a
bus already considered a passenger?
A: Yes. The person, by stepping and standing on the
platform of the bus, is already considered a
passenger and is entitled all the rights and protection
pertaining to such a contractual relation. Hence, it
has been held that the duty which the carrier owes to
its patrons extends to persons boarding cars as well
as to those alighting therefrom (Dangwa vs. CA,G.R.
No. 95582, October 7, 1991).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: If the bus started moving slowly when the
passenger is boarding the same, is the passenger
negligent?
A: No. Further, even assuming that the bus had "just
started" and "was still in slow motion" at the point
where the victim had boarded and was on its
platform, the victim cannot be considered negligent
under the said circumstances.. (Dangwa vs. CA, G.R.
No. 95582, October 7, 1991)
Q: P, a sales girl in a flower shop at the Ayala Station
of the Metro Rail Transit (MRT) bought two tokens
or tickets, one for her ride to work and another for
her ride home. She got to her flower shop where she
usually worked from 8 a.m. to 5 p.m. At about 3
p.m., while P was attending to her duties at the
flower shop, two crews of the MRT got into a fight
near the flower shop, causing injuries to P in the
process. Can P sue the MRT for contractual breach
as she was within the MRT premises where she
would shortly take her ride home? (2011 Bar
Question)(
A: No, since P had no intention to board an MRT train
coach when the incident occurred.
ARRIVAL AT DESTINATION
Q: To what extent is the common carrier liable for
death or injury to passengers upon arrival at
destination?
A: Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to leave
the carrier's premises. All persons who remain on the
premises 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 reasonable time to see after his
baggage and prepare for his departure. (La Mallorca v
CA,G.R. No. L-21486, May 14, 1966)
Q: Is the victims presence in a vessel after 1 hour
from his disembarkation enough in order to absolve
the carrier from liability in his death?
A: No. Carrier-passenger relationship continues until
the passenger has been landed at the port of
destination and has left the vessel-owners premises
(Aboitiz Shipping Corporation vs. CA, GR No. 84458,
November 6, 1989.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Robert De Alban and his family rode a bus owned
by Joeben Bus Company. Upon reaching their
desired destination, they alighted from the bus but
Robert returned to get their baggage. However, his
youngest daughter followed him without his
knowledge. When he stepped into the bus again, the
bus accelerated that resulting to Roberts daughter
death. The bus ran over her. Is the bus company
liable?
A: Yes. The relation of carrier and passenger does not
cease at the moment the passenger alights from the
carriers vehicle at a place selected by the carrier at
the point of destination, but continues until the
passenger has had a reasonable time or reasonable
opportunity to leave the current premises (La
Mallorca vs. CA,GR L-20761, 27 July 1966).
LIABILITY FOR ACTS OF OTHERS
EMPLOYEES
Q: Are common carriers liable for acts of its
employees?
A: Common carriers are liable for the death of or
injuries to passengers through the negligence or
willful acts of the formers 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 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. (Art. 1759, NCC.)
Note: The liability of the common carrier to the personal
violence of its employees or agents upon its passengers
extends only to those acts which the carrier could foresee
or avoid through the exercise of the diligence required.
Q: Can this liability as regards acts of employees be
limited by stipulation?
A: No. The common carriers 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. (Art. 1760,
NCC.)
Q: What is the rationale behind this principle?
A: The basis of the carrier's liability for assaults on
passengers committed by its drivers rests on the
principle that it is the carrier's implied dutyto
transport the passenger safely. As between the
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 TRANSPORTATION LAW
carrier and the passenger, the former must bear the
risk of wrongful acts or negligence of the carrier's
employees against passengers, since it, and not the
passengers, has power to select and remove them.
(Maranan v. Perez, GR No. L-22272, June 26, 1967.)
Q: The AAA Bus Company picks up passengers along
EDSA. X, the conductor, while on board the bus,
drew his gun and randomly shot the passengers
inside. As a result, Y, a passenger, was shot and died
instantly. Is AAA Bus Company liable? (2012 Bar
Question)
A: Yes. The bus company is liable because common
carriers are liable for the negligence or willful act of
its employees even though they acted beyond the
scope of their responsibility.
OTHER PASSENGERS AND STRANGERS
Q: What is the extent of liability of common carriers
for acts of co-passengers or strangers?
A: 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 carriers employees through the exercise of the
diligence of a good father of a family would have
prevented or stopped the act or omission. (Art. 1763,
NCC.)
Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, the bus driver, the
conductor, and the passengers disembarked for
lunch. P decided, however, to remain in the bus, the
door of which was not locked. At this point, V, a
vendor, sneaked into the bus and offered P some
refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and
contusions. Does he have cause to sue Sentinel
Liner? (2011 Bar Question)
A: Yes, since the carrier's crew did nothing to protect
a passenger who remained in the bus during the stop-
over.
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied her
baggage to be inspected invoking her right to
privacy. Should the jeepney operator be held liable
for damages?
A: No. The operator is not liable for damages. In
overland transportation, the common carrier is not
bound nor empowered to make an examination on
123
the contents of packages or bags, particularly those
handcarried by passengers. (Nocum v. Laguna
Tayabas Bus Company, G.R. No. L-23733, October 31,
1969.)
Q: In the question above, if it were an airline
company involved, would your answer be the same?
(1992 Bar Question)
A: No. The common carrier should be made liable. In
case of air carriers, it is unlawful to carry flammable
materials in passenger aircrafts, and airline
companies may open and investigate suspicious
packages and cargoes pursuant to R.A. 6235.
Q: A passenger was injured because a bystander
outside the bus hurled a stone. Is the bus company
liable? (1994 Bar Question)
A: No. There is no showing that any such incident
previously happened so as to impose an obligation on
the part of the personnel of the bus company to warn
the passengers and to take the necessary precaution.
Such hurling of a stone constitutes fortuitous event in
this case. The bus company is not an insurer of the
absolute safety of its passengers (Pilapil v. CA, G.R.
No. 52159, Dec. 22, 1989).
Q: May the registered owner of the vehicle be held
liable for damages suffered by a third person in the
course of the operation of the vehicle?
A: Yes. The registered owner of a public service
vehicle is responsible for damages that may arise
from consequences incident to its operation or that
may be caused to any of the passengers therein
(Gelisan v. Alday, G.R. No. L-30212, Sept 30, 1987).
Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious
acts of the driver is primary, direct, and joint and
several or solidary with the driver. (Philtranco Service
Enterprises, Inc. v. CA, G.R. No. 120553)June
EXTENT OF LIABILITY FOR DAMAGES
Q: What are the kinds of damages that may be
recovered in case of death of a passenger?
A: DEMEx-AI
1. An indemnity for the death of the victim
2. An indemnity for loss of earning capacity of the
deceased
3. Moral damages
4. Exemplary damages
5. Attorney's fees and expenses of litigation
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

6. Interest in proper cases. (Brias v. People,G.R.

No. L-30309, Nov. 25, 1983) Q: What are the defenses available in culpa
7. Hospital and funeral expenses contractual?

Note: Carrier is not liable for exemplary damages where A: FEC

there is no proof that it acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
Q: How much is the jurisprudential indemnity of a
common carrier in case of death of a passenger?
A: In case of death of a passenger, the Common
Carrier is liable to pay 50,000 pesos as indemnity for
the life of a passenger. (Victory Liner v Gammad, G.R.
No. 159636, November 25, 2004)
1. Exercise of extraordinary due diligence
2. Fortuitous event
3. Contributory negligence of passengers it does
not bar recovery of damages for death or injury if
the proximate cause is the negligence of the
common carrier but the amount of damages shall
be equitably reduced. (Art. 1762)
Q: Should the diligence of the passenger be
considered in determining liability in case of injury?

Q: What is the formula for computing the indemnity
for lost earnings in case of death of a victim?
A: The formula for the computation of unearned
income is:
A: Yes. The passenger must observe the diligence of a
good father of a family or ordinary diligence to avoid
injury to himself (Art. 1761, NCC.). This means that if
the proximate cause of the passengers injury is his
negligence, the common carrier is not liable.

1. Net Earning Capacity = Life Expectancy x (Gross Q: What are the options available to recover
annual income - Reasonable and necessary living damages in case of death or injuries to persons,
expenses). which resulted from a collision?

2. Life expectancy is determined in accordance with A:

the formula: 2 /3 x (80 age of deceased at the time BASIS OF DEFENDANT OF THE
of death). (Heirs of Ochoa v VS.G & S Transport CIVIL CASE
Corporation, G.R. No. 170071, March 09, 2011 ) LIABILITY
(Damages)
Note: When there is no showing that the living expenses
1. Culpa Contract of Filed against the
constituted the smaller percentage of the gross income, the
Court fixes the living expenses at half of the gross income. contractual carriage common carrier
wherein he is a
Q: What is the liability with regard to moral passenger. (Art. 1733,
damages? 1755-1764, NCC.)
2. Culpa Quasi- May be filed by third
A: GR: Moral damages are not recoverable for breach aquiliana delict persons or the
of contract of carriage in view of Art. 2219-20 of the passenger against the
Civil Code. drivers (may also be the
owners) of both
XPN: vehicles and the owners
1. Where the mishap results in the death of the thereof.
passenger
2. Where it is proved that the common carrier If the owner is an
was guilty of fraud or bad faith, even if death employer of the driver,
does not result. still the former has a
primary liability for an
Q: How much is are the heirs of a deceased action brought on the
passenger entitled to recover by way of moral ground of quasi delict
damages? under Art. 2180, NCC.
(Carpio vs. Doroja, GR
A: The current jurisprudential award for the loss of No. 84516, December 5,
life of a passenger is 100,0000 pesos by way of moral 1989.)
damages (Victory Liner v Gammad, Ibid, Heirs of 3. Culpa Crime May be filed by the
Ochoa v VS.G & S Transport Corporation, Ibid) criminal third persons or the

UNIVERSITY OF SANTO TOMAS 124

2013 GOLDEN NOTES
 TRANSPORTATION LAW

passengers against the specific responsibilities and assume stipulated

driver (may also be the obligations; and
owner) at fault if his act 3. It is a symbol of the goods.
amounts to a crime.
THREE-FOLD CHARACTER OF A BILL OF LADING
If the owner is an
employer of the driver, Q: What is the three-fold character of a bill of
then the former has a lading?
subsidiary liability (Art.
103, Revised Penal Code A: It is a receipt for the goods shipped and a contract
[RPC].) for an action to transport and deliver the same as therein
brought on the ground stipulated.
of civil liability arising
from crime under Art. 1. As a receipt, it recites the date and place of
100 of the RPC. (Carpio shipment, describes the goods as to quantity,
vs. Doroja, supra.) weight, dimensions, identification marks and
condition, quality, and value.
Q: What are the distinctions between an action to
enforce liability of the employer of the negligent 2. As a contract, it names the contracting parties,
driver under Art. 103 of the RPC, and an action which include the consignee, fixes the route,
based on quasi-delict? destination, and freight rate or charges, and
stipulates the rights and obligations assumed by
A: the parties. (Phoenix Assurance Co., Ltd. v. United
ART. 103, RPC ART. 2180, NCC (QUASI- States Lines, G.R. No. L-24033, Feb. 22, 1968)
DELICT)
Employer is only Liability is primary and 3. As a documentof title it regulates the relations
subsidiarily liable. direct. between a carrier and a holder of the same.
There must be a Action may proceed
judgment of conviction independently from the Note: In the absence of a bill of lading, their respective
claims may be determined by legal proofs which each of
against the negligent criminal action.
the contracting parties may present in conformity with law.
driver otherwise the
action against the
Q: What are the two types of bill of lading?
employer would be
premature.
A:
The defense of due The defense of due
1. Negotiable If issued to the bearer or to the
diligence in selection and diligence in selection
order of any person named in such bill.
supervision of employees and supervision of
2. Non-negotiable If issued to a specific person
cannot be invoked. employees may be
named in such bill.
invoked.

BILL OF LADING Q: X is a trader of school supplies in Calapan,

Q: What is a bill of lading?
A: It is a written acknowledgement of receipt of
goods and agreement to transport them to a specific
place and to a named person or to his order.
Q: What are the three functions of Bill of Lading?
A: REC
Oriental Mindoro. To bring the school supplies to
Calapan, it has to be transported by a vessel.
Because there were so many passengers, the two (2)
boxes of school supplies were loaded but the
shipping company was not able to issue the Bill of
Lading. So, on board, the Ship Captain issued instead
a "shipping receipt" to X indicating the two (2) boxes
of school supplies being part of the cargo of the
vessel. Which phrase therefore, is the most
accurate? (2012 Bar Question)

1. It is a Receipt for the goods shipped a. the owner of the vessel is not liable because no
2. It is a Contract by which the three parties namely bill of lading was issued to X hence, no contract
the shipper, carrier and consignee undertake of carriage was perfected.

125 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
b. it is possible to have a contract of carriage of
cargo even without a bill of lading, and the
"shipping receipt" would be sufficient.
c. the only acceptable document of title is a Bill of
Lading.
d. None of the above.
A: B. Although Article 359 of the Code of Commerce
provides that the shipper as well as the carrier of
merchandise or goods may mutually demand that a
bill of lading be made, still, said bill of lading is not
indispensable. For as long as there is a meeting of the
minds of the parties, a contract of carriage exists
even in the absence of a bill of lading (Perez, supra,
pg. 112, citing Robles vs. Santos, 44 OG 2268;
Compania Maritima vs. Insurance Co. of NA, 12 SCRA
213.)
DELIVERY OF GOODS
Q: Is the surrender of the bill of lading necessary
upon delivery of the goods?
A: Yes. If the carrier fails to require such surrender:
1. If non-negotiable Action against the carrier
does not lie.
2. If negotiable Action by the shipper may lie
against the carrier
Q: What is the period of delivery of goods?
A: If a period has been fixed for the delivery of the
goods, it must be made within such time, and, for
failure to do so, the carrier shall pay the indemnity
stipulated in the bill of lading, neither the shipper nor
the consignee being entitled to anything else (Art.
370, Code of Commerce).
Q: If indemnity is not stipulated, how will it be
determined?
A: If no indemnity has been stipulated and the delay
exceeds the time fixed in the bill of lading, the carrier
shall be liable for the damages which the delay may
have caused. (Art. 370, Code of Commerce)
Q: What is the duty of the carrier if there is no
period of time fixed for the delivery of goods?
A: The carrier shall be under the obligation to forward
them with the first shipment of the same or similar
merchandise he may make to the point where he
must deliver them, and should he not do so, the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
damages occasioned by the delay shall be suffered by
him (Art. 358,Code of Commerce).
Q: When could a consignee refuse to take delivery of
goods?
A: PLD2
1. When a Part of the goods transported are
delivered and the consignee is able to prove that
he cannot make use of the part without the
others; (Art. 365, Code of Commerce)
2. If the cargo consists of Liquids and they have
leaked out, nothing remaining in the containers
but one-fourth () of their contents, on account
of inherent defect of cargo. (Art. 687, Code of
Commerce)
3. If the goods are Damaged and such damage
renders the goods useless for the particular
purpose for which there are to be used; (Art.
365, Code of Commerce)
4. When there is Delay on account of the fault of
the carrier; (Art. 371, Code of Commerce)
Note: In all cases, the shipper may exercise the right of
abandonment by notifying the carrier. Ownership over
damaged goods passes to the carrier and carrier must pay
shipper the market value of the goods at point of
destination.
PERIOD FOR FILING CLAIMS
Q: What is the period for filling claims?
A:
1. Immediately after delivery if the damage is
apparent; or
2. Within 24 hours from delivery If the damage is
not apparent. (Art. 366, Code of Commerce)
Q: When does Article 366 of the Code of Commerce
apply?
A: It applies in case of domestic transportation (inter-
island) where there is damage to the goods
transported.
Q: What are the requisites before claim for damages
under Art. 366 may be demanded?
A:
1. Consignment of goods through a common
carrier, by a consignor in one place to a
consignee in another place; and
2. The delivery of the merchandise by the carrier to
the consignee at the place of destination (New
Zealand Ins. Co., Ltd. v. Choa Joy, G.R. No. L-7311,
Sept. 30, 1955).
126
 TRANSPORTATION LAW
Q: What is the effect of paying the transportation
charges in the filing of an action on account of
damages to goods?
A:
1. If paid before checking the goods The right to
file a claim is not waived.
2. If paid after the goods were checked The right
to file a claim is alreadywaived (Southern Lines,
Inc. v. CA, G.R. No. L-16629, Jan. 31, 1962).
Note: The filing of claim is a condition precedent for
recovery of damages.
Q: What is the doctrine of Combined or Connecting
Services?
A: The carrier which delivered the goods to the
consignee shall assume the obligations, rights and
actions of those who preceded him in the conveyance
of the goods.
The shipper or consignee should proceed against the
one who executed the contract or against the others
who received the goods without reservation. But
even if there is reservation, they are not exempted
from liabilities that they may have incurred by reason
of their own acts (Art. 373, Code of Commerce).
The carrier may then file a third-party complaint
against the one who is really responsible. The carrier
is an indispensable party. But the shipper or
consignee may sue all of them as alternative
defendants.
PERIOD FOR FILING ACTIONS
Q: What is the period for filing actions?
A: For coastwise or carriage within the Philippines,
Within 6 years if no bill of lading has been issued or
within 10 years if a bill of has been issued. For
international carriage from foreign port to the
Philippines within 1 year from delivery of goods or
the date when the goods have been delivered.
MARITIME COMMERCE
Q: Who are the Agents of Maritime Commerce?
A:
1. Ship-owners and ship agents
2. Captains and masters of the vessel
3. Officers and Crews of the vessel
127
4. Supercargoes (Sundiang, p 437, Commecial Law
Reviewer, 2011)
Q: Who are Supercargoes?
A: Persons especially employed by the owner of a
cargo to take charge of and sell to the best advantage
merchandise which has been shipped, and to
purchase returning cargoes and to receive freight, as
he may be authorized.
CHARTER PARTIES
Q: What is a charter party contract?
A: A contract whereby the whole or part of the ship is
let by the owner to a merchant or other person for a
specified time or use for the conveyance of goods, in
consideration of the payment of freight. (Caltex v.
Sulpicio Lines, G.R. No. 131166, Sept. 30, 1999)
Q: What are the classes of charter party?
A:
1. Bareboat or demise the ship owner gives
possession of the entire vessel to the charterer.
In turn, the charterer supplies, equips, and mans
the vessel. The charterer is the owner pro hac
vice.
2. Contract of affreightment the owner of the
vessel leases a part or all of its space to haul
goods for others. It can either be:
a. Time charter Vessel is chartered for a
particular time or duration. While the ship
owner still retains possession and control of
the vessel, the charterer has the right to use all
vessels facilities. The charterer may likewise
designate vessels destination.
b. Voyage charter Vessel is chartered for a
carriage of goods from one or more ports of
loading to one or more ports of unloading.
Q: What is a voyage charter?
A: A voyage charter is a contract wherein the ship
was leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight.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 freight.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

An owner who retains possession of the ship remains b. SAle by the owner of the vessel before
liable as carrier and must answer for loss or non- loading by the charterer.
delivery of the goods received for transportation.
(Cebu Salvage Corp. vs. Philippine Home Assurance 3. Due to fortuitous event: WEB-Pro-N
Corp., G.R. No. 150403, Jan. 25, 2007)
a. War There is a governmental prohibition of
Note: The same concept applies to a time charter. commercial intercourse, intended to bring
about an entire cessation for the time being
Q: What are the distinctions between a bareboat or of all trade whatever.
demise charter party from contracts of
affreightment? b. Embargo A proclamation or order of State,
usually issued in times of war or threatened
A: hostilities, prohibiting the departure of ships
BAREBOAT/DEMISE CONTRACT OF or goods from some or all the ports of such
CHARTER CONTRACT AFFREIGHTMENT State until further order; or
Ship owner remains
Negligence of the c. Blockade A sort of circumvallation around
liable and carrier must
charterer gives rise to its a place by which all foreign connection and
answer for any breach of
liability to others. correspondence is, as far as human power
duty.
Charterer is not can effect it, to be cut off.
Charterer is regarded as
regarded as owner. Ship
owner pro hac vice. Ship d. PROhibition to receive cargo at port of
owner retains ownership
owner temporarily destination.
over the vessel.
relinquishes possession
(Coastwise Lighterage v.
and ownership of the e. Inability of the vessel to Navigate.(Art. 640)
CA, G.R. No. 114167, July
vessel.
12, 1995)
LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS
Q: What is meant by owner pro hac vice?
Q: What is the three-fold character of the captain?
A: The charterer is considered the owner of the
vessel for the voyage or service stipulated. The A: GVG
charterer and not the owner of the vessel is liable for 1. General agent of the ship owner
vessels expenses, including seamans wages. 2. Vessels technical director
3. Government representative of the flag he
Q: What are the instances when a charter party may navigates under
be rescinded?
Q: What are the inherent powers of the ship
A: captain?
1. At the request of the charterer by: (FARER)
A: A2-C3-O
a. Failure to place vessel at charterers disposal
b. Abandoning the charter and paying half the 1. To Appoint or make contracts with the crew in
price the ship agents absence, and to propose said
c. Return the vessel due to pirates, enemies, crew, should said agent be present; but the ship
and bad weather agent may not employ any member against the
d. Error in tonnage or flag captain's express refusal
e. Arrival at port for Repairs - if repairs take
less than 30 days, pay full freightage; if more 2. To Command the crew and direct the vessel to
than, freightage in proportion to the the port of its destination, in accordance with the
distance covered. instructions he may have received from the ship
agent
2. At the request of the ship owner: (Sa-Te)
3. To impose Correctional punishment:
a. If extra lay days TErminate without the cargo a. Upon those who fail to comply with orders;
being placed alongside vessel; and or
b. Those wanting in discipline

UNIVERSITY OF SANTO TOMAS 128

2013 GOLDEN NOTES
 TRANSPORTATION LAW
4. To make Contracts for the charter of the vessel in
the absence of the ship agent or of its consignee
5. To Adopt all proper measures to keep the vessel
well supplied and equipped, purchasing all that
may be necessary for the purpose, provided
there is no time to request instruction from the
ship agent
6. To Order, in similar urgent cases while on a
voyage, the repairs on the hull and engines of the
vessel and in its rigging and equipment, which
are absolutely necessary to enable it to continue
and finish its voyage. (Art. 610)
Q: What are the obligationsof the captain?
A:
1. Inventory of equipment
2. Keep a copy of Code of Commerce on board
3. Have a log Book, freight book, accounting book
4. Conduct a marine survey of vessel before loading
5. Remain on board while loading
6. Demand pilot on departure and on arrival at each
port
7. Be on deck when sighting land
8. Arrivals under stress: to file marine protest in 24
hours
9. Record bottomry loan with Bureau of Customs
10. Keep papers and properties of crew members
who might die
11. Conduct himself according to the instuctions of
the ship agent
12. Report to ship agent on arrival
13. Observe rules on the situation of lights and
maneuvers to prevent collisions
14. Remain on board until the last hope to save the
vessel is lost and to abide by the decision of the
majority whether to abandon or not
15. In case of shipwreck: file marine protest, within
24 hours
16. Comply with rules and regulation on navigation.
(Art. 612, Code of Commerce)
LIABILITY FOR ACTS OF THE CAPTAIN
Q: In what cases shall the ship owner/agent be liable
to the damages caused by the captain?
A:
1. Damages suffered by the vessel and its cargo by
reason of want of skill or negligence on his part
2. Thefts committed by the crew, reserving his right
of action against the guilty parties;
129
3. Losses, fines, and confiscations imposed an
account of violation of customs, police, health,
and navigation laws and regulations;
4. Losses and damages caused by mutinies on
board the vessel or by reason of faults
committed by the crew in the service and
defense of the same, if he does not prove that he
made timely use of all his authority to prevent or
avoid them;
5. Those caused by the Misuse of the powers;
6. For those arising by reason of his going out of his
course or taking a course which he should not
have taken without Sufficient cause, in the
opinion of the officers of the vessel, at a meeting
with the shippers or supercargoes who may be
on board. No exceptions whatsoever shall
exempt him from this obligation;
7. For those arising by reason of his Voluntarily
entering a port other than that of his destination,
outside of the cases or without the formalities
referred to in Article 612; and
8. For those arising by reason of non-observance of
the Provisions contained in the regulations on
situation of lights and manoeuvres for the
purpose of preventing collisions (Art. 618, Code
of Commerce).
Note: Ship owner/agent is not liable for the obligations
contracted by the captain if the latter exceeds his powers
and privileges inherent in his position of those which may
have been conferred upon him by the former. However, if
the amount claimed were used for the benefit of the vessel,
the ship owner or ship agent is liable.
EXCEPTIONS TO THE RULE
Q: In what causes shall the captain be not liable for
loss or injury to persons or cargo?
A:
1. Force majeure
2. Obligations contracted for the vessels benefit,
except when the captain expressly agrees to be
liable.
Q: May the captain have himself substituted by
another?
A: No, in the absence of consent from the ship agent,
and should he do so he shall be liable for all the acts
of the substitute. (Art. 615, Code of Commerce)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: T, the captain of MV Don Alan, while asleep in his
cabin, dreamt of an Intensity 8.0 earthquake along
the path of his ship. On waking up, he immediately
ordered the ship to return to port. True enough, the
earthquake and tsunami struck three days later and
his ship was saved. Was the deviation proper? (2011
Bar Bar Question)
A: No, because no reasonable ground for avoiding a
peril existed at the time of the deviation
Q: When may the captain and crew members
rescind their contractual employment?
A: In case of: WOND
1. War
2. Outbreak of disease
3. New owner of vessel
4. Change of Destination. (Art. 647)
Q: Who is the shipowner of a vessel?
A: The person in possession, management, control
over the vessel, and the right to direct her navigation.
While in their possession, the ship owners also
receive freight earned and paid.
Q: Who is a ship agent?
A: The person entrusted with provisioning or
representing the vessel in the port in which it may be
found. Hence, whether acting as agent of the
ownerof the vessel or as agent of the charterer, he
will be considered as the ship agentand may be held
liable as such, as long as he is the one that provisions
or represents the vessel. (Macondray & Co., Inc. v.
Provident Insurance Corp, G.R. No. 154305, Dec. 9,
2004)
Q: What are the civil liabilities of ship owners and
agents?
A:
rd
1. Damages suffered by a 3 person for tort
committed by the captain;
2. Contracts entered for provisioning and repair of
vessel;
rd
3. Indemnities in favor of 3 persons arising from
the conduct of the captain from the care of
goods; and
4. Damages in case of collision due to fault or
negligence or want of skill of the captain.
5. Damages for the acts of the captain.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What are the powers, functions, and liabilities of
ship agents?
A: ID
1. Indemnity for expenses incurred for ships
benefit.
2. Discharge of captain and/or crew members.
The following are the rules observed by the ship
agent:
a. Captain and/or crew members contract not
for a definite period or voyage:
i. Before vessel sets out to sea: Ship agent at
his discretion may discharge the captain
and members of the crew. Ship agent
must pay captain and/or crew members
salaries earned according to their
contracts, and without any indemnity
whatsoever, unless there is an expressed
agreement;
ii. During voyage: Captain and/or crew
member shall receive salary until return to
the port where contract was made. Article
637 of the Code of Commerce enumerates
the just causes for discharge.
b. Where captain and members of the crews
contracts with ship agent be for a definite
period or voyage:
i. Captain and/or crew members may not be
discharged until after the fulfillment of
their contracts, except by reason of
insubordination in serious matters,
robbery, theft, habitual drunkenness, or
damage caused to the vessel or to its
cargo through malice or manifest or
proven negligence. (Art. 605, Code of
Commerce)
ii. If the captain should be the vessels co-
owner, he may not be discharged unless
ship agent returns his amount of interest
therein. In the absence of agreement
between the parties, interest shall be
appraised by experts appointed in the
manner established by civil procedure.
Q: What is the doctrine of inscrutable fault? (1997
Bar Question)
A: Under this doctrine, where fault is established but
ita cannot be determined which of the two vessels
130
 TRANSPORTATION LAW
wre at fault, both shall be deemed to have been at
fault.
Q: What is the Doctrine of Limited Liability? (1997
Bar Question)
A: Also called the no vessel, no liability doctrine, it
provides that liability of ship owner is limited to ship
owners interest over the vessel. Consequently, in
case of loss, the ship owners liability is also
extinguished. Limited liability likewise extends to
ships appurtenances, equipment, freightage, and
insurance proceeds. The ship owners or agents
liability is merely co-extensive with his interest in the
vessel, such that a total loss of the vessel results in
the liabilitys extinction. The vessels total destruction
extinguishes maritime liens because there is no
longer any res to which they can attach. (Monarch
Insurance v. CA, G.R. No. 92735, June 8, 200.)
Q: What is the rationale of the doctrine?
A: To offset against innumerable hazards and perils in
sea voyage and to encourage ship building and
maritime commerce. By abandonment, the ship
owner and ship agent exempt themselves from
liability, thus avoiding the possibility of risking his
whole fortune in the business (Real and hypothecary
nature of Maritime Law)
Q: Who can invoke the limited liability rule?
A: The only persons who could avail of this are the
shipowner and the shipping agent. He is the very
person whom the Limited Liability Rule has been
conceived to protect. The petitioners cannot invoke
this as a defense. (Philippine Trigon Shipyard
Corporation, et al. v. Crisostomo G. Concepcion, et al.,
G.R. No. 160088, July 13, 2011)
Q: What are the cases in which the doctrine of
limited liability is allowed?
A: SOLE
1. Civil liability of the Ship agent or shipowner for
the indemnities in favor of third persons; (Art.
587, Code of Commerce)
2. Civil liability of the co-Owners of the vessel for
the results of the acts of the captain; (Art. 590,
Code of Commerce)
3. If the vessel and her cargo be totally Lost, by
reason of capture or shipwreck, all the rights
shall be extinguished, both as regards the right of
the crew to demand wages and the right of the
ship agent to recover the advances made; (Art.
643, Code of Commerce) or
131
4. Extinction of civil liability incurred by the
shipowner or agent in cases of maritime
collisions. (Art. 837, Code of Commerce)
Q: What are the exceptions to the doctrine of
limited liability?
A:
1. Repairs and provisioning of the vessel before the
loss of the vessel; (Art. 586)
2. Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim
from the shipowner; (Vasquez v. CA, G.R. No. L-
42926, Sept. 13, 1985)
3. When the shipowner is guilty of fault or
negligence;
Note: But if the captain is the one who is guilty,
doctrine may still be invoked, hence, abandonment is
still an option.
4. Private carrier; or
5. Voyage is not maritime in character.
Q: A cargo ship of X Shipping, Co. ran aground off
the coast of Cebu during a storm and lost all its
cargo amounting to Php50 Million. The ship itself
suffered damages estimated at Php80 Million.
The cargo owners filed a suit against X Shipping but
it invoked the doctrine of limited liability since its
vessel suffered an Php80 Million damage, more than
the collective value of all lost cargo. Is X Shipping
correct? (2011 Bar Question)
A: No, since X Shipping neither incurred a total loss
nor abandoned its ship.
ACCIDENTS AND DAMAGES IN MARITIME
COMMERCE
Q: What are the accidents in maritime commerce?
A: CASA
1. Collision
2. Averages
3. Shipwreck
4. Arrival under stress
GENERAL AVERAGE
Q: What are averages?
A: All extraordinary or accidental expenses which
may be incurred during the voyage for the
preservation of the vessel or cargo or both.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

All those who have Only the owner of the

Q: What are the kinds of averages? benefited shall satisfy goods benefiting from the
the average. damage shall bear the
A: expense of average.
1. General average Damages or expenses
deliberately caused in order to save the vessel, its Q: What are goods not covered by general average
cargo or both from real and known risk. even if not sacrificed?

2. Particular average Damages or expenses caused A:

to the vessel or cargo that did not inure to the 1. Goods not recorded in the books or records of
common benefit, and borne by respective the vessel (Art. 855[2], Code of Commerce)
owners.
2. Fuel for the vessel if there is more than sufficient
fuel for the voyage (Rule IX, York-Antwerp Rule)
Q: What are the requisites for general average?
Q: What is jettison?
A: CD-PS
1. Common danger present; A: Act of throwing overboard part of a vessels cargo
2. Deliberate sacrifice of part of the vessel or cargo; or hull in hopes of saving a ship from sinking.
3. Successful saving of vessel and/or cargo; and
4. Proper procedure and legal steps. Q: What is the orderof goods to be cast overboard in
case of jettison?
Q: Who shall be liable for the amount of the general
averages? A:
1. Those on deck, preferring the bigger bulk with
A: All persons having an interest in the vessel and least value.
cargo therein at the time of the occurrence of the 2. Those below upper deck, beginning with the
average shall contribute. (Art. 812, Code of heaviest with least utility.
Commerce)
Q: Distinguish between overseas and inter-island
Q: Who shall be liable for the amount of the trade regarding reimbursement and payment of
particular averages? general averages on jettisoned deck cargo.

A: The owner of the things which gave rise to the A:

expenses or suffered the damage shall bear the
simple or particular averages (Art. 810, Code of
Commerce).
Q: What are the distinctions between general
average and particular average?
1. In case of overseas trade, the York-Antwerp
Rules prohibit the loading of cargo on deck. In
case such cargo is jettisoned, the owner will not
be entitled to reimbursement in view of the
violation. If the cargo were saved, the owner
must contribute to general average.

A: 2. In case of interisland trade, the York-Antwerp

GENERAL AVERAGE
Both the ship and cargo
are subject to the same
danger
There is a deliberate
sacrifice of part of the
vessel, cargo, or both
Damage or expenses
incurred to the vessel, its
cargo, or both,
redounded to the
benefit of the respective
owners.
PARTICULAR AVERAGE
No common danger to
both the vessel and the
cargo
Expenses and damages
are not deliberately made
Did not inure to common
benefit and profit of all
persons interested in the
vessel and her cargo.
Rules allow deck cargo. If the cargo loaded on
deck is jettisoned as a result of which the vessel
was saved, the cargo owner is entitled to
reimbursement. If the cargo is saved, the cargo
owner must contribute to the general average.
Reason: In interisland trade, voyages are usually short and
there are intervening islands and the seas are generally not
rough. In overseas trade, the vessel is exposed for many
days to the peril of the sea making deck cargo is dangerous
to navigation.

UNIVERSITY OF SANTO TOMAS 132

2013 GOLDEN NOTES
 TRANSPORTATION LAW
COLLISIONS
Q: What is a collision?
A: It is the impact of two movingvessels.
Q: What is allision?
A: It is the impact between a moving vessel and a
stationary one.
Q: What is an error in extremis?
A: The sudden movement made by a faultless vessel
during the third zone of collision with another vessel
which is at fault under the second zone. Even if
sudden movement is wrong, no responsibility will fall
on the faultless vessel.
Q: What are the rules governing liabilities of parties
in case of collision?
A:
1. One vessel at fault The ship owner of such
vessel shall be liable for all resulting damages.
2. Both vessels at fault Each vessel shall suffer
their respective losses but as regards the owners
of the cargoes, both vessels shall be jointly and
severally liable.
3. Vessel at fault not known Each vessel shall
suffer its own losses and both shall be solidarily
liable for loses or damages on the cargo.
(Doctrine of Inscrutable Fault).
4. Fortuitous event Each shall bear its own
damage.
5. Third vessel at fault The third vessel shall be
liable for losses and damages sustained.
Q: What are the zones of time in the collision of
vessel?
A:
1. First zone all time up to the moment when risk
of collision begins.
Note: One vessel is a privileged vessel and the other is
a vessel required to take action to avoid collision.
2. Second zone time between moment when risk
of collision begins and moment it becomes
practically a certainty.
133
Note: In this zone, the conduct of the vessels are
primordial. It is in this zone that vessels must observe
nautical rules, unless a departure therefrom becomes
necessary to avoid imminent danger. The vessel which
does not make such strict observance is liable.
3. Third Zone time when collision is certain and up
to the time of impact.
Note: An error at this point no longer bears any
consequence.
Q: What is the role of a protest with respect to
collisions?
A: The action for recovery of damages arising from
collisions cannot be admitted if a protest or
declaration is not presented within twenty-four hours
before the competent authority of the point where
the collision took place, or that of the first port of
arrival of the vessel, if in Philippine territory, and to
the Filipino consul if it occurred in a foreign country
(Art. 835).
Note: Failure to make a protest is not an impediment to the
maintenance of a civil action based on quasi-delict.
Q: When is a protest required?
A:
1. Arrival under stress; (Art. 612 [8], Code of
Commerce)
2. Shipwreck; (Arts. 601 [15], 843, Code of
Commerce)
3. If the vessel has gone through a hurricane or
where the captain believes that the cargo has
suffered damages or averages; (Art. 642, Code of
Commerce) and
4. Maritime collision. (Art. 835, Code of Commerce)
Q: Who can file a maritime protest?
A:
1. In case of maritime collision, the passenger or
other persons interested who may be on board
the vessel or who were in a condition who can
make known their wishes (Arts. 835-836) or the
captain himself. (Verzosa and Ruiz v. Lim, G.R.
No. 20145, Nov. 15, 1923)
2. The captain in cases of:
a. Arrival under stress
b. Shipwreck; or
c. If the vessel has gone through a hurricane or
where the captain believes that the cargo
has suffered damages or averages.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels
were safely conducted to a port. Kim, a passenger
and Ruby, a shipper who suffered damage to his
cargo, did not file maritime protest. Can Kim and
Ruby successfully maintain an action to recover
losses and damages arising from the collision? (2007
Bar Question)
A: Ruby, the shipper can successfully maintain an
action to recover losses and damages arising from the
collision notwithstanding his failure to file a maritime
protest since the filing thereof is required only on the
part of Kim, who, being a passenger of the vessel at
the time of the collision, was expected to know the
circumstances of the collision. Kim's failure to file a
maritime protest will therefore prevent him from
successfully maintaining an action to recover his
losses and damages (Art 836, Code of Commerce).
Q: What is a shipwreck?
A: The loss of the vessel at sea as a consequence of
its grounding, or running against an object in sea or
on the coast. If the wreck was due to malice,
negligence, or lack of skill of the captain, the owner of
the vessel may demand indemnity from said captain.
Q: Who shall bear the losses in shipwreck?
A: GR: The loss of a ship and her cargo shall fall upon
their respective owners. (Art. 840, Code of
Commerce)
XPN: If the wreck was due to malice, negligence,
or lack of skill of the captain, or because the vessel
put to sea was insufficiently repaired and
equipped, the ship agent or the shippers may
demand indemnity from the captain for the
damage caused to the vessel or to the cargo by
the accident. (Art. 841, Code of Commerce)
Q: What is arrival under stress?
A: It is the arrival of a vessel at the nearest and most
convenient port, if during the voyage the vessel
cannot continue the trip to the port of destination on
account of the lack of provisions, well-founded fear of
seizure, privateers or pirates, or by reason of any
accident of the sea disabling it to navigate. (Art. 819,
Code of Commerce)
Note: In arrival under stress, the captain must file a Protest
which is merely a disclaimer for the shipowner not to be
liable.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: When is arrival under stress unlawful?
A: LR-DM
1. Lack of provisions is due to negligence to carry
according to usage and customs
2. Risk of enemy not well known of manifest
3. Defect of vessel is due to improper repair; or
4. Malice, negligence, lack of foresight or skill of
captain. (Art. 820)
CARRIAGE OF GOODS BY SEA ACT (COGSA)
Q: When will COGSA apply?
A: It will only be applied in terms of loss or damage of
goods transported to and from Philippine ports in
foreign trade. It may also apply to domestic trade
when there is a paramount clause in the contract.
Q: What cases are covered under the COGSA?
A: It applies only in case of non-delivery or damage,
and not to misdelivery or conversion of goods. (Ang v.
American Steamship Agencies, Inc., G.R. No. L-22491,
Jan. 27, 1967)
Also, the deterioration of goods due to delay in their
transportation is not covered by Sec.6 of
COGSA.(Mitsui O.S.K. Lines Ltd. v. CA, G.R. No.
119571, Mar. 11, 1998)
Q: Is notice required to be filed in case of damage to
goods under the COGSA?
A: No. There is no consequence on the right to bring
suit if no notice is filed unlike under the Code of
Commerce. It only gives rise to a presumption that
the goods are delivered in the same condition as they
are shipped.
There is also no consequence if the transportation
charges and expenses are paid unlike under the Code
of Commerce.
Q: When should suits for loss or damage of cargo be
brought?
A: The suit should be brought within one year from:
1. Delivery of the goods, in case of damage; or
2. The date when the goods should have been
delivered, in case of loss.
134
 TRANSPORTATION LAW
Q: To whom should such delivery be made as basis
of the computation of the one-year period?
A: The one-year period is computed from the delivery
of goods to the operator and not to the consignee.
Q: What instances do the one-year period apply?
A: AFLS
1. Amendment of pleadings for suing the wrong
party
2. Filing of third party complaint
3. Loss or damage to cargo, excluding delay or
misdelivery
4. Subrogation. (Art 2207, NCC)
Q: When is the one year period in the COGSA
interrupted?
A:
1. When an action is filed in court; or
2. When there is an agreement between the parties
to extend it.
Q: Is Art. 1155 of the Civil Code providing that the
prescription of actions is interrupted by the making
of an extrajudicial written demand by the creditor
applicable also to actions brought under the COGSA?
A: No, written claims do not toll the running of the
one-year prescriptive period under the COGSA. (Dole
Philippines, Inc. v. Maritime Company of the
Philippines, G.R. No. L-61352, Feb. 27, 1987)
Q: Who are the persons who can give notice to, and
bring suit against the carrier?
A: SCA
1. The shipper
2. The consignee; or
3. Any legal holder of the bill of lading like the
indorsee, subrogee, or the insurer of the goods.
(Kuy v. Everett Steamship Corporation, G.R. No. L-
5554, May 27, 1953)
Q: Does the one-year prescriptive period within
which to file a case against the carrier also apply to a
claim filed by an insurer who stands as a subrogee to
the insured?
A: Yes, it includes the insurer of goods. Also, whether
the insurer files a third party complaint or maintains
an independent action is of no moment (Filipino
Merchants Insurance Co., Inc. v. Alejandro, G.R. No. L-
54140,Oct. 14, 1986).
135
Note: The ruling in the above-cited case should apply only
to suits against the carrier filed either by the shipper, the
consignee or the insurer, not to suits by the insured against
the insurer. The basis of the insurers liability is the
insurance contract and such claim prescribes in 10 years, in
accordance with Art. 1144 of the Civil Code. (Mayer Steel
Pipe Corporation v. CA, G.R. No. 124050, June 19, 1997)
Q: What is the prescriptive period in case of
misdelivery and conversion of goods?
A: In case of misdelivery or conversion, the proper
periods are:
1. If there is a written contract 10 years (Art.
1144, Civil Code)
2. Oral contract 6 years (Art. 1145)
3. For quasi-delict 4 years (Art. 1146)
Q: What is the amount of the carriers liability under
the COGSA?
A:
1. The liability limit is set at $500 per package or
customary freight unless the nature and value of
such goods is declared by the shipper.
2. Shipper and carrier may agree on another
maximum amount, but not more than amount of
damage actually sustained.
Note: When the packages are shipped in a container
supplied by carrier and the number of such units is stated in
the bill of lading, each unit and not the container constitute
the package.
Q: What are the instances where there is no liability
under COGSA?
A: FDUD
1. if the nature or value of goods knowingly and
Fraudulently misstated by shipper
2. if damage resulted from Dangerous nature of
shipment loaded without consent of carrier
3. if Unseaworthiness not due to negligence
4. if Deviation was to save life or property at sea.
Q: Clause 18 of the bill of lading provides that the
owner should not be liable for loss or damage of
cargo unless written notice thereof was given to the
carrier within 30 days after receipt of the goods.
However, Section 3 of the COGSA provides that even
if a notice of loss or damage is not given, "that fact
shall not affect or prejudice the right of the shipper
to bring suit within one year after the delivery of the
goods." Which of these two provisions should
prevail?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

A: Section 3 will prevail. Any clause, Sec. 3 of the
COGSA provides that any covenant, or agreement in a
contract of carriage relieving the carrier or the ship
from liability for loss or damage to or in connection
with the goods or lessening such liability otherwise
than as provided , shall be null and void and of no
effect." (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov.
29, 1954)
THE WARSAW CONVENTION
air carriers is deemed, for the purposes of WC to be
one undivided carriage, if it has been regarded by the
parties as a single operation, whether it had been
agreed upon under the form of a single contract or of
a series of contracts. (Art. 1 [3], WC)
Note: Such carriage does 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 same High
Contracting Party. (Ibid.)

Q: What is the Warsaw Convention (WC)?

Q: Where should an action for violation of a contract
of international carriage be brought?
A: Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air
A: An action for damage must be brought at the
provides for rules applicable to international
option of the plaintiff, in the territory of one of the
transportation by air. The Philippines is one of the
High Contracting Parties, either before the court:
signatories to WC. (Santos III vs. Northwest Orient
1. of the domicile of the carrier or
Airlines, 210 SCRA 256.) Hence, this has the force and
2. of his principal place of business, or
effect of a law in the Philippines. (Cathay Pacific
3. where the ticket was purchased, or
Airways, Ltd. Vs. CA, 219 SCRA 520.)
4. at the place of destination. (Art. 28 [1], WC.)
APPLICABILITY
Q: What are the documents of carriage issued under
WC?
Q: When is the Warsaw convention applicable?
A: The following are the documents of carriage:
A: This Convention applies to all international
1. Passenger Ticket
carriage of persons, luggage or goods performed by
2. Luggage Ticket
aircraft for reward. It applies equally to gratuitous
3. Air Consignment Note
carriage by aircraft performed by an air transport
undertaking. (Art. 1[1], Warsaw Convention)
Q: What is the function of the air consignment note?
Q: What is an international carriage?
A: It is prima facie evidence of
1. the conclusion of the contract
A: Any carriage in which, according to the contract
2. receipt of the goods
made by the parties, the place of departure and the
3. conditions of carriage. (Art. 11 [1], WC.)
place of destination, whether or not there be a break
in the carriage or a transshipment, are situated
Q: How will the consignor exercise its right to
either:
dispose of the goods?
1. Within the territories of two High Contracting
Parties; or
A:
2. Within the territory of a single High Contracting
1. by withdrawing them at the aerodrome of
Party, if there is an agreed stopping place within
departure or destination, or
a territory subject to the sovereignty, suzerainty,
2. by stopping them in the course of the journey on
mandate or authority of another Power, even
any landing, or
though that Power is not a party to the
3. by calling for them to be delivered at the place of
Convention. (Art. 1[2], WC)
destination or in the course of the journey to a
Note: High Contracting Parties are the signatories to the
person other than the consignee named in the
WC and those which subsequently adhered to it. (Mapa vs. air consignment note, or
CA, 275 SCRA 286.) 4. by requiring them to be returned to the
aerodrome of departure. (Art. 12, WC.)
Q: How should carriage performed by several
successive air carriers be treated under WC? Note: In the exercise of this right, the carrier or other
consignors must not be prejudiced. For the carrier to obey
the orders for disposition, the carrier must require the
A: A carriage to be performed by several successive

UNIVERSITY OF SANTO TOMAS 136

2013 GOLDEN NOTES
 TRANSPORTATION LAW
production of the part of the air consignment note
delivered to the consignor. (ibid.)
Q: When does this right to disposition ceases to
continue?
A: It ceases as soon as the consignee, on arrival of the
goods at the place of destination, require the carrier
to hand over to him the air consignment note and to
deliver the goods to him, on payment of charge due
and on complying with the conditions of carriage set
out in the air consignment note (Art. 13, WC)
LIMITATION OF LIABILITY
Q: What are the limitations to the liability of air
carriers?
A:
1. In the carriage of persons 250,000 francs for
each passenger. Nevertheless, by special
contract, the carrier and the passenger may
agree to a higher limit of liability.
2. In the carriage of registered baggage and of
cargo Two hundred and fifty (250) francs per
kilogramme, unless the passenger or consignor
has made, at the time when the package was
handed over to the carrier, a special declaration
of interest in delivery at destination and has paid
a supplementary sum if the case so requires.
3. As regards objects of which the passenger takes
charge himself Five thousand (5,000) francs per
passenger. (Art. 22, WC)
Note: Carrier is not entitled to the foregoing limit if the
damage is caused by willful misconduct or default on
its part (Art. 25, WC)
Q: Is a stipulation relieving the carrier from or
limiting its liability valid?
A: No. Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is laid
down in this Convention shall be null and void but
the nullity of such provision does not involve the
nullity of the whole contract. (Art. 23[1])
Q: What are the exceptions to these limitations?
A: WD-PG
1. Willful misconduct
2. Default amounting to willful misconduct
3. Accepting passengers without ticket
4. Accepting goods without airway bill or baggage
without baggage check
137
Q: When will ones right to damages be
extinguished?
A: The right to damages shall be extinguished if an
action is not brought within two years, reckoned
from the date of arrival at the destination, or from
the date on which the aircraft ought to have arrived,
or from the date on which the carriage stopped.
Note: Despite the express mandate that an action for
damages should be filed within 2 years from the arrival at
the place of destination, such rule shall not be applied
where delaying tactics were employed by airline itself in a
case where a passenger wishes to settle his complaint out-
of-court but the airline gave him the runaround, answering
the passengers letters but not giving in to his demands,
hence, giving the passenger no time to institute the
complaint within the reglementary period. (United Airlines
v. Uy, G.R. No. 127768, Nov. 19, 1999)
Q: Can a person recover a claim covered by Warsaw
Convention after the lapse two years?
A: No. A claim covered by the Warsaw Convention
can no longer be recovered under local law, if the
statute of limitations of two years has already lapsed.
(PAL. v. Savillo, 557 SCRA 66)
WILLFULL MISCONDUCT
Q: What constitutes willful misconduct?
A: The definition of "willful misconduct" depends in
some measure on which court is deciding the issue.
Some common factors that courts will consider are:
1. Knowledge that an action will probably result in
injury or damage
2. Reckless disregard of the consequences of an
action, or
3. Deliberately failing to discharge a duty related to
safety.
Courts may also consider other factors.
Q: Is the failure of the carrier to deliver the
passengers luggage at the designated time and
place ipso facto constitutes willful misconduct?
A: No.There must be a showing that the acts
complained of were impelled by an intention to
violate the law, or were in persistent disregard of
one's rights. It must be evidenced by a flagrantly or
shamefully wrong or improper conduct (Luna vs. CA,
GR No. 100374-75, November 27, 1992).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: Is the carriers guessing of which luggage

contained the firearms constitutes willful
misconduct?

A: Yes. The guessing of which luggage contained the

firearms amounted to willful misconduct under
Section 25(1) of the Warsaw Convention.(Northwest
Airlines vs. CA, GR No. 120334, January 20, 1998)

Q: Is the allegation of willful misconduct resulting in

a tort is insufficient to exclude the case from the
realm of Warsaw Convention?

A: Yes. A cause of action based on tort did not bring

the case outside the sphere of the Warsaw
Convention. (Lhuiller vs. British Airways, GR No.
171092, March 15, 2010.)

UNIVERSITY OF SANTO TOMAS 138

2013 GOLDEN NOTES
 THE CORPORATION CODE
THE CORPORATION CODE (CC)
CORPORATION
DEFINITION
A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes and properties expressly
authorized by law or incident to its existence. (Sec. 2,
CC)
ATTRIBUTES
The attributes of a corporation are the following:
ALS PAPI
1. It is anArtificial being
2. It iscreated by operation of Law
3. It enjoys the right of Succession
4. It has the Powers, Attributes and Properties
expressly authorized by law or Incident to its
existence.
Q: What is the Doctrine of Separate Juridical
Personality?
A: A corporation is a juridical entity with legal
personality separate and distinct from those acting
for and in behalf and, in general, from the people
comprising it. (Francisco vs. Mallen, Jr. GR No.
173169, Sept. 22, 2010.)
*Please refer to page 142 for an extensive discussion.
Q: How is a corporation created by operation of
law?
A: No corporation can exist without the consent or
grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty.
Corporations cannot come into existence by mere
agreement of the parties.(De Leon, The Corporation
Code of the Philippines Annotated, 2010 Edition, pg.
43-44)
Note: The Philippine jurisprudence adopted the Concession
or fiat theory, which states that a corporation is conceived
as an artificial person owing existence through creation by a
foreign power. Further, a corporation has without any
existence until it has received the imprimatur of the State
acting according to law, through the SEC. (Tayag v. Benguet
Consolidated, Inc., GR No. L-23145, Nov. 29, 1968.)
139
Q: Is the conferment by law always required for a
corporation to exist?
A: GR: A legislative grant or authority is necessary for
the creation of a corporation.
XPN: For corporations by prescription, such authority
is not necessary (De Leon, pg. 44.)
A corporation by prescription is one which has
exercised powers for an indefinite period without
interference on the part of the sovereign power
and which by fiction of law, is given the status of
a corporation (De Leon, pg. 62).
Q: Can Congress create a private corporation by
enactment of a special law?
A: No. Congress shall not, except by general law,
provide for the formation, organization, or regulation
of private corporations (Sec 16, Art XII, Constitution).
Q: What is a franchise?
A: A franchise includes any special privilege or right
affected with public interest, conferred by the State
on corporations or persons and which does not
belong to the citizens of the country, generally as a
matter of common right (De Leon, pg. 117, citing JRS
Business Corp. vs. Imperial Insurance, Inc., 11 SCRA
634).
Q: What are the two kinds of franchise?
A: The kinds of franchise are the following:
1. Primary/ Corporate/ General Franchise the right
to exist as a corporation.
2. Secondary/ Special Franchise the franchise to
exercise powers and privileges granted to such
corporation to the business for which it was
created, including those conferred for purposes of
public benefit such as the power of eminent
domain and other powers and privileges enjoyed
by public utilities. (De Leon, pg. 117-118.)
Q: Is the power to institute expropriation
proceedings granted to all corporations?
A: No. Only quasi-public corporations or those
affected with public interest are given the power to
institute condemnation proceedings against
owners of private property. To grant the right of
eminent domain to purely private entities
exercising functions, which are not public in nature,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
would be using the right to take property for
private use (De Leon, pg. 118, citing SEC Opinion,
Oct. 28, 1968).
Q: Distinguish between a primary and secondary
franchise.
A:
PRIMARY FRANCHISE SECONDARY FRANCHISE
Special authority given
to a corporation to
engage in a specialized
business. (e.g. banks,
insurance companies,
right to use the streets
of a municipality to lay
pipes of tracks, erect
The franchise or
poles, or string wires.)
authority to exist as a
corporation
Certain rights and
privileges conferred
upon existing
corporations
(J.R.S.Business Corp. v.
Imperial Insurance,
supra.)
GR: Granted by the
Corporation Code, Granted by a
XPN: In GOCCs with a Government Agency, or
special charter, a special a Municipal Corporation
law grants the franchise
Secondary franchises of
a corporation may
ordinarily be conveyed
or mortgaged under a
general power granted
to a corporation to
dispose of its property
Cannot be transferred (i.e. Through board
without the approval of resolution or approval of
Congress (Sundiang, stockholders) (Villarey
RevieweronCommercial vs. Ferrer G.R. No. L-
Law, 2011 Edition, pg. 23893, October 29,
179,) 1968.)
A secondary franchise
can be subject to levy
and sale on execution
together with corporate
property (Sundiang,
2011, pg. 179.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: How is the right to succession of a corporation
exercised?
A: A corporation has a capacity of continuous
existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual
stockholders or members and regardless of the
transfer of their interest or shares of stock (De Leon,
supra, pg. 44-45). A corporation may exist up to the
period stated in the articles of incorporation as long
as not exceeding 50 years from the date of
incorporation, unless sooner dissolved or unless said
period is extended (Sec. 11, CC).
Q: What powers can the corporation exercise?
A: Only those which are granted by the law of its
creation. All powers which may be implied from those
expressly provided by law and those which are
incidental or essential to the corporations existence
may also be exercised (Sec. 36, CC).
Q: May a corporation enter into a contract of
partnership or a joint venture?
A: GR: Corporations have no power to enter into
partnership.
XPN: The SEC allowed corporations to enter into
partnerships with other corporations and
individuals provided:
1. The authority to enter into partnership relation
is expressly conferred by the Charter or the
Articles of Incorporation (AOI) and the nature
of the business venture to be undertaken by
the partnership is in line with the business
authorized by the charter or the AOI. (SEC
Opinions, Feb. 29, 1980, Dec. 1, 1993, and Feb.
23, 1994.)
2. The partnership must be a limited partnership
and the corporation must be a limited partner
3. If it is a foreign corporation, it must obtain a
license to transact business in the country.
140
 THE CORPORATION CODE

Q: Distinguish a corporation from a partnership.

A:
PARTNERSHIP CORPORATION
As to creation and governing Law
Created by mere agreement of the parties and governed by Created by operation of law and governed by the
the Civil Code Corporation Code

Commencement of juridical personality and term of existence

From the moment of meeting of /minds of the partners
The term of a partnership may be established for any
period of time stipulated by the partners
Existence of the corporation commences from the
date of issuance of the Certificate of Incorporation by
the Securities and Exchange Commission (SEC).
Existence canNOT be for a term in excess of 50 years.
The term of a corporation may be extended to not
more than 50 years at any single instance.

Number of incorporators
GR: Requires at least 5 incorporators but not more
than 15.
May be organized by at least 2 persons
XPN: Corporation sole
Powers
GR: May exercise any power authorized by the partners.
May exercise only suchpowers as may be granted by
law and its articles of incorporation, implied therefrom
XPN: Acts which are contrary to: law, morals, good
or incidental thereto.
customs, public order, public policy
Management
GR: Power to do business and manage its affairs is
vested in the Board of Directors (BOD) / Board of
Trustees (BOT).

XPN:
When management is not agreed upon, every partner is an
1) Executive Committee (Sec 35, CC)
agent of the partnership
2) Management Contract (Sec 44, CC)
3) The AOI of a close corporation may provide that the
business of the corporation shall be managed by the
stockholders of the corporation rather than by a
board of directors (Sec 97, CC)
Effect of mismanagement

The suit against a member of the BOD or BOT who

A partner as such can sue a co-partner who mismanages. mismanages must be broughtin the name of the
corporation. (Derivative suit)

Extent of liability to third persons

GR: Partners are liable personally and
subsidiarily(sometimes solidarily) for partnership debts to Stockholders are liable only to the extent of the shares
third persons subscribed by them whether paid or not.
XPN: Limited partner
Right of Succession

141 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

No right of succession Has right of succession

Transferability of Share Holders interest
Stockholder has the right to transfer his shares
Partner cannot transfer his interest in the partnership without prior consent of the other stockholders unless
without the consent of all the other existing partners. the right of first refusal is embodied in the articles of
incorporation.
Dissolution
May be dissolved any time by the will of any or all of the
Can only be dissolved with the consent of the State.
partners.
Death or insolvency of shareholders cant dissolve the
Death, civil interdiction and insolvency of a partner
corporation.
dissolve the partnership.

Q: Does a defective incorporation result into a CLASSES OF CORPORATION

partnership?
A: The answer depends on whether or not there is a
clear intent to participate in the management of the
business affairs on the part of the investor.
The following are the classes of corporation:
1. As to whether their membership is represented
by shares of stock or not:

Parties who intends to participate or has actually
participated in the business affairs of the proposed
corporation would be considered as partners under a
de facto partnership.
On the other hand, parties who took no part
notwithstanding their subscriptions do NOT become
partners with other subscribers. (Pioneer Insurance
vs. CA, GR No. 84197, July 28, 1989.)
Q: Distinguish between a Joint Account and a
Partnership.
a. Stock one which have capital stock divided
into shares and are authorized to distribute
to the holders of such shares dividends or
allotments or the surplus profits on the basis
of the shares held. (Sec. 3, CC.)
b. Non-Stock is one which do not issue shares
and are created not for profit but for public
good and welfare and where no part of its
income is distributable as dividends to its
members, trustees, or officers. (Sec. 87, CC.)
2. As to the number of persons who compose them:

A: a. Corporation aggregate corporation

JOINT ACCOUNT PARTNERSHIP consisting of more than one member or
Has no firm name and is Has a firm name. corporator. The CC requires that these
conducted In the name corporations must be formed by not less
of the ostensible than 5 persons (Sec. 10, CC.);
partner. b. Corporation Sole religious corporation
Has no juridical Has juridical personality which consists of one member or corporator
personality and can sue and may sue or be sued only and his successor.
or be sued only in the under its firm name
name of the ostensible 3. As to whether they are for religious purpose or
partner. not:
Has no common fund. Has a common fund.
The ostensible partner All general partners have a. Ecclesiastical corporation one organized for
manages its business the right of religious purpose.
operations. management. b. Lay corporation one organized for a purpose
Liquidation thereof can Liquidation may, by other than for religion.
only be done by the agreement, be entrusted
ostensible partner. to a partner or partners. 4. As to whether they are for charitable purpose or
not:

a. Eleemosynary one established for religious

purposes.
b. Civil one established for business or profit.

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5. As to state or country under or by whose laws
they have been created:
a. Domestic one incorporated under the laws
of the Philippines
b. Foreign one formed, organized, or existing
under any laws other than those of the
Philippines and whose laws allow Filipino
citizens and corporations to do business in
its own country or state. (Sec 123, CC.)
6. As to their legal right to corporate existence:
a. De jure one existing both in fact and in law
b. De facto one existing in fact but not in law
7. As to whether they are open to the public or not:
a. Close one which is limited to selected
persons or members of the family. (Sec 96
105, CC.)
b. Open one which is open to any person who
may wish to become a stockholder or
member thereto
8. As to their relation to another corporation:
a. Parent or Holding one which is related to
another corporation that it has the power
either, directly or indirectly to, elect the
majority of the director of such other
corporation
b. Subsidiary one which is so related to
another corporation that the majority of its
directors can be elected either, directly or
indirectly, by such other corporation
9. As to whether they are corporations in a true
sense or only in a limited sense:
a. True one which exists by statutory authority
b. Quasi one which exist without formal
legislative grant.
i. Corporation by prescription one which
has exercised corporate powers for an
indefinite period without interference on
the part of the sovereign power and
which by fiction of law, is given the status
of a corporation;
ii. Corporation by estoppel one which in
reality is not a corporation, either de jure
or de facto, because it is so defectively
formed, but is considered a corporation
in relation to those only who, by reason
of theirs acts or admissions, are
143
precluded from asserting that it is not a
corporation. (Sec. 21, CC.)
10. As to whether they are for public (government)
or private purpose:
a. Public one formed or organized for the
government of a portion of the State
b. Private- one formed for some private
purpose, benefit or end
Q: What are the requisites of a stock corporation?
A: For a stock corporation to exist, two requisites
must be complied with, to wit:
1. A capital stock divided into shares and
2. An authority to distribute to the holders of such
shares, dividends or allotments of the surplus
profits on the basis of the shares held (Sec. 3, CC;
Collector of Internal Revenue vs Club Filipino de
Cebu 5 SCRA 321,)
Q: What are the requisites of a de facto corporation?
A: LAP
1. Organized under a valid Law.
2. Attempt in good faith to form a corporation
according to the requirements of the law.
Note: Issuance of Certificate of Incorporation by SEC is a
minimum requirement for the formation of the
Corporation in good faith.(Sundiang,supra, 2009, pg.
180.)
3. Use of corporate Powers - The corporation must
have performed the acts which are peculiar to a
corporation like entering into a subscription
agreement, adopting by-laws, and electing
directors.
Q: Can the existence of a de facto corporation be
collaterally attacked?
A: GR:No. The existence of a de facto corporation
shall not be inquired into collaterally in any private
suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo
warranto proceeding. (Sec. 20, CC.)
XPN: Collateral attack will be permitted, however,
when the lack of right or the wrong doing of the
corporation is in issue because in violation of public
policy or of express or implied statutory requirement,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

such as denial of its right to enforce contracts entered or stockholders are liable as partners.(De Leon, supra,
into without compliance with prohibitions of express pg. 107-108.)
or implied statutory or public policy.
Q: What are the rules governing a corporation by
Thus, the defendant may question the personality of estoppel?
a foreign corporation transacting business in the
Philippines to maintain a suit on the ground that it is A:
not duly licensed to do business in our country. (De 1. All persons who assume to act as a corporation
Leon, supra, pg. 204 citing 18 Am. Jur. 2d 606 and knowing it to be without authority to do so shall be
Sec. 133 of the CC.) liable as general partners for all debts, liabilities and
damages incurred or arising as a result.
Q: Distinguish between a de facto corporation and a
de jure corporation. 2. When any such ostensible corporation is sued on
any transaction entered by it as a corporation or on
A: any tort committed by it as such, it shall not be
DE FACTO DE JURE allowed to use as a defense its lack of corporate
One which actually One created in strict or personality.
exists for all practical substantial conformity
purposes as a with the mandatory 3. One who assumes an obligation to an ostensible
corporation but which statutory requirements corporation as such, cannot resist performance
has no legal right to for incorporation. thereof on the ground that there was in fact no
corporate existence as corporation.(Sec 21, CC.)
against the State.
There is a colorable There is substantial Note: Where there is no third person involved and the
compliance with the compliance with the conflict arises only among those assuming the form of a
corporation who know that the corporation has not been
requirements of the law requirements of the law
registered, there is NO corporation by estoppel.(Lozano v
creating the corporation. creating the corporation. Judge Delos Santos G. R. No. 125221.
Can be attacked directly Its right to exist as a
but not collaterally. corporation cannot be Q: Distinguish de facto corporation from corporation
successfully attacked or by estoppel.
questioned by any party
even in direct proceeding A:
for that purpose by the DE FACTO CORPORATION BY
State. (De Leon, supra, CORPORATION ESTOPPEL
197-198)
There is no existence in
There is existence in law
law
Q: What are the liabilities of officers and directors/
The dealings among the The dealings among the
trustees of a de facto corporation?
parties on a corporate parties on a corporate
basis is not required basis is required
A: The liabilities and penalties attending to officers
The State reserves the
and directors/ trustees of a de jure corporation shall Quo warranto
right to question its
be the same as those of a de facto corporation. This proceeding is not
existence through a quo
includes the liability under the criminal law. applicable
warranto proceeding
Stockholders in a de
Q: Can the members of a de facto corporation be Stockholders are liable
facto corporation are
held liable as partners by third persons? as general partners for
liable as a de jure
all debts, liabilities and
corporation
A: The members of a de facto corporation cannot be damages incurred
held liable as partners by third persons who deal with
them in their supposed corporate capacity, merely on
Q: University Publishing Company (UPC), through its
account of a technical defect in the formation of the
president, entered into a contract with Albert to
corporation.
publish the commentaries on the Revised Penal
Code. UPC published the commentaries but it did
On the other hand, where an attempt to organize a
not remit the amount due to Albert. This prompted
corporation fails by omission of some substantial
Albert to file a collection suit.
step or proceeding required by the law, its members

UNIVERSITY OF SANTO TOMAS 144

2013 GOLDEN NOTES
 THE CORPORATION CODE
The RTC decided against UPC. When the Sheriff were
about to implement the writ of execution against
the company, he discovered that UPC is not
registered corporation. Consequently, the president
of UPC was substituted in the writ of execution.
The president invoked the separate legal personality
of the corporation as his defense. 1) Is UPC a de
facto corporation? 2) Can the defense that UPC is a
corporation by estoppel be invoked by the
president? 3) Who is liable for the debts of the
corporation?
A:
1. No. UPC cannot be a considered a de facto
corporation because it was not registered with the
SEC
2. No. One who has induced another to act upon his
willful misrepresentation that a corporation was duly
organized and existing under the law, cannot
thereafter set up against his victim the principle of
corporation by estoppel.
3. The president, who negotiated with Albert is liable.
A person acting or purporting to act on behalf of a
corporation which has no valid existence assumes
such privileges and obligations and becomes
personally liable for contracts entered into or for
other acts performed as such agent (Albert v
University Publishing Co. G.R. No. L-19118, January
30, 1965).
Q: Does a religious corporation have to be registered
as a corporation?
A: No, the Corporation Code does not require any
religious groups to be registered as a corporation but
if it wants to acquire legal personality, its members
should incorporate under the Code.
Q: How is a corporation sole organized?
A: By the mere filing of a verified articles of
incorporation by the head of any religious
denomination, sect or church with the SEC without
the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical
character is acquired which is separate and distinct
from his natural character.
Note: A corporation sole is not required to file by-laws, it is
governed by the rules, regulations and discipline of its
religious denomination, sect or church.
145
Q: What is the nationality of a corporation sole?
A: A corporation sole does not have any nationality
but for purposes of applying nationalization laws,
nationality is determined not by the nationality of its
presiding elder but by the nationality of its members,
constituting the sect in the Philippines. Thus, the
Roman Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope. (Roman
Catholic Apostolic Church v. Land Registration
Commission, G.R. No. L-8451, Dec. 20, 1957)
Q: May a corporation sole acquire property?
A: Yes, a corporation sole may acquire property even
without court intervention by purchase, donation and
other lawful means. (Ibid.)
Q: Father X, an American priest who came from New
York, registered the Diocese of Bacolod of the
Roman Catholic Church which was incorporated as a
corporation sole. There were years when the head
of the Diocese was a Filipino, but there were more
years when the heads were foreigners. Today, the
head is an American again. Y donated a piece of land
located in Bacolod City for use as a school. Which
statement is most accurate? (2012 Bar Question)
a. The Register of Deeds of Bacolod City can refuse
to register and transfer the title because the
present head of the corporation sole is not a
Filipino.
b. The nationality of a corporation sole depends
upon the nationality of the head at any given
time.
c. A corporation sole, regardless of the nationality
of the head, can acquire real property either by
sale or donation.
d. A corporation sole is not legally allowed to own
real property.
A: C. Any corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes.
(Sec. 113, Corporation Code.)
Being a mere administrator of the temporalities or
properties titled in his name, constitutional provisions
requiring 60 (or 100) per centum Filipino ownership
are not applicable to the corporation sole. The
ownership thereof devolves upon the church or
congregation acquiring the same. To own the
property, compliance with the constitutionally
required 60 (or 100) per centum Filipino capital is
determined by the nationality of the constituents of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the diocese (church or congregation), and not the
nationality of the actual incumbent of the parish (the
Corporation Sole or the head of the church or
congregation) (De Leon, supra, pg. 733-734, citing SEC
Opinions, Nov. 6, 1990 and Sept. 21, 1993).
Q: How may a corporation sole alienate property?
A:
1. By obtaining an order from the RTC of the province
where the property is situated after notice of the
application for leave to sell or mortgage has been
given by publication or otherwise and by showing
that it is for the interest of the corporation that
leave to sell or mortgage should be granted.
2. In cases where the rules, regulations and discipline
of the religious denomination, sect or church,
religious society or order concerned represented by
such corporation sole regulate the method of
acquiring, holding, selling and mortgaging real
estate and personal property, such rules,
regulations and discipline shall control, and the
intervention of the courts shall not be necessary.
(Sec. 113, CC.)
Q: If a corporation sole wants to become a
corporation aggregate, does it need to be dissolved
first?
A: No. There is no point to dissolving the corporation
sole of one member to enable the corporation
aggregate to emerge from it. The Corporation Code
provides no specific mechanism for amending the
articles of incorporation of a corporation sole but
Section 109 of the Corporation Code allows the
application to religious corporations of the general
provisions governing non-stock corporations.
In non-stock corporations, the amendment needs the
concurrence of at least two-thirds of its membership.
If such approval mechanism is made to operate in a
corporation sole, its one member in whom all the
powers of the corporation technically belongs, needs
to get the concurrence of two-thirds of its
membership (Iglesia Evangelica Metodista v. Bishop
Lazaro. GR. 184088 July 6, 2010).
NATIONALITY OF CORPORATIONS
Q: What are the tests in determining the nationality
of corporations?
A:
1. Place of Incorporation test
2. Control test
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
3. Grandfather rule Nationality is attributed to the
percentage of equity in the corporation used in
nationalized or partly nationalized area. This test
is an exception to the Control Test and was
applied by the SEC in several cases.
4. Domiciliary test Determined by the principal
place of business of the corporation.
PLACE OF INCORPORATION TEST
In using the Place of Incorporation test, the
nationality of a corporation is determined by the
state of incorporation, regardless of the nationality of
the stockholders.
XPN: A corporation organized/incorporated abroad
and registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstading and entitled to vote is wholly
owned by Filipinos, may be considered a Philippine
National under the Foreign Investments Act of 1991.
This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3,
2004; De Leon, The Corporation Code of the
Philippines Annotated, 2010 ed.)
CONTROL TEST
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
This test was adopted by the Foreign Investment Act
of 1991 (R.A. 7042) as a general guideline in
determining the nationality of corporations engaged
in a nationalized activity (Sec Opinion No. 07-20, Nov
20, 2007).
Q: What are the requisites of the control test?
A: C F C
1. Control, not mere majority or complete stock
control, but Complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked such that the
corporate entity as to this transaction had at that
time no separate mind, will or existence of its
own;
2. Such control must have been used by the
defendant to commit Fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest or unjust act in
contravention of plaintiffs legal right; and
146
 THE CORPORATION CODE
3. The control and breach of duty must
proximatelyCause the injury or unjust loss
complained of. (Velarde v. Lopez, Inc., G.R. No.
153886, Jan. 14, 2004; Heirs of Ramon Durano,
Sr. v. Uy, G.R. No. 136456, Oct. 24, 2000)
Q: How is the control testapplied in determining the
nationality of a corporation?
A: Under RA 7042, the following are considered
Philippine Nationals:
1. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens.
Note: R.A 7042 provides that where a corporation and
its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least 60% of the capital stock
outstanding and entitled to vote of both corporations
and at least 60% of the members of the board of
directors of both corporations must be Filipino citizens
(DOUBLE 60% RULE).
2. Corporations organized abroad and registered as
doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.
Q: What is the nationality of a corporation organized
and incorporated under the laws of a foreign
country, but owned 100% by Filipinos? (1998 Bar
Question)
A: Under the control test of corporate nationality, a
corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
Filipinos is classified as a Philippine National. Where
there are grounds for piercing the veil of corporate
entity, the corporation will follow the nationality of
the controlling members or stockholders, since the
corporation will then be considered as one and the
same.
GRANDFATHER RULE
Q: How do you apply the Grandfather Rule in
determining the nationality of a corporation?
A: To ensure compliance with the constitutional
limitation(s) of corporations engaging in nationalized
activities, the nationality of a corporation must be
determined by ascertaining if 60% of the investing
corporations outstanding capital stock is owned by
Filipino citizens, or as interpreted, by natural or
individual Filipino citizens. If such investing
147
corporation is in turn owned to some extent by
another investing corporation, the same process
must be observed. (Redmont Consolidated Mines
Corporation vs. McArthur Mining Corporation, SEC En
Banc Case No. 09-09-177, March 25, 2010).
Reason: One must not stop until the citizenships of
the individual or natural stockholders of layer after
layer of investing corporations have been established,
the very essence of the Grandfather Rule. (ibid.)
Q: What are the rules governing the application of
the Grandfather Rule?
A:
1. The grandfather rule should be used in determining
the nationality of a corporation engaged in a partly
nationalized activity. (SEC-OGC Opinion No. 10-31,
December 9, 2010) This applies in cases where the
stocks of a corporation are owned by another
corporation with foreign stockholders exceeding 40%
of the capital stock of the corporation.
2. The Grandfather Rule will not apply in cases where
the 60-40 Filipino-alien equity ownership in a
particular natural resource corporation is not in
doubt. (DOJ Opinion No. 19, s. 1989). If the
stockholder corporation is 60% or more owned by
Filipinos, all the stock held by the stockholder
corporation is deemed to be held by Filipinos.
3) When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the SEC is
not precluded from using the Grandfather Rule. (SEC-
OGC Opinion No. 22-07 dated December 7, 2007).
Q: Several American doctors wanted to set up a
group clinic in the Philippines so they could render
modern medical services. If the clinic is to be
incorporated under our laws, what is the required
foreign equity participation in such a corporation?
(2011 Bar Question)
A: 0%
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: What are the nationalized activities reserved for Filipinos under the Constitution and special laws?

A:
100% Filipino Owned
(Zero percent (0%) foreign equity)
(CODE: CoFi AMMaN Co. ProMiSe- US$2.5M)

a. COoperatives(Ch. III, Art. 26, R.A. 6938);

b. Manufacture of FIrecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183).
c. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological
weapons and Anti-personnel mines (Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines).
d. Mass media except recording
e. Utilization of MArine resources (Art. XII, Sec. 2, Constitution);
f. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Art. II, Sec. 8,
Constitution);
g. COckpits (Sec. 5, P.D. 449);
h. Practice of all PROfessions
i. Law
ii. Medicine and allied professions
iii. Accountancy, etc.
i. Small-scale MIning (Sec. 3, R.A. 7076);
j. Private SEcurity agencies (Sec. 4, R.A. 5487);
k. Retail trade enterprises with paid-up capital of less than US$2.5 M(Sec. 5, R.A. 8762);

80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
(Code: Prc)
a. Private Radio Communications network (R.A. 3846).

75 % Filipino Owned
(Up to twenty-five percent (25%) foreign equity)
(Code: LoRD F)

a. Contracts for the construction and repair of LOcally-funded public works (Sec. 1, CA 541, LOI 630)
except:
i. infrastructure/development projects covered in R.A. 7718; and
ii. projects which are foreign funded or assisted and required to undergo international
competitive bidding (Sec. 2[a] , R.A. 7718);
b. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442);
c. Contracts for the construction of Defense-related structures (Sec. 1, CA 541).
d. Under the Flag Law, in the purchase of articles for the Government, preference shall be
given to materials and supplies produced, made, or manufactured in the Philippines, and to
domestic entites. Domestic entites means any citizen of the Philippines or commercial company
at least 75% of the capital of which is owned by citizens of the Philippines (Sec. 1, C.A. 138)

70 % Filipino Owned
(Up to thirty percent (30%) foreign equity)
(Code: AdPawn)

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2013 GOLDEN NOTES
 THE CORPORATION CODE

a. Advertising (Art. XVI, Constitution)

b. Corporations engaged in pawnshop business (Sec. 8, P.D. 114)

60 % Filipino Owned
(Up to forty percent (40%) foreign equity)
(Code: Go LEARN CUPIDCo)

a. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183)
b. Ownership of private Lands (Art. XII, Sec. 7, Constitution; Ch. 5, Sec. 22, CA 141; Sec. 4, R.A.
9182);
c. Ownership/establishment and administration of Educational institutions (Art. XIV, Sec. 4,
Constitution);
d. Adjustment Companies (Sec. 323, P.D. 613)
e. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5,
P.D. 194;
f. Exploration, development and utilization of Natural resources (Art. XII, Sec. 2 , Constitution);
g. Ownership of Condominium units where the common areas in the condominium project are
co-owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726).
h. Operation and management of public Utilities (Art. XII, Sec. 11, Const.; Sec. 16 of CA 146);
i. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise
(Art. XII, Sec. 11, Constitution; Sec. 2a, R.A. 7718);
j. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP
clearance (R.A. 7042 as amended by R.A. 8179)
k. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550)
l. Corporations engaged in Coastwise shipping (Sec. 806, P.D. 1464)

40 % Filipino Owned
(Up to sixty percent (60%) foreign equity)
(Code: FI [SEC] )

a.Financing companies regulated by the SEC(Sec. 6, R.A. 5980 as amended by R.A. 8556);
b. Investment houses regulated by the SEC(Sec. 5, P.D. 129 as amended by R.A. 8366).

CORPORATE JURIDICAL PERSONALITY A:

1. Liability for acts or contracts As a general rule,
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
The doctrine of corporate juridical personality states
that a corporation is a juridical entity with legal
personality separate and distinct from those acting
for and in its behalf and, in general, from the people
comprising it. (Francisco v Mallen Jr. G.R. No. 173169,
September 22, 2010)
Q: What are the significances of the doctrine of
separate personality?
the obligation of the corporation is not the
liability of the stockholders, officers or directors
(Remo vs. IAC, G.R. No. L-67626, April 18, 1989).
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be
connected, and vice versa.(Cease vs. CA,G.R. No.
L-33172, Oct. 18, 1979)

149 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
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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 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 corporation
remains unchanged and unaffected in its identity
by changes in its individual membership or
ownership of its stocks.
Q: Are stockholders entitled to possess the property
of the corporation?
A: No.The interest of the shareholder in the
properties of the corporation is inchoate only. The
interest of the shareholder on a particular property
becomes actual, direct and existing only upon the
liquidation of the assets of the corporation and the
provided that the same property is assigned to the
shareholder concerned.
Q: Are corporations entitled to constitutional rights?
A: Corporations are entitled to the following rights
under the constitution;
1. Right to Due Process (Sec. 1, Art. III,
Constitution.)
2. Right against unreasonable searches and seizures
(Sec. 2, ibid.)
However, the corporation is not entitled to the right
against self-incrimination, being a mere creature of
law. (Bataan Shipyard & Engineering v. PCGG , G.R.
No. 75885, May 27, 1987.)
LIABILITY FOR TORTS AND CRIMES
Q: Can a corporation be held liable for torts?
A: The corporation is liable for every tort which it
expressly directs or authorizes(PNB v. CA, G.R. No. L-
27155, May 18, 1978.)
Reason: A corporation is civilly liable in the same manner as
natural persons for torts, because generally speaking, the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
rules governing the liability of a principal or master for a
tort committed by an agent or servant are the same,
whether the servant or agent be a natural or artificial
person. (ibid.)
Q: Is a corporation liable for crimes?
A:
GR: No. Since a corporation is a mere creation of
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.
(People v. Tan Boon Kong, G.R. No. L-32066. Mar.
15, 1930)
XPN: If the penalty of the crime is only fine or
forfeiture of license or franchise. (Ching v Secretary
of Justice, G. R. No. 164317, Feb. 6, 2006.)
RECOVERY OF MORAL DAMAGES
Q: Are corporations entitled to moral damages?
A: GR: A corporation is not entitled to moral damages
because it has no feelings, no emotions, no senses.
(ABS-CBN Broadcasting Corporation v. CA, G.R. No.
128690 Jan 21, 1999 and Phillip Brothers Oceanic, Inc,
G.R. No. 126204, Nov. 20, 2001)
XPN:
1. The corporation may recover moral damages
under item 7 of Article 2219 of the New Civil
Code because said 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
injured party is a natural or juridical person.
Therefore, a corporation, as a juridical person,
can validly complain for libel or any other form
of defamation and claim for moral damages
(Filipinas Broadcasting Network, Inc. v. AMEC-
BCCM, G.R. No. 141994, Jan 17, 2005.)
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the
business realm (Manila Electric Company v.
T.E.A.M. Electronics Corporation, et. al., G.R. No.
131723, Dec. 13, 2007).
DOCTRINE OF PIERCING THE CORPORATE VEIL
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard the notion
150
 THE CORPORATION CODE
of separate personality of a corporation for justifiable
reason/s.
Note: This is an exception to the Doctrine of Separate
Corporate Entity.
Q: What is needed in order to justify the piercing of
the Corporate Veil?
A: Allegation or proof of fraud or other public policy
considerations (Hacienda Luisita Incorporated vs.
Presidential Agrarian Reform Council, G.R. No.
171101, November 22, 2011)
Q: What is the effect of piercing the corporate veil?
A: Courts will look at the corporation as an
aggregation of persons undertaking the business as a
group.
Note: When the veil of corporate fiction is pierced in
proper cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. The
decision applies only for that particular case. (Reynoso IV
vs. CA, G.R. Nos. 11612425, Nov 22, 2000)
Q: Is the juridical character of the corporation
entirely abrogated by the piercing of the veil?
A: When the veil of corporate fiction is pierced in
proper cases, the corporate character is not
necessarily abrogated. It continues for legitimate
objectives. The decision applies only for that
particular case. (ibid.)
GROUNDS FOR APPLICATION OF DOCTRINE
When the veil of corporate fiction is used as a shield:
(grounds)
1. To perpetuate fraud,
2. To defeat public convenience,
3. Justify wrong or
4. Defend crime or
5. For ends subversive of the policy and purpose
behind its creation, especially where the
corporation is a closed family corporation,
on equity considerations, this fiction will be
disregarded and the individuals composing it or two
corporations will be treated as identical. (Sundiang,
2009, supra, pg. 172 citing Cruz vs. Dalisay, AM No. R-
181-P, July 31, 1987; De Leon, supra, pg. 27, citing
Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160 [1961],
Emiliano Cano Enterp., Inc. vs. CIR, 13 SCRA 290
[1965].)
151
Q: What are some of the circumstances which do
NOT warrant the piercing of the corporate veil?
A: The mere fact that:
1. A corporation owns 50% of the capital stock of
another corporation, or the majority ownership
of the stocks of a corporation is not per se a
cause for piercing the veil.
2. Two corporations have common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is not
in itself sufficient ground to disregard separate
corporate entities.
3. There is a substantial identity of the
incorporators of the 2 corporations does not
necessarily imply fraud and does not warrant
piercing the corporate veil.
TEST IN DETERMINING APPLICABILITY
The following are the tests in determining the
applicability of the doctrine of piercing the corporate
veil:E C A O
1. When the corporation is used to defeat of public
convenience as when the corporate fiction is used as
a vehicle for the evasion of an existing obligation;
(Equity Cases)
2. In fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime;
(Control Test)
3. In Alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or
adjunct of another corporation (Timoteo H. Sarona
vs. National Labor Relations Commission, Royale
Security Agency, et al., G.R. No. 185280, January 18,
2012.).
4. The Objective test where the end result in piercing
the veil of corporate fiction is to make the
stockholders liable for debts and obligations of the
Corporation not to make the Corporation liable for
the debts and obligations of the stockholders. (Umali
v CA, G.R. No. 89561, Sept. 13, 1990.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: How do you justify piercing the veil of corporate
fiction on the basis of equity?
A: Equity cases applying the piercing doctrine are
what are termed the "dumping ground", where no
fraud or alter ego circumstances can be culled by the
Court to warrant piercing.
The main feature of equity cases is the need to
render justice in the situation at hand or to brush
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types of
piercing. (Villanueva, Corporation Law 2010.)
Specifically, the equity test can be applied when;
1. The corporate personality would be inconsistent
with the business purpose of the legal fiction, or
2. The piercing the corporate fiction is necessary to
achieve justice or equity for those who deal in good
faith with the corporation,
3. When the use of the separate juridical personality
is used to confuse legitimate issues
*The requisites of the control test are the same as
those applied in the determination of the nationality
of the corporation. Please refer to page 139 for the
review of the said topic.
Q: What are the indications that a subsidiary
corporation is a mere instrumentality of its parent
corporation?
A:
1. The parent corporation owns all or most of the
capital stock of the subsidiary.
2. The parent and subsidiary corporations have
common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
7. The subsidiary has substantially no business except
with the parent corporation or no assets except those
conveyed to or by the parent corporation.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described
as a department or division of the parent corporation,
or its business or financial responsibility is referred to
as the parent corporation's own.
9. The parent corporation uses the property of the
subsidiary as its own.
10. The directors or executives of the subsidiary do
not act independently in the interest of the subsidiary
but take their orders from the parent corporation.
11. The formal legal requirements of the subsidiary
are not observed. (PNB vs. Ritratto Group G.R. No.
142616, July 31, 2001.)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's decision,
X Corporation was found to be without assets.
Thereafter, plaintiffs filed an action against its
present and past stockholder Y Corporation which
owned substantially all of the stocks of X
corporation. The two corporations have the same
board of directors and Y Corporation financed the
operations of X corporation. May Y Corporation be
held liable for the debts of X Corporation? Why?
(2001 Bar Question)
A: Yes. Y Corporation may be held liable for the debts
of X Corporation. The doctrine of piercing the veil of
corporation fiction applies to this case. The two
corporations have the same board of directors and Y
Corporation owned substantially all of the stocks of X
Corporation, which facts justify the conclusion that
the latter is merely an extension of the personality of
the former, and that the former controls the policies
of the latter. Added to this is the fact that Y
Corporation controls the finances of X Corporation
which is merely an adjunct, business conduit or alter
ego of Y Corporation (CIR v. Norton & Harrison
Company, G.R. No. L17618, Aug. 31, 1964).
Q: X Corp. operates a call center that received
orders for pizzas on behalf of Y Corp. which operates
a chain of pizza restaurants. The two companies
have the same set of corporate officers. After 2
years, X Corp. dismissed its call agents for no
apparent reason. The agents filed a collective suit
for illegal dismissal against both X Corp. and Y Corp.
based on the doctrine of piercing the veil of
corporate fiction. The latter set up the defense that
the agents are in the employ of X Corp. which is a
separate juridical entity. Is this defense appropriate?
(2011 Bar Question)
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 THE CORPORATION CODE
A: Yes, it is not shown that one company completely
dominates the finances, policies, and business
practices of the other.
Q: X owns 99% of the capital stock of SSS
Corporation. X also owns 99% of TTT Corporation.
SSS Corporation obtained a loan from VW Bank. On
due date, SSS Corporation defaulted. TTT
Corporation is financially healthy. Which statement
is most accurate? (2012 Bar Question)
a. X being a controlling owner of SSS Corporation
can automatically be held personally liable for
the loan of SSS Corporation.
b. TTT Corporation, owned 99% by X, can
automatically be held liable.
c. SSS Corporation and TTT Corporation, although
both are owned by X, are two (2) distinct
corporations with separate juridical
personalities hence, the TTT Corporation cannot
automatically be held liable for the loan of SSS
Corporation.
d. The principle of piercing the veil of corporate
fiction can be applied in this case.
A: C.Mere ownership by a single stockholder of all or
nearly all of the capital stock of a corporation is not
by itself sufficient reason for disregarding the fiction
of separate corporate personalities. (Land Bank of the
Philippines, GR No. 127181, Sept. 4, 2001.) Thus, the
fact that X owns majority of the shares in both
corporations does not automatically arise to one and
the same personality or an intertwined ownership of
said corporations.
INCORPORATION AND ORGANIZATION
Q: What is incorporation?
A: It is the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts,
certification or records, which give the corporation its
existence.
Q: What are the steps in the creation of a
corporation?
A:
1. Promotion
2. Incorporation (Sec10)
3. Formal organization and commencement of
business operations ( Sec22)
Q. What are the components of a corporation?
A: DUMP-ISCO
153
1. Corporators Those who compose a corporation,
whether as stockholders or members
2. Incorporators They are those mentioned in the
Articles of Incorporation as originally forming and
composing the corporation and who are
signatories thereof.
3. Directors and trustees The Board of Directors is
the governing body in a stock corporation while
the Board of Trustees is the governing body in a
non-stock corporation.
4. Corporate Officers Officers who are identified
as such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the corporation.
5. Stockholders Owners of shares of stock in a
stock corporation.
6. Members Corporators of a corporation which
has no capital stock. They are not owners of
shares of stocks, and their membership depends
on terms provided in the articles of incorporation
or by-laws (Sec. 91).
7. 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. (Sec. 3.10, R.A.
No. 8799, SRC)
8. Subscriber persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be formed.
9. Underwriter a person who guarantees on a firm
commitment and/or declared best effort basis
the distribution and sale of securities of any kind
by another.
Q: What are the kinds of underwriting agreement?
A:
1. English the underwriter sells what the
corporation cannot sell
2. Firm Commitment the underwriter purchases
outright the securities and then resells the same
3. Best Efforts the underwriter merely sells for
commission.
PROMOTER
A Promoter is a person who, acting alone or with
others, takes initiative in founding and organizing the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

business or enterprise of the issuer and receives organization, as long as they are acting as promoters.
consideration therefor. (Sec.3.10, SRC.) (ibid., pg. 122-123.)

Specifically, a promoter is a person who brings about Note: This fiduciary relation imposes upon the promoter to
or cause to bring about the formation and act in good faith in all dealings in behalf of the corporation
organization of a corporation by: to protect the corporation from dishonest promoters.
(ibid.)
1. bringing together the incorporators or the
persons interested in the enterprise, Q: Is a promoter an agent of the corporation?
2. procuring subscriptions or capital for the
A: No. The promoters are not in any sense agents of
corporation and
3. setting in motion the machinery which leads to the corporation before it comes into existence for
the incorporation of the corporation itself. there cannot be an agency unless there is a principal.
But, they may become the agents of the corporation
after it has been formed provided there is assent,
Q: What do promotional activities include?
express or implied, on the part of the corporation.
(ibid.)
A: DIA
Q: Can a promoter be an agent of an incorporator/
1. Discovery consists of finding a business
corporator/ subscriber before the commencement
opportunity to be developed
of the corporate existence?
2. Investigation entails an analysis of the proposed
A: Yes. Before the corporation is formed, the
business to determine whether or not it is
promoters are considered agents of the subscribers,
economically feasible.
the incorporators or corporators.
3. Assembly Includes the bringing together of the
Note: The subscribers for stock in a proposed corporation
necessary personnel, property or money to set the do not, without agreement to such effect, become partners
business in motion as well as secondary details of with the promoters of it. (ibid.)
setting up the corporation itself (De Leon, supra, pg.
122.) Q: Distinguish a promoter from a corporation by
Q: Distinguish a promoter from a promotee of a estoppel.
corporation
A:
A: CORPORATION BY
PROMOTER PROMOTEE PROMOTER
ESTOPPEL
Those who merely Persons assume to act as
Involved in the initial No misrepresentation
subscribe to the shares a corporation knowing it
steps that finally led to that the corporation
of stock of a corporation to be without authority to
the incorporation does not yet exist
to be formed do so
Promoters organize a
corporation and are LIABILITY OF PROMOTER
Merely passive investors.
active participants in its
formation Q: What are the rules governing the liability of
A mere promotee should promoters in pre-incorporation agreements?
Promoter(s) have joint not be held liable for a
personal liability for a promoters liability in a A:
corporation which was corporation which was 1. If Corporation was never formed - The promoter is
not formed not formed liable for his pre-incorporation acts and assumes
the risk that he may not be reimbursed or relieved
Q: What is the nature of the relation of the of liability in the event that the corporation is not
promoter to the corporation? formed. (Wells v. Fay & Egan Co., 143 Ga. 732)

A: The promoter occupies a fiduciary or quasi-trust If the promoter contracts as an agent, when in fact
relation toward the corporation when it comes into he has no principal, he will be personally liable.
existence and towards the subscribers prior to its (Ibid.)

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2013 GOLDEN NOTES
 THE CORPORATION CODE
Thus,
GR:The promoter is liable to return the money paid
by the subscribers for shares in a projected
corporation, which failed to organize. This
notwithstanding that the money has been
already applied in payment of preliminary
expenses or otherwise.
Note: It must be shown by the subscriber that the
person receiving the money sought to be recovered
was authorized to receive it and the fact that the
said person actually received it.
XPN: Where the subscriber agrees that the amount
paid on his subscription may be applied on
certain promotional or development expenses
and it is so applied, the promoters are not
personally liable for the amount paid on the
subscription. (De Leon, supra, pg. 126-127.)
2. If Corporation was formed;
GR: If the contract is partly to be performed before
incorporation, the promoters solely are liable
even if the promoter signed "on behalf of
corporation to be formed, who will be obligor,"
(Stanley J. How & Assoc., Inc. v. Boss, 222 F.
Supp. 936,1963 U.S. Dist. 1963)
XPN: The promoter may be absolved from liability
by the adoption of the corporation of the
contract. The adoption must be expressed in a
novation or agreement to the effect:
a. that the creditor agreed to look solely to
the new corporation for payment; or
b. that the promoter did not have any duty
toward the creditor to form the
corporation and give the corporation the
opportunity to assume and pay the
liability. (ibid.)
LIABILITY OF CORPORATION FOR PROMOTERS
CONTRACT
Q: Is the corporation liable for the promoters
contracts?
A: GR:Since a corporation cannot, before its
organization, have agents contract for itself, or be
contracted with, it is NOT liable upon any contract
which a promoter attempts to make for it prior to its
organization.
XPN:
a. the contract is expressly or impliedly adopted
155
or ratified by the corporation after its
organization is completed or
b. liability is imposed by statute.
Note: Until such assumption of liability is made by the
corporation, the better rule is that the contracts
entered into by promoters should at most be deemed
suspended, and enforceable only after the
incorporation and organization of the corporation.
(Ibid, pg. 125-126.)
Q: Is the corporation liable for promotion fees?
A: GR: No. The corporation is not liable to its
promoters for their service fees incurred before
incorporation.
XPN:
1. The corporation expressly agrees to make such
payment or
2. From other facts the court can infer a new
contract to reimburse (Ibid., pg. 124.) or
3. If the same is provided for in the registration
statement of securities filed with the SEC (Sec.
8[34], Revised Securities Act.)
Q: Can the stockholders of the corporation be held
personally liable for the compensation claimed by
promoters?
A: No. Stockholders cannot be held personally liable
for the compensation for services performed by
promoters in the organization of the corporation in
the absence of any showing that said stockholders
contracted such services. The fact that they benefited
from such services is no justification to hold them
personally liable therefore. (Ibid., pg. 123, citing
Caram, Jr. vs. CA, 151 SCRA 372 [1987].)
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Q: What are the required number and the
qualifications of incorporators in a stock
corporation?
A:N5L - R1
1. GR:Natural person
XPN:Under theRural Banks Act of 1992,
incorporated cooperatives are allowedto be
incorporators of rural banks.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

2. GR:Incorporators must not be less than 5 but not Note: Non-residents may be incorporators because the law
more than 15 only requires that the majority of incorporators be
XPN: Corporation sole residents of the Philippines.

3. An incorporator must be of Legal age Q: X is a Filipino immigrant residing in Sacramento,

California. Y is a Filipino residing in Quezon City,
4. Majority of the incorporators must be Residents Philippines. Z is a resident alien residing in Makati
of the Philippines. City. GGG Corporation is a domestic corporation
40% owned by foreigners and 60% owned by
5. Each must own or subscribe to at least 1 share. Filipinos, with T as authorized representative. CCC
(Sec.10, CC.) Corporation is a foreign corporation registered with
the Philippine Securities and Exchange Commission.
Q: What are the distinctions between corporator KKK Corporation is a domestic corporation (100%)
and incorporator? Filipino owned. S is a Filipino, 16 years of age, and
the daughter of Y.
A:
INCORPORATOR CORPORATOR a) Who can be incorporators? Who can be
Those stockholders or subscribers?
members mentioned in b) What are the differences between an
Those who compose a incorporator and a subscriber, if there are any?
the AOI as originally
corporation, whether as (2012 Bar Question)
forming and composing
stockholders or as
the corporation and
members. A:
who are signatories
thereof. a) X, Y, and Z can be incorporators. Sec. 10 of the CC
May or may not be merely requires majority of the incorporators to
A signatory of the AOI be residents (not necessarily citizens) of the
signatory of the AOI
Philippines. Further, said incorporators must be
Ceases to be a
natural persons, of legal age and must own or
corporator by sale of his
subscribe to at least 1 share.
shares in case of stock
Does not cease to be an corporation.
Meanwhile, X, Y, Z, GGG, CCC, KKK can be
incorporator upon sale
subscribers. Residency requirement is immaterial
of his shares In case of non-stock
in subscription contracts. However, the
corporation, when the
citizenship requirement is material in
corporator ceases to be
subscription contracts if the corporation is
a member.
engaged in nationalized activities requiring at
GR: 5 to 15 natural
least majority Filipino citizenship as a
persons
requirement.
XPN:
1. In case of rural
b) The following are the differences between an
banks, registered GR: No limit
incorporator and a subscriber:
cooperatives may XPN: Close corporations
be incorporators.
INCORPORATORS SUBSCRIBER
2. corporation sole Those stockholders or They are persons who
only 1 incorporator members mentioned have agreed to take
GR: Filipino citizenship in the AOI as and pay for original,
is not a requirement. originally forming and unissued shares of a
composing the corporation formed
XPN: When engaged in corporation. or to be formed.
a business which is Same rule applies May or may not be
A signatory of the AOI
partly or wholly signatory of the AOI
nationalized where GR: 5 to 15 natural GR: No limit
majority must be persons XPN: Close
citizens. XPN: corporations not
1. In case of rural more than a specified
banks, registered number of persons,

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2013 GOLDEN NOTES
 THE CORPORATION CODE

cooperatives may be usually not exceeding a foundation shall use the word Foundation.
incorporators. 20 (Sec. 96) (SEC Memo. Circ. No. 5, Series of 2008.)

2. corporation sole 6. A persons full name or surname may be used in

only 1 incorporator a corporate name:
GR: Filipino
citizenship is not a a. If he is a stockholder of the corporation and
requirement. has consented to such use.
b. If the person is already deceased, the
XPN: When engaged consent shall be given by his estate.
Same rule applies
in a business which is c. The Commission may require a registrant to
partly or wholly explain to its satisfaction the reason for the
nationalized where use of a persons name.
majority must be d. The meaning of initials used in a name shall
citizens. be stated by the registration the articles of
Majority of the incorporation in a separate document signed
Residency by an incorporator or director. (SEC Memo.
incorporators must
requirement is not Circ. No. 5, Series of 2008.)
be residents of the
applicable.
Philippines.
7. The name of a dissolved firm shall not be allowed
CORPORATE NAME LIMITATIONS ON USE OF to be used by other firms within 3 years after the
CORPORATE NAME approval of the dissolution of the corporation by
SEC, unless allowed by the last stockholders
The limitations on the use of corporate name are as representing at least majority of the outstanding
follows: capital stock of the dissolved firm.(SEC Memo.
Circ. 14, Series of 2000.)
1. No corporate name may be allowed by the SEC if
the proposed name is identical ordeceptively or 8. For as long as a corporation is existing regardless
confusingly similar to that of any existing of whether or not it is in operation, its corporate
corporation.(Sec. 18, CC.) name cannot be used by any other group or
corporation. (SEC Opinion, Sept. 2, 1993.)
2. No corporate name may be allowed by the SEC if
the proposed name is identical or deceptively or Note: Priority of adoption determines the right to the
confusingly similar to any other name already exclusive use of a corporate name with freedom from
infringement.
protected by law. (Sec. 18, CC.)
Further, to determine whether a given corporate name is
3. The proposed name is patently deceptive, identical or confusingly or deceptively similar with
confusing or contrary to existing laws. (Sec. 18, another entitys corporate name, the corporate names
CC.) must be evaluated in their entirety. (Lyceum of the
Philippines vs. CA, 219 SCRA 610 [1993].)
4. If the name applied for is similar to the name of a
registered firm, the applicant shall at least Q: What is the doctrine of secondary meaning?
contain one or more distinctive words to the
proposed name to remove the similarity or A: It is the doctrine which states that a word or
differentiate it from the registered name. phrase originally incapable of exclusive appropriation
However, the addition of these distinctive words with reference to an article on the market, because
shall not be allowed if the registered name is geographically or otherwise descriptive, might
coined or unique unless the board of directors of nevertheless have been used so long and so
the subject corporation gives its consent to the exclusively by one producer with reference to his
applied name. (De Leon, supra, pg. 189, citing article that, in that trade and to that branch of the
SEC Memo, Cir. No. 5, Series of 2008.) purchasing public, the word or phrase has come to
mean that the article was his product.(Philippine Nut
5. The corporate name shall contain the word Industry, Inc. vs. Standard Brands. Inc. 6 SCRA 575
Corporation or its abbreviation Corp. or [1975].)
Incorporated, or Inc. The corporate name of

157 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Is the doctrine of secondary meaning applicable
to corporate names?
A: Yes. The application of this trademark law doctrine
has been extended to corporate names since the
right to use a corporate name to the exclusion of
others is based upon the same principle which
underlies the right to use a particular trademark or
trade name.(De Leon, supra, pg. 190.)
The doctrine of secondary meaning requires that the
word or phrase used in the corporate name has been
for such length of time with such exclusivity as to have
associated or identified the corporation in the mind
of the general public (or at least that portion of the
general public to do with the corporations market).
(Lyceum of the Philippines vs. CA, supra.)
Q: If a corporation changes its corporate name, is it
considered a new corporation?
A: No, it is the same corporation with a different
name, and its character is in no respect changed.
(Republic Planters Bank v. CA, G.R. No. 93073, Dec 21,
1992.)
CORPORATE TERM
Q: What is the term of corporate existence?
A: GR: The period stated in the AOI which in no case
shall exceed 50 years.
XPN: Unless sooner dissolved or unless said period is
extended. (Sec. 11, CC.)
Note: Extension may be made for periods not exceeding 50
years in any single instance by an amendment of the
articles of incorporation. However, extension must be made
within 5 years before the expiry date of the corporate term,
unless there are justifiable reasons for an earlier extension
as may be determined by the SEC. (Sec. 11, CC.)
Extension must also comply with procedural requirements
for amendment of AOI.
Q: What is the doctrine of relation or relating back
doctrine?
A: GR:The filing and recording of a certificate of
extension after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the corporation.
XPN: The doctrine of relation applies if the failure to
file the application for extension within the term of
the corporation is due to:
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
1. The neglect of the SEC officer with whom the
certificate is required to be filed or
2. A wrongful refusal on his part to receive it
(Aquino, Philippine Corporate Law Compendium,
2006).
Q: The term GGG Corporation in accordance with its
Articles of Incorporation ended last January 30,
2012. The term was not extended. What will happen
to the corporation?
a. The corporation is dissolved ipso facto.
b. There is a need to pass a board resolution to
formally dissolve the corporation.
c. The Board of Directors must pass a resolution
for the corporation to formally go into
liquidation.
d. The stockholders must pass a resolution to
dissolve the corporation.(2012 Bar)
A: A. The corporation ceases to exist and is dissolved
ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
the legal requisites of extension of period. (PNB vs.
CFI of Rizal, 209 SCRA 294 [1992].)
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENTS
Q: What are the capital stock requirements?
A: GR: There is no minimum authorized capital stock
as long as the paid-up capital is not less than
P5,000.00.
XPN: As provided by special law.
Q: What are the minimum stock subscription and
paid-up capital requirements?
A: At least 25% of the authorized capital stock as
stated in the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription (Sec 13,
CC).
Q: Is it required that each subscriber pay 25% of
each subscribed share?
A: No. It is only required that at least 25% of the total
subscribed capital must be paid.
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Q: What is paid-up capital?
A: Paid-up capital forms part of the authorized capital
stock of the corporation, subscribed and then actually
paid for. The assets transferred and the loans
extended to a corporation should not be considered
in computing the paid-up capital of the corporation
(MISCI-NACUSIP Local Chapter v. National Wages and
Productivity Commission 269 SCRA 173)
Q: When is the unpaid subscription payable?
A: The balance or the unpaid subscription shall be
payable:
1. On a date or dates fixed in the contract of
subscriptionwithout need of call, or
2. In the absence of a fixed date or dates, upon call
for payment by the BOD. (Sec. 13, CC.)
ARTICLES OF INCORPORATION (AOI)
NATURE AND FUNCTION OF ARTICLES
The Articles of Incorporation (AOI) is one that defines
the charter of the corporation and the contractual
relationships between the State and the corporation,
the stockholders and the State, and between the
corporation and its stockholders. (Government of the
Philippine Islands vs. Manila Railroad Co., 52 Phil. 699
[1929].)
Q: What is the three-fold nature of the AOI?
A: An AOI, which stands as the corporate charter is a
contract of three-fold nature because it is a contract
between:
1. the State and the corporation;
2. the corporation and the stockholders; and
3. the stockholders inter se.
CONTENTS
All corporations organized under the Code shall file
with the SEC AOI in any of the official languages duly
signed and acknowledged by all of the incorporators,
containing substantially the following matters, except
as otherwise prescribed by the Code or by special
law:
NaP- PlaTINum-ASONO
1. NAme of corporation
2. Purpose/s, indicating the primary and secondary
purposes(Purpose Clause)
3. PLAce of principal office
4. Term of existence
159
5. Names, nationalities and residences of
Incorporators
6. NUMber of directors or trustees, which shall not
be less than 5 nor more than 15, except for
corporation sole
7. 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, nationalities, 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;
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; name of treasurer elected by
subscribers; and
11. Other matters as are not inconsistent with law
and which the incorporators may deem
necessary and convenient. (Sec. 14, CC.)
Q: May an incorporator delegate the signing of the
AOI?
A: Yes. An incorporator may delegate to an attorney-
in-fact the signing of the AOI in a special power of
attorney to such effect. However, the
acknowledgment required under Sec. 15 of the CC
must reflect this fact. (De Leon, supra, pg. 153, citing
SEC Opinion, Dec. 26, 1972.)
Q: Is the duty of the SEC to file the AOI and to issue
a certificate of incorporation a ministerial one?
A: GR: Yes, provided the articles of incorporation
substantially comply with the statute. The SECs
discretion can only be exercised on matters of form
and does not extend to the merits of an application
for incorporation.(Asuncion vs. De Yriarte, GR No.
9321, Sept. 24, 1914.)
Note: If the SEC refuses to file the AOI, which
substantially complied with the statute, the remedy
of the applicant is to file a petition for mandamus.
(ibid.)
XPN: However, SEC has authority to pass upon the
lawfulness of the object or purpose of the
corporation as expressed in the AOI. Such
determination is an exercise of judgment, that
is, judicial function on a question of law. (ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
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Note: If the SEC errs in the determination of the
lawfulness of the purpose of the corporation stated
in the AOI and refuses to file the said AOI, its decision
is subject to review and correction by the court (ibid).
Q: What is required to be used as a part of the
corporate name?
A: The word, corporation or incorporated or an
abbreviation of either of them is required to be used
as a part of the corporate name. This is to distinguish
the corporation from a partnership and other
business organizations (SEC Memo. Circ. No. 5, Series
of 2008)
Q: What is the reason for the statement of the
purpose clause in the AOI?
A: The Purpose Clause determines whether the acts
performed by the corporation are authorized or
beyond its powers.Acts beyond the corporations
powers are called ultra vires acts.
Q: What are the rules in the statement of the
purpose clause?
A:
1. If there is more than one stated purpose, specify
which is the main or primary purpose and which
is or are the secondary or subsidiary purpose/s.
(Sec. 14[2], CC.)
Note: This specification is important in the application
of the prohibition under Sec. 42 of the CC which states
that the corporation is prohibited from investing
corporate funds for any purpose other than the
primary purpose for which it was organized unless
such investment is approved by both majority of the
BOD or BOT and ratified by the stockholders
representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in the case of a
non-stock corporation.
2. The purposes must be capable of being lawfully
combined.
3. A non-stock corporation may not include a
purpose which would change or contradict its
nature as such. (ibid.)
Q: What are the requirements of the SEC as regards
the address specification of the corporation in the
AOI?
A: SEC requires that the applicant corporation must
state in itsAOI the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
(i) specific address of their principal office, which
shall include, if feasible, the street name,
barangay, city or municipality; and
(ii) specific residence address of each incorporator,
stockholder, director, trustee, or partner.
SEC likewise prohibits the use of Metro Manila as
address of the principal office.
Q: What is considered as the residence of the
corporation?
A: The corporation is in a metaphysical sense a
resident of the place where its principal office is
located as stated in the AOI. (Golden Arches Devt
Corp. vs. St. Francis Square Holdings, Inc., GR 183843,
January 19, 2011.)
Note: This ruling regarding the residence of the corporation
holds true even though the corporation has closed its office
therein and relocated to another place. (Hyatt Elevators
and Escalators Corp. vs. Goldstar Elevators Phils., Inc., GR
161026, Oct. 24, 2005.)
AMENDMENT
Q: What are the limitations in the amendment of
AOI?
A:
1. The amendment must be for legitimate purposes
and must not be contrary to other provisions of the
CC and special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of
members;
4. The original and amended articles together shall
contain all provisions required by law to be set out
in the AOI. Such articles, as amended, shall be
indicated by underscoring the change/s made;
5. Certification under oath by corporate secretary and
a majority of the BOD/BOT stating the fact that said
amendment/s have been duly approved by the
required vote of the stockholders or members,
shall be submitted to the SEC;
6. Must be approved by SEC. (Sec. 16, CC.);
7. Must be accompanied by a favorable
recommendation of the appropriate government
agency in cases of:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies and other financial
intermediaries
e. Insurance companies
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f. Public utilities 1. Fraud in procuring its certificate of incorporation;

g. Educational institutions
h. Other corporations governed by special laws.
(Sec. 17 [2], CC.)
Q: When does amendment of AOI take effect?
A: The amendment of the AOI takes effect either:
1. Upon approval by the SEC, that is, upon issuance
of amended certificate of incorporation or
2. From the date of filing with the SEC:
a. if not acted upon within 6 months from the
date of filing and
b. for a cause not attributable to the corporation.
Note: The provision on automatic approval in Sec. 16 does
not apply to the dissolution of the corporations in the light
of Sec. 120, CC. (SEC Opinion, Mar. 30, 1982.)
2. Serious misrepresentation as to what the corporation
can do or its doing to the great prejudice of, or
damage to, the general public;
3. Refusal to comply with, or defiance or a lawful order of
the SEC restraining the commission of acts which
would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5)
years after commencing the transaction of its business
(Sec. 22, CC.);
5. Failure to file the bylaws within the required period;
6. Failure to file required reports.
Q: Is there an automatic rejection of the AOI or any
amendment thereto?
A: No. The SEC shall give the incorporators a
reasonable time within which to correct or modify
the objectionable portions of the AOI or amendment
(Sec. 17[1], CC).

NON-AMENDABLE ITEMS Q: What is the effect of non-use of corporate charter

and continuous inoperation of a corporation?
Q: What are the provisions of AOI that cannot be
amended? A:
1. Failure to organize and commence business
A: Those matters referring to accomplished facts, within 2 years from incorporation its corporate
except to correct mistakes. powers ceases and the corporation shall be
deemed dissolved.
E.g.
1. Names of incorporators 2. Continuous inoperation for at least 5 years
2. Names of original subscribers to the capital stock ground for the suspension or revocation of
of the corporation and their subscribed and paid corporate franchise or certificate of
up capital incorporation (Sec. 22, CC.).
3. Names of the original directors
4. Treasurer elected by the original subscribers Note: The above shall not be applicable if it is due to causes
5. Members who contributed to the initial capital of beyond the control of the corporation as determined by
the nonstock corporation SEC.
6. Witnesses to and acknowledgement with AOI
Q: Is the suspension or revocation of the certificate
Q: What are the grounds for the rejection or of registration due to failure to operate or
disapproval of AOI or amendment thereto by the continuous inoperation automatic?
SEC?
A: No. Under PD No. 902-A, SEC should afford due
A: process or proper notice and hearing before the
1. If such is not substantially in accordance with the suspension or revocation of certificate of registration.
form prescribed by the CC
2. The purpose/s of the corporation are patently REGISTRATION AND ISSUANCE OF CERTIFICATE OF
unconstitutional, illegal, immoral, or contrary to INCORPORATION
government rules and regulations
3. The treasurers affidavitconcerning the amount Q: What are the basic requirements for a stock
of capital stock subscribed and/or paid is false corporation?
4. The required percentage of ownership of the
capital stock to be owned by Filipino citizens has A:
not been complied with. (Sec. 17, CC.) 1. Name verification slip;
2. AOI and by-laws;
Note: The above grounds are NOT exclusive. The grounds 3. Treasurers affidavit;
according to PD No. 902A are: 4. Registration data sheet;

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FACULTY OF CIVIL LAW
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5. Proof of payment of subscription like Bank
Certificate of Deposit if the paid-up capital is in
cash;
6. Favorable endorsement from proper government
agency in case of special corporations; and
7. Undertaking of incorporators or directors to
change corporate name.
Q: What is the content of a treasurers affidavit?
A: That at least 25% of the authorized capital stock of
the corporation has been subscribed, and at least
25% of the total subscription has been fully paid in
actual cash and/or property; such paid-up capital
being not less than P5,000.(Sec. 14, 15, CC.)
Q: What is the doctrine of corporate entity?
A: GR: A corporation comes into existence upon the
issuance of the certificate of incorporation. Then and
only then will it acquire a juridical personality.
XPN: In case of a corporation sole, the corporation
sole commences existence upon the filing of the
articles of incorporation.
ADOPTION OF BY-LAWS
Q: What are by-laws?
A: Rules and regulations or private laws enacted by
the corporation to regulate, govern and control its
own actions, affairs and concerns and of its
stockholders or members and directors and officers in
relation thereto and among themselves in their
relation to it (Valley Golf & Country Club, Inc. vs. Vda.
De Caram, GR 158805, April 16, 2009).
NATURE AND FUNCTIONS OF BY-LAWS
The corporate power to adopt by-laws is inherent in
every corporation. However, to give emphasis to such
necessary corporate incident, said power is expressed
in Sec. 36(5) and Sec. 46 of the CC.
The by-laws supplement the AOI. The function of by-
laws is to define the rights and duties of corporate
officers and directors or trustees, and of stockholders
or members towards the corporation and among
themselves with reference to the management of
corporate affairs and to regulate transaction of the
business of the corporation in a particular way. (De
Leon, supra, pg. 456-457.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Is a corporation sole governed by by-laws?
A: No. It is instead governed by Rules, Regulations
and Discipline of its religious denomination which
already contain the provisions embodied in the by-
laws of ordinary corporations.
REQUISITES OF VALID BY-LAWS
The following are the requisites for the validity of by-
laws:CoMorO-RAG
1. Must be consistent with the COrporation Code,
other pertinent laws and regulations
2. Must not be contrary to MORals and public
policy
3. Must not impair Obligations and contracts or
property rights of stockholders
4. Must be Reasonable
5. Must be consistent with the charter or AOI
6. Must be of General application and not directed
against a particular individual.
Q: In case of conflict between the by-laws and the
articles of incorporation which prevails?
A: The AOI prevails because the by-laws are intended
merely to supplement the former.
BINDING EFFECTS
The following are the binding effects of by-laws:
1. As to members/ stockholders, officers, trustees/
directors and corporation They are bound by
and must comply them. They are presumed to
know the provisions of the by-laws.
2. As to third persons 3rd persons are not bound
unless they have knowledge of by-laws. (PMI
College vs. NLRC, 277 SCRA 462, [1997].)
Note: By-laws have no extra-corporate force and are not in
the nature of legislative enactments so far as third persons
are concerned.
Q: Give the procedures in adopting by-laws.
A: The by-laws may be adopted before or after
incorporation. In all cases, the By-laws shall be
effective only upon the issuance by the SEC of a
certification that the by-laws are not inconsistent
with the AOI.
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 THE CORPORATION CODE

1. Pre - incorporation It shall be approved and Q: Distinguish between AOI and by-laws.
signed by all the incorporators and submitted to
the SEC, together with AOI. A:
AOI BY-LAWS
2. Post incorporation Condition subsequent; its
Condition precedent in absence merely furnishes
a. Vote of the majority of the stockholders the acquisition of a ground for the
representing the outstanding capital stock or corporate existence revocation of the
members; franchise
Essentially a contract
b. By-laws shall be signed by the stockholders between the For the internal
or members voting for them corporation and the government artiof the
stockholders/ corporation but has the
c. It shall be kept in the principal office of the members; between the force of a contract
corporation and subject to the inspection of stockholders/ member between the corporation
the stockholders ore members during office inter se, and between and the stockholders/
hours the corporation and members, and between
the State; the stockholders and
d. Copy thereof, duly certified by the BOD or members;
BOT countersigned by the secretary of the
corporation, shall be filed with the SEC and May be executed after
shall be attached with the original AOI. (Sec. incorporation. Sec. 46
46, CC.) Executed before allows the filing of the by-
incorporation laws simultaneously with
Q: What are the contents of by-laws? the Articles of
Incorporation
A: Amended by a majority
1. Time, place and manner of calling and of the directors/ May be amended by a
conducting regular or special meetings of trustees and majority vote of the BOD
directors or trustees stockholders and majority vote of
2. Time and manner of calling and conducting representing 2/3 of the outstanding capital stock
regular or special meetings of the stockholder or outstanding capital or a majority of the
members stock, or 2/3 of the member in non-stock
3. The required quorum in meeting of stockholders members in case of corporation
or members and the manner of voting therein non-stock corporations
4. The form for proxies of stockholders and
members and the manner of voting them Q: What is the effect of non-filing of the by-laws
5. The qualification, duties and compensation of within the required period?
directors or trustees, officers and employees
6. Time for holding the annual election of directors A: Failure to submit the by-laws within 30 days from
or trustees and the mode or manner of giving incorporation does not automatically dissolve the
notice thereof corporation. It is merely a ground for suspension or
7. Manner of election or appointment and the term revocation of its charter after proper notice and
of office of all officers other than directors or hearing. The corporation is, at the very least, a de
trustees facto corporation whose existence may not be
8. Penalties for violation of the by-laws collaterally attacked. (Sawadjaan v. CA, G.R. No.
9. In case of stock corporations, the manner of 142284, June 8, 2005)
issuing certificates
10. Such other matters as may be necessary for the AMENDMENT OR REVISION
proper or convenient transaction of its corporate
business and affairs. (Sec. 47, CC.) Q: What are the ways of amending, repealing or
adopting new by-laws?

A:
1. Amendment may be made by stockholders
together with the Board by majority vote of

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FACULTY OF CIVIL LAW
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directors and owners of at least a majority of the
outstanding capital stock/members; or
2. By the board only after due delegation by the
stockholders owning 2/3 of the outstanding
capital stock/members. Provided, that such
power delegated to the board shall be
considered as revoked whenever stockholders
owning at least majority of the outstanding
capital stock or members, shall vote at a regular
or special meeting. (Sec. 48, CC.)
CORPORATE POWERS
Q: What are the kinds of powers of corporation?
A:
1. Express powers Granted by law, Corporation
Code, and its Articles of Incorporation or Charter,
and administrative regulations
2. Inherent/incidental powers Not expressly stated
but are deemed to be within the capacity of
corporate entities.
3. Implied/necessary powers Exists as a necessary
consequence of the exercise of the express powers
of the corporation or the pursuit of its purposes as
provided for in the Charter
Q: What are the three levels of control in the
corporate hierarchy?
A:
1. The board of directors, which is responsible for
corporate policies and the general management of
the business affairs of the corporation;
2. The officers of the corporation, who in theory
execute the policies laid down by the board, but in
practice often have wide latitude in determining the
course of business operations;
3. The stockholders who have the residual power over
fundamental corporate changes, like amendments of
the articles of incorporation. (City Bank NA vs. Chua,
G.R. No. 102300, March 17, 1993.
Q: Who has primary control over corporate powers?
A: The Corporation Code of the Philippines vests in
the board of directors the exercise of the corporate
powers of the corporation, save in those instances
where the Code requires stockholders approval for
certain specific acts. (Great Asian Sales Center
Corporation v CA, G.R. No. 105774, April 25, 2002.).
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
GENERAL POWERS, THEORY OF GENERAL CAPACITY
The general powers of a corporation also called
Theory of General Capacity are the following:
SuSuCo-ABS-PEDRO
1. To SUe and be sued
2. Of Succession
3. To adopt and use of COrporate seal
4. To amend its Articles of Incorporation
5. To adopt its By-laws
6. For Stock 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
9. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or
similar purposes, provided that nodonation is given
to any
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers and employees basis of which is the
Labor code
11. To exercise Other powers essential or necessary
to carry out its purposes.
Q: When does the power to sue and be sued
commence?
A: Upon issuance by SEC of Certificate of
Incorporation.
Q: What are the limitations of the corporation in
dealing with property?
A:
1. In dealing with any kind of property, it must be in
the furtherance of the purpose for which the
corporation was organized.
2. Constitutional limitations cannot acquire public
lands except by lease.
With regard to private land, 60% of the corporation
must be owned by the Filipinos, same with the
acquisition of a condominium unit.
Note: No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter will
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 THE CORPORATION CODE
exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. (JG
Summit Holdings, Inc. vs. CA, G.R. No. 124293, Jan. 31,
2005.
3. Special law subject to the provisions of the Bulk
Sales Law and law against monopoly, illegal
combination or restraint of trade.
Q: What are the requisites for a valid donation?
A: RPAI
1. Donation must be Reasonable
2. Must be for valid Purposes including public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes
3. Must not be an Aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a reasonable relation to the
corporations Interest and not be so remote and
fanciful.
Q: Can a corporation act as surety or guarantor?
A: GR: No. Acting as a surety or guarantor will be
contrary to the primary purpose for which the
corporation was created.
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the particular
transaction is reasonably necessary or proper in
the conduct of its business.
SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
The specific powers of a corporation also called
Theory of Specific Capacity are the following: ESB-PA-
SIDE-A
1. Power to Extend or shorten corporate term. (Sec.
37, CC.)
2. Increase or decrease corporate Stock. (Sec. 38,
CC.)
3. Incur, create, or increase Bonded indebtedness.
(Sec. 38, CC.)
4. Deny Pre-emptive right. (Sec. 39, CC.)
5. Sell, dispose, lease, encumber all or substantially
all of corporate Assets. (Sec. 40, CC.)
6. Purchase or acquire Shares. (Sec. 41, CC.)
7. Invest corporate funds in another corporation or
business for other purpose other than primary
purpose .(Sec. 42, CC.)
8. Declare Dividends out of unrestricted retained
earnings. (Sec. 43, CC.)
165
9. Enter into management contract with another
corporation (not with an individual or a
partnership within general powers) whereby
one corporation undertakes to manage all or
substantially all of the business of the other
corporation for a period not longer than five (5)
years for any one term. (Sec. 44, CC.)
10. Amend Articles of Incorporation. (Sec. 16, CC.)
Q: Which corporate powers are exercised by the
BOD and stockholders jointly?
A: ASIA-IDEA- MC
1. Amendments to by-laws
2. Extending or Shortening the corporate term
3. Increase or decrease of capital stock
4. The sale or other disposition of All or
substantially all of the corporate assets
5. Investment of corporate funds in another
corporation or business or for any other purpose
6. Issuance of stock Dividends
7. Entering into management contract
8. Amendment to Articles of incorporation
9. Merger or consolidation
10. Grant of Compensation to directors
POWER TO EXTEND ORSHORTEN CORPORATE TERM
Q: What are the procedural requirements in
extending/shortening corporate term?
A:
1. Majority vote of the BOD or BOT;
2. Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporation;
3. Written notice of the proposed action and of the
time and place of the meeting shall be addressed
to each stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally;
4. Copy of the amended AOI shall be submitted to
the SEC for its approval; and
5. In case of special corporation, a favorable
recommendation of appropriate government
agency. (Sec. 37, CC.)
6. The extension must be done during the lifetime
of the corporation not earlier than 5 years prior
to the expiry date unless exempted. The
extension must not exceed 50 years. (Sec 16, CC.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Note: After the term had expired without extension, the
corporation is deemed ipso facto dissolved. The remedy of
the stockholders is reincorporation.
Any dissenting stockholder may exercise his appraisal right
in case of shortening or extending corporate term (Sec. 37,
CC.).
Q.T Corp. has a corporate term of 20 years under its
Articles of Incorporation or from June 1, 1980 to
June 1, 2000. On June 1, 1991 it amended its Articles
of Incorporation to extend its life by 15 years from
June 1, 1980 to June 1, 2015. On June 1, 2011,
however, T Corp decided to shorten its term by 1
year or until June 1, 2014. Both the 1991 and 2011
amendments were approved by majority vote of its
Board of Directors and ratified in a special meeting
by its stockholders representing at least 2/3 of its
outstanding capital stock. The SEC, however,
disapproved the 2011 amendment on the ground
that it cannot be made earlier than 5 years prior to
the expiration date of the corporate term, which is
June 1, 2014. Is this SEC disapproval correct? (2011
Bar Question)
A: No, since the 5-year rule on amendment of
corporate term applies only to extension, not to
shortening, of term.
POWER TO INCREASE OR DECREASE CAPITAL STOCK
OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS
Q: What are the procedural requirements in
increasing or decreasing capital stock?
A:
1. Majority vote of the BOD;
2. Ratification by stockholders representing 2/3 of
the outstanding capital stock;
3. Written notice of the proposed increase or
diminution of the capital stock and of the time
and place of the stockholders meeting at which
the proposed increase or diminution of the
capital stock must be addressed to each
stockholder at his place of residence as shown
on the books of the corporation and deposited to
the addressee in the post office with postage
prepaid, or served personally;
4. A certificate in duplicate must be signed by a
majority vote of the directors of the corporation
and countersigned by the chairman and the
secretary of the stockholders meeting, setting
forth:
a. That the foregoing requirements have been
complied with;
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
b. The amount of increase or diminution of the
capital stock;
c. If an increase of the capital stock, the amount
of capital stock or number of shares of no par
stock actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or
number of no par stock subscribed by each,
and the amount paid by each on his
subscription in cash or property, or the
amount of capital stock or number of shares
of no par stock allotted to each stockholder if
such increase is for the purpose of making
effective stock dividend authorized;
d. The amount of stock represented at the
meeting; and
e. The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Note: The increase or decrease in the capital stock or the
incurring, creating or increasing bonded indebtedness shall
require prior approval of the SEC.
Q: What is the additional requirement with respect
to the increase of capital stock?
A: The application to be filed with the SEC shall be
accompanied by the sworn statement of the treasurer
of the corporation, showing that at least 25% of the
increase in the capital stock was subscribed and 25%
of the said amount has been paid either in actual cash
to the corporation or that there has been transferred
to the corporation property the valuation of which is
equal to 25% of the subscription.
Q: What shall be the basis of the required 25%
subscription?
A: It shall be based on the additional amount by
which the capital stock increased and not on the total
capital stock as increased.
Note: Treasurers affidavit is required in increasing capital
stock, NOT in decreasing capital stock.
Q: What is the additional requirement with respect
to the decrease of capital stock?
A: The same must not prejudice the right of the
creditors.
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 THE CORPORATION CODE
Q: What are the waysofincreasing or decreasing the
capital stock?
A: By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the
number of shares;
3. Number of shares and increasing or decreasing
the par value.
Note: In decreasing the capital stock, resorting to reduction
of number of shares may also be done through:
1. Redeeming redeemable shares(Sec. 8, CC.); or
2. purchasing of own shares(41, CC); or
3. Cancelling or retiring the shares, including the treasury
shares (Sec. 9); or
4. The corporation may accept a surrender of shares and
give the holders in exchange therefor a proportionate
amount of its assets, provided no rights of creditors
are involved; or
5. Issue bonds for that purpose or
6. Exchange another class of stock for that retired; or
7. Exchange the corporations outstanding shares for a
smaller number of shares; or
8. Cancelling shares which have not yet been issued. (De
Leon, supra, pg. 355-356.)
Q: Can there be a distribution of surplus on
reduction?
A: It depends whether there is an impairment of
capital.
1. If there is NO impairment of capital, the surplus
may be equitably distributed by the directors or
so much thereof as may not be required in
carrying on the business for the best interests of
the stockholders: Provided the rights of
creditors will not be affected nor the capital
impaired.
2. If there is reduction to meet an impairment
there will be no distribution.
Note: The distribution stated above is not mandatory,
notwithstanding the authority granted by the CC for the
same under Sec. 122, last par. (ibid., pg. 357-358.)
Q: Is the corporation prohibited from increasing its
authorized capital stock if the same has not yet been
fully subscribed?
A: No. A corporation is not prohibited from increasing
its authorized capital stock even if the same has not
yet been fully subscribed.
Note: Once an increase in authorized capital stock is
effected, it may be necessarily accompanied by an actual
167
increase in the assets and additional subscriptions in order
to comply with the 25% subscription requirement.
However, if such increase is for the purpose of effecting a
stock dividend previously authorized, then additional
subscriptions are NOT urgent.
Reason: The actual capital is increased by accumulated
profits and such profits are distributed to the stockholders
in the form of stock dividends, the capital stock is
increased, for the profits are reinvested in the corporation
by transferring the same from surplus account to a capital
account. The amount corresponding to the stock dividends
declared may be used to cover the required 25%
subscription to increase the authorized capital stock and, if
sufficient, will obviate the necessity of taking in new
subscription (De Leon, supra, pg. 350).
Q: Is the over-issue of shares allowed?
A: No. An issue of stock by a corporation in excess of
the amount prescribed or limited by its AOI is ultra
vires and the stock so issued is void even in the hands
of a bona fide purchaser for value. (ibid., pg. 351.)
Note: An over-issued stock is a spurious stock.(ibid.)
Q: Does the over-issue of stock avoid the original
issue?
A: No. There is no avoidance of the original issue
(ibid).
Note: There is no over-issue in the case of shares, which
were surrendered and new shares issued in their stead. The
new issue in such case merely takes the place of the shares
surrendered. (ibid.)
Q: What are the effects of an attempted
unauthorized increase of capital stock?
A: An attempted unauthorized increase of capital
stock amounts to an over-issue and such stock is,
therefore, absolutely void and cannot be validated by
application of the doctrine of estoppel.
Thus, the following are the effects of such
unauthorized increase:
1. Subscriptions for such stock are likewise void both
on the ground of illegality and for want of
consideration;
2. Subscribers for or purchasers of such stock acquire
none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or
on a winding up as stockholders for unpaid
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
subscriptions, and are not subject to a statutory
liability to creditors imposed upon stockholders;
and
4. Subscribers for or purchasers of such shares from
the corporation may recover from it money paid
to it under their subscription or purchase as upon
a failure of consideration, or breach of warranty fo
the existence of the thing sold, unless they are
precluded from such relief as parties in pari
delicto. (ibid, pg. 351-352.)
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special stockholders'
meeting:
Resolution increasing the authorized capital
stock of PPI; and
Resolution authorizing the Board of Directors to
issue, for cash payment, the new shares from
the proposed capital stock increase in favor of
outside investors who are nonstockholders.
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter was
Jimmy Morato who owned 1% of the stock. Are the
resolutions binding on the corporation and its
stockholders including Jimmy Morato, the dissenting
stockholder? (1998 Bar Question)
A: No. The resolutions are not binding on the
corporation and its stockholders including Jimmy
Morato. While these resolutions were approved by
the stockholders, the directors' approval, which is
required by law in such case, does not exist.
Q: What remedies, if any, are available to Morato?
(1998 Bar Question)
A: Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken by the
Board of Directors thereunder, null and void.
Q: What may evidence the corporations
indebtedness?
A: When a corporation borrows money, its
indebtedness may be evidenced by notes or bonds as
its primary security (De Leon, supra, pg. 360).
Q: What is the difference between a note and a
bond?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A:
1. If the amount borrowed is small and it is borrowed
in a single sum, or from a few persons, or for a short
time notes are usually given.
2. If, however, the amount is large and obtained from
a number of people and extends over a period of
years, the corporate obligation is preferably and
usually evidenced by bonds. (ibid.)
Q: What is bonded indebtedness?
A: It is a long-term indebtedness secured by real or
personal property (corporate assets).
Note: The requirements for the power to incur, create or
increase bonded indebtedness is also the same with the
power to increase or decrease capital stock.
Q: What is required of Bonds issued by the
corporation?
A: Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to
determine the sufficiency of the terms thereof (Sec.
38, CC).
Q: Is stockholders approval required for all
borrowings of the corporation?
A: Not all borrowings of the corporation need
stockholders approval. Only bonded indebtedness
requires such approval.
POWER TO DENY PRE-EMPTIVE RIGHTS
Q: What is pre-emptive right?
A: It is the preferential right of shareholders to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings.
(Sec. 39, CC.)
Note: The stockholder must exercise his pre-emptive right
within the time fixed in the resolution authorizing the
increase of capital stock.
Q: What is the purpose of pre-emptive right?
A: To enable the shareholder to retain his
proportionate control in the corporation and to retain
his equity in the surplus.
Q: Is there pre-emptive right on the re-issuance of
treasury shares?
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 THE CORPORATION CODE

A: Yes. When a corporation reacquires its own shares

which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
emptive right does not exist.
Q: May pre-emptive right be waived by the
stockholder?
A: Yes, either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
after being notified and given an opportunity to avail
of such right.
Q: Is the pre-emptive right of a stockholder
transferable?
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares, may the stockholder invoke his appraisal
rights and demand payment for his shareholdings?
(1999 Bar Question)
A: No, the stockholder may NOT exercise appraisal
right because the matter that he dissented from is
not one of those where right of appraisal is available
under the Corporation Code.
Q: When can the corporation deny pre-emptive
right?
A: The corporation can deny pre-emptive right if the
AOI or any amendment thereto denies such
right.(Sec. 39, CC)

A: Yes, unless there is an express restriction in the
AOI.
Q: Suppose that X Corporation has already issued
the 1000 originally authorized shares of the
corporation so that its Board of Directors and
stockholders wish to increase X's authorized capital
stock. After complying with the requirements of the
law on increase of capital stock, X issued an
additional 1000 shares of the same value.
Assume that stockholder A presently holds 200 out
of the 1000 original shares. Would A have a
preemptive right to 200 of the new issue of 1000
shares? Why?
A: Yes, A would have a preemptive right to 200 of
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. According
to the Corporation Code, each stockholder has the
preemptive right to all issues of shares made by the
corporation in proportion to the number of shares he
holds on record in the corporation.
Note: A stockholder whose pre-emptive right is violated
may maintain an action to compel the corporation to give
him that right. If the denial is by amendment to the AOI, he
may exercise his appraisal right under Sec. 81(1).
Q: What are the instances when pre-emptive right is
NOT available?
A:
1. Shares to be issued to comply with laws requiring
stock offering or minimum stock ownership by
the public;
2. Shares 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;
3. Shares issued in payment of previously
contracted debts;
4. In case the right is denied in the AOI;
5. Waiver of the right by the stockholder.
Q: Distinguish pre-emptive right from right of first
refusal.

Q: When should a stockholder exercise the pre- A:

emptive right?
PRE-EMPTIVE RIGHT
A: Pre-emptive right must be exercised within the Right to subscribe to all
period stated in the Articles of Incorporation or the issuance or dispositions of
By-Laws. When the Articles of Incorporation and the shares of the corporation
By-Laws are silent, the Board may fix a reasonable even to the subsequent
time within which the stockholders may exercise the sale of treasury stocks.
right. Right exercised against the
corporation.
Note: Pre-emptive right can only be exercised to the same May be exercised even
class of shares issued or disposed with that owned by the when there is no express
stockholder. (Share-a-like basis) provision in the AOI or
RIGHT OF FIRST
REFUSAL
Right to purchase
shares of a stockholder.
Right exercised against
a co-stockholder.
Can only be exercised
when so provided in
the AOI, by-laws and

169 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
amendment thereto. printed in the stock
certificate.
Pertains to unsubscribed Pertains to the sale of
portion of the authorized the stocks by another
capital stock. stockholder
Does not include
It includes treasury shares.
treasury shares
POWER TO SELL OR DISPOSE OF CORPORATE ASSETS
(SLEMPAD)
Q: What is meant by substantially all of corporate
assets?
A: If by the sale, lease, exchange, mortgage, pledge,
and any other disposition (slempad) thereof, the
corporation would be rendered:
1. incapable of continuing the business, or
2. incapable of accomplishing the purpose for
which it was incorporated (Sec 40, CC).
Q: What are the procedural requirements of
SLEMPAD of corporate assets?
A:
1. Majority vote of the BOD or BOT
2. Ratification by stockholders representing at least
2/3 of the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation
3. 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
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or served personally. (Sec.
40, CC.)
Note: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations and
monopolies.(ibid.)
Further, in case of non-stock corporations, where there are
no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient
authorization for the corporation to enter into any
transaction authorized by this section. (ibid.)
Q: May the BOD abandon the plan for SLEMPAD
even after the vote of the stockholders or members?
A: Yes, even after such authorization or approval by
the stockholders, the board may in its discretion,
abandon such SLEMPOD, subject to the rights of third
parties under any contract relating thereto, without
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
further action or approval by the stockholders or
members. (ibid.)
Q: When may the corporation forego the ratification
by stockholders / members?
A:
1. If sale is necessary in the usual and regular
course of business;
2. If the proceeds of the sale or other disposition of
such property and assets are to be appropriated
for the conduct of the remaining business;
3. If the transaction does not cover all or
substantially all of the assets.
Q: What is the remedy of a stockholder who
disagrees with the plan of SLEMPAD?
A: Any dissenting stockholder shall have the option to
exercise his appraisal right.
Q: What is the effect of sale of all or substantially all
of assets of one corporation to another corporation?
A: GR: The corporation who acquired all or
substantially all of the assets of the selling
corporation shall not be liable for the debts of the
latter.
XPN:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the
seller;
5. If there is violation of the Bulk Sales Law.
POWER TO ACQUIRE OWN SHARES
Q: What are the instances where corporation may
acquire its own shares?
A:
1. To eliminate fractional shares out of stock
dividends (Sec. 41, CC);
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale and to purchase delinquent
shares sold during said sale(ibid.);
3. To pay dissenting or withdrawing stockholders (in
the exercise of the stockholders appraisal
right)(ibid.);
4. To acquire treasury shares(Sec. 9, CC);
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 THE CORPORATION CODE
5. Redeemable shares regardless of existence of
retained earnings(Sec. 8, CC.);
6. To effect a decrease of capital stock(Sec. 38, CC);
Note: Where a corporation reacquires its own shares, it
does not thereby become a subscriber thereof.
7. In close corporations, when there is a deadlock in
the management of the business, the SEC may
order the purchase at their fair value of the shares
of any stockholder by a corporation regardless of
the availability of unrestricted retained earnings
(UREs) in its books (Sec. 104, par. 1 [4], CC).
Q: What are unrestricted retained earnings?
A: These are retained earnings which have not been
reserved or set aside by the board of directors for
some corporate purpose.
Q: What is the rule in order that a corporation may
acquire its own shares?
A: GR: The corporation may only acquire its own
stocks in the presence of UREs
XPN: RDC
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks
in payment of a Debt
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
as long as it will not result to the insolvency of
the corporation
A: What are the guidelines that the corporation
must follow in acquiring its own shares?
A:
1. The capital of the corporation must not be
impaired. There shall be UREs to purchase the
shares;
2. Legitimate or proper corporate objective is
advanced;
3. Condition of the corporate affairs warrants it;
4. Transaction is designed and carried out in good
faith;
171
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine.
(Sec. 41, SEC Opinions, Oct. 12, 1992, Sept. 11,
1985, and April 11, 1994.)
POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS
Q: Is the corporation allowed to engage in a business
different from those enumerated in its AOI?
A: No, unless the purpose will be amended to include
the desired business activity among its secondary
purpose.
Note: However, in the case of pawnshops organized as
corporations and partnerships, they may be allowed to
engage in ancillary activity of directly purchasing or selling
goods or articles. The Pawnshop Regulation Act contains no
prohibition to engage in ancillary activities. Hence, by
implication, their scope may be extended to other
unrelated business unless clearly prohibited by the said Act.
The only requirement is that the person or entity engaged
at the same time in other business not directly related or
not incidental to pawnshop business, shall keep such
business distinct and separate from his pawnshop
operations. (De Leon, supra, pg. 390 citing SEC Opinion,
March 28, 1985.)
Q: What is the rule in case a corporation wants to
invest in an undertaking?
A: GR: Investment of a corporation in a business
which is in line with its primary purpose requires only
the approval of the board.
XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose
other than a primary purpose, it has to comply with
the statutory requirements before it can do so.(Sec.
42, CC.)
Q: What are the statutory requirements that the
corporation needs to comply with to invest in
another corporation or business or for any purpose
other than a primary purpose?
A:
1. Approval by the majority vote of the BOD or BOT
2. Ratification by stockholders representing at least
2/3 of the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation
3. Ratification must be made at a meeting duly
called for the purposes, and
4. Prior written notice of the proposed investment
and the time and place of the meeting shall be
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

made addressed to each stockholder or member corporate creditors by corporate creditors

by mail or by personal service. because theyre part of
corporate capital
Note: Investment of a corporation in a business which is in Declared only by the
line with its primary purpose requires only the approval of Declared by the board with
board of directors at its
the board. the concurrence of the
discretion
stockholders representing
(majority of the
Any dissenting stockholder shall have appraisal right. at least 2/3 of the
quorum only, not
outstanding capital stock at
POWER TO DECLARE DIVIDENDS majority of all the
a regular/special meeting
board)
Q: What are the forms of dividends? Does not increase the Corporate capital is
corporate capital increased
A: Its declaration creates
1. Cash a debt from the No debt is created by its
Note: Cash dividends due on delinquent stock shall first corporation to each of declaration
be applied to the unpaid balance on the subscription its stockholders
plus cost and expenses. (Sec. 43, CC) If received by
individual: subject to
Not subject to tax either
2. Stock tax;
Note: Stock dividends are withheld from the delinquent
received by individual or a
If received by
stockholder until his unpaid subscription is fully paid. corporation
corporation: not
(ibid) subject to tax
Can be revoked despite
3. Property Cannot be revoked
announcement but before
Note: Stockholders are entitled to dividends PRORATA after announcement
issuance
based on the total number of shares and not on the
amount paid on shares. Applied to the unpaid Can be withheld until
balance of delinquent payment of unpaid balance
Q: May stock dividends be issued to a person who is shares of delinquent shares
not a stockholder in payment of services rendered?
Q: What is a scrip dividend?
A: No. Only stockholders are entitled to payment of
stock dividends. (Nielson & Co., Inc. v. Lepanto A: A scrip dividend is dividend issued by the
Consolidated Mining Co., G.R. No. 21763, Dec. 17, corporation when the obligation to pay becomes
1966). absolute. Thus, it becomes a debt absolutely due to
the stockholders although payment is postponed to a
Q: What are the requirements for the declaration of future date. (De Leon, supra, pg. 431.)
dividends?
Q: What is a stock split?
A:
1. Existence of UREs; A: It is merely a dividing up of the outstanding shares
2. Resolution of the board; and of a corporation into a greater number of units,
3. Additional Requirements for stock dividends: without disturbing the stockholders original
a. a vote representing 2/3 of outstanding proportional participating interest in the corporation.
capital.(Sec. 43)
b. a corporation must have also a sufficient Stock split is different from stock dividend. Stock
number of authorized unissued shares for dividend is a capitalization of earnings or profits,
distribution to stockholders. together with a distribution of the added shares
which evidence the assets transferred to capital. The
Q: Distinguish cash dividends from stock dividends. stock split, on the other hand, is a mere increase in
the number of shares which evidence ownership
A: without altering the amount of the capital, surplus, or
CASH DIVIDENDS STOCK DIVIDENDS segregated earnings. (ibid., pg. 435.)
Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy by Once issued, can be levied

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2013 GOLDEN NOTES
 THE CORPORATION CODE
Q: Who are entitled to receive dividends?
A: Dividends are payable to the stockholders of
record as of the date of the declaration of dividends
or holders of record. (Cojuanco and Prime Holdings,
Inc., v. Sandiganbayan G.R. No. 183278, April 24,
2009.)
Q: Who are entitled to receive dividends in case of
mortgaged or pledged shares?
A: GR: The mortgagor or the pledgor has the right to
receive the dividends.
XPN: When the mortgagor or pledgor defaults
and the mortgagee or pledgee acquires the
pledged stocks and the transfer is recorded in the
books of the corporation, the mortgagee or
pledgee is entitled to receive the dividends.
Q: What if there is a wrongful or illegal declaration
of dividends?
A: The Board of Directors is liable. The stockholders
should return the dividends to the corporation
(solutio indebiti).
Q: What are the sources of dividends?
A: GR: Dividends can only be declared out of actual
and bona fide unrestricted retained earnings
XPN: Dividends can be declared out of capital in
the following instances:
1. Dividends from investments wasting assets
corporation;
2. Liquidating dividends
Q: What are the sources of retained earnings?
A:
1. Paid-in surplus It is the difference between the
par value and the issued value or selling price of
the shares. It cannot be declared as cash
dividend but can be declared only as stock
dividends
2. Operational Income - The amount of profit
realized from a business's operations after taking
out operating expenses.It is available for both
cash and stock dividends
3. Revaluation surplus Increase in the value of a
fixed asset as a result of its appreciation. They
are by nature subject to fluctuations.
173
GR: It cannot be declared as dividends because
there is no actual gain.
XPN: It can be used in the declaration of
dividends provided the following conditions
exist:
a. The corporation has sufficient income from
operations from which the depreciation on
the appraisal increase was charged;
b. It has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
c. Such depreciation on appraisal increase
previously charged to operations has not
been erased or impaired by subsequent
losses; otherwise, only that portion not
impaired by subsequent losses is available
for dividend. (SEC Opinions, Oct. 2, 1981 and
March 19, 1992.)
4. Reduction surplus the surplus arises from the
reduction of the par value of the issued shares of
stocks. It cannot be declared as cash dividend but
can be declared only as stock dividends.
5. Gain from Sale of Real Property - Available as
dividends
6. Treasury Shares Gain realized from reissuance
of treasury shares. It Cannot be declared as stock
or cash dividends but it may be declared as
property dividend
Q: May stock dividends be issued to a person who is
not a stockholder in payment of services rendered?
A: No. Only stockholders are entitled to payment of
stock dividends (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. 21763, Dec. 17,
1966).
Q: What is the prohibition imposed by law on URE's
of a stock corporation?
A: GR: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock
XPN:
1. When justified by definite corporate expansion
projects or programs approved by the board of
directors
2. When the corporation is prohibited under any
loan agreement with any financial institution or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent
has not yet been secured;
3. When it can be clearly shown that such retention
is necessary under special circumstances obtaining
in the corporation, such as when there is need for
special reserve for probable contingencies.(Sec. 43,
CC.)
Q: What is the penalty in case a corporation
unjustifiably retains surplus profits in excess of one
hundred (100%) percent of the paid in accumulated
capital?
A: Improperly Earnings Tax equal to 10% of the
improperly accumulated taxable income. (Sec. 29 (A)
NIRC OF 1997)
Q: During the annual stockholders meeting, Cheryl, a
majority stockholder, proposed that a part of the
corporations URE's be capitalized and stock
dividends be distributed to the stockholders. Can
she compel the corporation to declare stock
dividends? (2001 Bar Question)
A: No. Stock dividends should initially be taken by the
BOD and thereafter to be concurred in by a 2/3 vote
of the stockholders. A stockholder cannot compel the
corporation to declare neither cash nor stock
dividends as it rests with the sound discretion of the
board.
POWER TO ENTER INTO MANAGEMENT CONTRACT
Q: What is a management contract?
A: It is any contract whereby a corporation
undertakes to manage or operate all or substantially
all of the business of another corporation, whether
such contracts are called service contracts, operating
agreements or otherwise. (Sec. 44, CC.)
Note: Sec. 44 refers only to a management contract with
another corporation. Hence, it does not apply to
management contracts entered into by a corporation with
natural persons (ibid.).
Q: What are the requirements for a management
contract to be valid?
A:
1. Contract must be approved by the majority of
the BOD or BOT of both managing and managed
corporation;
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or
members in case of a non-stock corporation, of
both the managing and the managed
corporation, at a meeting duly called for the
purpose
3. Contract must be approved by the stockholders
of the managed corporation owning at least 2/3
of the outstanding capital stock entitled to vote
or 2/3 of the members when:
a. Stockholders representing the same interest in
both of the managing and the managed
corporation own or control more than 1/3 of
the total outstanding capital stock entitled to
vote of the managing corporation (interlocking
stockholders);
b. Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation.(interlocking directors). (Sec. 44,
CC.)
Q: Can a corporation enter into a management
contract with a natural person without complying
with the requisites for Sec. 44?
A: Yes. Sec 44 refers only to a management contract
with another corporation. Hence, it does not apply to
management contracts entered into by a corporation
with natural persons.
Q: What is the allowed period for every
management contract entered into by the
corporation?
A: GR: Management contract shall be entered into for
a period not longer than 5 years for any one term.
XPN: In cases of service contracts or operating
agreements which relate to the exploitation,
development, exploration or utilization of natural
resources, it may be entered for such periods as
may be provided by the pertinent laws or
regulations.
ULTRA VIRES ACTS
An ultra vires act (UVA) refers to an act outside or
beyond express, implied and incidental corporate
powers. The concept also includes those acts that
may ostensibly be within such powers but are, by
general or special laws, either proscribed or declared
illegal. (Rural Bank of Milaor v Ocefemia, G.R. No.
137686, February 8, 2000.)
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 THE CORPORATION CODE
Q: What are the types of UVA?
A:
1. Acts done beyond the powers of the corporation
(through BOD)
2. Ultra vires acts by corporate officers
3. Acts or contracts which are per se illegal as being
contrary to law.
Applicability of ultra vires doctrine
Q: What are the distinctions between ultra vires acts
by reason of lack of authority and ultra vires acts by
reason of illegality (illegal acts)?
A:
ULTRA VIRES ACT ILLEGAL ACTS
Not necessarily unlawful, Unlawful; against law,
but outside the powers morals, public policy, and
of the corporation public order
Can be ratified Cannot be ratified
Can bind the parties if
Cannot bind the parties
wholly or partly executed
Q: When does the act of the officers bind the
corporation?
A:
1. If it is provided in the by-laws
2. If authorized by the board
3. Under the doctrine of apparent authority
4. When the act was ratified
Q: What is the doctrine of apparent authority?
A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of
an apparent authority, it holds him out to the public
possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
from denying the agents authority.
Q: When is the corporation estopped to deny
ratification of contracts or acts entered by its
officers or agents?
A: Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank vs. CA, G.R. No. 159352, Apr. 14,
2004)
175
Consequences of ultra vires acts
Q: What are the effects of an ultra vires act?
A: Ultra vires actsentered into by the board of
directors binds the corporation and the courts will
not interfere unless terms are oppressive and
unconscionable. (Gamboa vs. Victoriano, G.R. No. L-
43324. May 5, 1979)
These are the effects for the specific acts:
1. Executed contract courts will not set aside or
interfere with such contracts
2. Executory contracts no enforcement even at
the suit of either party (void and unenforceable)
3. Partly executed and partly executory principle
of no unjust enrichment at expense of another
shall apply
4. Executory contracts apparently authorized but
ultra vires the principle of estoppel shall apply.
Q: What are the remedies in case of ultra vires act?
A:
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of
registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors - Nullification of contract in fraud of
creditors.
Q: Corp., whose business purpose is to manufacture
and sell vehicles, invested its funds in Y Corp., an
investment firm, through a resolution of its Board of
Directors. The investment grew tremendously on
account of Y Corp.'s excellent business judgment.
But a minority stockholder in X Corp. assails the
investment as ultra vires.
Is he right and, if so, what is the status of the
investment? (2011 Bar Question)
A: Yes, it is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders
ratification.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

POWERS HOW EXERCISED provided in

the by-
BY THE SHAREHOLDERS laws

The shareholders participate in controlling the affairs
of the corporation by exercising their right to vote.
They can elect the directors who will actually govern
the corporation and they can also vote on important
matters that are still reserved to them by the
Corporation Code. (Aquino, 2006)
BY THE BOARD OF DIRECTORS
The Board of Directors is primarily responsible for the
governance of the corporation. Their primary duty is
to set the policies for the accomplishment of the
corporate objectives. (Art. 3, Revised Code of
Corporate Governance). They elect the officers who
carry out the policies that they have established.
BY THE OFFICERS
Q: What are the limitations on the holding of a
corporate officers position?
A: Any two or more positions may be held
concurrently by the same person, except that no one
shall act as president and secretary or as president
and treasurer at the same time. (Sec. 25, CC)
Q: What constitutes a corporate officers position?
A:
1. An office that is created by the charter of the
corporation and
2. The officer is elected by the directors or
stockholders. (Easycall Communications Phils., Inc. vs.
Edward King, G.R. No.145901, Dec. 15, 2005)

After the election of directors, the latter must Q: What are the distinctions between a corporate
formally organize by electing the corporate officers. officer and a corporate employee?
(Sec. 25, CC.) The corporate officers are tasked to
carry out the policies laid down by the Board, the A:
articles of incorporation and the by-laws. CORPORATE OFFICER CORPORATE EMPLOYEE
Position is provided for Employed by the action
Q: What are the positions of corporate officers to be in the by-laws or under of the managing officer
filled up by the Directors? the Corporation Code. of the corporation.
RTC acting as a special
Labor Arbiter has
A: commercial court has
jurisdiction in case of
CORP. MEMBERSHIP CITIZEN- jurisdiction over intra-
RESIDENCY labor disputes.
OFFICER REQUIREMENT SHIP corporate controversies.
1. Must be a Power to amend or
director at the Power to amend/repeal repeal by-laws or adopt
time he articles cannot be new by-laws may be
assumes office Need Need NOT delegated by the delegated by the 2/3 of
NOT be a be a stockholders/ members the outstanding capital
1.President
2. must be the Filipino Philippine to the board of stock or 2/3 of the
stockholder on Citizen Resident directors/ trustees members in the case of
record of at non-stock corporation
least 1 share of
stock TRUST FUND DOCTRINE
May or may not
Must be Must be a Q: What is the trust fund doctrine?
be a director,
a Filipino Philippine
2.Secretary unless required
Citizen Resident A: The subscribed capital stock of the corporation is a
by the by-laws
Need trust fund for the payment of debts of the
Must be a corporation which the creditors have the right to look
May or may not NOT be a
3.Treasurer Philippine up to satisfy their credits, and which the corporation
be a director Filipino
Resident may not dissipate. The creditors may sue the
Citizen
4. Such Qualifications may be provided for in the stockholders directly for the latters unpaid
other by-laws subscription.
officers as
may be

UNIVERSITY OF SANTO TOMAS 176

2013 GOLDEN NOTES
 THE CORPORATION CODE
Q: What are the effects of the trust fund doctrine?
A:
1. Dividends must never impair the subscribed capital
stock and must only be declared out of UREs
2. Subscription commitments cannot be condoned or
remitted
3. GR: The corporation cannot buy its own shares
using the subscribed capital as the consideration
therefore.(NTC v. Court of Appeals, G.R. No. 127937.
July 28, 1999)
XPN: RDC
a. Redeemable shares may be acquired even
without 0o]surplus profit for as long as it will not
result to the insolvency of the Corporation
b. In cases that the corporation conveys its stocks
in payment of a Debt
c. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for as
long as it will not result to the insolvency of the
corporation
4. Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets and
property of the corporation (Ong v Tiu, Ibid)
Q: What are the exceptions to the trust fund
doctrine?
A: The Code allows distribution of corporate capital
only in these instances:
1. Amendment of the AOI to reduce authorized
capital stock;
2. Purchase of redeemable shares by the
corporation regardless of existence of
unrestricted retained earnings;
3. Dissolution and eventual liquidation of the
corporation.
BOARD OF DIRECTORS AND TRUSTEES
DOCTRINE OF CENTRALIZED MANAGEMENT
The Doctrine of Centralized Management states that
all corporate powers are exercised by the BOD or
BOT. (Sec. 23, CC.)
177
However, this doctrine is not applicable to the
following instances:
1. In case of delegation to the Executive Committee
duly authorized in the by-laws;
2. Authorization pursuant to a contracted manager
which may be an individual, a partnership, or
another corporation.
3. In case of close corporations, the stockholders
may manage the business of the corporation
instead by a board of directors, if the articles of
incorporation so provide.
Q: Who is an independent director?
A: For this purpose, an independent director shall
mean a person other than an officer or employee of
the corporation, its parent or subsidiaries, or any
other individual having a relationship with the
corporation, which would interfere with the exercise
of independent judgment in carrying out the
responsibilities of a director.
Q: In what cases are independent directors
required?
A: At least two (2) independent directors are required
in the following companies;
1. Any corporation with a class of equity securities
listed for trading on an Exchange (Publicly traded
companies)
2. Banks
3. Corporations with secondary franchise
Q: How many independent directors are required for
the corporations covered by the Revised Code of
Corporate Governance (RCCG)?
A: At least 2 or such number of independent directors
that constitute 20% of the members of the board
whichever is lesser, but in no case less than 2 (Art. 3
[A], RCCG).
BUSINESS JUDGMENT RULE
Q: What is business judgment rule?
A: GR: Contracts intra vires entered into by the board
of directors are binding upon the corporation beyond
the interference of courts. The courts are barred from
intruding into business judgments of corporations,
when the same are made in good faith. (Ong v Tiu,
G.R. No. 144476. April 8, 2003)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: Courts can inquire unto contracts which are;
1. Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority
(Ong v Tiu, Ibid)
2. Bad faith or gross negligence by the directors
(Republic Communications Inc v CA, G.R. No.
135074,January 29, 1999)
Q: What are the consequences of business judgment
rule?
A:
1. Resolutions and transactions entered into by the
Board within the powers of the corporation cannot
be reversed by the courts not even on the behest
of the stockholders.
2. Directors and officers acting within such business
judgment cannot be held personally liable for such
acts.
3. If the cause of the losses is merely error in business
judgment, not amounting to bad faith or
negligence, directors and/or officers are not
liable.(Filipinas Port Services v Go, G.R. No. 161886,
March 16, 2007)
4. The Board of Directors has the power to create
positions not provided for in the corporation's
bylaws since the board is the corporations
governing body, clearly upholding the power of its
board to exercise its prerogatives in managing the
business affairs of the corporation.(Filipinas Port
Sevices v Go, Ibid)
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of their
authority and act in good faith, do not become
liable, whether civilly or otherwise, for the
consequences of their acts, which are properly
attributed to the corporation alone. (Benguet
Electric Cooperative, Inc. v. NLRC,GR 89070, May
18, 1992)
Q: PALI sought to offer its shares to the public in
order to raise funds for development of properties
and pay its loans with several banks.
To facilitate the trading of its shares, PALI applied
for a listing in the Philippine Stock Exchange Inc.
(PSE), a non-profit corporation. Subsequently, PSE
received a letter from the Heirs of Marcos,
requesting PSE to defer PALIs registration,
contending that certain properties of PALI are
owned by Marcos.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Consequently, PSE rejected PALIs application. The
SEC reversed the ruling of the PSE. Is the SEC
correct?
A: No. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing
(PSE v CA, G.R. No. 125469, October 27, 1997).
TENURE, QUALIFICATIONS AND DISQUALIFICATIONS
OF DIRECTORS OR TRUSTEES
Q: What is the term of office of BOD/BOT?
A: GR: The regular director shall hold office for 1 year.
XPN: If no election is held, the directors and
officers will continue to occupy position even
after the lapse of 1 year under a hold-over
capacity until their successors are elected and
qualified.
Note: This is applicable to a going concern where there
is no break in the exercise of the duties of the officers
and directors. (SEC Opinion, Dec. 15, 1989).
Q: What are the common qualifications of a director
and trustee?
A:
1. Majority of the directors/trustees must be
residents of the Philippines (Sec. 23, CC.)
2. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
violation of the Corporation Code, committed
within 5 years prior to the date of his election
(Sec. 27, CC.)
3. He must be of legal age
4. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation
Q: Can a director be elected without owning any
stock in the corporation?
A: A person who does not own a stock at the time of
his election or appointment does not disqualify him
as director if he becomes a shareholder before
178
 THE CORPORATION CODE
assuming the duties of his office. (SEC Opinions, Nov.
9, 1987 & Apr. 5, 1990)
Q: What are the additional qualifications provided
by the Revised Code of Corporate Governance?
A: A director should have the following:
1. College education or equivalent academic degree
2. Practical understanding of the business of the
corporation
3. Membership in good standing in relevant
industry, business or professional organizations
4. Previous business experience (Art 3. [D], RCCG)
Q: What are the grounds for disqualification of a
director?
A:
1. Conviction by final judgment of an offense
punishable by imprisonment exceeding 6 years
2. Violation of the Corporation Code committed
within 5 years prior to his election or
appointment (Sec 27, CC)
Note: Disqualification by reason of violation of the
Corporation Code does not require conviction for the
reason that the decision of the SEC is final and executory
unless appealed in CA and a TRO is obtained.
Q: Is a provision in the by-laws of the corporation
declaring a person engaged in a competing business
ineligible for nomination for elections to the board
of directors valid?
A: Yes, provided that before such nominee is
disqualified, he should be given due process to show
that he is not covered by the disqualification
(Gokongwei v. SEC, G.R. No. L-45911, Apr. 11, 1979).
Note: The disqualification of a competitor from being
elected to the board is a reasonable exercise of corporate
authority.
Are foreigners disqualified from being elected/
appointed as members of the BOD?
A: No. While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly or
partially nationalized business activities, they are
allowed representation in the BOD or governing body
of said entities in proportion to their shareholding.
(Sec. 2-A, Anti-Dummy Law; Sec. 11, Art. XII,
Constitution.)
Reason: The BOD/ governing body performs specific duties
as a body. Unlike corporate officers, each member of the
BOD/ governing body has no individual power or authority
179
to perform management functions (De Leon, supra, pg.
319).
ELECTIONS
Q: What are the requirements for the election of
directors in a stock corporation?
A:
1. Stockholders, representing a majority of the
outstanding capital stock of the corporation must
be present, either in person or by a
representative authorized to act by written
proxy,
2. The election must be by ballot, if requested by
any voting stockholder or member.
3. The total number of votes cast by him must not
exceed the number of shares owned by him as
shown in the books of the corporation multiplied
by the whole number of directors to be elected:
4. No delinquent stock shall vote or be voted for.
Q: What are the limitations on the election of
directors/ trustees?
A:
1. At a meeting of stockholders or members called
for the election of directors or trustees, there
must be present either in person or by
representative authorized to act by written
proxy, the owners of the majority of the
outstanding capital stock or majority of the
members entitled to vote.
2. The election must be by ballot if requested;
3. A stockholder cannot be deprived in the articles
of incorporation or in the by-laws of his statutory
right to use any of the methods of voting in the
election of directors;
4. No delinquent stock shall be voted;
5. The candidates receiving the highest number of
votes shall be declared elected. (Sec. 24)
Q: Is permanent representation allowed in the BOD?
A: No, the board of directors of corporations must be
elected from among the stockholders or
members directors every year. Estoppel does not set
in to legitimize what is wrongful. (Grace Christian
High School v. CA, G.R. No. 108905, Oct. 23, 1997)
Q: Who has jurisdiction over election contests in
stock and non-stock corporations?
A: As amended by R.A. 8799 (The Securities
Regulation Code), the jurisdiction of the SEC under
Sec. 5 P.D. No. 902A (SEC Reorganization Act) is now
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
transferred to Courts of General Jurisdiction (Regional
Trial Court). Thus, RTC now has jurisdiction over
election contest.
Q: In case where there are 2 lists of BOD submitted
to SEC, which one is controlling?
A: It is the list of directors in the latest general
information sheet as filed with the SEC which is
controlling. (Premium Marble Resources, Inc. v. CA,
G.R. No. 96551, Nov. 4, 1996)
CUMULATIVE VOTING/ STRAIGHT VOTING
Q: What are the different methods of voting?
A:
1. Straight voting every stockholder may vote
such number of shares for as manypersons as
there are directors to be elected.
2. Cumulative voting for one candidate 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.
3. Cumulative voting by distribution a stockholder
may cumulate his shares by multiplying the
number of his shares by the number of directors
to be elected and distribute the same among as
many candidates as he shall see fit.
Note: Cumulative voting in case of non-stock
corporations only if it is provided in the AOI. The
members of non-stock corporations may cast as many
votes as there are trustees to be elected but may cast
not more than one vote for one candidate.
QUORUM
Q: What is the quorum required in a stock or non-
stock corporation?
A: Unless otherwise provided for in the by-laws, a
quorum shall consist of the stockholders representing
a majority of the outstanding capital stock entitled to
vote or a majority of the members in the case of non-
stock corporations. (Sec. 52, CC)
REMOVAL
Q: Who may remove directors or trustees?
A: The power to remove belongs to the stockholders
exclusively. (Sec. 28, CC)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What are the requisites for removal of directors
or trustees?
A:
1. It must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose
2. Previous notice to the stockholders or members
of the intention to remove a director
3. A vote of the stockholders representing 2/3 of
outstanding capital stock or 2/3 of members
4. GR: removal may be with or without cause
XPN: If the director was elected by the minority,
there must be cause for removal because the
minority may not be deprived of the right to
representation to which they may be entitled
under Sec. 24 of the Code.(Sec. 28)
Q: In 1999, Corporation A passed a board resolution
removing X from his position as manager of said
corporation. The bylaws of A corporation provide
that the officers are the president, vicepresident,
treasurer and secretary. Upon complaint filed with
the SEC, it held that a manager could be removed by
mere resolution of the board of directors. On
motion for reconsideration, X alleged that he could
only be removed by the affirmative vote of the
stockholders representing 2/3 of the outstanding
capital stock. Is X's contention legally tenable. Why?
(2001 Bar Question)
A: No. Stockholders' approval is necessary only for
the removal of the members of the Board. For the
removal of a corporate officer or employee, the vote
of the Board of Directors is sufficient for the purpose.
FILLING OF VACANCIES
Q: What are the ways of filling up the vacancies in
the board?
A:
1. Vacancies filled up by stockholders or members:
ERORI
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration of
term, where the remaining directors do not
constitute a quorum for the purpose of filling the
vacancy;
d. If the vacancy may be filled by the remaining
directors or trustees but the board Refers the
matter to stockholders or members; or
180
 THE CORPORATION CODE
e. Increase in the number of directors results to
vacancy.
2. Vacancies filled up by the remaining
directorsconstituting a quorum or by the members
of the board if still constituting a quorum, at least a
majority of them are empowered to fill any vacancy
occurring in the board other than by removal by
the stockholders or members, expiration of term or
increase in the number of board seats. (Sec. 29,
CC.)
Note: The phrase may be filled in Sec. 29 indicates that
the filling of vacancies in the board by the remaining
directors constituting a quorum is merely permissive.
Corporations may choose how vacancies in their boards
may be filled up, either by the remaining directors or
trustees constituting a quorum or by all stockholders or
members.
However, if the by-laws prescribe the specific mode of filling
up existing vacancies, the provisions of the by-laws should
be followed.(De Leon, supra, pg. 296.)
Q: What is the duration of the term of a
replacement director?
A: A director elected to fill vacancy shall serve the
unexpired term of the director he replaced. (Sec. 29,
CC)
Q: How will a vacancy caused by resignation of a
director in a hold-over position be filled-up?
A: The vacancy caused by resignation of a director in
a hold-over position can only be filled up by the
stockholders or members, for the cause of vacancy is
not resignation but by expiration of term because the
hold-over period is not a part of the directors original
term of office, nor is it a new term. (De Leon, supra,
pg. 295-296)
COMPENSATION
Q: How are directors compensated?
A: GR: Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
XPN:
1. When their compensation is fixed in the by-
laws.
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special meeting
181
3. If they perform services other than as
directors of the corporation. (i.e. where
directors are also corporate officers or
employees of the corporation) (Sec. 30, CC.)
Q: Is the BOD prohibited from securing an insurance
policy for the life of its members and making the
directors the beneficiaries instead of the
corporation?
A: No. The Insurance Code does not contain any
prohibition as to such. However, the premium paid
thereon is analogous to a continuing bonus and gift
and thus falls within the context of additional
compensation. A corporation may not be used by its
officers or stockholders as a means of diverting
profits or proceeds to the payment of premium on
insurance policies to the enrichment of its
beneficiaries at the expense of, or to the detriment
of, its creditors (SEC Opinion, Dec. 8, 1987).
Q: What is the limitation on the amount of
compensation to be received by the directors?
A: In no case shall the total yearly compensation of
directors, as such directors exceed 10% of the net
income before income tax of the corporation during
the preceding year (Sec. 30, CC).
Q: What is the remedy of the stockholders if there
was no proper authorization for the grant of
compensation to the directors?
A: Compensation to the directors of a corporation
without proper authorization in the by-laws or by the
vote of the stockholders may be recovered in a
stockholders suit (De Leon, supra, pg. 298).
Q: Is the general rule that directors are not entitled
to compensation applicable to corporate officers,
who are not directors?
A: No. Such officers, not being directors and having
no control over the funds and property of the
corporation, even though they may be stockholders,
do not occupy the relation of trustees to the
corporation. (ibid., pg. 301, citing Cheeney vs.
Lafayette, BOR Co., 61 III. 570.)
FIDUCIARY DUTIES AND LIABILITY RULES
Q: What is the nature of the obligation of the
directors to the corporation?
A: The directors character is that of a fiduciary
insofar as the corporation and the stockholders as a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
body are concerned. As agents entrusted with the
management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust.
The ordinary trust relationship of directors of a
corporation and stockholderssprings from the fact
that directors have the control and guidance of
corporate affairs and property and hence of the
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only
beneficiaries thereof (Gokongwei vs. SEC, supra).
Q: What is the Majority Rule Doctrine in the dealings
of directors with stockholders?
A: The majority rule, states that a director has a
fiduciary with respect to the corporation as an entity,
and NOT to the stockholders as individuals.
Consequently, he is subject to the duty to disclose all
material facts only to the corporation and not to the
stockholders. (American T. Co. v. California etc. Ins.
Co. , 15 Cal.2d 42, 1940)
Q: What is the Special Fact Doctrine?
A: The special fact doctrine is an exception to the
majority rule doctrine. It states that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises, and
concealment is fraud (ibid).
Q: What is the determining factor for the application
of the special fact doctrine?
A: Special circumstances or facts are present which
make it inequitable for the director to withhold
information from the stockholder.
What are the instances where the special fact
doctrine has been applied?
A: In foreign US jurisprudence, the special fact
doctrine was applied in the following cases
1. Where a director actively participation in the
negotiations for a transfer of the corporate property
(Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed.
853)
2. Where a director undertakes to speak or become
active in inducing the sale, he must speak fully,
frankly, and honestly, and conceal nothing to the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
disadvantage of the selling stockholder (Poole v.
Camden, 79 W. Va. 310)
3. Where a director personally seeks a stockholder for
the purpose of buying his shares without making
disclosure of material facts within his peculiar
knowledge and not within reach of the stockholders,
the transaction will be closely scrutinized and relief
may be granted in appropriate instances (Strong v.
Repide, Ibid)
Q: Are the directors/ trustees or officers of a
corporation personally liable for their official acts?
A: GR: No. The officers of a corporation are not
personally liable for their official acts.
XPN: If it is shown that they exceeded their
authority. In the following instances, the
directors/ trustees may be held personally liable
for damages:
1. They willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation or
2. They are guilty of gross negligence or bad
faith in directing the affairs of the corporation
or
Note: Bad faith or negligence is a question of fact.
Bad faith does not simply mean bad judgment or
negligence. It imparts a dishonest purpose or some
moral obliquity and conscious doing of wrong. It
means breach of a known duty through some
motive or interest or ill-will; it partakes of the
nature of fraud (Ford Phils., Inc., et al. vs. CA, GR
99039, Feb. 3, 1997).
3. They acquire any personal or pecuniary
interest in conflict with their duty as such
directors or trustees. (Sec. 31, CC.) or
4. When they consent to the issuance of
watered stocks or who, having knowledge
thereof, does not forthwith file with the
corporate secretary his written objection
thereto. (Sec. 65, CC.) or
5. When they are made, by a specific provision
of law, to personally answer for their
corporate action (Sec. 144, CC; PD 115, Sec.
13; Uichico vs. NLRC, GR 121434, June 2,
1997.) or
6. When they agree to hold themselves
personally and solidarily liable with the
corporation. (Tramat Mercantile, Inc. vs. CA
238 SCRA 14 [1994].)
182
 THE CORPORATION CODE
Note: When the officers of the corporation exceeded their
authority, their actions are not binding upon the A: No. Even though the agreement to receive a secret
corporation unless ratified by the corporation or is profit is made prior to the time the recipient becomes
estopped from disclaiming them (Reyes v. RCPI Credit
a director/ trustee or officer, he is still liable under
Employees Union, G.R. No. 146535, Aug. 18, 2006).
the above rule (De Leon, supra, pg. 307).
Q: When could a director be solidary liable with the
Q: Is the above rule changed by the fact that the
corporation for termination of employees?
secret profits were obtained from ultra vires
transactions?
A: Only when the termination is done with malice or
in bad faith on the part of the director. Without any
A: No. Notwithstanding the fact that the profits were
evidence of bad faith or malice, directors may not be
derived from transaction ultra vires, the director/
held personally liable (Equitable Banking Corporation
trustee or officer is still liable (ibid).
vs. NLRC, GR No. 02467, June 13, 1997).
Q: What is doctrine of corporate opportunity?
Q: What is the liability of directors for the issuance
of watered stocks?
A: Where a director, by virtue of his office, acquires
for himself a business opportunity which should
A: Any director or officer of a corporation consenting
belong to the corporation, thereby obtaining profits
to the issuance of stocks for a consideration less than
to the prejudice of such corporation. (Sec. 34, CC.)
its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair
Q: To what extent is the director liable under the
value, or who, having knowledge thereof, does not
doctrine of corporate opportunity?
forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily,
A: A director shall refund to the corporation all the
liable with the stockholder concerned to the
profits he realizes on a business opportunity which:
corporation and its creditors for the difference
between the fair value received at the time of
1. The corporation is financially able to undertake;
issuance of the stock and the par or issued value of
2. From its nature, is in line with corporations
the same (Sec. 65, CC.).
business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable
Q: What is the liability of the director, trustee or
expectancy.(ibid.)
officer who attempts to acquire or acquires any
interest adverse to the corporation in respect of any
Note: The rule shall be applied notwithstanding the fact
matter which has been reposed in him in that the director risked his own funds in the venture.(ibid.)
confidence?
However, if such act is ratified by a vote of the stockholders
A: When a director, trustee, or officer attempts to representing at least 2/3 of the outstanding capital stock,
acquire or acquires, in violation of his duty, any the director is excused from remitting the profit
interest adverse to the corporation in respect of any realized.(ibid.)
matter which has been reposed in him in confidence,
as to which equity imposes a disability upon him to Q: When is the doctrine of corporate opportunity
deal in his own behalf, he shall be liable as a trustee NOT applicable?
for the corporation and must account for the profits
which otherwise would have accrued to the A: The doctrine is not applicable to the following
corporation.(Sec. 31, CC.) instances:

Note: Private or secret profits obtained must be accounted
for, even though the transaction on which they are made is
advantageous or is not harmful to the corporation, or even
though the director/ trustee or officer acted without intent
to injure the corporation.
Q: Is the above rule changed by the fact that the
agreement whereby the director/ trustee or officer
is to receive a secret profit is made prior to the time
he becomes as such director/ trustee or officer?
1. When a director engages in a distinct enterprise
of the same general class of business as that
which his corporation is engaged in, so long as he
acts in good faith.
2. The opportunity is one which is not essential to
the corporations business, or employment of
companys resources, or where the director or
officer embracing opportunity personally is not
brought into direct competition with the
corporation.

183 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. When the property or business opportunity has
ceased to be a corporate opportunity and has
transformed into a personal opportunity. In
such a case the corporation is definitely no
longer able to avail itself of the opportunity,
which may arise from financial insolvency, or
from legal restrictions, or from any other factor
which prevents it from acting upon the
opportunity for its own advantage (SEC Opinion,
March 4, 1982)
Q: Malyn, Schiera and Jaz are the directors of Patio
Investments, a close corporation formed to run the
Patio Cafe, an al fresco coffee shop in Makati City. In
2000, Patio Cafe began experiencing financial
reverses, consequently, some of the checks it issued
to its beverage distributors and employees bounced.
In October 2003, Schiera informed Malyn that she
found a location for a second cafe in Taguig City.
Malyn objected because of the dire financial
condition of the corporation.
Sometime in April 2004, Malyn learned about Fort
Patio Cafe located in Taguig City and that its
development was undertaken by a new corporation
known as Fort Patio, Inc., whereboth Schiera and Jaz
are directors. Malyn also found that Schiera and Jaz,
on behalf of Patio Investments, had obtained a loan
of P500, 000.00, from PBCom Bank, for the purpose
of opening Fort Patio Cafe. This loan was secured by
the assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action
before the Regional Trial Court of Makati City
against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Did Schiera and Jaz violate the principle of corporate
opportunity? Explain. (2005 Bar Question)
A: Shciera and Jaz violated the principle of corporate
opportunity, because they used Patio Investments to
obtain a loan, mortgaged its assets and used the
proceeds of the loan to acquire a coffee shop through
a corporation they formed (Sec. 34, CC).
RESPONSIBILITY FOR CRIMES
Q: When is a director or officer liable for a criminal
offense?
A: Where a law requires a corporation to do a
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
particular act, failure of which on the part of the
responsible officer to do so constitutes an offense,
the responsible officer is criminally liable therefore.
The reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it are
liable. While the corporation may be fined for such
criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned
(People vs. Tan Boon Kong, GR L-35262, March 15,
1930).
However, a director or officer can be held liable for a
criminal offense only when there is a specific
provision of law making a particular officer liable
because being a corporate officer by itself is not
enough to hold him criminally liable.
INSIDE INFORMATION
Q: What is inside Information?
A: Any material non-public information about the
issuer of the securities (corporation) or the security
obtained by being an insider, which includes: ID-
ReGoL
1. The Issuer;
2. A Director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
3. A person whose RElationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public;
4. A GOvernment employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material
information about an issuer or a security that is not
generally available to the public; or
5. A person who Learns such information by a
communication from any forgoing insiders. (Sec.
3.8 SRC.)
*Extensive discussions on Insider Trading are found on
page 245.
184
 THE CORPORATION CODE
CONTRACTS
BY SELF-DEALING DIRECTORS WITH THE
CORPORATION
Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with
one or more of its directors or trustees or officers is
VOIDABLE, AT THE OPTION OF THE 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 the case of an officer, the contract with
the officer has been previously authorized by the
board of directors. (par. 1, Sec. 32, CC.)
Q: Can the contract entered with a director or
trustee be ratified by the vote of stockholders?
A: Yes. Such contract may be ratified by the vote of
the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in a
meeting called for the purpose. However, the
following should be concurring:
st
1. Any of the first 2 conditions set forth in the 1
paragraph of Sec. 32, CC is absent;
2. Contract is with a director or trustee;
Note: If the contract is with an officer of the
corporation, there must be a prior board resolution
authorizing the same.
3. Full disclosure of the adverse interest of the
directors or trustees involved is made at the
stockholders meeting called for the purpose;
4. The contract is fair and reasonable under the
circumstances. (par. 2, Sec. 32, CC.)
rd
Note: Hence, in all such instances, the 3 element
(contract is fair and reasonable) cannot be dispensed
with for the transaction is to be valid and enforceable.
Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall be
relieved from all liability for any contract entered
into by the corporation with any firm in which the
directors may be interested." Thus, director A
acquired claims which overlapped with X's claims
and were necessary for the development and
185
operation of X's mining properties. Is the by-law
provision valid? Why? (2001 Bar Question)
A: No. It is in violation of Sec. 32 of the Corporation
Code.
Q: What happens if director "A" is able to
consummate his mining claims over and above that
of the corporation's claims? (2001 Bar Question)
A: "A" should account to the corporation for the
profits which he realized from the transaction. He
grabbed the business opportunity from the
corporation (Sec. 34, CC).
BETWEEN CORPORATIONS WITH INTERLOCKING
DIRECTORS
Contracts between corporations with interlocking
directors. A contract between two or more
corporations having interlocking directors shall NOT
be invalidated on that ground alone:
Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal
(not exceeding 20% of the outstanding capital
stock), he shall be subject to the provisions of
Sec. 32 insofar as the latter corporation or
corporations are concerned.(Sec. 33, CC.)
Q: What constitutes substantial interest?
A: Stockholdings exceeding 20% of the outstanding
capital stock shall be considered substantial for
purposes of interlocking directors (ibid.).
MANAGEMENT CONTRACTS
A management contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise.
A corporation under management is bound by the
acts of the managing corporation and is estopped to
deny its authority (National Bank vs. Producers
Warehouse Association, 42 Phil. 609).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

*Extensive discussions regarding management 3. Amendment, repeal or adoption of by-laws

contracts are found on pages 167. 4. Amendment or repeal of any resolution of the
Board which by its express terms is not
EXECUTIVE COMMITTEE amendable or repealable
5. Cash dividend declaration. (Sec. 35, CC)
An executive committee is a body created by the by-
laws and composed of not less than three members Q: What are the executive committees provided in
of the board which, subject to the statutory the Revised Code of Corporate Governance?
limitations, has all the authority of the board to the
extent provided in the board resolution or by-laws. A:
The committee may act by a majority vote of all of its 1. Audit Committee
members (Sec. 35, CC.). 2. Nomination Committee
3. Compensation and Remuneration
Note: An executive committee can only be created by Committee
virtue of a provision in the by-laws and that in the absence
of such by-law provision, the board of directors cannot Q: Is a foreigner allowed to be a member of the
simply create or appoint an executive committee to
executive committee?
perform some of its functions (SEC Opinion, Sept. 27, 1993).

In such a case where there was an unauthorized creation of A: Yes. A foreigner can be allowed representation in
executive committee by the board, the principle of de facto the executive committee since he can be allowed in
officers may be applied insofar as third persons are the BOD. An Executive Committee is a governing body
concerned. However, insofar as the corporation is which functions as the board itself. Thus,
concerned, the unauthorized act of appointment of an membership therein shall be governed by the same
executive committee may be subject to Sec. 144, which law/ rules applicable to the BOD as provided in Sec.
provides for penalties in violation of the Code. (ibid.) 35. (SEC Opinion, June 3, 1998.)
Q: Can non-members of the board be appointed as Q: What is the quorum required of the executive
members of the executive committee? committee?
A: Yes, provided that there are at least 3 members of A: The quorum requirements for executive
the board who are members of the committee (SEC committee is the same as that of the BOD.
Opinion, Sept. 16, 1986).
MEETINGS
Q: In what capacity can a person not a director act if
appointed as a member of the executive
REGULAR OR SPECIAL
committee?
Q: When will BOD/BOT meetings be held?
A: A person not a director can be a member of the
executive committee but only in a recommendatory
A:
or advisory capacity.
i. DATE AND PLACE OF ii. REQUIRED WRITTEN
MEETING /VERBAL NOTICE
Q: Are the decisions of the executive committee
subject to appeal to the board? Regular Meeting
1. The date fixed in Notice must:
A: No. However, if the resolution of the Executive the by-laws; or 1. State the date, time
Committee is invalid, i.e. not one of the powers 2. If there is no date and place of the
conferred to it, it may be ratified by the board (SEC in the by-laws meeting
Opinion, July 29, 1995.). shall be held 2. Be sent to every
monthly director or trustee
Q: What are the limitations on the powers of the a. Within the period
executive committee? Venue: provided in the by-
1. Venue fixed by laws
A: The executive committee cannot act on the the by-laws; or b. In the absence of
following: 2. If venue is not provision in the by-
1. Matters needing stockholder approval provided by the laws, at least 1 day
2. Filling up of board vacancies by-laws, prior to the
anywhere in or scheduled meeting.

UNIVERSITY OF SANTO TOMAS 186

2013 GOLDEN NOTES
 THE CORPORATION CODE

outside of the 1. Inquiry on whether the director will attend

Philippines. A director or trustee may physically or through tele/videoconferencing;
waive this requirement, 2. Contact number/s of the Secretary and office
either expressly or staff whom the director may call to notify and
impliedly. state whether he shall be physically present or
Special Meeting attend through tele/videoconferencing;
Notice must: 3. Agenda of the meeting;
1. State the date, time 4. All documents to be discussed in the meeting,
1. Any time upon and place of the including attachments, shall be numbered and
the call of the meeting duly marked by the Secretary in such a way that
president; or 2. Be sent to every all the directors, physically or electronically
2. As provided in the director or trustee present, can easily follow, refer to the
by-laws a. Within the period documents and participate in the meeting.(SEC
provided in the by- Memo Circ. No. 15, Series of 2001.)
Venue: laws
1. Venue fixed by b. In the absence of Note: If the director chooses tele/videoconferencing, he
shall give notice of at least five days prior to the scheduled
the by-laws; or provision in the by-
meeting to the Secretary. The latter shall be informed of his
2. If venue is not laws, at least 1 day contact number/s. In the same way, the Secretary shall
provided by the prior to the inform the director concerned of the contact number/s he
by-laws, scheduled meeting. will call to join the meeting. The Secretary shall keep the
anywhere in or records of the details, and on the date of the scheduled
outside of the A director or trustee may meeting, confirm and note such details as part of the
Philippines. waive this requirement, minutes of the meeting.(ibid.)
either expressly or
impliedly. In the absence of an arrangement, it is presumed that the
director will physically attend the Board meeting.(ibid.)

Q: What are the requisites for a valid tele/

Q: Is a meeting held in the absence of some of the
videoconferencing?
directors and without any notice to them legal?
A: R.A. 8792, as implemented by SEC Memo. Circular
A: No. It is illegal, and the action at such meeting
No. 15, Nov 30, 2001,provides that:
although by a majority of the directors, is invalid
1. Directors must express their intent on
unless:
teleconferencing;
1. subsequently ratified or waived, expressly or
2. Proper identification of those attending;
impliedly, by the absent directors or
3. The corporate secretary must safeguard the
2. rights have been acquired by innocent third
integrity of the meeting by recording it. There is
persons, as against whom the corporation must
no violation of the Anti-Wire Tapping Act (R.A.
be held estopped to set up the failure to observe
4200) because all the parties to the board
formalities.(De Leon, supra, pg. 495.)
meeting are aware that all the communications
are recorded.
WHO PRESIDES
Note: The basic types of teleconferencing are:
1. Video conferencing; The president shall preside at all meetings of the
2. Computer conferencing; directors or trustees as well as of stockholders or
3. Audio conferencing. members unless the by-laws provide otherwise. (Sec.
54, CC)
Q: In case of a tele/videoconferencing during BOD
meetings, what are the contents of the notice, which QUORUM
should be sent to every director?
The following constitutes quorum during meetings of
A: The Corporate Secretary shall send out the notices BOD/BOT:
of the meeting to all directors in accordance with the
manner of giving notice as stated in the corporate by- GR: Majority of the number of directors or
laws. trustees.
The notice shall include the following:

187 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: If AOI or the by-laws provide for a greater
number.(Sec. 25, CC.)
Note: GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which there is
quorum shall be valid as a corporate act. (ibid.)
XPNs:
1. The election of officers which shall require the vote
of a majority of all the members of the board. (ibid.)
2. No board approval is necessary where there is
custom, usage and practice in the corporation not
requiring prior board approval or where subsequent
approval is sufficient. (Board of Liquidators v. Kalaw,
G.R. No. L18805, Aug. 14, 1967)
Note: The quorum is the same even if there is vacancy in
the board.
Q: Can directors or trustees attend or vote by proxy
at board meetings?
A: No (Sec.25, CC). The members of the BOD are
required to exercise their judgment and discretion in
running the affairs of the corporation and they
cannot be substituted by others. (SEC Opinion, May
27, 1970.)
RULE ON ABSTENTION
Q: What is the effect of Abstention?
A: No inference can be drawn in a vote of abstention.
When a director or trustee abstains, it cannot be said
that he intended to acquiesce in the action taken by
those who voted affirmatively. Neither, for that
matter, can such inference be drawn from the
abstention that he was abstaining because he was
not then ready to make a decision. (Lopez v Ercita,
G.R. No. L-32991, June 29, 1972)
Q: When is a director required to abstain in voting?
A: 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. (Robert's Rules, 10th ed., p 394.) 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.
Q: Give an example where a director needs to
abstain
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A: To avoid Insider Trading, Insiders are obligated
to abstain from trading the shares of his
corporation. This duty to abstain is based on two
factors:
1. The existence of a relationship giving access,
directly or indirectly, to information intended to be
available only for a corporate purpose and not for
the personal benefit of anyone;
2. The inherent unfairness involved when a party
takes advantage of such information knowing it is
unavailable to those with whom he is dealing (SEC
vs. Interport Resources Corporation, G.R. No.
135808, October 6, 2008 .
STOCKHOLDERS AND MEMBERS
Q: How does one become a shareholder in a
corporation?
A: A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an existing
corporation (he is a stockholder upon acceptance
of the corporation of his offer to subscribe whether
the consideration is fully paid or not),
2. Purchase treasury shares from the corporation, or
3. Acquires shares from existing shareholders by sale
or any other contract, or acquires shares by
operation of law like succession (Sundiang, supra,
2009, pg. 227.)
RIGHTS OF A STOCKHOLDER AND MEMBER
The rights of a stockholder/ member are as follows:
1. Management Right
a. To attend and vote in person or by proxy at a
stockholders meetings. (Secs. 50, 58, CC)
b. To elect and remove directors. (Secs. 24, 28,
CC)
c. To approve certain corporate acts. (Sec. 58,
CC)
d. To adopt and amend or repeal the by-laws of
adopt new by-laws (SecS. 46, 48, CC)
e. To compel the calling of the meetings. (Sec.
50, CC)
f. To enter into a voting trust agreement. (Sec.
59, CC)
g. To have the corporation voluntarily dissolved
(Secs. 118, 119, CC)
188
 THE CORPORATION CODE
2. Proprietary rights
a. To transfer stock in the corporate book. (Sec.
63, CC)
b. To receive dividends when declared .(Sec.
43, CC)
c. To the issuance of certificate of stock or
other evidence of stock ownership. (Sec. 64,
CC)
d. To participate in the distribution of
corporate assets upon dissolution. (Sec. 118,
119, CC)
e. To pre-emption in the issue of shares. (Sec.
39, CC)
3. Remedial rights
a. To inspect corporate books. (Sec. 74, CC)
b. To recover stock unlawfully sold for
delinquent payment of subscription. (Sec.
69, CC)
c. To be furnished with most recent financial
statements or reports of the corporations
operation (Sec. 74, 75, CC);
d. To bring suits (derivative suit, individual suit,
and representative suit).
e. To demand payment in the exercise of
appraisal right. (Secs. 41, 81, CC)
DOCTRINE OF EQUALITY OF SHARES
Q: What is the doctrine of equality of shares?
A: Where the articles of incorporation do not provide
for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are also
subject to the same liabilities. (Sec. 6, CC.)
PARTICIPATION IN MANAGEMENT
Under the Corporation Code, stockholders or
members periodically elect the board of directors or
trustees, who are charged with the management of
the corporation.The board, in turn, periodically elects
officers to carry out management functions on a day-
to-day basis. As owners, though, the stockholders or
members have residual powers over fundamental
and major corporate changes.
While stockholders and members (in some instances)
are entitled to receive profits, the management and
direction of the corporation are lodged with their
representatives and agents -- the board of directors
or trustees. In other words, acts of management
pertain to the board; and those of ownership, to the
189
stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of
the stockholders or members.(Tan vs. Sycip, August
17, 2006, GR 153468.)
PROXY
The term proxy designates the formal written
authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise the
voting rights of the former.
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders or
members meeting.
It also refers to the instrument which evidences the
authority of the agent. (De Leon, supra, pgs. 505-
506.)
Note: A proxy is a special form of agency. A proxy holder is
an agent and as such a fiduciary. (ibid., pg. 506.)
Since a proxy acts for another, he may act as such although
he himself is disqualified to vote his shares.
A proxy-stockholder disqualified to vote because his stock
has been declared delinquent may vote the stocks of his
principal which is not delinquent.
Q: What are the purposes of proxies?
A: The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings of
stockholders of large corporations;
2. Enables those who do not wish to attend a
stockholders/ members meeting to protect
their interest by exercising their right to vote
through a representative; and
3. One of the devices in securing voting control or
management control in the corporation. (ibid.)
Q: What are the requirements for a valid proxy?
A:
1. Proxies shall be in writing and shall be signed by
the stockholder or member concerned;
Note: Oral proxies are NOT valid.
2. The proxy shall be filed before the scheduled
meeting with the corporate secretary;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Unless otherwise provided (continuing in nature) in
the proxy, it shall be valid only for the meeting for
which it is intended; and
Note: The authority may be general or limited.
4. No proxy shall be valid and effective for a period
longer than 5 years at any one time. (Sec.58 B.P. 68
as amended by Sec. 20, SRC)
Q: May the SEC pass upon the validity of the
issuance and use of proxies?
A: Yes. PD 902-A empowers the SEC, among others,
to pass upon the validity of the issuance and use of
proxies and voting trust agreements for absent
stockholders or members. (Sec. 6[g])
Q: May the directors vote through proxies at board
meetings?
A: No. While stockholders or members may vote in
person or by proxy in all meetings of stockholders or
members(Sec. 58, CC), the directors must always act
in person.The latter cannot attend or vote by proxy at
board meetings (Sec. 25, CC.), but they may act as
proxies in stockholders meetings. (De Leon, supra,
pgs. 507-508.)
Q: Who may be a proxy?
A: Any person whom the stockholder or member sees
fit to represent him.
Note: By-laws restricting the stockholders or members
right in this respect are void. (De Leon, supra, pg. 507.)
Further, same person may act as proxy for one or several
stockholders or members.
Q: Is the power to appoint a proxy a personal right?
A: Yes. The right to vote is inseparable from the right
of ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is be voted. (SEC Opinion, Dec. 3,
1993, citing 5 Fletcher, Sec. 2053.)
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated proxy
may not further re-designate another under the same
proxy. An alternate proxy can only act as proxy in
case of non-attendance of the other designated
proxy. (De Leon, supra, pg. 508.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the duration of proxy?
A:
1. Specific proxy authority granted to the proxy
holder to vote only for a particular meeting on a
specific date.
2. Continuing proxy grants authority to a proxy to
appear and vote for and in behalf of a shareholder
for a continuing period which should not be more
than 5 years at any one time. By-laws may provide
for a shorter duration of a continuing proxy.
Q: What is the extent of authority of a proxy?
A:
1. General proxy A general discretionary power to
attend and vote at an annual meeting, with all the
powers the undersigned would possess if
personally present, to vote for directors and all
ordinary matters that may properly come before a
regular meeting.
Note: A holder of a general proxy has no authority to
vote for a fundamental change in the corporate charter
or other unusual transactions such as merger or
consolidation.
2. Limited proxy Restrict the authority to vote to
specified matters only and may direct the manner
in which the vote shall be cast. (ibid., pg. 510-511.)
Q: When may the right to vote by proxy be
exercised?
A:
1. Election of the BOD/BOT(Sec. 24, CC)
2. Voting in case of joint ownership of stock(Sec. 56,
CC)
3. Voting by trustee under VTA(Sec. 59, last par.)
4. Voting by members in non-stock corps. (Sec. 89,
par. 2, CC)
Note: In non-stock corporations the right to vote by
proxy, or even the right to vote itself may be denied to
members in the articles of incorporation or the by-laws
as long as the denial is not discriminatory.
5. In considering other matters:
a. Pledge or mortgage of shares (Sec. 55, par. 2,
CC.)
b. In all other matters as may be provided in
the by-laws (Sec. 47[4], CC.)
c. In all meetings of stockholders or members
(Sec. 58, CC)
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Q: How and when is a proxy revoked?
A: A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote
may revoke the same at anytime.
XPN:Said proxy is coupled with interest, even if it
may appear by its terms to be revocable. (De
Leon, supra, pg. 513.)
Note: Last proxy given revokes all previous proxies. (SEC
Opinion, Oct. 14, 1991.)
VOTING TRUST
A voting trust agreement (VTA)is 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 rights (and/or any
other specific rights) over such shares; and in return,
trust certificates are given to the stockholder/s,
which are transferable like stock certificates, subject,
to the trust agreement.
Q: What are the purposes of a VTA?
A: The following are the purposes of a VTA:
1. VTA makes possible a unified control of the
affairs of the corporation and a consistent policy
by binding stockholders to vote as a unit.
2. To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors;
3. To enable the owners of the majority of the stock
of the corporation to control the corporation;
4. To vest and retain the management of the
corporation in the persons originally promoting
it;
5. To prevent a rival concern from acquiring control
of the corporation;
6. To carry out a proposed sale of the corporations
assets and to facilitate its dissolution;
7. To enable two holding companies to operate
jointly a corporation controlled by them;
8. To effect a plan for reorganization of a
corporation in financial difficulty or in bankruptcy
proceedings; and
9. To aid a financially embarrassed corporation to
obtain a loan and protect its creditors.(De Leon,
supra, pg. 521-522.)
191
Q: What are the procedural requirements and
limitationsimposed on VTAs?
A:
1. The agreement must be in writing and notarized
and specify the terms and conditions thereof.
2. A certified copy of such agreement shall be filed
with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA
shall be cancelled.
4. A new certificate shall be issued in the name of
the trustee/s stating that they are issued
pursuant to the VTA.
5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said VTA.
6. The trustee/s shall execute and deliver to the
transferors voting trust certificates, which shall
be transferable in the same manner and with the
same effect as certificates of stock.
7. No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every
voting trust) except in the case of a voting trust
specifically requiring a longer period as a
condition in a loan agreement, in which case, the
period may exceed 5 years but shall
automatically expire upon full payment of the
loan.
8. No VTA shall be entered into for the purpose of
circumventing the law against monopolies and
illegal combinations in restraint of trade.
9. The agreement must not be used for purposes of
fraud. (Sec. 59, CC.)
Q: What is the effect of a voting trust agreement
with respect to the rights of the trustor and the
trustee?
A: It is the trustee of the shares who acquires legal
title to the shares under the voting trust agreement
and thus entitled to the right to vote and the right to
be elected in theboard of directors while the trustor-
stockholder has the beneficial title which includes the
right to receive dividends.(Lee vs. CA, 205 SCRA 752,
[1992].)
Q: What is the duration of a voting trust agreement?
A: Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors. (Sec. 59,
CC.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

This does not involve a transfer of stocks but is

Q: What are the distinctions between a voting trust
agreement and proxy?
A:
VOTING TRUST
If validly executed, VTA is
intended to be irrevocable
for a definite and limited
period of time.
Trustee acquires legal title to
the shares of the transferring
stockholder
Right to vote as well as other
rights may be given except
the right to receive
dividends. The trustee may
vote in person or by proxy
unless the agreement
provides otherwise
The agreement must be
notarized
Trustee is not limited to act
at any particular meeting
The stock certificate shall be
cancelled and a new one in
the name of the trustee shall
be issued stating that they
are issued pursuant to a VTA.
A trustee can vote and
exercise all the rights of the
stockholder even when the
latter is present.
An agreement must not
exceed 5 years at any one
time except when the same
is made a condition of a loan.
Governed by the law on trust
A trustee has the right to
inspect corporate books.
PROXY
A proxy, unless
coupled with interest,
is revocable at
anytime.
Proxy has no legal title
to the shares of the
principal
Only right to vote is
given. The proxy must
vote in person.
Proxy need not be
notarized
Proxy can only act at a
specified stockholders
meeting (if not
continuing)
No cancellation of the
certificate shall be
made
A proxy can only vote
in the absence of the
owner of the stocks
A proxy is usually of
shorter duration
although under Sec. 58
it cannot exceed 5
years at any one time
Governed by the law
on agency
A proxy does not have
a right of inspection of
corporate books.
merely a private agreement (Sec. 100, CC).
Q: When are pooling agreements valid?
A: As long as they do not limit the discretion of the
BOD in the management of corporate affairs or work
any fraud against stockholders not party to the
contract.
Q: What is the difference between Pooling
Agreement and Voting Trust Agreement?
A: In Pooling Agreement, the stockholders
themselves exercise their right to vote. On the other
hand, the trustees are the ones who exercise the
right to vote under the Voting Trust Agreement.
Q: A distressed corporation executed a voting trust
agreement for a period of three years over 60% of
its outstanding paid up shares in favor of a bank to
whom it was indebted, with the Bank named as
trustee. Additionally, the Company mortgaged all its
properties to the Bank. Because of the insolvency of
the Company, the Bank foreclosed the mortgaged
properties, and as the highest bidder, acquired said
properties and assets of the Company.
The three-year period prescribed in the Voting Trust
Agreement having expired, the company demanded
the turn-over and transfer of all its assets and
properties, including the management and
operation of the Company, claiming that under the
Voting Trust Agreement, the Bank was constituted
as trustee of the management and operations of the
Company. (1992 Bar Question)
A: The demand of the company does not tally with
the concept of a Voting Trust Agreement. The Voting
Trust Agreement merely conveys to the trustee
theright to vote the shares of grantor/s. The
consequence of foreclosure of the mortgaged
properties would be alien to the Voting Trust
Agreement and its effects

Q: What is a pooling agreement?

A: This is an agreement, also known as voting

agreement, entered into by and between 2 or more
stockholders to make their shares as one unit (ex:
Shareholders, A,B,C,D,E, holds 50% of the outstanding
capital stock, entered into a pooling agreement to
vote for F as a member of the board of director). This
usually relates to election of directors where parties
often provide for arbitration in case of disagreement.

UNIVERSITY OF SANTO TOMAS 192

2013 GOLDEN NOTES
 THE CORPORATION CODE
CASES WHEN STOCKHOLDERS ACTION IS REQUIRED
Q: What are the corporate powers exercised jointly by the BOD and stockholders?
A:
CORPORATE ACT
1. Amendments, repeal, or adoption of new
by-laws
2. Entering into management contract
3. Issuance of stock dividends
4. Amendment to articles of incorporation
5. Grant of compensation to directors
6. Extending or shortening the corporate
term
7. Increase or decrease of capital stock
8. To incur, create, or increase bonded
indebtedness
9. Investment of corporate funds in another
corporation or business or for any other
purpose other than the primary purpose
10. The sale or other disposition of all or
substantially all of the corporate assets
VOTE REQUIREMENT
BOARD OF STOCKHOLDERS
DIRECTORS
Majority vote of GR: Majority vote of the outstanding
the BOD capital stock
XPN: If delegated by the stockholders to
the board
Majority of the GR: Vote of the majority of the
quorum of the outstanding shares of stock or members
BOD of both the managing and the managed
corporation.
XPN: The vote required for the
managed corporation is not merely
majority but 2/3 of the outstanding
capital stock in cases where
1. a stockholder or stockholders
representing the same interest of both
the managing and the managed
corporations own or control more than
one-third (1/3) of the total outstanding
capital stock entitled to vote of the
managing corporation; or
2 majority of the members of the board
of directors of the managing
corporation also constitute a majority of
the members of the board of directors
of the managed corporation.
Majority of the Vote representing 2/3 of the
quorum of the outstanding capital stock
BOD
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Approval of the Majority vote of the outstanding capital
Board stock
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Approval of the Vote representing 2/3 of the
board outstanding capital stock
193 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
11. Merger or consolidation
12. Voluntary dissolution
13. To adopt a plan of distribution of assets
of a non-stock corporation
Q: What are the corporate powers exercised solely by the stockholders?
A:
CORPORATE ACT
1. Election of directors or trustees; filling up of
vacancies by the stockholders due to the
expiration of term, removal from office or
increase in the number of board seats
2. To elect officers of the corporation
3. Fixing the issued price of no-par value shares
4. Declaration of cash and other dividends other
than stock dividends
5. To adopt by laws
6. To revoke the power delegated to the BOD to
amend or repeal the by-laws or adopt new by
laws
7. To call a special meeting to remove directors or
trustees
8. Removal of directors
9. Delegation of the power to amend by-laws to
the board of directors
10. Ratification of corporate contract with a
director
11. To delegate to the BOD the power to amend or
repeal the by-laws or adopt new by laws
Q: Is a provision requiring the consent of the BOD
prior to transfer or other disposition of shares valid?
A: No.A shareholder has the right to transfer, sell,
assign or dispose his shares as an incident of
ownership. A provision that requires any stockholder
to first obtain the consent of the board of directors or
other stockholders of the corporation before he can
transfer his shares is void as it unduly restrains the
exercise of the stockholder of his right to transfer.
PROPRIETARY RIGHTS
The following are the proprietary rights of the
stockholders:
1. Right to Dividend
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Majority vote of Vote representing 2/3 of the
the BOD outstanding capital stock
Majority vote of 2/3 of the members having voting rights
the Trustees
APPROVAL OF STOCKHOLDERS
Candidates receiving the highest number of votes from
the outstanding capital stock or members entitled to
vote (plurality, NOT majority)
Plurality vote of the BOD listed in the AOI, not merely
those present constituting a quorum
Majority of the quorum of the BOD if authorized by the
AOI or in the absence of such authority, by a majority of
the outstanding capital stock
Majoirty of the quorum of the board
Majority of the outstanding capital stock or of the
members
Majority of the outstanding capital stock or of the
members
Majority of the outstanding capital stock or of the
members entitled to vote
Vote representing 2/3 of the outstanding capital stock
or of members entitled to vote
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
2/3 of the outstanding capital stock or of the members
2. Right of First Refusal
3. Preemptive Right
RIGHT TO DIVIDENDS
*This topic should be read in relation to the Power to
Declare Dividends found on page 165.
Q: What is the right to dividend of a stockholder?
A: It is the right of the stockholder to demand
payment of dividends after board declaration.
Stockholders are entitled to dividends pro rata based
on the total number of shares that they own and not
on the amount paid for the shares.(SEC Opinion,
October 10, 1992 and July 16, 1996)
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 THE CORPORATION CODE
Q: Who are entitled to receive dividends?
A: GR: Those stockholders at the time of declaration
are entitled to dividends. (Sundiang, supra, 2009, pg.
211 citing SEC Opinion, July 15, 1994.)
Note: Dividends declared before the transfer of shares
belong to the transferor and those declared after the
transfer belong to the transferee. (ibid.)
XPNs:
a. In case a record date is provided for.
Note: A record date is the date fixed in the
resolution declaring dividends, when the dividend
shall be payable to those who are stockholders of
record on a specified future date or as of the date
of the meeting declaring said dividend. (De Leon,
supra, pg. 419, footnote no. 50.)
b. Holders of shares not fully paid which are not
delinquent shall have all the rights of a stock
holder.
Q: What is the rule in applying dividends in
delinquent shares?
A:
Cash Cash dividends due on delinquent
stock shall first be applied to the
unpaid balance on the subscription
plus cost and expenses.
Stock Stock dividends are withheld from the
delinquent stockholder until his
unpaid subscription is fully paid.
RIGHT TO APPRAISAL
Appraisal right refers to the right of the stockholder
to demand payment of the fair value of his shares,
after dissenting from a proposed corporate action
involving a fundamental change in the corporation in
the cases provided by law. (De Leon, supra, pg. 675.)
Q: What are the instances where a stockholder may
exercise his appraisal right?
A: Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair value
of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any
respect superior to those of outstanding shares of
195
any class, or of extending or shortening the term
of corporate existence.
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code.
3. In case of merger or consolidation.(Sec. 81, CC)
This appraisal right is likewise available to a
dissenting stockholder in case the corporation
decides to invest its funds in another corporation or
business for any purpose other than its primary
purpose as provided in Sec. 42 of the CC.
Under Sec. 105, any stockholder of a close
corporation may, for any reason, compel said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of
capital stock.
Q: What are the limitations on the exercise of
appraisal right?
A:
1. Any of the instances provided by law for the
exercise of the right by a dissenting stockholder
must be present (Secs. 81, 42, CC);
2. The dissenting stockholder must have voted
against the proposed corporate action (Sec. 82,
CC);
Note: The right is not available to a stockholder who
was either absent at the meeting where the
corporate action was approved, or was present at
such meeting but abstained from casting his vote;
3. A written demand on the corporation for
payment of his shares must be made by him
within 30 days after the date the vote was
taken. (ibid.);
Note: Failure to make the demand within such period
shall be deemed a waiver of the appraisal right.
4. The price must be based on the fair value of the
shares as of the day prior to the date on which
the vote was take (ibid.);
Note: If the proposed corporate action is
implemented or effected, the payment shall be made
upon surrender of the certificate(s) of stock
representing his shares.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
5. Such fair value must be determined as provided
in Sec. 82 (ibid);
Note: The fair value shall exclude any appreciation or
depreciation in anticipation of such corporate action.
6. Payment of the shares must be made only out
of the unrestricted earnings of the corporation
(ibid); and
7. Upon such payment, the stockholder must
transfer his shares to the corporation. (ibid.)
Q: What shall happen if there is a disagreement
between the withdrawing stockholder and the
corporation as to the fair value of the shares?
A: If within a period of 60 days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within 30 days after such award is made. (Sec. 82, CC)
Q: What are the effects of the exercise of the right of
appraisal?
A:
1. Once the dissenting stockholder demands
payment of the fair value of his shares:
a. All rights accruing to such shares including
voting and dividend rights shall be
suspended; and
b. He shall be entitled to receive payment of
the fair value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
him..
c. GR: He is not allowed to withdraw his
demand for payment of his shares
XPN: unless the corporation consents
thereto.
2. If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares. (Sec. 83, CC)
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2013 GOLDEN NOTES
Note: Even if his rights as stockholder are suspended
after his demand in writing is made, he cannot be
considered as an ordinary creditor of the corporation
(SEC Opinion, Jan. 11, 1982.)
3. But, upon payment of the stockholders shares,
all his rights as stockholders are terminated, not
merely suspended. (Sec. 82, CC)
4. If before the stockholder is paid the proposed
corporate action is abandoned is abandoned, his
rights and status as a stockholder shall
thereupon be permanently restored. (Sec. 84, CC)
Q: When does the right to payment cease?
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on
his shares shall be paid to him if:
a. Demand for payment is withdrawn with the
consent of the corporation or
b. The proposed corporate action is abandoned by
the corporation or
c. The proposed corporate action is rescinded by
the corporation or
d. The proposed corporate action is disapproved by
the SEC where such approval is necessary or
e. The SEC determines that the dissenting
stockholder is not entitled to the appraisal
right.(Sec. 84, CC)
Q: Who bears the cost of appraisal?
A: The costs and expenses of appraisal shall be borne
as follows:
1. By the corporation
a) Where the price which the corporation
offered to pay the dissenting stockholder is
lower than the fair value as determined by
the appraisers named by them;
b) Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
2. By the dissenting stockholder
a) Where the price offered by the corporation
is approximately the same as the fair value
ascertained by the appraisers;
196
 THE CORPORATION CODE
b) Where the same action is filed by the
dissenting stockholder and his refusal to
accept payment is found by the court to be
unjustified. (De Leon, supra, pg. 682, citing
Sec. 85, CC)
Q: In case of disagreement between the corporation
and a withdrawing stockholder who exercises his
appraisal right regarding the fair value of his shares,
a three-member group shall by majority vote resolve
the issue with finality. May the wife of the
withdrawing stockholder be named to the three
member group? (2011 Bar Question)
A: No, the wife of the withdrawing shareholder is not
a disinterested person.
RIGHT TO INSPECT
The right to inspect is the right of a stockholder to
inspect the books of the corporation is subject to the
following limitations:
1. The right must be exercised during reasonable
hours on business days
2. The person demanding the right has not improperly
used any information obtained through any
previous examination of the books and records of
the corporation
3. The demand is made in good faith or for legitimate
purpose germane to his interest as a stockholder.
(Sec. 74)
4. It should follow the formalities that may be
required in the by-laws
5. The right does not extend to trade secrets
6. It is subject to limitations under special laws, e.g.
Secrecy of Bank Deposits and FCDA or the Foreign
Currency Deposits Act.
Note: The right extends, in compliance with equity, good
faith, and fair dealing, to a foreign subsidiary wholly-owned
by the corporation.
However, this right does not apply where the corporation is
not organized under the Philippine law as in such a case,
the right of the stockholder is governed by the inspection
requirements in the jurisdiction in which the corporation
was organized. (De Leon, supra, pg. 643)
Q: What is the rationale behind the right of
inspection of a corporation?
197
A: The stockholder's right of inspection of the
corporation's books and records is based upon their
ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership
of the corporate property (Republic v Sandiganbayan,
G.R. No. 88809, July 10, 1991)
Q: Who are entitled to inspect corporate books?
A:
1. Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (Sec. 74)
2. Voting trust certificate holder- The term
stockholder, as used in Sec. 74 means not only
a stockholder of record; it includes a voting trust
certificate holder who has become merely an
equitable owner of the shares transferred. (Sec.
59, par. 3)
3. Stockholder of a sequestered company. (Republic
vs. Sandiganbayan, supra)
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established by
evidence.
Q: What are the remedies for enforcement of right?
A:
1. Action for mandamus or damages
2. Civil and criminal liability.
Q: What is the liability of a corporate officer or
agent in case he violates the stockholders right to
inspection?
A: Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, shall be liable to
such director, trustee, stockholder or member for
damages, and in addition, shall be liable for by a fine
of not less than one thousand (P1,000.00) pesos but
not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but
not more than five (5) years, or both, in the discretion
of the court. (Sec 75 and Sec 144)
Q: What are the requisites for existence of probable
cause to file a criminal case of violation of a
stockholders right to inspect corporate books?
A:
1. A director, etc. has made a prior demand in
writing for a copy or excerpts from the
corporations records or minutes;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Any officer or agent of the concerned
corporation shall refuse to allow the said
director, etc., to examine and copy said excerpts;
3. If such refusal is made pursuant to a resolution
or order of the BODs the liability for such action
shall be imposed upon the directors or trustees
who voted such refusal; and
4. Where the officer or agent of the corporation
sets up the defense that the person demanding
to examine and copy excerpts from the records
and minutes has improperly used any
information secured through any prior
examination of the same or was not acting in
good faith or for a legitimate purpose in making
his demand, the contrary must be shown or
proved. (De Leon, supra, pg. 643, citing Ang-
Abaya vs. Ang, 573 SCRA 129 [2008])
Q: What are the books and records required to be
kept by the corporation?
A: The following are the books and records required
to be kept by private corporations:
1. a record of all business transactions;
2. minutes of all meetings of stockholders or
members;
3. minutes of all meetings of directors or trustees;
and
4. stock and transfer book, in case of stock
corporations. (Sec. 74, CC)
Note: The duty to keep these books is imperative and
mandatory.
The stockholder can likewise inspect the financial
statements of the corporation (Sec. 75, CC)
Q: Where shall these books and records be kept?
A: GR: All the above books and records must be kept
at the principal office of the corporation (ibid)
XPN: the stock and transfer book may be kept in the
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by
the corporation. (ibid.)
Q: What is the requirement in order for the minutes
of the board meetings be given probative value?
A: The minutes of board meetings should be signed
by the corporate secretary. Without such signature,
neither probative value nor credibility could be
accorded such minutes. (Union of Supervisors [RB]-
NATU vs. Sec. of Labor, 109 SCRA 139 [1981].)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
PRE-EMPTIVE RIGHT
Q: What is pre-emptive right?
A: It is the preferential right of shareholders to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings.
(Sec. 39, CC)
Q: What is the purpose of pre-emptive right?
A: To enable the shareholder to retain his
proportionate control in the corporation and to retain
his equity in the surplus.
Q: Is there pre-emptive right on the re-issuance of
treasury shares?
A: Yes. When a corporation reacquires its own shares
which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
emptive right does not exist.
Q: May pre-emptive right be waived by the
stockholder?
A: Yes, either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
after being notified and given an opportunity to avail
of such right.
Q: Is the pre-emptive right of a stockholder
transferable?
A: Yes, unless there is an express restriction in the
AOI.
Q:Suppose that X Corporation has already issued the
1000 originally authorized shares of the corporation
so that its Board of Directors and stockholders wish
to increase X's authorized capital stock. After
complying with the requirements of the law on
increase of capital stock, X issued an additional 1000
shares of the same value.
Assume that stockholder A presently holds 200 out
of the 1000 original shares. Would A have a pre-
emptive right to 200 of the new issue of 1000
shares? Why?
A: Yes, A would have a pre-emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. According
to the Corporation Code, each stockholder has the
198
 THE CORPORATION CODE
pre-emptive right to all issues of shares made by the
corporation in proportion to the number of shares he
holds on record in the corporation.
. vote?
Q: When should stockholder A exercise the pre-
emptive right?
A: Pre-emptive right must be exercised in accordance
with the Articles of Incorporation or the By-Laws.
When the Articles of Incorporation and the By-Laws
are silent, the Board may fix a reasonable time within
which the stockholders may exercise the right.
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares, may the stockholder invoke his appraisal
rights and demand payment for his shareholdings?
(1999 Bar Question)
A: No, the stockholder may not exercise appraisal
right because the matter that he dissented from is
not one of those where right of appraisal is available
under the Corporation Code.
Q: When can the corporation deny pre-emptive
right?
A: The corporation can deny pre-emptive right if the
articles of incorporation or amendment thereto
denies such right.
Q: What are the instances when pre-emptive right is
not available?
A:
1. Shares to be issued to comply with laws requiring
stock offering or minimum stock ownership by the
public;
2. Shares 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;
3. Shares issued in payment of previously contracted
debts;
4. In case the right is denied in the Articles of
Incorporation;(Sec. 39, CC)
5. Waiver of the right by the stockholder.
199
RIGHT TO VOTE
Q: How can the stockholders exercise their right to
A: The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other corporate
acts which require stockholders approval.
Q: What are the conditions for the issuance of non-
voting shares?
A: The issuance of non- voting shares is subject to the
following conditions under Section 6 of the
Corporation Code:
1. Only preferred or redeemable shares may be
made non-voting shares;
2. There must remain other shares with full voting
rights
Q:When are non-voting shares entitled to vote?
A: The non-voting shares may still vote in the
following matters:
1. Amendment of the articles of incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property.
4. Incurring, creating or increasing bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with
another corporation or other corporations
7. Investment of corporate funds in another
corporation or business in accordance with the
corporation code
8. Dissolution of the corporation (Sec 6, CC)
Q: What is the rule in case of joint ownership of
stock?
A: GR:in case of shares of stock owned jointly by two
or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary.
XPN: If there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any
other person to vote such share or shares.
Provided, That when the shares are owned in an
"and/or" capacity by the holders thereof, any one
of the joint owners can vote said shares or appoint
a proxy therefor.(Sec. 56, CC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: Are treasury shares entitled to vote?

Note: When only the by-laws provide a right of first refusal
A: Treasury shares shall have no voting right as long without the corresponding provision in the AOI and not
as such shares remain in treasury. printed in the stock certificate, it is null and void. There is
no authority to create property restrictions in by-laws
provisions. (Hodges v. Lezama, 62 O.G. 6823)
Q: What is the rule in case of pledged or mortgaged
shares?
Q: May a provision in the articles of incorporation
validly grant a right of first refusal in favor of other
A: GR:The pledgor or mortgagor shall have the right
stockholders?
to attend and vote at meetings of stockholders even
though their shares are pledged or mortgaged
A: Yes, the SEC, as a matter of policy, allows
restrictions on transfer of shares in the articles of
XPN: The pledgee or mortgagee has the right to
incorporation if the same is necessary and convenient
vote and attend meetings if he is expressly given by
to the attainment of the objective for which the
the pledgor or mortgagor such right in writing
company was incorporated, unless palpably
which is recorded on the appropriate corporate
unreasonable under the circumstances. (SEC Opinion,
books (Sec. 55, CC).
Feb. 20, 1995)
RIGHT OF FIRST REFUSAL
REMEDIAL RIGHTS
Q: Distinguish pre-emptive right from right of first
Q: What actions can the stockholders or members
refusal.
bring?
A:
A:
RIGHT OF FIRST
PRE-EMPTIVE RIGHT 1. Derivative suit one brought by one or more
REFUSAL
stockholders or members in the name and on
Arises only by virtue of
behalf of the corporation to redress wrongs
May be exercised even contractual stipulations
committed against it or to protect or vindicate
when there is no express but is also granted
corporate rights, whenever the officials of the
provision of law under the provisions on
corporation refuse to sue or are the ones to be
close corporation
sued or hold control of the corporation.
Pertains to unsubscribed
portion of the authorized Exercisable against 2. Individual suit an action brought by a
capital stock. A right that another stockholder of stockholder against the corporation for direct
may be claimed against the corporation of his violation of his contractual rights.
the corporation. It includes shares of stock
treasury shares. 3. Representative suit one brought by a person in
his own behalf and on behalf of all similarly
Q: What is the right of first refusal? situated.

A: A right that grants to the corporation or another INDIVIDUAL SUIT

stockholder the right to buy the shares of stock of
another stockholder at a fixed price and only valid if Q: When is a stockholder entitled to an individual
made on reasonable terms and consideration. suit?

A: When the injury is suffered directly by an

individual shareholder as to affect his proprietary
Q: Is the right of first refusal a substantive right rights, as when his right to vote is unlawfullywithheld
under the Corporation Code? or his right to inspect corporate books arbitrarily
denied, an action may be brought by the injured
GR: No. The right of first refusal can only arise by stockholder in his own name and for his own benefit
means of a contractual stipulation, or when it is against the corporation (Salonga, Private
provided for in the articles of incorporation. Corporations.)
XPN: in the case of a close corporation where the
right of first refusal is required to be a feature to be
found in the articles of incorporation

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2013 GOLDEN NOTES
 THE CORPORATION CODE

REPRESENTATIVE SUIT DERIVATIVE SUIT

Q: What is the subject of a representative suit?
A: A representative suit is one filed by the
shareholder individually, or on behalf of a class of
shareholders to which he or she belongs, for injury to
his or her interest as a shareholder. (Cua vs. Tan, GR
182008, Dec. 4, 2009.)
Q: When is a representative suit proper?
A: Where the wrong is done to a group of
stockholders, as where preferred stockholders rights
are violated, a class or representative suit will be
proper for the protection of all stockholders
belonging to the same group. (ibid.)
Q: What are the requisites for the existence of a
derivative suit?
A:SExAN
a. He was a Stockholder or member at the time the
acts or transactions subject of the action occurred
and at the time the action was filed;
b. He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to
EXhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief
he desires;

Q: Distinguish a representative suit from a derivative c. No Appraisal rights are available for the act or acts
suit complained of; and

A: d. The suit is not a Nuisance or harassment suit.

REPRESENTATIVE SUIT DERIVATIVE SUIT (Rule 8 of the Interim Rules of Procedure
Initiated by the stockholder Initiated by the Governing Intra-Corporate Controversies, Cited in
under his own name or on stockholder on behalf of Anthony S. Yu, et al., vs. Joseph S. Yukayguan, et
behalf of other the corporation al., G.R. No. 177549, June 18, 2009)
stockholders
Seeks vindication for injury Seeks to recover for the Q: What is the rationale for a derivative suit?
to his or her interest as a benefit of the
shareholder corporation and its A: Under the Corporation Code, where a corporation
whole body of is an injured party, its power to sue is lodged with its
shareholders when board of directors or trustees. But an individual
injury is caused to the stockholder may be permitted to institute a
corporation that may derivative suit on behalf of the corporation in order
not otherwise be to protect or vindicate corporate rights whenever the
redressed because of officials of the corporation refuse to sue, or are the
failure of the ones to be sued, or hold control of the corporation.
corporation to act (Hi-Yield Realty vs. CA, G.R. No. 168863, June 23,
Deals with individual Deals with corporate 2009)
stockholders or a class of rights (ibid.)
stockholders rights Q: Is the stockholder a real party in interest in a
derivative suit?
Q: Are the remedies of representative suit and
derivative suit mutually exclusive in a single cause of A: No. The corporation is the real party-in-interest
action? while the suing stockholder, on behalf of the
corporation, is only a nominal party. (Ibid.)
A: The two actions are mutually exclusive: i.e., the
right of action and recovery belongs to either the Q: When must a person be a stockholder for him to
shareholders (direct action) or the corporation be justified in filing a derivative suit?
(derivative action) (ibid.)
A: He must be a stockholder at the time the cause of
action accrued. If the cause of action is general and
continuing, said person must be a stockholder at the
time of filing of the suit and at the time the cause of
action accrued.

201 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: Which court has jurisdiction over a derivative OBLIGATIONS OF A STOCKHOLDER

suit?
A: A derivative suit is an intra-corporate controversy
hence under the jurisdiction of the RTC acting special
commercial court.
The following are the obligations of the stockholder:
1. Obligation to pay the corporation for the unpaid
subscription including interest;

Q: AA, a minority stockholder, filed a suit against BB, 2. Obligation to pay the creditors of the corporation
CC, DD, and EE, the holders of majority shares of to the extent of their subscription if the corporate
MOP Corporation, for alleged misappropriation of assets are not sufficient.
corporate funds. The complaint averred, inter alia,
that MOP Corporation is the corporation in whose MEETINGS
behalf and for whose benefit the derivative suit is
brought. In their capacity as members of the Board REGULAR OR SPECIAL
of Directors, the majority stockholders adopted a
resolution authorizing MOP Corporation to Q: When will stockholders/members meeting be
withdraw the suit. Pursuant to said resolution, the held?
corporate counsel filed a Motion to Dismiss in the
name of the MOP Corporation. Should the motion A:
be granted or denied? Reason briefly. i. DATE AND PLACE OF ii. REQUIRED WRITTEN
MEETING NOTICE
A: It should not be denied. The requisites for a valid
Regular meeting
derivative suit exist in this case. First, AA was exempt
from exhausting his remedies within the corporation The notice of meetings
and did not have a demand on the Board of Directors 1. Annually on date fixed in shall be in writing, and
for the latter to sue. Here, such a demand would be the by-laws; or the time and place
futile, since the directors who comprise the majority thereof stated therein.
(namely BB, CC, DD and EE are the ones guilty of the 2. If there is no date in the
wrong complained of. Second, AA appears to be a by-laws any date in April as The notice shall be sent
stockholder at the time of the alleged determined by the board. to the stockholder:
misappropriation of corporate funds. Third, the suit is 1. Within the period
brought on behalf and for the benefit of MOP Venue: In the city or provided in the by-laws
Corporation. In this connection, it was held in municipality where the 2. In the absence of
Commart (Phils.) Inc. v. SEC, G.R. No. 85318, June 3, principal office is located, provision in the by-laws
1991, that to grant to the corporation concerned the and if practicable in the at least 2 weeks prior
right of withdrawing or dismissing the suit, at the principal office of the to the meeting.
instance of the majority stockholders and directors corporation: Provided, that
who themselves are the persons alleged to have Metro Manila shall be Notice may be waived,
committed the breach of trust against the interests of considered a city or expressly or impliedly, by
the corporation would be to emasculate the right of municipality. any stockholder or
the minority stockholders to seek redress for the member.
corporation. Filing such action as a derivative suit Special meeting
even by a lone stockholder is one of the protections The notice of meetings
1. Any time deemed
extended by law to minority stockholders against shall be in writing, and
necessary; or
abuses of the majority. the time and place
2. As provided in the by-laws
thereof stated therein.
Q: Can an allegation of tort with a stockholder Venue: In the city or
coexist with a derivative suit in the same petition? The notice shall be sent
municipality where the
to the stockholder:
principal office is located,
A: Yes, A personal injury suffered by a stockholder 1. Within the period
and if practicable in the
cannot disqualify him from filing a derivative suit on provided in the by-laws
principal office of the
behalf of the corporation. It merely gives rise to an 2. If no provision in the
corporation: Provided, that
additional cause of action for damages against the by-laws at least 1 week
Metro Manila shall be
erring directors (Goachan v Young, G.R. No. 131889, prior to the meeting
considered a city or
March 12, 2001).
municipality.
Notice may be waived,

UNIVERSITY OF SANTO TOMAS 202

2013 GOLDEN NOTES
 THE CORPORATION CODE
expressly or impliedly, by
any stockholder or
member.
WHO CALLS THE MEETING
The call for a meeting is exercised by the person
who has the power to call the meeting.
The following persons may exercise the power to
call for a meeting:
1. The person or persons designated in the by-laws
to have the authority to call stockholders/
members meeting;
2. In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with the
management of the corporation unless otherwise
provided by law;
3. A stockholder/ member may make the call on
order of the SEC whenever for any cause, there is
no person authorized to call a meeting (Sec. 50,
last par., CC) or the officers authorized fail or
refuse to call a meeting.
Note: SEC may compel the officers of any corporation
registered by it to call meetings of
stockholders/members thereof under its supervision.
(Sec. 6[f], PD No. 902-A)
4. Corporate Secretary or a stockholder/member
for a special meeting intended for the removal of
directors or trustees (Sec. 28, CC)
QUORUM
Q: What is the required quorum in a stock
corporation?
A: GR: Shall consist of the stockholders representing
majority of the outstanding capital stock or a majority
of the actual and living members with voting rights, in
the case of non-stock corporation. (Tan v. Sycip, G.R.
No. 153468, Aug. 17, 2006)
XPN:
1. A different quorum may be provided for in the
by-laws
2. The corporation code provides for certain
resolutions that must be approved by at least
2/3 of the outstanding capital stock, in which
case, majority of the outstanding capital stock
is insufficient to constitute a quorum, presence
203
of the stockholders representing 2/3 of the
outstanding capital stock is necessary for such
purpose.
Q: What are the requirements for a valid meeting
whether stockholders/members or the board?
A:
1. It must be held in the proper place;
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter;
3. It must be called by the proper person:
a. The person or persons designated in the by-
laws have authority to call stockholders or
members meeting
b. In the absence of such provision in the by-
laws it may be called by a director or trustee
or by an officer entrusted with the
management of the corporation
c. A stockholder or member may make the call
on order of the SEC whenever for any cause
there is no person authorized to call a
meeting
d. The special meeting for the removal of
directors or trustees may be called by the
secretary or by stockholder or member.
4. There must be a previous notice
5. There must be a quorum
Q: What are the rules on meeting or voting which
are applicable to certain kinds of shares?
A:
1. Delinquent shares shall not be entitled to vote.
2. Treasury shares have no voting rights while they
remain in the treasury (Sec. 57, CC.)
3. Fractional shares shall not be entitled to vote.
4. Escrow shares shall not be entitled to vote before
the fulfillment of the condition imposed thereon.
5. Unpaid shares, if not delinquent, are entitled to all
the rights of a stockholder including the right to
vote.
6. Sequestered shares-
GR: The registered owner of the shares of a
corporation, even if they are sequestered by the
government through the PCGG, exercises the right
and the privilege of voting on them.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The PCGG as a mere conservator cannot, as a rule,
exercise acts of dominion by voting these shares.
XPN: Two-tiered test: The registered owner of
sequestered shares may only be deprived of these
voting rights, and the PCGG authorized to exercise
the same, only if it is able to establish that
(1) there is prima facie evidence showing that the
said shares are ill-gotten and thus belong to
the State; and
(2) there is an imminent danger of dissipation,
thus necessitating the continued sequestration
of the shares and authority to vote thereupon
by the PCGG while the main issue is pending
before the Sandiganbayan.(Trans Middle East
[Phils.] vs. Sandiganbayan, GR 172556, June 9,
2006)
XPN to the XPN: The two-tiered test does not apply
in cases involving funds of public character (public
character exception). In such cases, the
government is granted the authority to vote said
shares, namely:
a. Where the government shares are taken over by
private persons or entities who or which
registered them in their own names; and
b. Where the capitalization of shares that were
acquired with public funds somehow landed in
private hands (Republic vs. Sandiganbayan, G.R.
No. 107789, Apr. 30, 2003)
7. Pledgor, mortgagor, or administrator shares (Sec.
55, CC)- pledgor or mortagor has the right to
attend and vote at meetings unless pledge or
morgagee is expressly given such right in writing, as
recorded on the books.
Executor, administrators, receivers, and other legal
representatives may attend and vote in behalf of
the stockholder or members without need of any
written proxy. In Gochan v. Young, G.R. No.
131889, Mar. 12, 2001, it was held that heirs are
not prohibited from representing the deceased
with regard to shares of stock registered in the
name of the latter, especially when no
administrator has been appointed.
8. Shares jointly owned (Sec. 56, CC.) consent of all
the co-owners is necessary, unless there is a
written proxy signed by all the co-owners. If shares
are owned in an and/or capacity by the holders
thereof, any one of the joint owners can vote or
appoint a proxy thereof.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
MINUTES OF THE MEETINGS
The minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/
members or directors/ trustees, but also at meeting
of an executive committee.
The minutes are usually kept in a book especially
designed for that purpose, but they may also be kept
in the form of memoranda or in any other manner in
which they can be identified as minutes of a meeting.
(People vs. Dumlao, GR 168918, March 2, 2009.)
To have probative value and credibility, the minutes
must be signed by the corporate secretary,
notwithstanding that the one taking the minutes was
a mere clerk. (Union of Supervisors [RB]-NATU vs. Sec.
of Labor, 109 SCRA 139 [1981]).
CAPITAL STRUCTURE
SUBSCRIPTION AGREEMENTS
Q: What is a subscription contract?
A: It is a contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be
formed. It is considered as such notwithstanding the
fact that the parties refer to it as purchase or some
other contract. (Sec. 60, CCC)
Q: What are the kinds of subscription contracts?
A:
1. Pre-incorporation subscription entered into before
incorporation (Sec. 61, CC)
2. Post-incorporation subscriptionentered into after
incorporation. (Sundiang, supra, 2009, pg. 227)
Q: What is the nature of a subscription contract?
A: A subscription contract is indivisible.
Consequently, where stocks were subscribed and part
of the subscription contract price was not paid, the
whole subscription shall be considered delinquent
and not only the shares which correspond to the
amount not paid.
Note: This is called the Doctrine of Individuality
(Indivisibility) of Subscription.A subscription is one entire
and indivisible whole contract. It cannot be divided into
portions. (Sec. 64, CC.)
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 THE CORPORATION CODE

Q: Can payment of a subscription contract be Q: What are the rules governing pre-incorporation
condoned by a corporation? subscription contracts?

A: No. A corporation has no power to release an A: GR: A pre-incorporation subscription agreementis

original subscriber to its capital stock from the irrevocable for a period of six (6) months from the
obligation of paying for his shares, without a valuable date of subscription.
consideration for such release (PNB v Bitulok Sawmill
Inc, G.R. Nos. L-24177-85, June 29, 1968) XPN: 1. If all of the other subscribers consent to the
revocation,
Q: Is a stockholder entitled to the rights pertaining 2. If the incorporation of said corporation fails
to shares of stock subscribed although not fully to materialize within said period or within a
paid? longer period as may be stipulated in the
contract of subscription
A: Yes. As long as the shares are not considered
delinquent, they are entitled to all rights granted to it XPN to XPN: No pre-incorporation subscription may
whether or not the subscribed capital stocks are fully be revoked after the submission of the AOI to
paid. the Securities and Exchange Commission.(Sec.
61, CC)
Q: What are the distinctions between subscription
and purchase? Q: What is a stock option and how does it differ
from a warrant?
A:
SUBSCRIPTION PURCHASE A:
May be made before or May be made only after STOCK OPTION WARRANT
after incorporation incorporation
Buyer does not become a A privilege granted to a A type of security which
Subscriber becomes a stockholder until the party to subscribe to a entitles the holder the
stockholder even if he fulfillment of the terms of certain portion of the right to subscribe to a
has not fully paid the the sale and registration unissued capital stock of pre-determined number
subscription thereof in the books of a corporation within a of unissued capital stock
the corporation certain period and under of a corporation
Cannot be released the terms and conditions (subscription warrant), or
The corporation may
from his subscription of the grant exercisable to purchase a pre-
rescind or cancel the
unless all stockholders by the grantee at determined number of
contract for non-
agree thereto and no anytime within the issued or existing shares
fulfillment of the contract
creditor is thereby period granted (SEC Rule in the future (covered
by the buyer
prejudiced BED No. 902-A-3, Sec.1; warrant).
Corporate creditors may De Leon, The Corporation
proceed against the Code Annotated, 2010
Creditors may not ed.).
subscriber for his unpaid
proceed against the buyer Note: A warrant is
subscription in case the detachable if it may be sold,
for the unpaid price as
assets of the transferred or assigned to
there is no privity of
corporation are not any person by the warrant
contract between them
sufficient to pay their holder separate from and
claims independent of the
In purchase amounting to corresponding beneficiary
Not covered by the more than 500 pesos, the securities, or shares of stock
or other securities of the
Statute of Frauds Statute of Frauds shall
issuer which form the basis
apply of the entitlement in a
Subscription price are warrant. It is non-
Purchase price does not
considered assets of the detachable if it may not be
become assets of the
corporation, hence, sold etc. (SEC Rules, Sept.
corporation unless fully
creditors may go after 15, 1993; De Leon, The
paid Corporation Code
them
Annotated, 2010 ed.)

205 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
CONSIDERATION FOR STOCKS
Q: What are valid considerations in a subscription
agreement?
A:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible (i.e. patents or
copyrights), the requisites are as follows:
a. The property is actually received by the
corporation
b. The property is necessary or convenient for
its use and lawful purposes
c. It must be subject to a fair valuation equal to
the par or issued value of the stock issued
d. The valuation thereof shall initially be
determined by the incorporators; and
e. The valuation is subject to the approval by
the SEC.
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations or indebtedness
5. Amounts transferred from unrestricted retained
earnings to stated capital (in case of declaration
of stock dividends)
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion. (Sec. 62,
CC)
Note: Promissory notes or future services are not valid
considerations (ibid.)
Q: Who are required to pay in full their subscription
upon incorporation?
A: The following are required to pay their
subscription in full upon incorporation:
1. Nonresident foreign subscribers upon
incorporation must pay in full their subscriptions
unless their unpaid subscriptions are guaranteed
by a surety bond or by an assumption by a
resident stockholder through an affidavit of
liability.
2. In case of nopar value shares, they are deemed
fully paid and nonassessable. (Sec. 6, CC)
Note: The issued price of no-par value shares may be
fixed in the AOI or by the BOD pursuant to authority
conferred upon it by the AOI or the by-laws, or in the
absence thereof, by the stockholders representing at
least a majority of the outstanding capital stock at a
meeting duly called for the purpose. (Sec. 62, CC)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
SHARES OF STOCK
Stock or share of stock is one of the units into which
the capital stock is divided. It represents the interest
or right which the owner has
1. In the management of the corporation in which
he takes part through his right to vote (if voting
rights are permitted for that class of stock by the
AOI);
2. In a portion of the corporate earnings, if and
when segregated in the form of dividends; and
3. Upon its dissolution land winding up, in the
property and assets of the corporation remaining
after the payment of corporate debts and
liabilities to creditors. (De Leon, supra, pg. 79,
citing 11 Fletcher, pg. 18 [1971 ed.])
Q: In order to comply with the 60% capital
requirement for ownership by Filipinos of certain
corporations, what does the term capital refer to?
A. The term capital refers to shares with voting
rights, as well as with full beneficial ownership,
which must be owned and held by citizens of the
Philippines (Gamboa v. Teves G.R. No. 176579,
October 9, 2012).
Note: This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership
of stocks, translates to effective control of a corporation
(Gamboa v. Teves G.R. No. 176579, October 9, 2012).
Q: Is legal title without beneficial title of stocks
sufficient to meet the ownership requirement?
A: No. Mere legal title is insufficient to meet the 60%
Filipino-owned capital required in the Constitution.
Full beneficial ownership of 60% of the outstanding
capital stock, coupled with 60% of the voting rights, is
required. The legal and beneficial ownership of 60%
of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is
considered as non-Philippine nationals. Full
beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential (Gamboa v.
Teves G.R. No. 176579, October 9, 2012).
Note: Since the constitutional requirement of at least 60
percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative
that such requirement apply uniformly and across the
board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation.
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 THE CORPORATION CODE
Under the Corporation Code, capital stock consists of all property of the corporation. (De Leon, ibid., pg. 80,
classes of shares issued to stockholders, that is, common citing 18 Am. Jur. 2d 737.)
shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the
The interest over the share is purely inchoate, or a
articles of incorporation. The Corporation Code allows
mere expectancy of a right in the management of the
denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporation and to share in the profits thereof and in
corporate matters. Thus, common shares have the right to the properties and assets thereof on dissolution, after
vote in the election of directors, while preferred shares may payment of the corporate debts and obligations.
be denied such right. Nonetheless, preferred shares, even if (ibid., citing Saw vs. CA, 195 SCRA 740
denied the right to vote in the election of directors, are [1991].)Further, the stockholders interest in the
entitled to vote on certain corporate matters. corporate property is merely equitable or beneficial
in nature; hence he cannot be said to be a co-owner
Since a specific class of shares may have rights and
of the corporate property. (ibid., citing Stockholders
privileges or restrictions different from the rest of the
of F. Guanzon & Sons , Inc. vs. Register of Deeds)
shares in a corporation, the 60-40 ownership requirement
in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting Q: What kind of property is a share of stock?
rights but also to shares without voting rights (This is
because when only preferred shares without voting rights A: Shares of stock are personal property. They are
are issued, the requirement of full beneficial ownership will incorporeal in nature (Art. 417 and 2095 of the Civil
be used as the standard). Preferred shares, denied the right Code).
to vote in the election of directors are anyway still entitled
to vote on the eight specific corporate matters under Sec,
Q: Does a share of stock constitute an indebtedness
6. Thus, if a corporation, engaged in a partially nationalized
of the corporation to the shareholder?
industry, issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting shares A: No. They are in the nature of choses in action but
must be owned by Filipinos. Of course, if a corporation are not in a strict sense. They do not constitute an
issues only a single class of shares, at least 60 percent of indebtedness of the corporation to the shareholder
such shares must necessarily be owned by Filipinos. In and are therefore, not credits as to make the
short, the 60-40 ownership requirement in favor of Filipino stockholder a creditor of the corporation. (De Leon,
citizens must apply separately to each class of shares, supra, pg. 81)
whether common, preferred non-voting, preferred voting
or any other class of shares. This uniform application of the
SUBSCRIPTION AGREEMENTS
60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the
ownership and operation of public utilities shall be reserved *Please refer to page 197 for the extensive discussion
exclusively to corporations at least 60 percent of whose of this topic.
capital is Filipino-owned.
CONSIDERATION FOR SHARES OF STOCK
Applying uniformly the 60-40 ownership requirement in
favor of Filipino citizens to each class of shares, regardless *Please refer to the previously discussed topic on
of differences in voting rights, privileges and restrictions,
Consideration for Stocks found on the previous page.
guarantees effective Filipino control of public utilities, as
mandated by the Constitution. Moreover, such uniform
application to each class of shares insures that the WATERED STOCK
controlling interest in public utilities always lies in the
hands of Filipino citizens. This addresses and extinguishes DEFINITION
Pangilinans worry that foreigners, owning most of the non-
voting shares, will exercise greater control over A watered stock is a stock issued in exchange for
fundamental corporate matters requiring two-thirds or cash, property, share, stock dividends, or services
majority vote of all shareholders (Gamboa v. Teves G.R. No. lesser than its par value or issued value. (Sec. 65, CC)
176579, October 9, 2012).
Watered Stocks include stocks:
NATURE OF STOCK
1. Issued without consideration (bonus share)
The ownership of share of stock confers no
2. Issued for a consideration other than cash, the
immediate legal right or title to any of the property of
fair valuation of which is less than its par or
the corporation. Each share merely represents a
issued value;
distinct undivided share or interest in the common

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3. Issued as stock dividend when there are no
sufficient retained earnings to justify it; and
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or
issued value (discount share). (De Leon, supra,
pg. 605-606.)
Note: Both par and no par value shares can be watered
stocks.
Q: What is the reason behind the prohibition on the
issuance of watered stocks?
A: It is to protect persons who may acquire stock and
the creditors of the corporation particularly those
who may become such on the faith of its outstanding
capital stock being fully paid. The prohibition secures
equality among subscribers and prevents
discriminations against those who have paid in full
the par or issued value of their shares. (ibid., pg. 606.)
Q: Are all exchanges of stocks worth less than their
value considered watered stock?
A: No. The watered stocks refer only to original issue
of stocks but not to a subsequent transfer of such
stocks by the corporation, for then it would no longer
be an issue but a sale thereof.(De Leon, supra, pg.
607, citing Rochelle Roofing Co. vs. Burley, 115 NE
478.)
Q: Are treasury shares subject to the prohibition on
the issuance of watered stocks?
A: No. Treasury shares are not original issuances.
They are shares of stocks which have been issued and
fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption,
donation, or through some other lawful means. (Sec.
9). Since they do not lose their status as issued
shares, they cannot be treated as new issues when
disposed of or reissued.
Q: What is the limitation on the re-disposal of
treasury shares?
A: Treasury shares may again be disposed of for a
reasonable price fixed by the BOD. Since they are not
subject to the prohibition on the issuance of watered
stock, they may be sold for less than their par or
issued value as long as the price for re-disposal is
reasonable.
Q: Is the issuance of watered stock an ultra vires act,
which can be ratified by the stockholders?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A: No. It is not merely ultra vires, but is illegal per se
as it is a violation of Sec. 62, CC.
LIABILITY OF DIRECTORS FOR WATERED STOCKS
Any director or officer of a corporation shall be
solidarily liable with stockholder concerned to the
corporation and its creditors for difference between
the fair value received at the time of the issuance of
the stock and the par or issued value of the same, if:
1. He consents to the issuance of stocks for
consideration less than its par or issued value or
2. He consents to the issuance of stocks for a
consideration in any form other than cash,
valued in excess of its fair value or
3. Who, having knowledge thereof, does not
forthwith express his objection in writing and file
the same with the corporate secretary. (Sec. 65,
CC)
Q: What are the defenses that can be invoked in
order that a director or an officer can escape liability
for the issuance of watered stocks?
A:
1. The director or officer did not consent and did not
have knowledge in the issuance of the watered stock.
2. The director or officer objected to its issuance
a. Objection must be directed to the issuance of the
watered stocks
b. In writing
c. File the same with the corporate secretary
d. Such objection must be done before the sale of
stocks. (Sec. 65, CC)
TRUST FUND DOCTRINE FOR LIABILITY FOR
WATERED STOCK
Q: What is the trust fund doctrine?
A: 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.
*To review the Trust Fund Doctrine, please refer to
page 169.
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Q: Where does the solidary liability of directors

consenting to the issuance of watered stock CLASSES OF SHARES OF STOCK
emanate?
Q: What are the kinds or classifications of shares?
A: The solidary liability of the directors emanates
from the fiduciary character of the position of A:
director or corporate officer. 1. Par value shares
2. No par value shares
Q: Is the trust fund doctrine violated by the issuance 3. Common shares
of the corporation of stocks less than the par value? 4. Preferred shares
5. Redeemable shares
A: GR:The trust fund doctrine is violated where stocks 6. Treasury shares
are issued by the corporation for a consideration 7. Founders share
which is less than its par value. 8. Voting shares
9. Non-voting shares
XPN: Trust fund doctrine is not violated in case 10. Convertible shares
treasury shares are reacquired and subsequently re- 11. Watered stock
issued for a lesser consideration by the corporation. 12. Fractional share
The only limitation for the reissuance of treasury 13. Shares in escrow
shares is that their price must be reasonable. 14. Over-issued stock
15. Street certificate
SITUS OF SHARES OF STOCK 16. Promotion share

Q: Where is the situs of shares of stock? Q: Who may classify shares?

A: Generally, the situs of shares of stock is the A:

country where the corporation is domiciled (Wells 1. Incorporators - the classes and number of shares
Fargo Bank v CIR, G.R. No. L-46720, June 28, 1940). which a corporation shall issue are first
determined by the incorporators as stated in the
Q: Where is the domicile of the corporation located? articles of incorporation filed with the SEC.

A: The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI even though the
corporation has closed its office therein and
relocated to another place (Hyatt Elevators and
Escalators Corp. vs. Goldstar Elevator Phils., Inc.,
supra.).
2. Board of directors and stockholders - after the
corporation comes into existence, classification
of shares may be altered by the board of
directors and the stockholders by amending the
articles of incorporation pursuant to Sec. 16.
Q: What is the doctrine of equality of shares?

Q: What is the exception to the above-enunciated
situs of shares?
A: The exception is when the case involves property
taxation. For that purpose, the situs of intangible
property, such as shares of stocks, is at the domicile
or residence of the owner.However, this exception
admits of its own exceptions, i.e.
1. When a nonresident alien has shares of stock in a
domestic corporation, then the situs will be in
the Philippines.
2. For purposes of the estate tax, the gross estate
of a resident decedent, whether citizen or alien,
or a citizen decedent, whether resident or
nonresident, includes his intangible personal
property wherever situated. (De Leon, supra, pg.
82-83.)
A: This doctrine states that except as otherwise
provided by the articles of incorporation and stated in
the stock certificate, each share shall be in all
respects equal to every other share. (Sec. 6, CC.)
Q: What are par value shares?
A: Shares with a value fixed in the articles of
incorporation and the certificates of stock. The par
value fixes the minimum issue price of the shares.
(Sec. 62, CC)
Q: Can a corporation issue shares less than its par
value shares?
A: GR: A corporation cannot issue shares at less than
its par value.

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XPN: The prohibition applies only to original
issuance of shares and not to the subsequent sale
of treasury shares and sale of shares made by
stockholders.
Q: What are no par value shares?
A: These are shares having no stated value in AOI.
Q: What are the limitations on no par value shares?
A: 5DP - B2tip - AP
1. Shares which are no par value, cannot have an
issued price of less than P5.00;
2. The entire consideration for its issuance
constitutes capital so that no part of it should be
Distributed as dividends;
3. They cannot be issued as Preferred stocks;
4. They cannot be issued by Banks, Building and
loan association, Trust companies, Insurance
companies, and Public utilities;
5. The Articles of incorporation must state the fact
that it issued no par value shares as well as the
number of said shares;
6. Once issued, they are deemed fully Paid and
non-assessable. (Sec. 6, CC)
Q: What are common shares?
A: These are ordinarily and usually issued stocks
without extraordinary rights and privileges, and
entitle the shareholder to a pro rata division of
profits. It represents the residual ownership interest
in the corporation. The holders of this kind of share
have complete voting rights and they cannot be
deprived of the said rights except as provided by law.
Q: What are preferred shares?
A: These entitle the shareholder to some priority on
distribution of dividends and assets over those
holders of common shares. Preferred shares may be
issued only with a stated par value. (Sec. 6, CC)
Q: What are the kinds of preferred shares?
A:
1. Preferred shares as to assets Shares which gives
the holder preference in the distribution of the
assets of the corporation in case of liquidation.
a. Participating preferred shares Entitled to
participate with the common shares in
excess distribution
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
b. Non-participating preferred shares Not
entitled to participate with the common
shares in excess distribution.
2. Preferred shares as to dividends Shares which
are entitled to receive dividends on said share to
the extent agreed upon before any dividends at
all are paid to the holders of common stock.
a. Cumulative preferred shares If a dividend is
omitted in any year, it must be made up in a
later year before any dividend may be paid
on the common shares in the later year.
b. Non-cumulative preferred shares There is
no need to make up for undeclared
dividends
Q: Are holders of preferred shares creditors?
A: No. Holders of preferred shares cannot compel the
corporation to give them dividends. The preference
only applies once dividends are declared.
Q: Planters Bank issued preferred redeemable
shares with a feature that entitles them to be
preferred in the payment of dividends.
Subsequently, the bank experienced liquidity
problems. The Central Bank ruled that the bank has
a reserve deficiency. Despite of the condition, one of
the stockholders holding the preferred shares filed
an action against the corporation to redeem his
shares and pay the dividends due. Will the suit
prosper?
A: No. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of capital
stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Furthermore, the declaration of dividends is
dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be.
Shareholders, both common and preferred, are
considered risk takers who invest capital in the
business and who can look only to what is left after
corporate debts and liabilities are fully paid. (Republic
Planters Bank v Judge Agana, G.R. No. 51765. March
3, 1997)
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Q: What is preferred cumulativeparticipating share 2. Right to dividends

of stock?
A: This is a kind of share which gives the holder
preference in the payment of dividends ahead of
common stockholders and to be paid the dividends
due for prior years and to participate further with
common stockholders in dividend declaration.
Q: What are redeemable shares?
A: Theseare shares of stocks issued by a corporation
which said corporation can purchase or take up from
their holders upon expiry of the period stated in
certificates of stock representing said shares (Sec.
8,CC).
Q: What are the kinds of redeemable shares?
A:
1. Compulsory - the corporation is required to
redeem the shares.
2. Optional - the corporation is not mandated to
redeem the shares.
Q: What are the limitations on redeemable shares?
A: ATVI
1. Issuance of redeemable shares must be expressly
provided in the Articles of incorporation;
2. The Terms and conditions affecting said shares
must be stated both in the articles of
incorporation and in the certificates of stock;
3. Redeemable shares may be deprived of Voting
rights in the articles of incorporation, unless
otherwise provided in the Code. (Sec. 6, par. 6,
CC)
4. Redemption cannot be made if it will cause
Insolvency of the corporation.
Note: Treasury shares are not retired shares. They do not
revert to the unissued shares of the corporation but are
regarded as property acquired by the corporation which
may be reissued or resold at a price to be fixed by the
Board of Directors (SEC Rules Governing Redeemable and
Treasury Shares, CCP No. 1-1982).
Q: What are the other means in which a corporation
may acquire its own shares?
A:
1. To collect or compromise unpaid indebtedness to
the corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
4. Redemption; and
5. Close corporation.
Q: What are the limitations on treasury shares?
A:
1. They may be re-issued or sold again as long as it
is for a reasonable price fixed by the BOD.
2. Cannot participate in dividends.
3. It cannot be represented during stockholders
meetings.
4. The amount of URE equivalent to the cost of
treasury shares being held shall be restricted
from being declared and issued as dividends.
Note: When treasury shares are sold below its par or issued
value, there can be no watering of stock because such
watering of stock contemplates an original issuance of
shares.
Q: Distinguish treasury shares from redeemable
shares?

Q: Can redeemed shares be reissued? A:

TREASURY SHARES REDEEMABLE SHARES
A: Redeemable shares, once redeemed are retired Shares so acquired by
unless reissuance is expressly allowed in the AOI. Issued by the
the corporation
corporation when
through purchase,
Q: What are treasury shares? expressly so provided
donation, redemption
in the articles of
or any other lawful
A: Shares that have been earlier issued as fully paid incorporation.
means
and have thereafter been acquired by the
Redeemable shares
corporation by purchase, donation, and redemption
may be acquired even
or through some lawful means.(Sec. 9, CC)
Can only be acquired without unrestricted
in the presence of retained earnings for
Q: What rights can be denied to treasury shares?
Unrestricted retained as long as it will not
earnings result to the
A:
insolvency of the
1. Voting Rights
Corporation.

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Must comply with the Is an exception to the
trust fund doctrine trust fund doctrine
Q: What are founders' shares?
A: Shares classified as such in the articles of
incorporation which may be given special preference
in voting rights and dividend payments.
Q: What are the limitations in the issuance of
founders' shares?
A: The exclusive right to vote and be voted for as
director is granted, this privilege is subject to
approval by the SEC, and cannot exceed 5 years from
the date of approval. (Sec. 7)
Q: What are voting shares?
A: Shares with a right to vote. If the stock is originally
issued as voting stock, it may not thereafter be
deprived of the right to vote without the consent of
the holder.
Q: What are non-voting shares?
A: Shares without right to vote. The law only
authorizes the denial of voting rights in the case of
redeemable shares and preferred shares, provided
that there shall always be a class or series of shares
which have complete voting rights. (Sec. 6, CC)
Q: What are the instances when holders of non-
voting shares are allowed to vote?
A:
These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental
matters:
1. Amendment of articles of incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property
4. Incurring, creating or increasing bonded
indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with
another corporation or other corporations
7. Investment of corporate funds in another
corporation or business in accordance with this
Code
8. Dissolution of the corporation. (Sec. 6 par. 6)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What are convertible shares?
A: A share that is changeable by the stockholder from
one class to another at a certain price and within a
certain period.
GR: Stockholder may demand conversion at his
pleasure.
XPN: Otherwise restricted by the articles of
incorporation.
Q: What is a fractional share?
A: A fractional share is a share of equity that is less
than one full share.
Q: What are shares in escrow?
A: Subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with a
third person to be kept by the depositary until the
performance of certain condition or the happening of
a certain event contained in the agreement.
Q: What is an over-issued stock?
A: It is a stock issued in excess of the authorized
capital stock. Stocks which are issued in this manner
are null and void.
Q: What is a street certificate?
A: It is a stock certificate endorsed by the registered
holder in blank and the transferee can command its
transfer to his name from issuing corporation.
Q: What is a promotional share?
A: This is a share issued to promoters or those in
some way interested in the company, for
incorporating the company, or for services rendered
in launching or promoting the welfare of the
company.
Q: What is a watered stock?
A: Shares issued below its par value or issued value.
Note: Watered stocks pertain only to original issuance of
shares.
Q: Can the corporation designate other classes of
stocks?
A: Yes. There can be other classifications as long as
they are indicated in the AOI, stock certificate and not
contrary to law.
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Q: What are unrestricted retained earnings (URE)?
A: It represents the surplus profits of the corporation.
It is determined by subtracting the liabilities (L), the
Capital Stock (CS) and the Restricted Retained
Earnings (RRE) from the assets (A) of the corporation.
(URE = A (L + CS+ RRE))
Q: What are included in UREs?
A: Unrestricted Retained Earnings shall include
accumulated profits and gains realized out of the
normal and continuous operations of the company
after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts. It does NOT include;
1. Funds appropriated by its BOD for corporate
expansion projects or programs;
2. Funds covered by a restriction for dividend
declaration under a loan agreement;
3. Funds required to be retained under special
circumstances obtaining in the corporation such
as when there is a need for a special reserve for
probable circumstances.
Q: What are the other means in which a corporation
may acquire its own shares?
A:
1. To collect or compromise unpaid indebtedness to
the corporation (Sec 41, CC);
2. To eliminate fractional shares; (Sec 41,CC)
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares; (Sec 41,CC)
4. Redeemable shares; and
5. In close corporations pre-emptive rights shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for money,
property or personal services, or in payment of
corporate debts, unless the articles of
incorporation provide otherwise. (Sec 100, CC)
Q: What is the rule in order that a corporation may
acquire its own shares?
A: GR: The corporation may only acquire its own
stocks in the presence of UREs
XPN: RDC
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks
in payment of a Debt
213
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
as long as it will not result to the insolvency of
the corporation.
PAYMENT OF BALANCE OF SUBSCRIPTION
Q: When should the balance of the subscription be
paid?
A:
1. On the date specified in the subscription contract,
without need of demand or call, or
2. If no date of payment has been specified, on the
date specified on the call made by the BOD; (Sec.
67, CC)
3. If no date of payment has been specified on the
call made, within 30 days from the date of call;
4. When insolvency supervenes upon a corporation
and the court assumes jurisdiction to wind it up,
all unpaid subscriptions become payable on
demand, and are at once recoverable, without
necessity of any prior call.
Q: Will the unpaid balance accrue interest?
A: Yes, if so required by the bylaws and at the rate of
interest fixed in the bylaws. If no rate of interest is
fixed in the bylaws, such rate shall be deemed to be
the legal rate. (Sec. 66, CC)
The above interest is different from the interest
contemplated by Sec. 67, the unpaid balance involved
in which, will only accrue interest, by way of penalty,
on the date specified in the contract of subscription or
on the date stated in the call made by the board.
Note: Interest contemplated in Sec. 66 is pertains to
moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67 speaks of
compensatory interest which is the interest on account of
delay.
Q: Differentiate Moratory and Compensatory
interest
A:
1. Compensatory interest (under Sec. 67, CC)
Interest which accrues by way of penalty, on the
date specified in the contract of subscription or
on the date stated in the call made by the board.
The stockholder liable for interest at the legal
rate on such balance, unless a different rate of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
interest is provided in the by-laws, computed
from such date until full payment.
2. Moratory Interest (under Sec. 66, CC)Interest on
unpaid subscription by reason of amortization/
installments. It can be collected only if stipulated
and for the rate specified in the contract and
fixed by the by-laws. If the rate is silent the legal
rate shall be followed.
Q: What is the effect of failure to pay the
subscription on the date it is due?
A: It shall render the entire balance due and payable
and shall make the shareholder liable for
compensatory interest at the legal rate on such
balance, unless a different rate of interest is provided
in the bylaws.
Q: What are the remedies of corporations to enforce
payment of stocks?
A:
1. Extra-judicial sale at public auction (Sec. 67, CC)
2. Judicial action (Sec. 70, CC)
CALL BY BOARD OF DIRECTORS
Q: How does the board of directors call for the
payment of unpaid subscription?
A: A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and
payable and the same or such percentage thereof
shall be collected, together with all accrued interest,
on a specified date and that if no payment is made
within 30 days from said date, all stocks covered by
said subscription shall thereupon become delinquent
and shall be subject to public auction sale.
Q: What is an unpaid claim?
A: It refers to any unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may
owe the corporation arising from any other
transaction. (Sundiang, supra, 2009, pg. 245, citing
China Bank vs. CA, March 26, 1997.)
Q: What are the requisites for a valid call?
A: SEC opined on July 21, 1976 that the following are
the requisites for a valid call:
1. It must be made in the manner prescribed by law;
2. It must be made by the BOD; and
3. It must operate uniformly upon all the
shareholders.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Is the call of the board of directors always
necessary to collect payment for unpaid
subscription?
A: No. The necessity for calls depends upon the
provisions of the contract of subscription. When no
time is fixed for payment, the subscription is payable
only upon call by the BOD which may be made at any
time the board may decide (De Leon, supra, pg. 616).
However, a call is not necessary where:
1. the subscription contract specifies the date of
payment; or
2. the corporation becomes insolvent (Sundiang,
supra, 2009, pg. 245)
3. the subscriber becomes insolvent (De Leon, supra,
pg. 616)
NOTICE REQUIREMENT
The notice of the call has to be served on the
stockholders concerned in the manner prescribed in
the call, which may either be by registered mail
and/or personal delivery and publication.
Notice of call is necessary to bind the stockholders.
(ibid., citing Baltazar vs. Lingayen Gulf Electric Power,
14 SCRA 522).
SALE OF DELINQUENT SHARES
Q: When will the share become delinquent?
A: If within 30 days from expiry of the date of
payment or from the date stated in the call made by
the board, and no payment is made, all stocks
covered by said subscription shall thereupon become
delinquent and shall be subject to delinquency sale
unless the BOD orders otherwise (Sec. 67, CC).
EFFECT OF DELINQUENCY
Q: What are the effects of stock delinquency?
A:
1. Upon the stockholder
a. Accelerates the entire amount of the unpaid
subscription;
b. Subjects the shares to interest expenses and
costs;
c. Disenfranchises the shares from any right that
inheres to a stockholder, except the right to
dividends (Sec. 71, CC) (but which shall be
applied to any amount due on said shares, or,
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 THE CORPORATION CODE
in the case of stock dividends, to be withheld
by the corporation until full payment of the
delinquent shares. (Sec. 43, CC)
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director, the
director shall continue to be a director but he
cannot run for re-election (Sundiang, supra,
2009, pg. 247.)
b. A delinquent stockholder seeking to be elected
as director may not be a candidate for, not be
duly elected to, the board.
CALL BY RESOLUTION OF THE BOARD OF DIRECTORS
Q: Is a call of the board of directors required to
declare a stock delinquent?
A: No. Stocks become delinquent when the unpaid
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified
in the subscription contract or in the call by the board
of directors.
The delinquency is automatic after said 30 day period
and does not need a declaration by the board making
the stock delinquent.
NOTICE OF SALE
Q: What is the notice requirement in case of sale of
delinquent stock?
A: The notice of sale and copy of the board resolution
ordering the sale shall be:
1. Sent to every delinquent stockholder either
personally or by registered mail or;
2. Published once a week for 2 consecutive weeks
in a newspaper of general circulation in the
province or city where the principal office of the
corporation is located.(Sec. 68, CC)
AUCTION SALE AND THE HIGHEST BIDDER
Q: What is the procedure for the sale of delinquent
stocks?
A:
1. Resolution the board shall issue resolution
ordering the sale of delinquent stock
2. Notice notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
215
stockholder either personally or by registered
mail
3. Publication the notice shall furthermore be
published once a week for two consecutive
weeks in a newspaper of general circulation in
the province or city where the principal office of
the corporation is located
4. Sale the delinquent stock shall be sold at the
public auction to be held not less than 30 days
nor more than 60 days from the date stocks
become delinquent;
5. Transfer 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; and
6. Credit remainder the remaining shares, if any,
shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering the
same (Sec. 68, CC; Aquino, Philippine Corporate
Law Compendium, 2006).
Q: When may delinquency sale be discontinued or
cancelled?
A: If the delinquent SH pays the unpaid balance plus
interest, costs and expenses on or before the date
specified for the sale or when the BOD orders
otherwise.(Sec. 68, CC.)
Q: Who is the winning bidder in a delinquency sale?
A:
1. The person participating in the delinquency sale
who offers to pay the full amount of the balance of
the subscription together with the accrued interest,
costs of advertisement and expenses of sale, for
the smallest number of shares;
2. If there is no bidder as mentioned above, the
corporation, subject to the provisions of Sec. 68,
CC, may bid for the same, and the total amount
due shall be credited as paid in full in the books of
the corporation. The purchase by the corporation
must be made out of net earnings in view of the
trust fund doctrine. Thereafter, the reacquired
shares shall be considered as treasury shares.(Sec.
41; De Leon, supra, pg. 622.)
Note: The board is not bound to accept the highest bid
unless the contrary appears. The bidder is the one making
the offer to purchase, which the corporation is free to
accept or reject. (ibid., pg. 621)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

secretary or assistant secretary(Bitong vs. CA, 292

Q: What happens to the remaining shares, if any, SCRA 503 [1998]);
were not sold? .
Note: Unless it complies with the foregoing, it is not
A: The remaining shares, if any, shall be credited in deemed issued.
favor of the delinquent stockholder who shall likewise
be entitled to the issuance of a certificate of stock 2. The certificate must be sealed with the seal of the
covering such shares. (Sec. 68, CC) corporation;

Q: May the sale of delinquent share in public auction 3. The certificate shall be issued in accordance with
be questioned? the by-laws;

A: 4. The certificate must be delivered;

GR:The sale at public auction of delinquent share is 5. The par value as to par value shares, or full
absolute and not subject to redemption. subscription as to no par value shares must be
fully paid, the basis of which is the doctrine of
XPN: An action may be filed to question the sale, the indivisibility of subscription
requisites for which are:
6. The original certificate must be surrendered
1. There should be allegation and proof of where the person requesting the issuance of a
irregularity or defect in the notice of sale or in certificate is a transferee from the stockholder
the sale itself. (ibid.; Sec. 64.).
2. The party filing the action must first pay the
party holding the stock the sum for which the Q: What are the distinctions between shares of
stock was sold with legal interest from the date stock from certificates of stock?
of sale.
3. The action is filed within 6 months from the date A:
of sale.(Sec. 69, CC) SHARE OF STOCK CERTIFICATE OF STOCK
Evidence of the holders
Q: Does the action to question a delinquency sale ownership of the stock
Unit of interest in a
prescribe? and of his right as a
corporation
shareholder and of his
A: Yes. The action prescribes 6 months from such sale extent specified therein.
It is an incorporeal or It is concrete and
CERTIFICATE OF STOCK intangible property tangible
It may be recognized
Q: What is a certificate of stock? by the corporation It may be issued only if
even if the the subscription is fully
A: It is a written evidence of the shares of stock but it subscription is not paid.
is not the share itself (Sundiang, supra, 2009, pg. fully paid.
235, citing Lincoln Phils. Life vs. CA, 293 SCRA 92).
NATURE OF THE CERTICIATE
Q: When may the certificate of stock be issued?
Q: What is the nature of a certificate of stock?
A: It may only be issued until the full amount of the
stockholders subscription together with the A: A certificate of stock is a prima facieevidence of
interest and expenses (in case of delinquent ownership and evidence can be presented to
shares) if due has been paid. (Sec. 64, CC) determine the real owner of the shares. (Bitong vs.
CA, supra.)
Q: What are the requisites for the issuance of the
It is not essential to the existence of a share of stock
Certificate of Stock?
or the creation of the relation of the shareholder with
the corporation (Tan vs. SEC, 206 SCRA 740 [1992]).
A:
1. The certificate must be signed by the president or
vice-president, countersigned by the corporate

UNIVERSITY OF SANTO TOMAS 216

2013 GOLDEN NOTES
 THE CORPORATION CODE
UNCERTIFICATED SHARES
Q: What is an uncertificated share?
A: An uncertificated share is a subscription duly
recorded in the corporate books but has no
corresponding certificate of stock yet issued.
Q: May a stockholder alienate his shares even if
there is no certificate of stock issued by the
corporation?
A: Yes. The absence of a certificate of stock does not
preclude the stock holder from alienating or
transferring his shares of stock.
Q: In case of a fully paid subscription but the
corporations has not yet issued a certificate of stock,
how can the transfer be effected?
A: In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale of deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
Q: How are transfers of subscription not fully paid
effected?
A: In case of subscription not fully paid, the
corporation may record such transfer, provided that
the transfer is approved by the board of directors and
the transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
NEGOTIABLITY
Q: Is a stock certificate negotiable?
A: Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred b delivery, it is well-settled that the
instrument is NON-NEGOTIABLE, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel. (Republic v.s
Sandiganbayan, 403 SCRA 84 [2003].)
Q: A is the registered owner of Stock Certificate No.
000011. He entrusted the possession of said
certificate to his best friend B who borrowed the
said endorsed certificate to support B's application
for passport (or for a purpose other than transfer).
217
But Bsold the certificate to X, a bona fide purchaser
who relied on the endorsed certificates and believed
him to be the owner thereof.
Can A claim the shares of stocks from X? Explain.
(2001 Bar Question)
A: No. Since the shares were already transferred to
"B", "A" cannot claim the shares of stock from "X".
The certificate of stock covering said shares have
been duly endorsed by "A" and entrusted by him to
"B". By his said acts, "A" is now estopped from
claiming said shares from "X", a bona fide purchaser
who relied on the endorsement by A of the
certificate of stock.
REQUIREMENTS FOR VALID TRANSFER OF STOCK
The following are the requirements for valid transfer
of stocks:
1. If represented by a certificate, the following must
be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties, the transfer must be
recorded in the books of the corporation. (Rural
Bank of Lipa v. CA, G.R. No. 124535, Sept 28,
2001).
2. If NOT represented by a certificate (such as when
the certificate has not yet been issued or where for
some reason is not in the possession of the
stockholder).
a. By means of deed of assignment: and
b. Such is duly recorded in the books of the
corporation. (Sundiang, supra, 2009, pg. 236.)
Q: What is the effect of the non-payment of
Documentary Stamp Tax?
A: No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any share
of stock shall be registered in the books of the
corporation unless the receipts of payment of the tax
herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation.
(Section 11 of Revenue Regulations No. 6-2008.)
Q: What if the transfer is not recorded, is it valid?
A: Yes, but, only insofar as the parties to the transfer
are concerned.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Note: To bind the corporation, the deed affecting the
transfer must be duly recorded in the corporate books.
(Sec. 63)
Q: May a stockholder bring suit to compel the
corporate secretary to register valid transfer of
stocks?
A: Yes, it is the corporate secretarys ministerial duty
and obligation to register transfers of stocks provided
all the requirements for a valid transfer had been
complied with.
Q: What are the remedies where corporation
refuses to transfer certificate of stocks?
A:
1. Petition for mandamus
2. Suit for specific performance of an express or
implied contract
3. May sue for damages where specific
performance cannot be granted
Note: There must be a special power of attorney executed
by the registered owner of the share authorizing transferor
to demand transfer in the stock and transfer book (Ponce
vs. Arsons Cement, G.R. No. 139802, Dec. 10, 2002).
The law does not prescribe a period within which the
registration of the transfer of shares should be effected.
Hence, the action to enforce the right does not accrue until
there has been a demand and a refusal concerning the
transfer.
Q: When may the corporation validly refuse to
register the transfer of shares?
A: The corporation may refuse to register the transfer
of shares if it has an existing unpaid claim over the
shares to be transferred. The unpaid claim refers to
the unpaid subscription on the shares transferred and
not to any other indebtedness that the transferor
may have to the corporation. (Sec. 63, CC.)
Note: If the contract of subscription is still not fully paid,
the consent of the corporation must be obtained first since
there would be a change of debtor. Hence, the consent of
the creditor (corporation) is necessary.
Q: What kind of transfer requires registration in the
books of the corporation?
A: Only absolute transfers. Hence, Registration in the
stock and transfer book is not necessary if the
conveyance is by way of chattel mortgage. However,
registration must be had with the Register of Deeds.
(Chua Guan vs. Samahan, supra.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
ISSUANCE
Q: When may a corporation issue a stock certificate?
A: A certificate of stock may only be issued to a
subscriber if the full amount of subscription together
with interest and expenses (in case of delinquent
shares) if any due, has been paid. (Sec 64)
Q: What is the rule on right to issuance?
A: A corporation may now, in the absence of
provisions in their by-laws to the contrary, apply
payments made by subscribers-stockholders, either
as:
FULL PAYMENT
Full payment for the corresponding number of shares
of stock, the par value of each of which is covered by
such payment; OR
PAYMENT PRO-RATA
Payment pro-rata to each and all the entire number
of shares subscribed for. (Baltazar v. Lingayen Gulf
Electric Power Co., Inc, G.R. No. L-16236-38, June 30,
1965)
LOST OR DESTROYED CERTIFICATES
Q: What is the procedure for the issuance of a new
stock certificate in lieu of those which have been
lost, stolen or destroyed?
A:
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file
with the corporation an affidavit in triplicate setting
forth;
a. if possible, the circumstances as to how the
certificate was lost, stolen or destroyed,
b. the number of shares represented by such
certificate,
c. the serial number of the certificate and the name
of the corporation which issued the same.
Note: He shall also submit such other information and
evidence which he may deem necessary.
2. After verifying the affidavit and other information
and evidence with the books of the corporation,
the latter shall publish a notice in a newspaper of
general circulation published in the place where
the corporation has its principal office, once a week
218
 THE CORPORATION CODE
for three (3) consecutive weeks at the expense of
the registered owner of the Certificate of Stock.
Note: Contents of notice:
a) Name of the corporation
b) Name of the registered owner
c) Serial number of the certificate of stock.
d) Number of share represented by the certificate of
stock.
3. After the expiration of one (1) year from the date
of the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the corporation shall cancel in
its books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu thereof
new certificate of stock.
Note: After the expiration of the 1 year period to
contest, such right shall be barred unless the registered
owner files a bond or other security in lieu thereof as
may be required, effective for a period of 1 year, for
such amount and in such form and with such sureties as
may be satisfactory to the BOD, in which case, a new
certificate may be issued even before the expiration of
the 1 year period provided herein.
4. Provided that if a contest has been presented to
said corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision
by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed. (Sec. 73, CC)
Q: May the corporation be sued for the issuance of
new certificates of stock in case of lost or destroyed
certificate?
A: GR: No action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.
XPN:Where there is fraud, bad faith, or negligence
on the part of the corporation and its officers.
(ibid.)
Q: A stockholder claimed that his stock certificate
was lost. After going through with the procedure for
the issuance of lost certificate, and no contest was
presented within 1 year from the last publication,
the corporation issued a new certificate of stock in
lieu of the supposed lost certificate. The
stockholder immediately sold his shares and
219
endorsed the replacement certificate to a buyer. It
turned out that the original certificate was not lost,
but sold and endorsed to another person. (1) May
the corporation be made liable by the aggrieved
party? (2) Who will have a better right over the
shares, the endorsee of the original certificate or the
endorsee of the replacement certificate?
A:
1. No, the corporation cannot be made liable. Except
in cases of fraud, bad faith, or negligence on the
part of the corporation and its officers, no action
may be brought against any corporation which
has issued certificates of stock in lieu of those
lost, stolen, or destroyed pursuant to the
procedure prescribed by law.
2. The endorsee of the replacement certificate has a
better right to the shares. After expiration of 1
year from the date of the last publication, and no
contest has been presented to said corporation
regarding said certificate, the right to make such
contest has been barred and said corporation
already cancelled in its books the certificate
which have been lost, stolen, or destroyed and
issued in lieu thereof new certificate.
Q: What if there are oppositions on the issuance of
new certificates, what may the corporation do?
A: The corporation may file an interpleader
proceeding to compel the parties to litigate among
themselves.
STOCK AND TRANSFER BOOK
CONTENTS
Q: What are the contents of a stock and transfer
book?
A:
1. All stocks in the name of the stockholders
alphabetically arranged
2. Amount paid and unpaid on all stocks and the
date of payment of any installment
3. Alienation, sale or transfer of stocks
4. Other entries as the by-laws may
prescribe(Sundiang, supra, 2009, pg. 247-248.)
WHO MAY MAKE VALID ENTRIES
Q: Who may make proper entries in stock and
transfer books?
A: The obligation and duty falls on the corporate
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
secretary. If the corporate secretary refuses to
comply, the stockholder may rightfully bring suit to
compel performance. The stockholder cannot take
the law on to his hands; otherwise such entry shall be
void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997).
Q: What is the probative value of the stock and
transfer book?
A: 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 (Bitong vs. CA, supra.).
DISPOSITION AND ENCUMBRANCE OF SHARES
Q: Is the registration by the corporation of the
transfer of shares required for the alienation to be
valid?
A: As between the parties to the contract of sale,
registration of the transfer of shares is not required.
However, until the shares are fully paid, such transfer
cannot be recorded in the books of the corporation.
Consequently, the transferee will not be considered
as a stockholder.
Q: What are the reasons for the recording of the
alienation of shares?
A:
1. To enable the corporation to know at all times
their actual stock holders.
2. To afford the corporation the opportunity to
object or refuse its consent to the transfer in
case it has any claim against the stock and
3. To avoid fictitious and fraudulent transfer
ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES
Q: What are the requisites for a restriction to be
valid?
A:
1. Restrictions are provided in the articles of
incorporation and
2. It must be printed at the back of the certificate of
stock.
3. Must not be more onerous than the right of first
refusal
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Can the corporation provide regulations to the
sale/transfer of the shares of stockholders?
A: Yes, but the authority granted to a corporation to
regulate the transfer of its stock does not empower it
to restrict the right of a stockholder to transfer his
shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be
followed in effecting transfer (Thomson vs. CA, G.R.
No. 116631, October 28, 1998).
SALE OF PARTIALLY PAID SHARES
Q: Can a stockholder transfer his shares without
being fully paid?
A: Yes. The incomplete payment of the subscription
does not preclude the subscriber from alienating his
shares of stock. However, the transfer, shall be valid
only between the parties.
Q: Can the transferee of the partially paid shares
compel the corporation to record the transfer of
shares in its books, even though he has no
knowledge that they are not fully paid?
A: No. Shares of stock against which the corporation
holds any unpaid claim shall not be transferable in
the books of the corporation. (Sec 63, CC)
SALE OF A PORTION OF SHARES NOT FULLY PAID
Q: Can a stockholder sell a portion of the shares not
fully paid?
A: No. A stockholder who has not paid the full
amount of his subscription cannot transfer a portion
of his subscription in view of the indivisible nature of
the subscription contract (Villanueva, Phil.
Corporation Law, pg. 240).
Q: In case the stockholder on record fails to pay the
purchase price, is transferee liable for the balance of
the purchase price?
A: No. The stockholder on record is still liable for the
balance of the purchase price. Unless the transfer of
the shares are recorded, the stockholder is still the
owners of the shares as far as the corporation is
concerned.
Reason: The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. (Nava v
Peers Marketing Corporaiton, G.R. No. L-28120 November
25, 1976)
220
 THE CORPORATION CODE
Q: Po subscribed to 80 shares of Peers Marketing
Corporation at one hundred pesos a share with a
total value of 8,000 pesos. Po initially paid 2,000
pesos (25% of the amount of subscription). Without
paying the full subscription price, Po sold to Nava 20
of his 80 shares. Nava requested the officers of the
corporation to register the sale in the books of the
corporation. The request was denied because Po has
not paid fully the amount of his subscription. Can
Nava compel the corporation to register the sale?
A: No. The corporation has a claim on the said shares
for the unpaid balance of Po's subscription. A stock
subscription is a subsisting liability from the time the
subscription is made. The subscriber is as much
bound to pay his subscription as he would be to pay
any other debt. (Ibid)
SALE OF ALL SHARES NOT FULLY PAID
Q: Is the sale of shares of not fully paid subscription
allowed?
A: Yes. The incomplete payment of the subscription
does not preclude the subscriber from alienating his
shares of stock. However, the transfer, shall be valid
only between the parties. The corporation has the
right to refuse from recording the sale in its books.
SALE OF FULLY PAID SHARES
Q: Is the sale of fully paid shares allowed?
A: Yes, even without the consent of the corporation
as long as the requisites for the valid transfer of
shares are complied.
Q: Four months before his death, PX assigned 100
shares of stock registered in his name in favor of his
wife and his children. They then brought the deed
of assignment to the proper corporate officers for
registration with the request for the transfer in the
corporation's stock and transfer books of the
assigned shares, the cancellation of the stock
certificates in PX's name, and the issuance of new
stock certificates in the names of his wife and his
children as the new owners. The officers of the
Corporation denied the request on the ground that
another heir is contesting the validity of the deed of
assignment. May the Corporation be compelled by
mandamus to register the shares of stock in the
names of the assignees? (2004 Bar Question)
A: Yes. The corporation may be compelled by
mandamus to register the shares of stock in the name
of the assignee. The only legal limitation imposed by
221
Section 63 of the Corporation Code is when the
Corporation holds any unpaid claim against the
shares intended to be transferred. The alleged claim
of another heir of PX is not sufficient to deny the
issuance of new certificates of stock to his wife and
children. It would be otherwise if the transferee's title
to the shares has no prima facie validity or is
uncertain.
Q: Does the recoding of a deed of assignment with
the SEC without the transfer of shares bind the
rd
corporation and 3 persons?
A: No. The recording of a deed of assignment does
not give rise to any legal benefit to the corporation or
any person (Sec Memo Circular No. 17, Series of
2004).
REQUISITES OF A VALID TRANSFER
*Please refer to page 210 for the extensive discussion
regarding this topic.
INVOLUNTARY DEALINGS WITH SHARES
Q: What is involuntary dealing?
A: It refers to such writ, order or process issued by a
court of record affecting shares of stocks which by
law should be registered to be effective, and also to
such instruments which are not the willful acts of the
registered owner and which may have been executed
even without his knowledge or against his consent.
Q: Give examples of involuntary dealings of a share.
A:
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Q: Must involuntary dealings be registered?
A: Yes. It is the act of registration which creates a
constructive notice to the whole world of such
instrument or court writ or process and is the
operative act that conveys ownership (Aquino,
Corporation Law, p. 185, 2007)
DISSOLUTION AND LIQUIDATION
Q: What is meant by dissolution?
A: It is the extinguishment of the franchise of a
corporation and the termination of its corporate
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
existence. (Sundiang, supra, 2009, pg. 252.)
MODES OF DISSOLUTION
The following are the modes of dissolution of the
corporation:
A. Voluntary
1. By the vote of the BOD/ BOT and the
stockholders/ members where no creditors
are affected (Sec. 118, CC.)
2. By the judgment of the SEC after hearing of
petition for voluntary dissolution, where
creditors are affected (Sec. 119, CC)
3. By amending the AOI to shorten the
corporate term (Sec. 120, CC)
4. In case of a corporation sole, by submitting to
the SEC a verified declaration of the
dissolution for approval (Sec. 115, CC)
5. Merger or consolidation
B. Involuntary
1. By expiration of corporate term provided for
in the AOI (Sec. 11, CC)
2. By legislative enactment
3. By failure to formally organize and commence
the transaction of its business within 2 years
from the date of incorporation (Sec. 22, CC)
4. By order of the SEC on grounds under existing
laws (Sec. 121, CC)
5. Judicial decree on Quo Warranto Proceeding
(Sec. 20)
Note: Methods effecting dissolution as prescribed by
statute are exclusive, and a corporation cannot be dissolved
except in the manner prescribed by law. (De Leon, supra,
pg. 738.)
The requirements for dissolution mandated by the CC
should be strictly complied with. (Vesaga vs. CA, 371 SCRA
508, [2001].)
VOLUNTARY
WHERE NO CREDITORS ARE AFFECTED
Q: What is the procedure of dissolution of a
corporation where NO creditors are affected?
A:Meet-NAC-PA
a. A MEETing must be held on the call of directors or
trustees;
b. Notice of the meeting
i. Given to each stockholder or member either by
registered mail or by personal delivery at least
thirty (30) days prior to the said meeting and
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
ii. Published for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located and
if no newspaper is published in such place, then
in a newspaper of general circulation in the
Philippines
c. Resolution to dissolve must be Approved by
majority vote of the board of directors or trustees
and adopted by the affirmative vote of
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of members.
d. Copy of the resolution is then certified by the
majority of Board of directors or trustees and
countersigned by the secretary of the Corporation.
e. Petition for dissolution together with the signed
and countersigned copy of the resolution is then
filed with the SEC.
f. Approval of SEC of the petition and issuance of
certificate of dissolution. (Sec. 118, CC.
WHERE CREDITORS ARE AFFECTED
Q: What is the procedure of dissolution of a
corporation where creditors are affected?
A: APSIVECSO CPUPOOJ
a. Approval of the stockholders representing at
least 2/3 of the outstanding capital stock or by at
least two-thirds (2/3) of the members at a
meeting of its stockholders or members called
for that purpose.
b. Filing of Petition for dissolution with SEC, petition
must be (SiVeCS)
i.SIgned by a majority of its board of directors or
trustees or other officers having the
management of its affairs;
ii.VErified by its president or secretary or one of
its directors or trustees
iii.Set forth all Claims and demands against it
iv.State that its dissolution was approved by the
required votes of Stockholders or members.
c. SEC shall issue an Order reciting the purpose of
the petition and fix a date when objections
thereto may be filed by any person. Said date
must not be less than thirty (30) days nor more
than sixty (60) days after the entry of the order.
d. Copy of the order shall be
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 THE CORPORATION CODE
i. PUblished at least once a week for three (3)
consecutive weeks in a newspaper of general
circulation published in the municipality or
city where the principal office of the
corporation is situated, or if there be no such
newspaper, then in a newspaper of general
circulation in the Philippines, and
ii. POsted for three (3) consecutive weeks in
three (3) public places in such municipality or
city.
e. After expiration of the time to file objections and
upon prior 5-day notice to hear the objections,
SEC shall proceed to hear the petition and try any
issue made by the Objections file.
f. If no objection is sufficient and the material
allegations of the petition are true, it shall render
Judgment dissolving the corporation and
directing such disposition of its assets as justice
requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation.
Q: Is creditors consent necessary for dissolution?
A: No, consents of creditors are not necessary to
approve dissolution for the reason that liquidation
proceedings will be conducted to protect their
interest.
BY SHORTENING THE CORPORATE TERM
Q: What is the procedure for dissolving the
corporation by shortening of the corporate term?
A: ASAF
a. Amending the Articles of Incorporation pursuant to
Sec. 16
i. Approved by majority vote of the board of
directors or trustees
ii. Ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding capital
stock or by at least two-thirds (2/3) of the members
in case of non-stock corporations).
b. Copy of the amended AOI shall be submitted with
the SEC.
c. Approval of SEC of the amended AOI.
d. As an additional requirement, the SEC requires to
submit the final audited Financial statement not
older than 60 days before the application for
223
shortening the corporate term.(Sec. 120, CC in
relation to Sec. 16 thereof.)
Q: What is the procedure for dissolution of a
corporation sole?
A: In case of a corporation sole, by submitting to the
SEC for approval, a verified declaration of dissolution
which will set forth the following:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church;
d. The names and addresses of the persons who are
to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (Sec.
115, CC.)
Q: Can a corporation be dissolved by merger or
consolidation?
A: Yes. Upon issuance of SEC of a Certificate of
Merger or Consolidation, the corporate existence of
the absorbed corporation and the constituent
corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
thereafter be conducted. (Sec. 80, CC)
Q: Is liquidation necessary in case a corporation is
dissolved by merger and consolidation?
A: In case of Merger or consolidation, the surviving or
the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
all receivables due on whatever account, including
subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or
due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or deed
(Sec 80, CC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
INVOLUNTARY
EXPIRATION OF CORPORATE TERM
Q: When does the corporate term expire?
A: The corporation shall exist within the period stated
in the AOI not exceeding 50 years unless sooner
legally dissolved (Secs. 19, 22, 117-122, 144, 145, CC)
or unless its registration is revoked upon any of the
grounds provided by law (Sec. 6, PD 902-A & Sec. 22,
CC). In the absence of any express stipulation, it shall
exist for a period not exceeding fifty (50) years from
the date of incorporation. After the term had expired
without extension, the corporation is dissolved.
Q: What is the remedy in case the stockholders want
to still continue the business of the corporation after
its term expired?
A: The remedy of the stockholders is reincorporation.
Amending the articles of the incorporation to extend
the corporate term is not an available remedy as the
corporation has ceased to exist.
FAILURE TO ORGANIZE AND COMMENCE BUSINESS
WITHIN 2 YEARS FROM INCORPORATION
What is the effect of failure of a corporation to
formally organize?
A: If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from
the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved
(Sec 22, CC.
Q: What does formally organize means?
A. Organize as used in reference to corporations
means;
a. Election of officers, providing for the
subscription and
b. payment of the capital stock, and
c. adoption of by-laws, and
d. such other similar steps as are necessary to
endow the legal entity with the capacity to
transact the legitimate business for which it was
created. (Benguet Consolidated Mining Co. v
Pineda, G.R. No. L-7231, March 28, 1956)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
LEGISLATIVE DISSOLUTION
Q: How is a corporation created by a special charter
dissolved?
A: A corporation created by special law can be
dissolved by an enactment of special law or
expiration of its charter.
DISSOLUTION BY THE SEC ON GROUNDS UNDER
EXISTING LAWS
Q: When can the SEC dissolve a corporation?
A: A corporation may be dissolved by the Securities
and Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations. (Sec. 121, CC)
The following are some of the grounds, which may
result to the issuance of a dissolution order by the
SEC after conduct of appropriate proceedings:
1. Violations of the Corporation committed by the
corporation. Such violations are generally
penalized by Sec. 144 as the Code did not
specifically penalized the same.
2. Deadlocks in a close corporation. (Sec. 104, CC)
3. Mismanagement of a close corporation. (Sec.
105, CC)
4. On any of the following grounds, wherein the SEC
retains its power to suspend or revoke, after
proper notice and hearing, the franchise or
certificate of registration of the corporations,
partnerships or associations: FMI-DBR
a. Fraud or misrepresentation in procuring its
Certificate of Registration;
b. Serious Misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
c. Continuous Inoperation for a period of at least
5 years (Sec. 22);
d. Refusal to comply or Defiance with any lawful
order, rules or regulations of SEC restraining
commission of acts which would amount to a
grave violation of its franchise;
e. Failure to file By-laws within the required
period. However, SEC must give the corporation
the opportunity to explain such failure;
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 THE CORPORATION CODE
f. Failure within the prescribed period to submit
requiredReports in appropriate forms as
determined by the SEC (e.g. General
Information Sheet, Financial Statements)(De
Leon, supra, pgs. 751-752.)
Note: All actions filed with the SEC must be prosecuted and
defended in the name of the real party-in-interest. (Rule III,
Sec. 2, SEC Rules of Procedure.)
Q: What are the effects of the dissolution of a
corporation?
A:
1. Corporation Ceases as a body corporate to
continue the business for which it was
established. (Sec. 122, CC.)
2. The assets of the corporation will then be
Liquidated and legal title to the remaining
corporate properties are transferred to the
stockholders who become co-owners thereof
3. The Corporation continues as a body corporate
for 3 years only for the purpose of winding up or
liquidation.
4. A dissolved corporation cannot be revived.
However, those interested may reincorporate by
refilling a new AOI and by-laws. (Rebollido vs. CA,
170 SCRA 800 [1989].)
Q: XYZ Corporation entered into a contract of lease
with ABC, Inc., over a piece of real estate for a term
of 20 years, renewable for another 20 years,
provided that XYZ's corporate term is extended in
accordance with law. Four years after the term of
XYZ Corporation expired, but still within the period
allowed by the lease contract for the extension of
the lease period, XYZ Corp. notified ABC, Inc., that it
is exercising the option to extend the lease. ABC,
Inc., objected to the proposed extension, arguing
that since the corporate life of XYZ Corp. had
expired, it could no longer opt to renew the lease.
XYZ Corp. countered that withstanding the lapse of
its corporate term it still has the right to renew the
lease because no quo warranto proceedings for
involuntary dissolution of XYZ Corp. has been
instituted by the Office of the Solicitor General. Is
the contention of XYZ Corp. meritorious? Explain
briefly.
A: XYZ Corporations contention is not meritorious
XYZ Corp. was dissolved ipso facto upon the
expiration of its original term. It ceased to be a body
corporate for the purpose of continuing the business
for which it was organized, except only for purposes
connected with its winding up or liquidation.
225
Extending the lease is not an act to wind up or litigate
XYZs affairs. It is contrary to the idea of winding up
the affairs of the corporation.(PNB v. CFI of Rizal, May
27, 1992).(2004 Bar Question)
METHODS OF LIQUIDATION
Q: What is Liquidation?
A: Liquidation is a process by which all the assets of
the corporation are converted into liquid assets
(cash) in order to facilitate the payment of obligations
to creditors, and the remaining balance if any is
distributed to the stockholders.(Sundiang, supra,
2009, pg. 255.)
Period of Liquidation: Three (3) years
Q: What are the modes of liquidation?
A:
1. By the corporation itself or its board of directors
or trustees; (Sec. 122, par. 1)
2. By a trustee to whom the assets of the
corporation had been conveyed. (Sec. 122, par.
2); (Board of Liquidators v. Kalaw, G.R. No.
L18805, Aug. 14, 1967)
3. By a management committee or rehabilitation
receiver appointed by SEC; (Sec. 119, last par.)
BY THE CORPORATION ITSELF
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner:
1. shall nevertheless be continued as a body
corporate for 3 years after the time when it
would have been so dissolved,
2. for the purpose of
a. prosecuting and defending suits by or
against it and
b. enabling it to settle and close its affairs,
c. to dispose of and convey its property and
d. to distribute its assets,
3. but NOT for the purpose of continuing the
business for which it was established. (Sec. 122,
par.1, CC)
Q: Can the corporation distribute is assets prior to
dissolution?
A: GR: No. This will violate the trust fund doctrine. A
corporation is allowed to distribute its assets or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
property only upon lawful dissolution and after
payment of all its debts and liabilities (Sec. 122)
XPN:
1. Decrease of Capital Stock (Sec. 38)
2. Redemption of Redeemable Shares (Sec. 8)
4. Reacquisition of shares which are considered as
treasury shares (Sec. 9)
5. Acquisition of own shares (Sec. 41)
6. Declaration of dividends (Sec. 43)
7. Purchase of shares of any stockholder in case of
deadlocks in a close corporation (Sec. 104 par
1[4])
8. Withdrawal of a stockholder in a close
corporation (Sec 105)
9. Upon lawful dissolution and after payment of all
debts and liabilities (Sec. 122)
Q: What happens to suits brought against the
corporation within the 3-year period but remained
pending beyond said period?
A: Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
The creditors of the corporation who were not paid
within the 3-year period may follow the property of
the corporation that may have passed to its
stockholders unless barred by prescription or laches
or disposition of said property in favor of a purchaser
in good faith.
Q: What happens to suits NOT brought against the
corporation within the 3-year period?
A: The suits may still be prosecuted against the
corporation, since there is nothing in Sec. 122, par. 1
which bars action for the recovery of the debts of the
corporation against the liquidator thereof after the
lapse of the winding up period of 3 years. (Republic of
the Philippines vs. Marsman Dev. Co., 44 SCRA 418
[1972].)
Q: Is approval of the SEC required in order to
liquidate and distribute the assets of a dissolved
corporation?
A: No. The liquidation and distribution of the assets
of a dissolved corporation is a matter of internal
concern of the corporation and falls within the power
of the directors and stockholders or duly appointed
liquidation trustee (SEC Opinion, July 23, 1996)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: Does a corporation in the process of liquidation
have legal authority to engage in any new business?
A: No, a corporation in the process of liquidation has
no legal authority to engage in any new business,
even if the same is in accordance with the primary
purpose stated in its article of incorporation.
Q: The Securities and Exchange Commission
approved the amendment of the articles of
incorporation of GHQ Corporation shortening its
corporate life to only 25 years in accordance with
Sec. 120 of the Corporation Code. As shortened, the
corporation continued its business operations until
May 30, 1997, the last day of its corporate existence.
Prior to said date, there were a number of pending
civil actions, of varying nature but mostly money
claims filed by creditors, none of which was
expected to be completed or resolved within five
years from May 30, 1997. If the creditors had sought
your professional help at that time about whether
or not their cases could be pursued beyond May 30,
1997, what would have been your advice? (2000 Bar
Question)
A: The cases can be pursued even beyond May 30,
1997, the last day of the corporate existence of GHQ
Corporation. The corporation is not actually dissolved
upon the expiration of its corporate term. There is
still the period for liquidation or winding up.
Q: X Corporation shortened its corporate life by
amending its articles of incorporation. It has no
debts but owns a prime property located in Quezon
City. How would the said property be liquidated
among the five stockholders of said corporation?
Discuss two methods of liquidation. (2001 Bar
Question)
A: The prime property of X Corporation can be
liquidated among the five stockholders after the
property has been conveyed by the corporation to
the five stockholders, by dividing or partitioning it
among themselves in any two of the following ways:
1. By physical division or partition based on the
proportion of the values of their stockholdings;
or
2. By selling the property to a third person and
dividing the proceeds among the five
stockholders in proportion to their stockholdings;
or
3. After the determination of the value of the
property, by assigning or transferring the
property to one stockholder with the obligation
on the part of said stockholder to pay the other
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 THE CORPORATION CODE
four stockholders the amount/s in proportion to
the value of the stockholding of each.
Q: Can the stockholders of a dissolved corporation
reincorporate?
A: Yes, there is nothing to prevent the stockholders
from conveying their shareholdings toward the
creation of a new corporation to continue the
business of the old. Winding up is the sole activity of
a dissolved corporation that does not intend to
incorporate anew.
It is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio v Intermediate Appellate
Court, 1988)
Q: What is the order of distribution of assets in case
of liquidation?
A: CreSt-PreComE
1. Payment of claims of CREditors who are not
stockholders (based on preference or concurrence of
credits)
2. Payment of claims of stockholders who are
creditors of the corporation, as to the amount of their
claim as creditors.
3. Residual Balance shall be distributed
proportionately:
a. Holders of PREferred stock, if any; then to
the
b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found,
their claims or shares shall be Escheated in favor of
the city or municipality where the asset is located.
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR
PERIOD
At anytime during the 3-year period for liquidation,
said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of
its stockholders, members, creditors and other
persons in interest.
From and after any such conveyance by the
corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
227
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest.(Sec. 122, par. [2], CC)
Q: What happens to suits brought by the
corporation within the 3-year period but remained
pending beyond said period?
A: A corporation that has a pending action and which
cannot be terminated within the 3 year period after
its dissolution is authorized under Sec. 122 of the CC
to convey all its property to a trustee to enable it to
prosecute and defend suits by or against the
corporation beyond the 3-year period. The trustee
may commence a suit which can proceed to final
judgment even beyond the 3-year period. The
director may be permitted to continue as trustees to
complete the liquidation. (Clemente vs. CA, 242 SCRA
717 [1995].)
Q: Are suits brought by the corporation beyond the
3-year period barred?
A: No. The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period. The
expiration of 3 years after the dissolution of a
corporation does not affect its right to enforce a
favorable judgment, because under Sec. 145 of the
CC, no right or remedy in favor or against any
corporation shall be removed or impaired either by
subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the CC or any
part thereof. (Knecht vs. United Cigarette Corp., 384
SCRA 48 [2002].)
Q: Is the right of the Corporation to appeal a
judgment extinguished by the expiration of the 3-
year period?
A: No, corporations whose certificate of registration
was revoked by the SEC may still maintain actions in
court for the protection of its rights which includes
the right to appeal.(Paramount Insurance Corp. v A.C.
Ordonez Corp, 2008)
Q: What is the period of existence of the
trusteeship?
A: Where no time limit has been fixed with respect to
the existence of the trusteeship, the trustee has
authority to close the affairs of the corporation even
after the expiration of the statutory 3-year period and
claims not barred by the statute of limitations can be
presented and allowed until the liquidation is
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
terminated. (National Abaca & Other Fibers Corp. vs.
Pore, 2 SCRA 989 [1961].)
BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
In the case of a dissolution order where creditors are
affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation. (Sec.
119, last par., CC)
Note: Thus, the appointment of receiver is addressed to the
sound discretion of the court or the SEC.
Q: Is the appointment of receiver for a going
corporation always the priority remedy to be
employed?
A: No. The appointment of a receiver for a going
corporation is a last resort remedy, and should not be
employed when another remedy is available. Relief
by receivership is an extraordinary remedy and is
never exercised if there is an adequate remedy at law
or if the harm can be prevented by an injunction or a
restraining order. Bad judgment by directors, or even
unauthorized use and misapplication of the
companys funds, will not justify the appointment of a
receiver for the corporation if appropriate relief can
otherwise be had.(Rev. Ao-As vs. CA, GR 128464, June
20, 2006.)
Q: May the corporation, through its president
condone penalties and charges after it had been
placed under receivership?
A: No. The appointment of a receiver operates to
suspend the authority of a corporation and of its
directors and officers over its property and effects,
such authority being reposed in the receiver (Yam v.
CA, G.R. No. 104726 Feb 11, 1999).
.
LIQUIDATION AFTER 3 YEARS
If the 3-year extended life has expired without a
receiver or trustee having been expressly designated
by the corporation within that period:
(a) The BOT/BOT itself may be permitted to so
continue as trustees by legal implication to
complete the liquidation.
(b) Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets,
including not only the stockholders but likewise
the creditors of the corporation, acting for and in
its behalf, may make proper representations with
the SEC which has primary and sufficiently broad
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns.
(c) The only surviving stockholder or director of a
corporation whose term of existence has expired
may act as trustee-in-liquidation after the 3-year
period to liquidate has expired without the
appointment of a trustee-in-liquidation.
(d) The counsel who prosecuted and defended the
interest of the corporation and who, in fact,
appeared in behalf of the corporation, may be
considered a trustee of the corporation at least
with respect to the matter in litigation only. (De
Leon, supra, pgs. 768-769, citing: Sec. 145, CC;
Clemente vs. CA, supra; SEC Opinion No. 10-96,
Jan. 29, 2010, Reburiano vs. CA, 301 SCRA 342
[1999].)
OTHER CORPORATIONS
CLOSE CORPORATION
A closecorporation is one whose AOI provide that:
1. All of the corporations issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding 20;
2. All of the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by the provisions on close
corporations; and
3. The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class.
Notwithstanding the foregoing, a corporation shall be
deemed NOT a close corporation when at least 2/3 of
its voting stock or voting rights is owned or controlled
by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close
corporation, EXCEPT: MOSBI-PEP
1. Mining or Oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
5. Public utilities,
6. Educational institutions and
7. corporations declared to be vested with Public
interest in accordance with the provisions of the
Corporation Code. (Sec. 96, CC.)
Q: Are all corporations with 20 or less stockholders
considered close corporations?
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 THE CORPORATION CODE

A: No. The Corporation is not a close corporation
even if the shares belong to only twenty or less
stockholders if not all the requisites (under Sec. 96)
are present. (San Juan Structural and Steel
Fabricators, Inc. v. CA, G.R. No. 129459, Sept. 29,
1998.)
CHARACTERISTICS OF A CLOSE CORPORATION
Q: What is the nature of a close corporation?
5. Pre-emptive right extends to all stock issuances,
including treasury shares. (Sec. 102, CC)
6. Deadlock in the board is settled by the SEC, on
the written petition by any stockholder. (Sec.
104, CC)
7. A stockholder may withdraw and avail of his right
of appraisal. (Sec. 105, CC.)
8. The rules primarily governing close corporations
are set forth under Title XII of the Corporation
Code. Other titles of the Code apply suppletorily.

A: A close corporation is essentially an incorporated Q: Distinguish a close corporation from a closely-

partnership in which the stockholders consider each held corporation.
other as partners but which the law treats as a
corporation. Thus, stockholders in a close corporation A:
are very much like members in a partnership. They CLOSE CLOSELY HELD
owe to one another the same duty of utmost good CORPORATION CORPORATION
faith and diligence that partners owe one another. A close corporation is A closely-held
This strict duty applies particularly to controlling that defined in Sec. 96. It corporation focuses more
stockholders. (De Leon, supra, pg. 700.) emphasizes a on the number of
determination on the shareholders in the
Q: What is the most peculiar characteristic of a close part of the participants in corporation at that
corporation? the enterprise to keep particular time,
outsiders from acquiring indicating that they are
A: What is outstandingly peculiar with a close any interest in the few in number.
corporation is the fact that all the outstanding stock is business.
owned by the persons who are active in the
management and conduct of the business.(De Leon, VALIDITY ON RESTRICTIONS ON TRANSFER OF
supra, pg. 700.) SHARES

Q: What are the other characteristics of a close Q: Why is there a need for stock transfer restrictions
corporation? in close corporations?

A: The following are the other characteristics of a
close corporation:
1. Where the AOI provide that the business of the
corporation shall be managed by the
stockholders themselves rather than by a BOD,
then the stockholders shall be deemed to be the
directors with all the liabilities imposed by the
Code on directors. (Sec. 97, CC.)The stockholders
shall likewise be personally liable for corporate
torts unless the corporation has obtained
reasonably adequate liability insurance. (Sec.
100, CC)
2. Quorum may be greater than mere majority.
(ibid.)
3. Restrictions on transfer of shares can be validly
imposed. Right of first refusal can be exercised.
(Sec. 98, CC)
4. Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed
valid if any of the circumstances on Sec. 101, CC
is present.
A: The stockholders seek to maintain delectus
personae. The close corporation is essentially an
incorporated partnership, wherein one of the major
objectives of the shareholders is to remain close and
be able to prevent changes in the control of the
corporation which might otherwise result from the
transfer of voting shares. (De Leon, supra, pg. 708.)
Q: What are the conditions for validity of restrictions
on transfer of shares?
A:
1 Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in
the certificate of stock, otherwise they shall not
be binding on any purchaser thereof in good
faith; and
2 They shall not be more onerous than granting the
existing stockholders or the corporation the
option to purchase the shares of the transferring
stockholders with such reasonable terms,
conditions, or period stated therein. (Sec. 98, CC.)

229 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Note: Any transfer made should not result in exceeding the
number of stockholders as allowed by the Code.
Q: Can the AOI provide that the consent of the
corporation shall be obtained in case the
stockholder sells his shares?
A: No, such restriction is more onerous than the right
of first refusal.
Q: How is right of first refusal exercised in Sec. 98?
A: The corporation or the stockholders have the right
of first refusal, that is, the stockholder who wants to
sell his shares to any third person must first offer it
either to the corporation or to the other existing
stockholders usually under the same terms and
conditions. The right pertains to shares already issued
to stockholders. If the existing stockholders or the
corporation fails to exercise the option to purchase
within the period stated, the transferring stockholder
may sell his shares to any third person.
Q: What is the option period to exercise the right of
first refusal?
A: The option period stated in the AOI, By-laws and
Certificate of Stock. The SEC likewise limits the period
to 1 month which is deemed sufficient for the
stockholders or for the corporation to signify their
desire to buy the shares of stock being offered for
sale by any stockholder.(SEC Opinion, Oct. 13, 1964.)
ISSUANCE OR TRANSFER OF STOCK IN BREACH OF
QUALIFYING CONDITION
Q: What does the term transfer contemplate?
A: The term transfer as used in Sec. 99, is not
limited to a transfer for value. This therefore include
donations. (Sec. 99[6], CC.)
Q: When can a close corporation refuse to register
the transfer of stock?
A: A close corporation may, at its option, refuse to
register the transfer of stock in the name of the
transferee if the person is not qualified to be a
stockholder and has notice thereof.
Any person to whom stock of a close corporation has
been issued or transferred has, or is conclusively
presumed to have, notice either
a. That he is a person not eligible to be a holder of
stock of the corporation,
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
b. The 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,
c. The transfer of stock is in violation of a restriction
on transfer of stock (Sec. 99 [4], CC.)
Q: When is there conclusive presumption of
knowledge of restrictions?
A: When the stock certificate issued or transferred
conspicuously shows the qualifications of persons
entitled to be holders of record; number of persons,
not exceeding 20 allowed to be stockholders; and
other restrictions as provided in the AOI of the close
corporation.(Sec. 99 [1],[2],[3], CC)
Q: Can stock transfers in violation of the restrictions
still be registered in the books of the Corporation?
A: Yes, in the following cases:
1. If all the stockholders consent;
2. If the AOI of the close corporation was duly
amended. ( Sec. 99 (5), CC.)
Note: In both the above cases, the corporation will no
longer be a close corporation if the conditions under Sec.
96 will no longer be present, as in the case where the
transfer results in the presence of more than 20
stockholders.
Q: Does the breach of any of these restrictions bar
the rescission by the transferee of the transaction?
A: No. The breach in any of the restrictions shall not
in any way impair any right of a transferee regarding
any right to rescind the transaction or to recover
under any applicable warranty, express or implied.
(Sec. 99[7], CC.)
WHEN BOARD MEETING IS UNNECESSARY OR
IMPROPERLY HELD
Q: What is the effect of unnecessary or improperly
held board meeting?
A: Unless the by-laws of the close corporation
otherwise provides,any action by the directors of a
close corporation without a meeting shall be valid if:
CKAO
1. Before or after such action is taken, written
Consent is signed by all the directors
230
 THE CORPORATION CODE
2. All the stockholders have actual or implied
Knowledge of the action and make no prompt
objection
3. The directors are Accustomed to take informal
action with the express or implied acquiescence of
all the stockholders
4. All the directors have express or implied knowledge
of the action in question and make no prompt
Objection thereto.
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 he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof. (Sec. 101, CC)
Q: Can the SEC interfere with the management of a
close corporation in case of disagreement of the
stockholders or directors?
A: Yes. In case of deadlock in the management of the
corporation, the SEC may intervene and can do
certain acts which would have not been allowed to do
in open corporations.
PRE-EMPTIVE RIGHT
Q: What is the difference between pre-emptive right
in an ordinary corporation and in a close
corporation?
A: As compared to ordinary corporations, in close
corporations, pre-emptive right can be exercised
even as to stocks issued for corporate purposes or for
payment of a previously contracted debt.
AMENDMENT OF THE ARTICLES OF INCORPORATION
Q: If the amendment to AOI seeks to delete or
remove any provision required for close
corporations or to reduce a quorum or voting
requirement stated in the AOI, what are the
requirements to be complied with to effect such
amendment?
A: Any amendment to the articles of incorporation
which seeks to delete or remove any provision
required for close corporations or to reduce a
quorum or voting requirement stated in the articles
of incorporation must be:
1. Approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock,
a. whether with or without voting rights, or
231
b. a greater proportion of shares as may be
specifically provided in the articles of incorporation
2. In a meeting duly called for the purpose.
Q: Corporation A, a close corporation, amended its
articles of incorporation and removed the provision
that all shares of stock, exclusive of treasury stock,
shall be held by a specified number of shareholders
not exceeding 20. What is the effect of such
amendment to Corporation A?
A: It is a special feature of a close corporation that its
shares of stock exclusive of treasury shares shall be
held by not more that 20 stock holders. The deletion
of such special feature would render Corporation A,
no longer a close corporation.
DEADLOCKS
Q: When does deadlock in a close corporation
exists?
A: It is when the directors or stockholders are so
divided respecting the management of the business
and affairs of the corporation that the votes required
for any corporate action cannot be obtained and as a
result, business and affairs can no longer be
conducted to the advantage of the stockholders
generally. (Sec. 104, CC.)
Q: What is the remedy in case of deadlocks in a close
corporation?
A: The SEC may be asked, upon written petition by
any stockholder, to intervene. And SEC shall have the
authority to do the following:
1. To arbitrate the dispute
2. Cancel or alter any provision contained in the
articles of incorporation, by-laws, or any
stockholder's agreement;
3. Cancel, alter or enjoin any resolution or act of
the corporation or its board of directors,
stockholders, or officers;
4. Direct or prohibit any act of the corporation or its
board of directors, stockholders, officers, or
other persons party to the action;
5. Require the purchase at their fair value of shares
of any stockholder, either by the corporation
regardless of the availability of unrestricted
retained earnings in its books, or by the other
stockholders;
6. Appoint a provisional director;
7. Dissolve the corporation; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
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8. Grant such other relief as the circumstances may

warrant. (ibid.)

Q: Who is a provisional director?

A: A provisional directoris an impartial person who is

neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the
corporation. A provisional director has all the rights
and powers of a director of the corporation, including
the right to notice of and to vote at meetings of
directors, until such time as he shall be removed by
order of the Commission or by all the stockholders.

Q: Is a provisional director considered as a receiver

of a corporation?

A: A provisional director is not considered as a

receiver of the corporation. He does not have the
title and powers of a custodian or receiver.

Q: Is dissolution one of the possible consequences of

a deadlock under Sec. 104?

A: Yes. (Sec. 104, CC)

Q: Distinguish a widely held from a close corporation.

A:
WIDELY HELD CLOSE CORPORATION
CORPORATION
Number of No limit Not exceeding 20(Sec. 96, CC)
Stockholders
Public Offering/ Allowed Not Allowed (Sec. 96, CC.)
Listing of Shares in
the Stock Exchange
Corporate powers are exercised, all The articles of incorporation of a close
business conducted and all property of such corporation may provide that the business
Who may exercise
corporations controlled and held by the of the corporation shall be managed by the
corporate Powers
board of directors or trustees (Sec. 23, CC) stockholders of the corporation rather than
by a board of directors. (Sec. 97, CC)
Qualification of Qualifications of stockholders are not Specific qualifications are usually provided
Stockholders normally prescribed for. ( Sec. 97, CC)
Restriction on A restriction need not be provided for There must be a restriction on the transfer
transfers of shares of shares (Sec. 96,CC)
All stockholders of a stock corporation shall The pre-emptive right of stockholders in
enjoy pre-emptive right to subscribe to all close corporaitons shall extend to all stock
issues or disposition of shares of any class, to be issued, including reissuance of
in proportion to their respective treasury shares, whether for money or for
shareholdings, unless such right is denied property or personal services, or in
Pre-emptive Right by the AOI or amendment thereto: payment of corporate debts, unless the AOI
Provided, that such pre-emptive right shall provide otherwise. (Sec. 102, CC)
not extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership by
the public; or to shares to be issued in good

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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. (Sec. 39, CC)
Only to those cases provided by law under Can be exercised with or without reason
Sec. 42 and 81. and regardless of whether the corporation
has unrestricted retained earnings.(Sec.
Appraisal Right
Required that the Corporation has 105, CC)
unrestricted retained earnings at the time
of demand.(Sec. 82, CC)
Interference of SEC as Not allowed. Based on the Business Allowed in case of deadlocks. (Sec. 104, CC)
to the management Judgment Rule
of the Corporations
business.
For voluntary dissolutions, approval of Dissolution may be effected by any
majority of the Board of Directors or stockholder upon petition to the SEC
Trustees and of stockholders representing whenever any of acts of the directors,
2/ 3 of the outstanding capital stock or 2/3 officers or those in control of the
of the members in case of non-stock corporation is illegal, or fraudulent, or
Dissolution
corporations is necessary. (Sec. 118 and dishonest, or oppressive or unfairly
119, CC.) prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted. (Sec. 105,
CC.)
Requires vote or written assent of Amendment as to the matters stated in Sec.
stockholders representing at least 2/3 of 103 requires affirmative vote of at least 2/3
Amendment of AOI
the outstanding capital stock (Sec. 16, CC) of the outstanding capital stock. (Sec. 103,
CC)
Oral objection is sufficient to preserve the Written objection is required. (Sec. 101,
Objection in a
right of the director to question the validity CC.)
meeting without
of an action taken in a meeting held
proper notice
without proper notice. (Sec. 53, CC)

NON-STOCK CORPORATION 2. No part of its income during its existence is

distributable as dividends to its members,
DEFINITION trustees, or officers;
3. As a general rule, it is not empowered to engage
in business with the object of making income or
Q: What is the concept of a non-stock corporation?
profits directly or indirectly. However, it is not
prohibited to make income or profits as an
A: It is one where no part of its income is
incident to its operation. (Sec. 87, CC)
distributable as dividends to its members, trustees or
4. There is non-transferability of membership. (Sec.
officers.
90, CC)
5. The right to vote of members may be limited,
Any profit which it may obtain as an incident to its
broadened, or even denied in the AOI or the by-
operations shall whenever necessary or proper, be
laws. (Sec. 89, CC)
used in furtherance of the purpose or purposes for
6. Non-stock corporations may, through their
which it was organized.(Sec. 87, CC)
articles of incorporation or their by-laws
designate their governing boards by any name
Q: What are the characteristics of a non-stock
other than as BOT (Sec. 138, CC)
corporation?
7. By-laws may provide that the members may hold
their meetings at any place even outside the
A:
place where the principal office of the
1. It does not have capital stock divided into shares;
corporation is located, provided that such place
is within the Philippines. (Sec. 93, CC)

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8. A non-stock corporation is not allowed to members does not change the nature of the
distribute any of its assets or any incidental corporation.
income or profit made by the corporation during
its existence. Q: If a nonstock corporation earns profit, does it
9. Non-availability of conversion into stock render such corporation a stock corporation?
corporation. (SEC Opinion, February 24, 1989.)
Q: What is a foundation? A: No. The fact that a nonstock corporation earns a
profit does not make it a profitmaking corporation
A: A foundation is a non-stock, non-profit where such profit or income is used for purposes set
corporations with funds established to maintain or forth in its articles of incorporation and is not
aid charitable, religious, educational, athletic, distributed to its incorporators, members or officers.
cultural, literary, scientific, social welfare or similar
activities primarily through extending grants or DISTRIBUTION OF ASSETS UPON DISSOLUTION
endowments. A foundation, as distinguished from an
ordinary non-stock corporation requires a minimum Q:What is the order of distribution of assets on
capital of 1 million Pesos. (SEC Memo. Circular No. 1 dissolution of non-stock corporations?
Series of 2004) A:
1. All liabilities of the corporation shall be paid or
PURPOSES adequate provision thereof shall be made;
2. Assets held upon a condition requiring return,
Non-stock corporations may be formed or organized transfer or conveyance upon, and which
for: (CREP-CFLSS) condition occurs by reason of the dissolution,
shall be returned, transferred or conveyed;
1. Charitable, 3. Assets received and held by the corporation
2. Religious, subject to limitations permitting their use only
3. Educational, for charitable, religious, benevolent, educational
4. Professional, or similar purposes shall be transferred or
5. Cultural, conveyed to one or more corporations, societies
6. Fraternal, or organizations engaged in activities in the
7. Literary, Philippines substantially similar to those of the
8. Scientific, dissolving corporation.
9. Social, 4. All other assets shall be distributed to the
10. Civic service, or members as provided by the articles of
11. Similar purposes, like trade, industry, agriculture incorporation or the by-laws.
and like chambers, or any combination thereof. 5. In the absence of provision in the AOI or by-laws,
(Sec. 88, CC) distribution may be made in accordance to a plan
of distribution adopted by the board of trustees
Note: A non-stock corporation organized to promote by majority vote and by at least 2/3 of the
educational objectives may not be an educational members. (Sec. 94, CC.)
corporation as contemplated in Secs. 106 to 108, CC.
Q: Can a non-stock corporation offset unused
Q: Is political purpose included on the purposes for contributions of members against the balance of
which a non-stock corporation may be established? receivables from the same members?

A: No. Political purpose is not specifically included. A: No. The unused contributions of members cannot
SEC may reject the AOI if the purpose of the be offset against the balance of receivables because
corporation is to engage in election campaign or this would amount to distribution of the capital of the
partisan political activity (SEC Opinion, April 10, corporation. Members of Non-stock Corporation are
1985). not entitled to distribution of capital. They are only
entitled to distribution of capital upon dissolution
TREATMENT OF PROFITS when it is provided for in the articles of incorporation
or by-laws. (SEC Opinion, Nov. 27, 1985)
Q: May a nonstock corporation earn profit?

A: Yes. Mere intangible or pecuniary benefit to the

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Q: Distinguish a stock corporation from a non-stock corporation

A:
STOCK- CORPORATION NON-STOCK CORPORATION
Existence of Has capital stock divided into shares. No capital stock.
Capital Stock (Sec. 3, CC)
Non-stock corporations has capital is in the
form of contributions or donations.
Purpose Organized for profit. Not organized for profit.
Distribution of Profits are distributed to the Profits are not distributed to members.
Profit stockholders through dividends(Sec. 3, Any profit earned by the non-stock
CC) corporation is used for the furtherance of
the purpose or purposes for which it is
organized. (Sec. 87, CC)
Number of Not less than 5 but not more than 15. Not less than 5 and may be more than 15
Directors or except Non-stock educational institutions
Trustees Except corporation sole and banks (in (maximum of 15 trustees).
case of merger or consolidation) which
can have a maximum of 21 directors
Term of Office of Term of one year until their successors Subject to the provision in AOI and By-laws,
Directors are elected and qualified, subject to the 3 years on a staggered basis.
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not Members may directly elect officers. (Sec.
Officers by the stockholders 92, CC)
Place of meeting Stockholders meeting shall be held in city May be held at any place outside the
or municipality where the principal office principal place of business of the
of the corporation is located or at the corporation provided it shall be within the
principal office of the corporation. (Sec. Philippines.(Sec. 93, CC)
51, CC).
Right to vote Stockholders can resort to cumulative No cumulative voting unless allowed by
voting. AOI.

Only preferred and redeemable shares
can be denied the right to vote except
those matters in Sec. 6.
Voting of directors may be made only
through general voting. Regional or
district voting of directors is not allowed.
Transferability of Shares may be transferred by the
Shares/ stockholder with or without the consent
Membership of the corporation.
Right to expel Stockholders may be expelled only for
members grounds provided by law.
Distribution of Assets of stock corporation shall be
Assets in case of distributed in the following order:
dissolution
1.Payment of claims of creditors who are
not stockholders (based on preference of
credit)
2.Payment of claims of stockholders as
creditors
3.Residual balance is distributed
Right to vote may be limited, broadened or
denied by the AOI and by-laws. (Sec. 89, CC)
Regional or district voting of trustees is
allowed.
Membership is personal in character and is
not transferable unless allowed by the AOI
or by-laws. (Sec. 90, CC)
Membership shall be terminated in the
manner and for the causes provided in the
articles of incorporation or the by-laws
(Sec. 91, CC)
Assets of non-stock corporation shall be
distributed as follows:
1. Payment of claims of creditors
2. Assets held on condition of return or
subject to limitation of use shall be
returned, transferred or conveyed.
3. Distribution to member based on
distributive rights stated in AOI or by-
law.

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proportionately to preferred shares, if 4. In case of default, distribution

any, then to common stock. pursuant to Plan of Distribution of
Assets.

Note: A stock-corporation may be converted to a non-stock corporation by amendment of AOI. But a non-stock corporation
cannot be converted to a stock-corporation by mere amendment of AOI.

FOREIGN CORPORATIONS a foreign corporation

which has transacted
A foreign corporation is done, formed, organized or business in the
existing under any laws other than those of the Philippines whether
Philippines and whose laws allow Filipino citizens and licensed or registered
corporations to do business in its own country or
State. (Sec. 123, CC) 3. Service of summons to
its resident agent in an
Note: This definition lays down the twin requirements for isolated transaction.
securing a license to engage in business in the Philippines

1. Incorporation test- Due to the enactment of RA 7042,
the control test is now used in the determination of
nationality of the corporation. However, this does not
preclude the use of other tests in determining the
nationality of the corporation.
In fact, as per SEC Opinion on Nov. 28, 2009, the SEC
opined that the grandfather rule can be useful when a
corporations economic activity is strictly limited by
law to Filipino citizens, such as certain types of retail
trading and mass media. Further, according to the
commission, the control test, which is more liberal, is
applied for corporations intending to engage in
commerce where 60%-40% equity ratio is allowed by
law.
2. Reciprocity rule-This is merely prescribed as a
requirement to secure a license and not an essential
element of being a foreign corporation. (De Leon,
supra, pg. 775-776.)
Q: How is jurisdiction obtained over a foreign
corporation?
BASES OF AUTHORITY OVER FOREIGN
CORPORATION
The following are the two bases of authority
(jurisdiction) over foreign corporations:
1. A corporation may give actual consent to judicial
jurisdiction manifested normally by compliance
with the States foreign corporation qualification
requirements (licensing requirements and other
requisites to lawfully transact business in the
Philippines); and
2. A corporation, even though not qualified (not
licensed), by engaging in sufficient activity (doing
business) within the State, established judicial
jurisdiction over the foreign corporation.
(http://www.repository.law.indiana.edu/cgi/view
content.cgi?article=2888&context=ilj: Foreign
Corporations: The Interrelation of Jurisdiction and
Qualification, Indiana Law Journal, Article 4, Vol.
33, Issue 3, retrieved on April 29, 2013.)

A:
IF THE FOREIGN
CORPORATION IS THE
PLAINTIFF
1. Voluntary appearance
1.GR:
before the local courts by
the filing of an action by
a licensed corporation
2. If the foreign
corporation is a co-
plaintiff with a domestic
corporation and latter
filed a suit here in the
Philippines.
2. Service of summons to
CONSENT
IF THE FOREIGN
CORPORATION IS THE Through compliance with the Philippines legal
DEFENDANT requirements to lawfully engage in business within
the countrys territory, the foreign corporation gives
Voluntary
its actual consent to be subjected to the jurisdiction
appearance of the
of the Philippines (ibid).
corporation by
interposing a defense
By securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the
XPN: A special
foreign entity would be giving assurance that it will
appearance to file a
abide by the decisions of our courts, even if adverse
motion to dismiss
to it. (Eriks PTE, Ltd. vs. CA, GR 118843, Feb. 6, 1997.)
based on lack of
jurisdiction
Under Sec. 123, CC, foreign corporations shall not be
permitted to transact or do business in the
Philippines until they have secured a licensefor that

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purpose from the SEC and certificate of authority Note: Actual transaction of business within the Philippine
from the appropriate government agency. territory is an essential requisite for the Philippines to
acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine
DOCTRINE OF DOING BUSINESS
business license (B. Van Zuiden Bros., Ltd. v. GTVL
Manufacturing Industries, Inc., G.R. No. 147905, May 28,
Q: What is considered as "doing business" in the
2007).
Philippines
Q: What are the considered as doing or transacting
A: To be doing or transacting business in the
business in the Philippines for foreign
Philippines for purposes of Section 133 of the
corporations?
Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is,
A:
perform specific business transactions within the
1. Soliciting orders, entering into service contracts,
Philippine territory on a continuing basis in its own
and opening offices, whether called liason
name and for its own account (Gargill Inc. v Intra
offices or branches.
Strata Assurance Corporation, G.R. No. 168266,
2. Appointing representatives, distributors domiciled
March 15, 2010)
in the Philippines or who stay for a period or
periods totaling 180 days or more.
Q: What are the jurisdictional tests of doing or
3. Participating in the management, supervision or
transacting business in the Philippines for foreign
control of any domestic business, firm, entity, or
corporations?
corporation in the Philippines.
4. Any act or acts that imply a continuity of
A:
commercial dealings or arrangements, and
1. Twin Characterization Test
contemplate to some extent the performance of
acts or works or the exercise of some functions
a. Continuity Test doing business implies a
normally incident to and in progressive
continuity of commercial dealings and
prosecution of, the purpose and object of its
arrangements, and contemplates to some
organization.(Sec. 3[d], RA 7042.)
extent the performance of acts or works or
the exercise of some functions normally
Q: What are not considered doing business under
incident to and in progressive prosecution
the Foreign Investment Act?
of, the purpose and object of its
organization.
A:
1. Mere investment as a shareholder by a foreign
b. Subsequent Test a foreign corporation is
entity in a foreign corporation duly registered to
doing business in the country if it is
do business.
continuing the body or substance of the
2. The exercise of rights as a stock investor and
enterprise of business for which it was
3. Having a nominee director or officer to represent
organized. (Sundiang, supra, 2009, pg. 256.)
its interest in such corporation
4. Appointing a representative or distributor
2. Contract Test
domiciled in the Philippines which transacts
business in its own name and for its own
Whether the contracts entered into by the
account.
foreign corporation, or by an agent acting under
5. Publication of general advertisement through
the control and direction of the foreign
any print or broadcast media
corporation, are consummated in the Philippines.
6. Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
To be doing or transacting business in the
processed by another entity in the Philippines.
Philippines for the purposes of Sec. 133 of the
7. Consignment by a foreign entity of equipment
Corporation Code, the foreign corporation must
with a local company to be used in the
actually transact business in the Philippines, that
processing of products for export and
is, perform specific business transactions within
8. Performing services auxiliary to an existing
the Philippine territory on a continuing basis, in
isolated contract of sale which are not on a
its own name or for its own account.
continuing basis, such as installing in the
Philippines machinery it has manufactured or
exported to the Philippines, servicing the same,

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training domestic workers to operate it and
similar incidental services.(ibid.)
NECESSITY OF A LICENSE TO DO BUSINESS
The purpose of the law in requiring that a foreign
corporation doing business in the Philippines be
licensed to do so is to subject such corporation to the
jurisdiction of the courts. The object is not to prevent
foreign corporation from performing single acts but
to prevent it from acquiring a domicile for the
purpose of business without taking steps necessary to
render it amenable to suits in local courts.(Marshall-
Wells Co. vs. Elser & Co., 46 Phil. 71 [1924].)
Further, the following are considered objectives of
the statutory provisions prescribing regulation of
foreign corporations:
1. To place the foreign corporations under the
jurisdiction of the court;
2. To place them in the same footing as domestic
corporation;
3. To protect the public in dealing with the said
corporation.
Q: Is corporation engaged in exporting goods to the
Philippines required to obtain a license?
A: If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no
jurisdiction to require such foreign corporation to
secure a Philippine business license. Actual
transaction of business within the Philippine territory
is an essential requisite for the Philippines to acquire
jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine
business license. (B. Van Zuiden Bros., Ltd. v. GTVL
Manufacturing Industries, Inc., G.R. No. 147905, May
28, 2007).
REQUISITES FOR ISSUANCE OF LICENSE
Q: What are the requisites for the issuance of license
to a foreign corporation?
A: The foreign corporation will submit to SEC the
following:
1. Copy of its articles of incorporation and by-laws,
certified in accordance with law and their
translation to an official language of the
Philippines, if necessary.
2. The application, which shall be under oath.
3. Attached to the application for license shall be a
duly executed certificate under oath by the
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2013 GOLDEN NOTES
authorized official or officials of the jurisdiction of
its incorporation, attesting to the fact that:
a. The laws of the country or state of the
applicant allow Filipino citizens and
corporations to do business therein
Note: This oath of reciprocity is one of the
requirements to secure a license under Sec. 123, CC,
which defines a foreign corporation.
b. The applicant is an existing corporation in good
standing.
c. If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
4. Statement under oath by the President or other
person authorized by the Corporation showing to
the satisfaction of the SEC and other governmental
agency in the proper cases that the
a. applicant is solvent and in sound financial
condition
b. the assets and liabilities of the corporation
as of the date not exceeding one (1) year
immediately prior to the filing of the
application.
5. An agreement or stipulation stating the designated
resident agent who will receive summons and
other legal processes a for the corporation
together with a Special Power of Attorney.
6. An agreement that if it ceases to transact business
or if there is no more resident agent, summons
shall then be served through SEC; and
7. Deposit securities for the benefit of present and
future creditors, within 60 days after the issuance
of license.
Note: Foreign banking, financial and insurance corporations
shall, in addition to the above requirements, comply with
the provisions of existing laws applicable to them.
Q: Is the AOI and by-laws of a licensed and
registered foreign corporation valid despite the fact
that said AOI and by-laws not approved by SEC?
A: Yes, Since the SEC will grant a license only when
the foreign corporation has complied with all the
requirements of law, it follows that when it decides
to issue such license, it is satisfied that the applicant's
by-laws, among the other documents, meet the legal
requirements. This, in effect, is an approval of the
foreign corporations by-laws. (Citibank v Chua, G.R.
no. 102300, March 17, 1993)
238
 THE CORPORATION CODE
RESIDENT AGENT
Q: Who can be a resident agent?
A:
1. An individual, who must be of good moral
character and of sound financial standing,
residing in the Philippines; or
2. A domestic corporation lawfully transacting
business in the Philippines. (Sec. 127, CC)
Q: What is the purpose of appointing a resident
agent?
A: The appointment of a resident agent is required
for the purpose of accepting and receiving, on behalf
of the foreign corporation:
a) notice affecting the corporation pending the
establishment of its local office and
b) summons and other legal processes in all
proceedings for or against the corporation.
Q: What is the effect of service of summons and
notices to the resident agent?
A: Service upon any agent of a foreign corporation,
whether or not engaged in business in the
Philippines, constitutes personal service upon the
corporation. (Sec. 128, CC; Facilities Management
Corp. vs. Dela Rosa 89 SCRA 131 [1979].)
Q: Can a resident agent sign the certificate of non-
forum shopping?
A: No, while a resident agent may be aware of the
actions filed against the principal, he may not be
aware of the actions initiated by the principal,
therefore he cannot sign the certificate of non-forum
shopping that is a requirement for filing of an
initiatory pleading in court (Expert Travel & Tours Inc.
v. CA, G.R. No. 152392, May 26, 2005).
Q: How is a resident agent replaced?
A: SEC requires the submission of
1. a duly authenticated copy of board resolution or
a certification from the authorized officer of the
company formally revoking his appointment as a
resident agent of the corporation,
2. accompanied by a duly authenticated written
power of attorney designating the substitute or
the new resident agent. (SEC Opinion, Sept. 4,
1990.)
239
Note: The appointment of a resident agent of a foreign
corporation is revocable at any time at the instance of the
corporation (ibid.)
Q: What is the duty of the resident agent in case it
changes its address?
A: It shall be his or its duty to immediately notify in
writing the SEC of the new address. (Sec. 128, CC.)
Q: When is service of summons or other legal
processes made upon the SEC instead of a resident
agent?
A:
1. If a foreign corporation, previously granted a
license, ceases to transact business in the
Philippines, or
2. shall be without any resident agent in the
Philippines on whom any summons or other legal
processes may be served,
then in any action or proceeding arising out of any
business or transaction which occurred in the
Philippines, service of any summons or other legal
process may be made upon the SEC (ibid.)
Q: What shall be the effect of such service made
upon the SEC?
A: Such service made upon the SEC shall have the
same force and effect as if made upon the duly
authorized officers of the corporation at its home
office. (ibid.)
Whenever such service shall be made upon the SEC, it
must, within 10 days thereafter, transmit by mail a
copy of such summons or other legal process to the
corporation at its home or principal office. The
sending of such copy by the Commission shall be a
necessary part of and shall complete such service.
PERSONALITY TO SUE
Q: Do all foreign corporations have the personality
to sue?
A: GR: Only foreign corporations that have been
issued a license to operate a business in the
Philippines have the personality to sue. (Sec.133, CC.)
XPN:Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence.
Q: Is a foreign corporation which is not licensed to
do business in the Philippines absolutely
incapacitated from filing a suit in local courts?
A: No. Only when that foreign corporation is
transacting or doing business in the country will a
license be necessary before it can institute suits. It
may, however, bring suits on isolated business
transactions, which is not prohibited under Philippine
law. Thus, a foreign insurance company may sue in
Philippine courts upon the marine insurance policies
issued by it abroad to cover international-bound
cargoes shipped by a Philippine carrier, even if it has
no license to do business in this country. It is the act
of engaging in business without the prescribed
license which bars a foreign corporation from access
to our courts (Divina, supra, pg. 120, citing Aboitiz
Shipping Corp. vs. Insurance Co. of North America,
561 SCRA 262).
SUABILITY OF FOREIGN CORPORATIONS
Q: Is a foreign corporation, which was granted a
license to transact business in the Philippines,
suable before local courts or administrative
agencies?
A: Yes. It is suable since any foreign corporation
lawfully doing business in the Philippines shall be
bound by all laws, rules and regulations applicable to
domestic corporations of the same class, save and
except:
1. such only as provide for the creation, formation,
organization or dissolution of the corporations or
2. such as fix the relations, liabilities, responsibilities,
or duties of stockholders, members or officers of
corporations to each other or to the corporation.
(Sec. 129, CC)
Note: Matters relating to the organization or internal affairs
of the corporation are governed by the laws of the home or
incorporating State unless they offend any public policy of
the Philippines.
Q: Can a foreign corporation without any license,
engaged in doing business in the Philippines, be
sued in the country?
A: Yes. While an unlicensed foreign corporation doing
business in the country cannot maintain any action,
said corporation can be sued in the country, under
the doctrine of quasi-estoppel by acceptance of
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
benefits. It shall not be allowed to invoke its lack of
license to impugn the jurisdiction of the courts.
(Marubeni Nedeland BV vs. Tensuan, 190 SCRA 105
[1990]; SEC Opinion, Jan. 10, 1995.)
INSTANCES WHERE AN UNLICENSED FOREIGN
CORPORATION BE ALLOWED TO SUE
Q: Give instances when unlicensed foreign
corporations can sue.
A:
1. Isolated transactions;
2. A license subsequently granted enables the
foreign corporation to sue on contracts executed
before the grant of the license;
3. In an action for infringement of patent or other
intellectual property rights, provided that the
country of the foreign corporation is a party to
the Paris Convention.
4. If the foreign corporation is co-plaintiff with a
domestic corporation and the domestic
corporation is the one who instituted the suit in
the Philippines; and
5. By reason of the doctrine of estoppel.
Q: What is an isolated transaction?
A: The Court has not construed the term isolated
transaction to literally mean one or a mere single
act. The phrase isolated transaction has a definite
and fixed meaning, i.e., a transaction or series of
transaction set apart from the common business of a
foreign enterprise in the sense that there is no
intention to engage in progressive pursuit of the
purpose and object of the business organization.
(Lorenzo Shipping Corp., vs. Chubb and Sons, 431
SCRA 266 [2004].)
GROUNDS FOR REVOCATION OF LICENSE
Q: What are the grounds for revocation of license of
a foreign corporation?
A:Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
grounds:
1. Failure to file its annual report or pay any fees as
required by the Code;
2. Failure to appoint and maintain a resident agent in
the Philippines;
240
 THE CORPORATION CODE
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change;
4. Failure to submit to the SEC an authenticated copy
of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation
within the time prescribed by the Corporation Code;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation
is authorized under its license;
8. Transacting business in the Philippines as agent of
or acting for and in behalf of any foreign corporation
or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (Sec 134, CC)
Q: What shall be issued by the SEC upon revocation
of the license to transact business in the Philippines?
A: The certificate of revocation shall be issued by the
SEC. A copy thereof shall be furnished to the
appropriate government agency in the proper cases.
The SEC shall also mail to the corporation at tits
registered office in the Philippines a notice of such
revocation accompanied by a copy of the certificate
of revocation. (Sec. 135, CC.)
Q: What are the effects of revocation of license of a
foreign corporation?
A: The following are the effects of such revocation:
1. The revocation cannot affect the validity of
contracts entered into by it before the revocation
nor its right to maintain an action to enforce
them. (Billmeyer Lumber Co. vs. Merchants Coal
Co., 69 SE 1073.)
2. The revocation shall not affect the validity of
contracts entered into by a foreign corporation
after revocation. The only effect of the
revocation is that the foreign corporation cannot
seek redress from the courts to enforce such
241
contracts. It simply removes its legal standing to
sue. (SEC Opinion No. 10-07, Feb. 5, 2010.)
3. Innocent parties can enforce such contracts
whether the same are considered valid or not.
However, the foreign corporation can no longer
transact business in the Philippines, and it cannot
maintain any suit or action in any court or
administrative agency. (Sec. 133, CC)
Q: May a foreign corporation licensed to transact
business in the Philippines, withdraw from said
license?
A: Yes, a foreign corporation licensed to transact
business in the Philippines may be allowed to
withdraw from the Philippines by filing a petition for
withdrawal of license. However, no certificate of
withdrawal shall be issued by the SEC unless all the
following requirements are met:
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in the
Philippines. (Sec. 136, CC)
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a
country which is a party to any convention, treaty,
or agreement relating to intellectual property rights
or the repression of unfair competition, to which the
Philippines is also a party or extend reciprocal rights
sue in trademark or service mark enforcement
action?
A: Yes, the foreign corporation mentioned above may
sue in trademark or service mark enforcement action.
This is in accordance with Section 160, in relation to
Section 3 of R.A. No. 8393, The Intellectual Property
Code. (Sehwani Inc. v. InnOut Burger, G.R. No.
171053, Oct. 15, 2007)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

MERGERS AND CONSOLIDATIONS Q: What are the common forms of corporate

combinations?
DEFINITION AND CONCEPT
A:
Q: What are the distinctions between merger and 1. Sale of assets One corporation sells all or
consolidation? substantially all of its assets to another. Such
sale, usually, though not necessarily made in the
A: course of the dissolution of the vendor
MERGER CONSOLIDATION corporation.
One where a
corporation One where a 2. Lease of assets A corporation, without being
absorbs another new corporation dissolved, leases its property to another
corporation and is created and corporation for which the lessor merely receives
Definition remains in consolidating rental paid by the lessee. This is similar to the
existence while corporations are sale of assets, except that under a lease, nothing
others are extinguished. passes, except the right to use the property
dissolved. (Sec. (Sec. 76, CC) leased.
76, CC)
Consequent All of the 3. Sale of stock The purpose of a holding
All consolidated corporation is to acquire a sufficient amount of
dissolution constituent
corporations are the stock of another corporation for the purpose
of a corporations
dissolved of acquiring control. The acquiring corporation is
corporation involved are
without called the parent/ holding company. The
or dissolved except
exception corporation whose stocks were acquired is the
corporations one
Consequent subsidiary.
No new A new
creation of a
corporation is corporation 4. Merger One where a corporation absorbs
new
created emerges another corporation and remains in existence
corporation
All assets, while others are dissolved.
The surviving
liabilities, and
Acquisition corporation 5. Consolidation - One where a new corporation is
capital stock of
of Assets, acquires all the created and consolidating corporations are
all consolidated
Liabilities, assets, liabilities, extinguished.(ibid., 656-661.)
corporations are
Capital and capital stock
transferred to
Stock of all constituent Q: Where one corporation sells or otherwise
the new
corporations transfers all of its assets to another corporation, is
corporation
the latter liable for the debts and liabilities of the
Q: Can a partnership be allowed to merge or to transferor?
consolidate with a corporation?
A: GR: No.
A: No. Only corporations can merge or consolidate
into a single corporation. Hence, a partnership may XPNs:
NOT be allowed to merge with a corporation but the 1. Where the purchaser expressly or impliedly
partnership may transfer all its assets and liabilities to agrees to assume such debts;
the corporation which will issue its shares of stock to 2. Where the transaction amounts to a
be distributed to the partners in proportion to their consolidation or merger of the corporations;
respective interest in the partnership, provided the 3. Where the purchasing corporation is merely a
partnership shall be dissolved in accordance with the continuation of the selling corporation; and
Civil Code. (De Leon, supra, pg. 656, citing SEC 4. Where the transaction is entered into to
Opinion, Jan 3, 1984.) fraudulently to escape liability for such debts.
(Edward J. Nell Co. vs. Pacific Farms, Inc., 15
SCRA 415 [1965].)

UNIVERSITY OF SANTO TOMAS 242

2013 GOLDEN NOTES
 THE CORPORATION CODE
CONSTITUENT vs. CONSOLIDATED CORPORATION
The parties to a merger or consolidation are
constituent corporations. (McLeod vs. NLRC, 512
SCRA 222, [2007].)
Sec. 76 of the CC authorizes two or more
corporations to merge under one of the participating
constituent corporations, or to consolidate into a new
single corporation called consolidated corporation.
(BPI vs. BPI-Employees Union-Davao Chapter
Federation of Unions in BPI Unibank, GR 164301, Aug.
10, 2010, J. Brion, dissenting.)
PLAN OF MERGER OR CONSOLIDATION
The plan of merger or consolidation is a plan created
by the representatives of the constituent
corporations, providing for the details of such
merger.
Q: What should the plan of merger or consolidation
contain?
A: The BOD/ BOT of each corporation party to the
merger or consolidation must set forth the following
in their plan of merger or consolidation:
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 AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI for
corporations organized under the CC; and
4. Such other provisions with respect to the
proposed merger or consolidation as are deemed
necessary or desirable. (Sec. 76, CC.)
Q: Whose approvals are required for an effective
plan of merger or consolidation?
A: The plan of merger or consolidation must be
approved by majority vote of each of the BOD/ BOT
of the constituent corporation. Thereafter, it shall be
submitted for approval by the stockholders or
members of each of such corporations at separate
corporate meetings duly called for the purpose. The
affirmative vote of the stockholders representing at
least 2/3 of the outstanding capital stock of each
corporation in the case of stock corporations or at
least 2/3 of the members in the case of non-stock
243
corporations, shall be necessary for the approval of
such plan. (Sec. 77, CC.)
Q: Is an appraisal right available to a dissenting
stockholder to a plan of merger or consolidation?
A: Yes. Any dissenting stockholder in stock
corporations may exercise his appraisal right in
accordance with this Code: Provided, that if after the
approval by the stockholders of such plan, the BOD
should decide to abandon the plan, the appraisal
right shall be extinguished. (ibid.)
Q: Can a plan of merger or consolidation be
amended?
A: Yes. Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD / BOT of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members of
each of the constituent corporations. (ibid.)
Note: Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
ARTICLES OF MERGER OR CONSOLIDATION
After approval of the plan of merger or consolidation,
an article of merger or consolidationis executed by
each of the constituent corporations to be signed by
the president or vice-president of the each
corporation and signed by their secretary or assistant
secretary setting forth:
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
3. As to each corporation, the number of shares or
members voting for and against such plan,
respectively. (Sec. 78, CC.)
PROCEDURE
Q: What is the procedure for merger or
consolidation?
A:
1. Board of each corporation shall draw up a plan of
merger or consolidation.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Plan of merger or consolidation shall be approved
by majority vote of each board of the concerned
corporations at separate meetings.
3. The plan of merger or consolidation shall be
submitted for approval by the stockholders or
members of each such corporation at separate
corporate meetings duly called for the purpose.
Notice should be given to all stockholders or
members at least two (2) weeks prior to date of
meeting, either personally or by registered mail.
4. Affirmative vote of 2/3 of the outstanding capital
stock in case of stock corporations, or 2/3 of the
members of a non-stock corporation shall be
required.
5. Dissenting stockholders may exercise the right of
appraisal. But if Board abandons the plan to merge
or consolidate, such right is extinguished.
6. The plan may still be amended before the same is
filled with the SEC; however, any amendment to
the plan must be approved by the same votes of
the board members of trustees and stockholders or
members required for the original plan.
7. After such approval, Articles of Merger or Articles
of Consolidation shall be executed by each of the
constituent corporations, signed by president or VP
and certified by secretary or assistant secretary,
setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
outstanding; in non-stock, the number of
members; and
c. As to each corporation, number of shares or
members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or
Consolidation shall be submitted to the SEC for
approval. Special corporations like banks,
insurance companies, building and loan
associations, etc., need the prior approval of the
respective government agency concerned.
9. If SEC is satisfied that the merger or consolidation is
not inconsistent with the provisions of the
Corporation Code and existing laws, it shall issue
the Certificate of Merger or the Certificate of
Incorporation, as the case may be.
10. If, upon investigation, the SEC has reason to
believe that the proposed merger or consolidation
is contrary to or inconsistent with the Corporation
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Code or other existing laws, it shall set a hearing to
give the corporations the opportunity to be heard
and written notice of said hearing shall be given to
each constituent corporation at least two weeks
prior to the said hearing. (Secs. 76-79.)
EFFECTIVITY
Q: When shall the merger or consolidation become
effective?
A: Upon issuance by the SEC of the certificate of
merger and consolidation. (Sec. 79, CC.)
In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. (ibid.)
LIMITATIONS
Q: What are the limitations with regard to merger or
consolidation of corporations?
A: Subject to the limitations provided by the
Constitution, the merger or consolidation should not
create illegal combinations nor create monopolies
and it should not eliminate free and healthy
competition.
Q: What does monopoly mean?
A: A "monopoly" embraces any combination the
tendency of which is to prevent competition in the
broad and general sense, or to control prices to the
detriment of the public. (Gokongwei v SEC, G.R. No. L-
45911 April 11, 1979)
EFFECTS
Q: What are the effects of a merger or
consolidation?
A: The effects of merger or consolidation are:
1. The constituent corporations shall become a single
corporation which:
a. In case of merger, shall be the surviving
corporation designated in the plan of merger
b. In case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation
244
 THE CORPORATION CODE

2. The separate existence of the constituent

corporations shall cease, except that of the
surviving or the consolidated corporation

3. The surviving or the consolidated corporation shall

possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and
liabilities of a corporation organized under this
Code

4. The surviving or the consolidated corporation shall

thereupon and thereafter possess:
a. All the rights, privileges, immunities and
franchises of each of the constituent
corporations
b. All property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and other
choses in action, and all and every other
interest of, or belonging to, or due to each
constituent corporation
c. These shall be deemed transferred to and
vested in such surviving or consolidated
corporation without further act or deed

5. The surviving or consolidated corporation shall:

a. Be responsible and liable for all the liabilities
and obligations of each of the constituent
corporations in the same manner as if such
surviving or consolidated corporation had
itself incurred such liabilities or obligations
b. Any pending claim, action or proceeding
brought by or against any of such
constituent corporations may be prosecuted
by or against the surviving or consolidated
corporation
c. The rights of creditors or liens upon the
property of any of such constituent
corporations shall not be impaired by such
merger or consolidation. (Sec. 80, CC; BPI vs.
Lee, GR 190144, Aug. 1, 2012.)

245 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
SECURITIES REGULATION CODE
STATE POLICY, PURPOSE
Q: What is the nature of the Securities Regulation
Code (SRC)?
A: The SRC is enacted to protect the public from
unscrupulous promoters, who stake business or
venture claims which have really no basis, and sell
shares or interests therein to investors.
The SRC also serves to protect investors, promote
investor confidence, and stabilize the financial
markets.
Q: What is the state policy with regard to the SRC?
A:
1. Establish a socially-conscious free market that
regulates itself
2. Encourage widest participation of ownership in
enterprises
3. Enhance democratization of wealth
4. Promote development of the capital market
5. Protect investors
6. Ensure full and fair disclosure about securities
7. Minimize, if not totally eliminate, insider trading
and other fraudulent or manipulative devices and
practices which creates distortion in the free
market.
SECURITIES REQUIRED TO BE REGISTERED
Q: What are securities? (1996 Bar Question)
A: Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
character. It includes: DO DIET
1. Debt instruments bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
2. Other instruments as may in the future be
determined by the SEC.
3. Derivatives options and warrants
4. Investments instruments Investment contracts, ,
fractional undivided interests in oil, gas, or
other mineral rights
5. Equity instruments Shares of stock, certificates
of interest or participation in a profit sharing
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
6. Trust instruments Certificates of assignments,
certificates of participation, trust certificates,
voting trust certificates or similar instruments(Sec.
3, SRC)
Q: What is required of securities before they are
sold or offered for sale or distribution within the
Philippines?
A: They are required to be registered with and
approved by the SEC. Registration also includes the
disclosure to SEC of all material and relevant
information about the issuer of the security. Prior to
the sale, the information on the securities, in such
form and with such substance as the SEC may
prescribe, shall be made available to each prospective
purchaser. (Sec. 8, SRC.)
Q: What is the reason behind the registration
requirement?
A: To protect the public from fraud.
Q: Are there any exceptions to the registration
requirement?
A: Yes. The following need not be registered:
1. Exempt securities
2. Securities sold in exempt transactions.
However, as an exception to the above exceptions,
SRC provides that the resale of securities previously
sold in an exempt transaction must be registered.
Q: What are the effects of non-registration?
A: The issuer would be penalized.Issuers of securities
not registered shall be subjected tocriminal, civil and
administrative charges.
EXEMPT SECURITIES
Q:What are the exempt securities?
A: PC-RIBO
1. Any security issued or guaranteed by the
Government of the Philippines, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as 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
246
 SECURITIES REGULATION CODE
any state, province or political subdivision
thereof on the basis of reciprocity. Provided, that
the SEC may require compliance with the form
and content of disclosures the Commission may
prescribe.
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 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 (which serves to promote the sale
of securities issued by heavily regulated banks).
6. Other securities as determined by the SEC by rule
or regulation, after public hearing.(Sec. 9, SRC)
Note: Being an issuer of an exempt security does NOT
exempt such issuer from the requirement of submission of
reports under the regime of full and fair disclosure.
Q: What is the rationale for the exemption of
securities from registration?
A: These enumerated securities can be regulated by
another government agency or body other than the
SEC.
EXEMPT TRANSACTIONS
Q: What are exempt transactions?
A: JuDe ISCaRIOTS Ex-20-QBs
1. Any JUdicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy
2. Those sold by a pledge holder, mortgagee, or any
other similar lien holder, to liquidate a bona fide
debt a security pledged in good faith as security for
such DEbt
3. Those sold or offered for sale in an Isolated
transaction for the owners account and the owner
not being an underwriter
4. Distribution by the corporation of Securities to its
stock holders or other security holders as stock
dividends or distribution out of surplus
247
5. Sale of CApital stock of a corporation to its own
stockholders exclusively wherein no commission or
remuneration is paid or given directly or indirectly
in connection with the sale of such capital stock
Note: Also, this sale must not involve an underwriter or
financial advisor
6. Bonds or notes secured by a mortgage upon Real
estate or tangible personal property, where the
entire mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale
7. Issue and delivery of any security in exchange for
any other security of the same Issuer pursuant to
the right of conversion entitling the holder of the
security surrendered in exchange to make such
conversion.
8. Brokers transactions executed upon customers
Orders, on any registered Exchange or other
Trading market
9. Share Subscriptions in capital stock prior to
incorporation or in pursuance of an increase in its
authorized capital stock under the Corporation
Code when no expense is incurred, or no
commission, compensation or renumeration is paid
or given in connection with the sale or disposition
of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to
comply with the requirements of such law as to the
percentage of the capital stock of a corporation
which should be subscribed before it can be
registered and duly incorporated, or its authorized
capital increased.
10. EXchange of securities by the issuer with its
existing security holders exclusively, when no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange
11. Sale by issuer to fewer than 20persons in the
Philippines during any 12 month period, otherwise
known as private placement transactions
12. Sale of securities to any number of the following
Qualified Buyers:
a. banks,
b. registered investment houses,
c. insurance companies,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
d. pension funds or retirement plans maintained by
the Government of the Philippines or any
political subdivision thereof or managed by a
bank or other persons authorized by the
Bangko Sentral to engage in trust functions,
investment companies, and
e. other persons or entities ruled qualified by the
SEC on the basis of such factors such as
financial sophistication, net worth, knowledge,
and experience in financial and business
matters, or amount of assets under
management. (Sec. 10.1, SRC.)
Q: What is the rationale behind exempt
transactions?
A: Although the securities themselves must still be
registered, the sale or issue need not be registered
because the investors involved herein are considered
as highly sophisticated investors or specialized
investors and as such, have a greater risk tolerance or
do not need strict protection from the Commission.
Q: Is the list of exempt transactions exclusive under
the SRC?
A: No, because under Section 10.2 of Republic Act
8799, the Commission may exempt other
transactions, if it finds that the requirements of
registration under the Code is not necessary in the
public interest or for the protection of the investors
such as by reason of the small amount involved or the
limited character of the public offering.
PROCEDURE FOR REGISTRATION OF SECURITIES
Q: What is the purpose for registration of securities?
A: Registration of securities allows the subsequent
release of these securities to the investing public and
serves to protect investors.
Q: What is the procedure for registration of
securities?
A: A- POSE- CsFP- RulE
1. Application All securities required to be
registered shall be registered through the filing
by issuer with SEC, of a sworn registration
statement with respect to such securities in such
form and containing such information or
documents as the Commission shall prescribe.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. Prospectus The registration statement shall
include any prospectus required or permitted to
be delivered;
3. Other information 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;
4. Signatories to registration statement The
registration statement shall be signed by the
issuers:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary or persons performing
similar functions
Note: it shall be accompanied by a duly verified
resolution of the Board of Directors of the
issuer corporation.
5. Written consent of Expert 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
6. Certification by Selling stockholders Where the
registration statement includes shares to be sold
by the selling shareholders, a written certification
by such selling shareholders as to the accuracy of
any part of the registration statement
contributed by such selling shareholders shall
also be filed
7. Fees Upon filing of the registration statement,
the issuer shall pay to the SEC a fee of not more
than one tenth of one percent (1/10 of 1%) of
the maximum aggregate price at which such
securities are proposed to be offered; the SEC
shall prescribe by rule, diminishing the fees in
inverse proportion, the value of the aggregate
price of the offering
Note: This fee paid to the SEC is called a diminishing
fee.
8. Notice and Publication Notice of the filing of
the registration statement shall be immediately
published by the issuer, at its own expense, in
two newspapers of general circulation in the
Philippines; once a week for two consecutive
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 SECURITIES REGULATION CODE
weeks, or in such other manner as the
Commission by rule shall prescribe, reciting that:
a. A registration statement for the sale of such
security has been filed, and
b. The aforesaid registration statement as well
as the papers attached thereto is open to
inspection at the Commission during
business hours.
c. Copies thereof, photo static or otherwise,
shall be furnished to interested parties at
such reasonable charges as the Commission
may prescribe.
9. RULing Within 45 days after the date of the
filing of the registration statement, or by such
later date to which the issuer has consented, the
SEC shall declare the registration statement
effective or rejected, unless the applicant is
allowed to amend the registration statement.
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 also impose such terms and
conditions as may be necessary or appropriate
for the protection of the investors.
10. Effectivity Upon effectivity 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.
Note: Any untrue statement or fact of omission to
state a material fact required to be stated therein or
necessary to make the statement therein not
misleading shall constitute fraud.
Q: What are the grounds for rejection of a
registration statement and revocation of the
effectivity of a registration statement and the
registration of a security? I(irefco) ICE
A: After due notice and hearing by issuing an order to
such effect, the Commission may reject the
registration statement or revoke the registration of a
security based on the following grounds:
1. The Issuer:
a. Has been judicially declared Insolvent
b. Has violated any of the provisions of the
Code, the Rules promulgated pursuant
thereto, or any order of the SEC of which the
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issuer has notice in connection with the
offering for which a registration statement
has been filed
c. Has been or is Engaged or is about to engage
in fraudulent transactions
d. Has made any False or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e. Has failed to comply with any requirement
that the COmmission may impose as a
condition for registration of the security for
which registration statement has been filed.
2. The registration statement is on its face
Incomplete or inaccurate in any material respect
or includes any untrue statement of a material
fact or omits to state a material fact required to
be stated therein or necessary to make the
statements therein not misleading
3. The issuer, any officer, director or Controlling
person of the issuer, or any person performing
similar functions, or any underwriter has been
convicted by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent judicial
or administrative body for violations of
securities, commodities and other related laws
4. Any issuer who refuses to permit the
Examination to be made by the Commission
Note: The Commission may compel the production of all
the books and papers of the issuer, and may administer
oaths to, and examine the officers of such issuer or any
other person connected therewith as to its business and
affairs.
Q: What are the grounds for suspension or
cancellation of certificate of registration?
A: ROSe Co BRO
1. Fraud in procuring Registration
2. Serious misrepresentation as to Objectives of
corporation
3. Refusal to comply with lawful order of SEC
4. COntinuous non-operation for at least 5 years
5. Failure to file By-laws within required period
6. Failure to file Reports
7. Other similar grounds. (Sec. 6 [L], SRC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What are the grounds for suspension of
registration?
A: I-FIRE
1. If any time, the Information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or incomplete
in any material respect; or
2. The sale or offering for sale of the security
registered thereunder may work or tend to work
a Fraud;
3. Pending Investigation of the security registered,
if the Commission deems it necessary, to
ascertain whether the registration of such
security should be revoked on any ground
specified the SRC;
4. REfusal to furnish information required by the
Commission. (Sec. 15, SRC)
Q: Does the order of suspension by the SEC require a
subsequent hearing?
A: An order of suspension must be followed by a
hearing to be conducted by the Commission. If the
Commission determines that the sale of any security
should be revoked, it shall issue an order prohibiting
the sale of such security. Until the issuance of a final
order, the suspension of the right to sell, though
binding upon the persons notified thereof, shall be
deemed confidential, and shall not be published,
unless it shall appear that the order of suspension has
been violated after notice.
However, if the Commission finds that the sale of the
security will neither be fraudulent nor result in fraud,
it shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its
status as a registered security as of the date of such
order of suspension.
Q: Who are the securities market professionals as
classified by the SRC?
A: They are the broker, dealer, associated person of a
broker or dealer, and a salesman.
Q: Who is a broker?
A: A person engaged in the business of buying and
selling securities for the account of others (Sec.3.3,
SRC)
Q: Who is a dealer?
A: Any person who buys and sells securities for
his/her own account in the ordinary course of
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Business (Sec. 3.4, SRC).
Q: Who is an associated person of a broker or
dealer?
A: He is an employee of a broker or dealer who
directly exercises control of supervisory authority but
does not include a salesman, or an agent, or a person,
whose functions are solely clerical or ministerial.(Sec.
3.5, SRC)
Q: Who is a salesman?
A: He is a natural person, employed as such, or as an
agent, by a dealer, issuer or broker to buy and sell
securities; but for the purpose of registration, shall
not include any employee of an issuer whose
compensation is not determined directly or indirectly
on sales of securities of the issuer.
Q: What is the obligation of the broker to his client?
A: The primary obligation of the broker is to ensure
his accounts compliance with the law. (Abacus
Securities Corp. v. Ampil, G.R. No. 160922, Feb. 27,
2006)
Note: Since a brokerage relationship is essentially a
contract for the employments of an agent, the law on
contracts govern the broker-principal relationship
Q: Are security market professionals required to be
registered?
A: Yes. No broker shall sell any securities unless he is
registered with the SEC (Sec. 19, Revised Securities
Act) (Nicolas vs. CA, et al.,G.R. No. 12285, Mar. 27,
1998)
Q: Can a stock broker without license from the SEC,
recover management fees allegedly earned from
handling the securities transactions of a client?
A: No. An unlicensed person may not recover
compensation for services as a broker where a
statute or ordinance is applicable and such is of a
regulatory nature.
Q: What is margin trading?
A: A kind of trading that allows a broker to advance
for the customer/investor part of the purchase price
of the security and to keep the same security as
collateral for such advance.
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 SECURITIES REGULATION CODE
Q: What is the margin allowance standard?
A: GR: The credit extended must be for an amount
not greater than, whichever is higher of:
1. 65% of the current market price of the security;
or
2. 100% of the lowest market price during the
preceding 36 calendar months, but not more
than 75% of the current market price.
XPN, the Monetary Board may increase or decrease
the above percentages, in order to achieve the
objectives of the Government with due regard for
promotion of the economy and prevention of the use
of excessive credit.
Q: What are the purposes of the margin
requirements?
A: Theyare primarily intended toachieve a
macroeconomic purpose theprotection of the
overall economy fromexcessive speculation in
securities. Theirrecognized secondary purpose is to
protect small investors.
Q: Who has the burden of compliance with margin
requirements?
A: The brokers and dealers.
Note: In securities trading, the brokers are essentially the
counterparties to the stock transactions at the Exchange.
Since the principals of the broker are generally undisclosed,
the broker is personally liable for the contracts thus made.
Brokers have a right to be reimbursed for sums advanced
by them with the express or implied authorization of the
principal. (Abacus Securities Corporation v. Ampil, G.R. No.
160016, Feb. 27, 2006)
PROHIBITIONS ON FRAUD, MANIPULATIONS AND
INSIDER TRADING
MANIPULATION OF SECURITY PRICES
Q: What acts are considered manipulation of
security prices?
A:
1. Transactions intended to create a false or
misleading appearance of active trading in any
listed security traded in an Exchange or any other
trading market:
a. Wash Sale is a transaction in which there is
no genuine change in the beneficial (or
actual) ownership of a security
251
b. Matched Sale is a change of ownership in
the securities by entering an order for the
purchase or sale of a security with the
knowledge that a simultaneous order 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.
c. Similar transactions where there is no change
of beneficial ownership.
2. Effecting a series of transactions that will raise or
depress the price of securities to induce the
purchase or sale of securities respectively, or
creating active trading to induce transactions
through manipulative devices:
a. Marking the close buying and selling of
securities at the close of the market in an
effort to alter the closing price of these
securities.
b. Painting the tape engaging in a series of
transactions effected by brokers in securities
that are reported publicly to give the
impression or illusion of activity or price
movement in a security, which may trick
investors into trading in these securities
because of the alleged trading volume or
indications of interest.
c. Squeezing the float refers to taking
advantage of a shortage of securities in the
market by controlling the demand side and
exploiting market congestion during such
shortages in a way to create artificial prices.
This prevents the actual market from
determining the price of these securities.
d. Hype and dump engaging in buying activity
at increasingly higher prices and then selling
securities in the market at the higher prices.
e. Boiler room operations refers to activities
that involve the use of high pressure sale
tactics such as direct mail offers or
telephone follow-ups to investors to
promote purchase and sale of securities
wherein there is misrepresentation in these
securities. This is a fraudulent transaction
that tricks investors into trading in a fake
market.
f. Daisy chain refers to a series of purchase
and sales of the same issue at successively
higher prices by the same group of people
with the purpose of manipulating prices are
drawing unsuspecting investors into the
market leaving them defrauded of their
money and securities.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
g. Front-Running is the prohibited practice of a
broker-dealer executing its proprietary order
before the customers order for the same
security. This violates the fiduciary
responsibility by the broker-dealer to its
customer accounts as well as placing the
customers order first.
h. Churning involves the excessive trading of
securities by a broker-dealer in a customers
discretionary account in order to generate
commissions, without regard to the
customers investment objective.
3. Circulating or disseminating 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 that security for the
purpose of inducing the purchase or sale of such
security.
4. 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.
5. To effect, either alone or with 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 the
Code or by rules of the Commission.
SHORT SALES
Q: What is Short Selling?
A: It is the selling of shares which the seller does not
actually own or possess and therefore he cannot,
himself, supply the delivery.
FRAUDULENT TRANSACTIONS
Q: What are considered fraudulent transactions?
A:
1. Employ any device, scheme or artifice to defraud
investors.
2. Obtaining money or property by means of any
untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statement made not
misleading.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
3. Engaging in any act, transaction, practice or
course of business, which operates as a fraud or
deceit upon any person.
INSIDER TRADING
Q: What is insider trading?
A: A purchase or sale made by an insider, or such
insiders spouse or his relative by affinity or
consanguinity within the second degree, legitimate or
common-law, shall be presumed to be effected while
in possession of material non-public information if
transacted after such information came into
existence but prior to the public dissemination of
such information, and lapse of reasonable time for
the market to absorb such information.
.
Q: Who is an insider?
A: A person in possession of corporate material
information not generally available to the public.
Q: Who may be an insider? (1995 Bar Question)
A:
1. The issuer
2. A director or officer (or person performing
similar functions) of, or a person controlling the
issuer
3. A person whose relationship or former
relationship to the issuer gives or gave him
access to material information about the issuer
or the security that is not generally available to
the public
4. A government employee, or director , or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a security
that is not generally available to the public; or
5. Constructive Insider A person who learns such
information by a communication from any of the
foregoing insiders. (Sec. 3.8, SRC)
Q: What are the other prohibited acts in an insider
trading?
A:
1. For an insider to communicate material non-
public information about the issuer or the
security to any person who by virtue of the
communication thereby becomes an insider,
where the original insider communicating the
information knows or has reason to believe that
such person will likely buy or sell a security of the
issuer while in possession of such information
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 SECURITIES REGULATION CODE
2. When a tender offer has commenced or is about
to commence, it is unlawful for any person, other
than the tender offeror, who is in possession of
material non-public 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 non-public and
has been acquired directly or indirectly from the
tender offer, or 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
3. When a tender offer has commenced or is about
to commence, it is also unlawful for any tender
offeror, or those acting on its behalf, the issuer of
securities covered by such tender offer, and any
insider, to communicate material non-public
information to any person relating to the tender
offer which would likely result in violation of
prohibition of the insider from trading.
Q: When is information material non-public?
(1995 Bar Question)
A:
1. Information about the issuer or the security 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
2. Would be considered by a reasonable person
important under the circumstances in
determining his course of action whether to buy,
sell or hold a security (Sec. 27.2, SRC).
Q: What are the possible defenses against insider
trading?
A:
1. That the information was acquired not on account
of his relationship with the issuer; or
2. That he disclosed the information to the other
party who knew or had the reason to believe he
knew the material information
3. That the purchaser or seller was not aware of the
material, non-public information at the time of the
purchase or the sale.
253
PROTECTION OF INVESTORS
Q: What are the provisions in the SRC intended to
protect the investors?
A:
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
TENDER OFFER RULE
Q: What is a tender offer?
A: Publicly declared intention to buy securities of
public companies given to all stockholders by:
1. Filing with the SEC a declaration to that effect,
and paying the filing fee.
2. Furnishing the issuer a statement containing the
information required of the issuers as SEC may
prescribe, including subsequent or additional
materials.
3. Publishing all requests or invitations for tender,
or materials making a tender offer or requesting
or inviting letters of such security.
Q: What is the purpose of tender offer?
A: Tender offer is in place to protect the interest of
minority stockholders of a target company against
any scheme that dilutes the share value of their
investments. It affords such minority shareholders
the opportunity to withdraw or exit from the
company under reasonable terms or a chance to sell
their shares at the same price as those of the majority
stockholders.
Q: In what instances is a tender offer required to be
made?
A:
1. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
equity shares in a public company shall disclose
such intention and contemporaneously make a
tender offer for the percent sought to all
shareholders of such class
Note: In the event that the tender offer is
oversubscribed, the aggregate amount of securities to be
acquired at the close of such tender offer shall be
proportionately distributed across both selling
shareholder with whom the acquirer may have been in
private negotiations and the minority shareholders.
2. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
equity shares of a public company (corporation
with assets of at least P 50,000,000.00 and having
200 or more stockholders with at least 100 shares
for each stock holder) pursuant to an agreement
made between or among the person or group of
persons and one or more sellers.
3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of
a public company in one or more transactions
within a period of 12 months shall be required to
make a tender offer to all holders of such class for
the number of shares so acquired within the same
period.
4. If any acquisition of even less than 35% would
result in ownership of over 51% of the total
outstanding equity securities of a public company,
the acquirer shall be required to make a tender
offer under this Rule for all the outstanding equity
securities to all remaining stockholders of the said
company at a price supported by a fairness opinion
provided by an independent financial advisor or
equivalent third party. The acquirer in such tender
offer shall be required to accept any and all
securities thus tendered.
5. In any transaction covered by this Rule, the sale of
shares pursuant to the private transaction shall not
be completed prior to the closing and completion
of the tender offer. Transactions with any of the
seller/s of significant block of shares with whom
the acquirers may have been in private negotiation
shall close at the same time and upon the same
terms as the tender offer made to the public under
this Rule. For paragraph (2)(B), the last sale
meeting the threshold shall not be consummated
until the closing and completion of the tender
offer.
Note: Tender offer applies to both direct and indirect
acquisition.
Q: What may be considered as a public company?
A:
1. Those listed on an exchange; or
2. Those with assets of at least PHP 50M and having
200 shareholders owning at least 100 shares each.
3. Those companies that have an effective
registration statement under Section 12 of the
SRC.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What are the unlawful and prohibited acts
relating to tender offers?
A: It shall be unlawful for any person to:
1. Make any untrue statement of a material fact or
omit to state any material fact necessary in order
to make statements made, in the light of the
circumstances under which they are made, not
misleading, or
2. Engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with
any tender offer or request or invitation for
tenders, or any solicitation of security holders in
opposition to or in favor of any such offer,
request, or invitation.
RULES ON PROXY SOLICITATION
Q: What are the requisite for valid proxy
solicitation?
A:
1. It must be in writing
2. It must be signed by the stockholder or his duly
authorized representative
3. It must be filed before the scheduled meeting
with the corporate secretary (Sec. 20, SRC)
Note: Unless otherwise provided in the proxy, the proxy
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.
Q: What are the rules on proxy solicitation with
regard to broker or dealer?
1. No broker or dealer shall give any proxy, consent
or authorization, in respect of any security carried
for the account of a customer, to a person other
than the customer, without the express written
authorization of such customer.
2. A broker or dealer who holds or acquires the
proxy for at least 10% or such percentage as the
Commission may prescribe of the outstanding
share of the issuer, shall submit a report
identifying the beneficial owner within 10 days
after such acquisition, for its own account or
customer, to the issuer of the security, to the
Exchange where the security is traded and to the
Commission. (Sec. 20, SRC)
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DISCLOSURE RULE
Q: When does disclosure begin?
A: It begins at registration and continues periodically
through the regular filing of periodic report.
Q: May it be suspended?
A: Yes. It may be suspended for any fiscal year after
the year such registration became effective if such
issuer as of the first day of any such fiscal year, has
less than 100 shareholders of such class of securities
and it notifies the Commission of such. (Rule 17.1,
SRC IRR).
Q: When does the disclosure requirement end?
A: GR:Disclosure does not end because once an issuer
becomes a reporting company, it remains as such
even when the registration of securities has been
revoked (Rule 13 SCR IRR).
XPN: If the primary license is revoked.
XPN to the XPN: In the case of hospitals and
educational institutions if the primary license is
revoked, the disclosure requirement still
continues because of public interest.
Q: Give the reportorial requirements.
A:
1. Issuers:
a. Shall file with the Commission within 135 days,
after the end of the issuers fiscal year, or such
other time as the Commission may prescribe, an
annual report which shall include among others,
a balance sheet, profit and loss statement and
statement of cash flows, for such last fiscal year,
certified by an independent certified public
accountant, and a management discussion and
analysis of results of operations; and
b. Such other periodical reports for interim fiscal
periods and current reports on significant
developments of the issuer as the Commission
may prescribe as necessary to keep current
information on the operation of the business and
financial condition of the issuer. (Sec. 17, SRC)
2. Types of Issuers Required to File Reports:
a. An issuer which has sold a class of its securities
pursuant to a registration statement under Section
12 of the SRC;
255
b. An issuer with a class of securities listed for
trading in an Exchange;
c. An issuer with assets of at least PHP 50M and
having 200 or more holders each holding at least
100 shares
3. Persons Acquiring Securities:
If the issuer is one that has to make a report, any
person who acquires directly or indirectly the
beneficial ownership of more than 5% of such class,
or in excess of such lesser per centum as the
Commission by rule may prescribe, shall, within 10
days after such acquisition or such reasonable time as
fixed by the Commission, submit to the issuer of the
security, to the Exchange where the security is
traded, and to the Commission a sworn statement
containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of the
business, any plans the recipient may have
affecting a major change in the business
d. The number of shares beneficially owned, and
the number of shares for which there is a right to
acquire
e. granted to such person or his associates
f. Information as to any agreement with a third
person regarding the securities (Sec. 18, SRC)
4. Persons that has beneficial ownership of 10% or
more:
Every person who is directly or indirectly the
beneficial owner of more than 10% of any class of
any equity security, or who is director or an
officer of the issuer of such security, shall file:
a. Statement with the SEC and, if such security is
listed for trading on an Exchange, also with the
Exchange, of the amount of all equity
securities of such issuer of which he is the
beneficial owner,
b. Within 10 days after the close of each calendar
month, if there is a change in ownership
during such month, a statement indicating his
ownership at the close of the calendar month
and such changes in his ownership as have
occurred during such calendar month. (Sec. 23,
SRC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
CIVIL LIABILITY
Q: What are the grounds for civil liability to arise?
A:
1. False Registration Statement. (Sec. 56, SRC)
2. Fraud with connection to prospectus,
communications and reports. (Sec. 57, SRC)
3. Fraud in connection with security transactions.
(Sec. 58, SRC)
4. Manipulation of security prices. (Sec. 60, SRC)
5. Insider trading. (Sec. 61, SRC)
Q: Who are the persons that may be liable in case of
false registration statement?
1. The issuer and every person who signed the
registration statement
2. 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
3. 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
4. Every auditor or auditing firm named as having
certified any financial statements used in
connection with the registration statement or
prospectus
5. 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 statement, report,
or valuation, which purports to have been prepared
or certified by him
6. 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
7. Every underwriter with respect to such security
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the effect on the validity of the sale of
shares acquired 12 months after the approval of the
Registration Statement?
A: 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 months beginning from the effective
date of the registration statement the right of
recovery shall be conditioned on proof that the
person who 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 (Sec. 56,
SRC).
Q: Who are the persons liable with regard to fraud
with connection to prospectus, communications and
reports?
A: Any person who offers to sells or sells
a. in violation any provisions on registration of
securities; and
b. by the use of any means or instruments of
transportation or communication, by means of a
prospectus or other written or oral
communication.
Q: Who are the persons liable with regard to fraud
in connection with security transactions?
A: Any person who engages in any act or transaction
in violation of Sections 19.2, 20 or 26 of SRC.
Q: Who are the persons liable for the manipulation
of security prices?
A: Any person who willfully participates in any act or
transaction in violation of Section 24 shall be liable to
any person who shall purchase or sell any security at
a price which was affected by such act or transaction.
Q: Who are the persons liable with regard to insider
trading?
A: Any person in case of legal tender who:
1. Purchases or sells a security while in possession of
material information not generally available to the
public.
2. Communicates material non-public information
256
 SECURITIES REGULATION CODE

Q: How are the persons enumerated liable? director. To ensure independence therefore, he
must be (2012 Bar Question)
A: Jointly and severally a) nominated and elected by the entire
shareholders;
Q: What is the prescriptive period for filing of b) nominated and elected by the minority
action? shareholders;
c) nominated and elected by the majority
A: Two years after the discovery of the facts shareholders;
constituting the cause of action and within five years d) appointed by the Board
after such cause of action accrued
A: B. He must be nominated and elected by the
Q: What court has the jurisdiction over civil minority shareholders
liabilities?

A: Regional Trial Court

Q: What is the limitation for awarding damages?

A:
1. The court can award not exceeding triple
the amount of the transaction plus actual damage

2. The court is also authorized to award attorneys

fees not exceeding 30% of the award

Q: When may the court award exemplary damages?

A: In cases of:
1. Bad Faith
2. Fraud
3. Malevolence or
4. Wantonness in the violation of SRC or the Rules
and Regulations promulgated by the Commission

INDEPENDENT DIRECTORS

Q: When does the Securities Regulation Code

require an independent director?

A: When any corporation with a class of equity

securities listed for trading on an exchange or with
assets in excess of Fifty Million Pesos and having two
hundred or more holders, at least 200 of which are
holding at least one hundred shares of a class of its
equity securities or which has sold a class of equity
securities to the public pursuant to sec. 12 must have
at least two independent directors or such directors
must constitute at least twenty percent of the board,
whichever is less.

Q: Section 38 of The Securities Regulation Code

defines an independent director as a person who
must not have a relation with the corporation which
would interfere with his exercise of independent
judgment in carrying out the responsibilities of a

257 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
THE NEW CENTRAL BANK ACT (RA 7653 [NCBA])
Q: What is Bangko Sentral ng Pilipinas (BSP)?
A: It is the states central monetary authority. It is
the government agency charged with the
responsibility of administering the monetary, banking
and credit system of the country and is granted the
power of supervision and examination over bank and
non-bank financial institutions performing quasi-
banking functions, including savings and loan
associations. (Busuego vs. CA, G.R. No. L-48955, June
30, 1987.)
Q: What is the nature of the Banko Sentral as an
institution?
A: The Banko Sentral is a government-owned
corporation which enjoys fiscal and administrative
autonomy.
STATE POLICIES
Q: What is the policy of the state with respect to the
creation of the BSP?
A: The State shall 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. (Sec 2, New Central Bank
Act [NCBA].)
CREATION OF THE BANGKO SENTRAL NG PILIPINAS
(BSP)
Q: What are the salient considerations on the
creation of BSP?
A:
1. It is established as an independent central
monetary authority.
2. Its capital shall be P50,000,000,000, to be fully
subscribed by the Philippine Government.
3. The P10,000,000,000 of the capital shall be fully
paid for by the Government upon the effectivity of
NCBA and the balance to be paid for within a
period of 2 years from the effectivity of NCBA in
such manner and form as the Government,
through the Secretary of Finance and the
Secretary of Budget and Management, may
thereafter determine. (ibid.)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
RESPONSIBILITY AND PRIMARY OBJECTIVE
Q: What are the responsibilities of BSP
A: PSR
1. To provide policy directions in the areas of
money, banking, and credit
2. To supervise bank operations
3. To regulate the operations of finance companies
and non-bank financial institutions performing
quasi-banking functions, and similar institutions.
(Sec. 3, NCBA.)
Q: What are the primary objectives of BSP?
A:
1. To maintain price stability conducive to a
balanced and sustainable growth of the
economy; and
2. To promote and maintain monetary stability and
the convertibility of the peso. (Sec. 3, NCBA)
Q: What are the functions of BSP?
A: BRAGS-CHB
1. Banker of the government the BSP shall be the
official depository of the Government and shall
represent it in all monetary fund dealings (Secs.
110- 116, NCBA)
2. Custodian of Reserves. (Secs. 64-66, 94, 103,
NCBA)
3. Financial Advisor of the government (Secs. 123-
124) Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract or
guarantee foreign loans but with the prior
concurrence of the Monetary Board.
4. Government agent (Secs. 117-122, NCBA)D
5. Source of credit (Secs. 61-63, 81-89, 109, NCBA)
6. Issuer of Currency. (Sec. 49-60, NCBA)
7. Clearing channel or House; especially where the
PCHC does not operate.(Sec. 102, NCBA)
8. Supervisor of the Banking system (Sec. 25, NCBA)
shall include the power to:
a. Examine, which power extends to
enterprises wholly or majority-owned or
controlled by the bank (Sec. 7, General
Banking Law [GBL]); this power may not be
restrained by a writ of injunction unless
there is convincing proof that the action of
the BSP is plainly arbitrary (Sec. 25, NCBA)
b. Place a bank under receivership or
liquidation (Sec. 30, NCBA)
c. Initiate criminal prosecution of erring
officers of banks
258
 BANKING LAWS
MONETARY BOARD POWERS AND FUNCTIONS
Q: What is the Monetary Board?
A: It isthe body through which the powers and
functions of the Bangko Sentral are exercised. (Sec 6,
NCBA)
Q: What are the powers and functions of the
Monetary Board?
A: RASBI
1. Issue Rules and regulations it considers necessary
for the effective discharge of the responsibilities
and exercise of its powers.
2. Direct the management, operations, and
Administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and regulations as
it may deem necessary or convenient for this
purpose.
3. Establish a human resource management System.
4. Adopt an annual Budget for and authorize such
expenditures by the Bangko Sentral as are in the
interest of the effective administration and
operations of the Bangko Sentral in accordance
with applicable laws and regulations.
5. Indemnify its members and other officials of the
Bangko Sentral, including personnel of the
departments performing supervision and
examination functions against all costs and
expenses reasonably incurred by such persons in
connection with any civil or criminal action. (Sec 15,
NCBA.)
Note: In the event of a settlement or compromise,
indemnification shall be provided only in connection with
such matters covered by the settlement as to which the
Bangko Sentral is advised by external counsel that the
person to be indemnified did not commit any negligence
or misconduct. The costs and expenses incurred in
defending the aforementioned action, suit or proceeding
may be paid by the Bangko Sentral in advance of the final
disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the member,
officer, or employee to repay the amount advanced
should it ultimately be determined by the Monetary
Board that he is not entitled to be indemnified as
provided in this subsection. (ibid.)
259
Q: What are the liabilities of the members of the
Monetary board?
A: Members of the Monetary Board, officials,
examiners, and employees of the Bangko Sentral
who:
1. Willfully violate RA 7653
2. Who are guilty of negligence, abuses or acts of
malfeasance or misfeasance or
3. Fail to exercise extraordinary diligence in the
performance of his duties
Shall be held liable for any loss or injury suffered by
the Bangko Sentral or other banking institutions as a
result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise
extraordinary diligence. (Sec 16 NCBA.)
HOW BSP HANDLES BANKS IN DISTRESS
Q: What is the function of the BSP on a distressed
bank?
A: Appointment of a conservator or receiver or
closure of the bank.
CONSERVATORSHIP
Q: Who is a conservator?
A: One appointed if the bank is in the state of
illiquidity or the bank fails or refuses to maintain a
state of liquidity adequate to protect its depositors
and creditors. The bank still has more assets than its
liabilities but its assets are not liquid or not in cash
thus it cannot pay its obligation when it falls due. The
bank, not the BSP, pays for fees.
Q: What are the powers of a conservator?
A: CARe BEAr
1. Collect all monies and debts due to the said bank
2. To take charge of the Assets, liabilities, and the
management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board
deems necessary
5. Exercise all powers necessary to restore its
viability, with the power to overrule or revoke the
actions of the previous management and board of
directors of the bank or quasi-bank
6. To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First
Philippine International Bank vs. CA, G.R. No.
115849, Jan. 24, 1996).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Does the power of a conservator extend to the
revocation of valid and perfected contracts?
A: The powers of a conservator cannot extend to post
facto repudiation of valid and perfected transactions.
Thus, the law merely gives the conservator power to
revoke contracts that are deemed to be defective-
void, voidable, unenforceable or rescissible. Hence,
the conservator merely takes the place of the banks
board.
Q: When is conservatorship terminated?
A: Conservatorship is terminated when the Monetary
Board is satisfied that the bank can operate on its
own.
Note: When the Monetary Board, on the basis of the report
of the conservator or of its own findings, determine that
the continuance in business of the institution would involve
probable losses to its depositors or creditors, the bank will
go under liquidation.
CLOSURE
Q: When may the Monetary Board close a bank or
quasi bank?
A:
1. Cash Flow test - Inability to pay liabilities as they
become due in the ordinary course of business
(Sec. 30 [a] NCBA).
2. Balance sheet test Insufficiency of realizable
assets to meet its liabilities (Sec 30 [b] NCBA).
3. Inability to continue business without involving
probable losses to its depositors and creditors
(Sec 30 [c] NCBA).
4. Willful violation of 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 (Sec 30 [d] NCBA).
5. Notification to the BSP or public announcement
of a bank holiday (Sec 53, GBL).
6. Suspension of payment of its deposit liabilities
continuously for more than 30 days (Sec 53,
GBL).
7. Persisting in conducting its business in an unsafe
or unsound manner (Sec 56, GBL).
Q: What is the close now-hear later doctrine?
A: It is to prevent unwarranted dissipation of the
banks assets and as a valid exercise of police power
to protect the depositors, creditors, stockholders and
the general public. The law does not contemplate
prior notice and hearing before the bank may be
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
directed to stop operations and placed under
receivership. (Central Bank of the Philippines v. CA,
G.R. No. 76118 Mar. 30, 1993)
No prior hearing is necessary in appointing a receiver
and in closing the bank. It is enough that subsequent
judicial review is provided for. Indeed, to require such
previous hearings would not only be impractical but
would tend to defeat the very purpose of the law.
(Rural Bank of Lucena v. Arca, G.R. No. L-21146,
September 20, 1965)
Q: Can the closure and liquidation of a bank, which
is considered an exercise of police power, be the
subject of judicial inquiry?
A: Yes, the validity of such exercise of police power is
subject to judicial inquiry and could be set aside if it is
either capricious, discriminatory, whimsical, arbitrary,
unjust or a denial or due process and equal
protection clauses of the Constitution (Central Bank
v. CA, G.R. No. L-50031-32, July 27, 1981).
Q: Upon maturity of the time deposit, the bank
failed to remit. By reason of punitive action taken by
Central Bank, the bank has been prevented from
performing banking operations. Is the bank still
obligated to pay the time deposits despite the fact
that its operations were suspended by the Central
Bank?
A: Yes, the suspension of operations of a bank cannot
excuse non-compliance with the obligation to remit
the time deposits of depositors which matured before
the banks closure. (Overseas Bank of Manila v. CA,
G.R. No. 45886, Apr. 19, 1989)
RECEIVERSHIP
Q: Who is a receiver?
A: One appointed if the bank is already insolvent
which means that its liabilities are greater than its
assets.
Note: For banks, it would be the Philippine Deposit
Insurance Corporation; for quasi-banks, it could be any
person of recognized competence in banking or finance.
(Sec. 30, NCBA)
Q: What are the duties of a receiver?
A:
1. The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution.
260
 BANKING LAWS
2. Administer the same for the benefit of the
creditors, and exercise the general powers of a
receiver under the Revised Rules of Court
3. 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.
4. Within 90 days from the take-over, the receiver
shall determine whether the institution may be
rehabilitated or otherwise placed in such a
condition that it may be permitted to resume
business with safety to its depositors and creditors
and the general public
5. If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business, then the Monetary Board shall notify in
writing the board of directors of the institution of
its findings and direct the receiver to proceed with
liquidation of the institution. (Sec 30, NCBA).
Q: Is the receiver authorized to transact business in
connection with the banks assets and property?
A: No, the receiver only has authority to administer
the same for the benefit of its creditors. (Abacus Real
Estate Development Center, Inc. v. Manila Banking
Corp, G.R. No. 162270, Apr. 6, 2005)
Q: Should the issue of whether or not the Monetary
Boards resolution is arbitrary be only raised in a
separate action?
A: No. While resolutions of the Monetary Board
forbidding a bank to do business on account of a
condition of insolvency and appointing a receiver to
take charge of the banks assets or determining
whether the bank may be rehabilitated or should be
liquidated are by law final and executory. However,
they can be set aside by the court on one specific
ground - if the action is plainly arbitrary and made in
bad faith. Such contention can be asserted as an
affirmative defense or a counterclaim in the
proceeding for assistance in liquidation. (Salud v.
Central Bank, G.R. No. L-17630, Aug. 19, 1986)
LIQUIDATION
Q: What is liquidation of a bank?
A: Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the s
261
to creditors and other parties for the purpose of
paying debts of such institution. (Banco Filipino v.
Central Bank, G.R. No. 70054, Dec. 11, 1991)
Q: Can the liquidator of a distressed bank prosecute
and defend suits against the bank?
A: Yes. Prosecution of suits collection and the
foreclosure of mortgages against debtors the bank by
the liquidator and are among the usual and ordinary
transactions pertaining to the administration of a
bank. (Banco Filipino v. Central Bank, G.R. No. 70054,
Dec. 11, 1991)
Q: Can a liquidator foreclose mortgages due to a
bank while the issue of receivership is pending?
A: Yes. A liquidator can foreclose mortgages for and
in behalf of the bank even if the issue on receivership
and liquidation is still pending. (Supra)
Q: An intra-corporate case was filed before RTC. On
the other hand, another complaint was filed before
BSP to compel a bank to disclose its stockholdings
invoking the supervisory power of the latter. Is there
a forum shopping?
A: None. The two proceedings are of different nature
praying for different relief. The complaint filed with
the BSPwas an invocation of its supervisory powers
over banking operations which does not amount to a
judicial proceeding. (Suan v. Monetary Board, A.C.
No. 6377, Mar. 12, 2007)
Q: Where will the claims against the insolvent bank
be filed?
A: All claims against the insolvent bank should be
filed in the liquidation proceeding. It is not necessary
that a claim be initially disputed in a court or agency
before it is filed with the liquidation court. (Ong v. CA,
G.R. No. 112830, Feb. 1, 1996).
XPN:Where it is the bank that files a claim against
another person or legal entity, the claim should be
filed in the regular courts.
Reason: The judicial liquidation is intended to provide an
orderly mode for payment of all claims.
Q: What is the rule of promissory estoppel?
A: The BSP may not thereafter renege on its
representation and liquidate the bank after majority
stockholders of the bank complied with the
conditions and parted with value to the profit of CB,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

which thus acquired additional security for its own
advances, to the detriment of the banks
stockholders, depositors and other creditors. (Ramos
v. Central Bank of the Philippines, G.R. No. L-29352,
Oct. 4, 1971)
Q: Can a final and executory judgment against an
insolvent bank be stayed?
A: Yes, after the Monetary Bank has declared that a
bank is insolvent and has ordered it to cease
operations, the assets of the insolvent bank are held
in trust for the equal benefit of all creditors. One
cannot obtain an advantage or preference over
another by attachment, execution or otherwise. The
final judgment against the bank should be stayed as
to execute the judgment would unduly deplete the
assets of the banks to the obvious prejudice of other
depositors and creditors. (Lipana v. Development
Bank of Rizal, G.R. No. L-73884, Sept. 24, 1987)

Q: Distinguish conservatoship, receivership and liquidation

A:
CONSERVATORSHIP RECEIVERSHIP LIQUIDATION
Grounds

1.Continuing inability 1. Inability to pay liabilities as they fall 1. Insolvency

2.Unwilling-ness to due e.g: bank run, rumors, etc. 2. Bank cannot be rehabilitated
maintain condition of 2. Assets are less than its liabilities
liquidity 3. Cannot continue business
without causing damage;
4. Violation of a cease and desist order
5. Bank holiday for more than 30
days. (Sec. 30)
Effects:
1.Juridical personality is 1. Juridical personality is retained Same with conservator-ship
retained. 2. Suspension of operation /stoppage
of business
2.Perfected transactions 3. Assets deemed in custodia legis
cannot be repudiated (Domingo v. NLRC, G.R. 156761, Oct
17, 2006)

UNIVERSITY OF SANTO TOMAS 262

2013 GOLDEN NOTES
 BANKING LAWS
HOW BSP HANDLES EXCHANGE CRISIS
Q: What is Legal Tender?
A: All notes and coins issued by the Bangko Sentral
are fully guaranteed by the Republic and shall be legal
tender in the Philippines for all debts, both public and
private (Sec. 52)
Q: What is the legal tender power of coins?
A:
1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not
exceeding P1,000.00
2. 25 centavo coin or less: In amounts not exceeding
P100.00 (Circular No. 537, 2006)
Q: What are the rules on BSPs Authority to replace
legal tender?
A:
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, NCBA)
Note: Checks representing demand deposits do not have
legal tender power and their acceptance in the payment
of debts, both public and private, is at the option of the
creditor. However, a check which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account
(Sec. 60, NCBA).
Q: What is the period of replacement?
A:
1. Notes for any series or denomination More than
5 years old
2. Coins More than 10 years old
Q: How is the Power to determine Rates of Exchange
exercised?
A:
1. The Monetary Board shall determine the rates at
which the Bangko Sentral shall buy and sell spot
263
exchange, and shall establish deviation limits
from the effective exchange rate or rates as it
may deem proper.
2. The Monetary Board shall similarly determine
the rates for other types of foreign exchange
transactions by the Bangko Sentral, including
purchases and sales of foreign notes and coins,
but the margins between the effective exchange
rates and the rates thus established may not
exceed the corresponding margins for spot
exchange transactions by more than the
additional costs or expenses involved in each
type of transactions.(Sec. 74, NCBA)
Q: What are the instances where the Banko Sentral
may exercise its exchange regulating powers?
A:
1. The international reserve of the Bangko Sentral
falls to a level which the Monetary Board
considers inadequate to meet the prospective
demands
2. Whenever the international reserve appears to
be in imminent danger of falling to such a level,
3. Whenever the international reserve is falling as a
result of payments or remittances abroad which,
in the opinion of the Monetary Board are
contrary to the national welfare. (Sec 67, NCBA)
Q: What actions does the Bangko Sentral take when
international stability of Peso is threatened?
A:
1. Take such remedial measures as are appropriate
and within the powers granted to the Monetary
Board, and the Bangko Sentral
2. Submit to the President of the Philippines and the
Congress, and make public a detailed report which
shall include, as a minimum, a description and
analysis of:
a. The nature and causes of the existing or
imminent decline;
b. The remedial measures already taken or to be
taken by the Monetary Board
c. The monetary, fiscal or administrative
measures further proposed
d. The character and extent of the cooperation
required from other government agencies for
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the successful execution of the policies of the
Monetary Board (Sec. 67, NCBA)
Q: What are the emergency restrictions on the
foreign exchange operations?
A:
1. Temporarily suspending and restricting sales of
foreign exchange by the Bangko Sentral;
2. Subjecting all transactions in gold and foreign
exchange to license by the Bangko Sentral;
3. Requiring that any foreign exchange thereafter
obtained by any person residing or entity
operating in the Philippines be delivered to the
Bangko Sentral or to any bank or agent designated
by the Bangko Sentral for said purpose, at the
effective exchange rate or rates (Sec. 72, NCBA)
Q: How does the BSP ensure sufficiency of foreign
exchange resources, convertibility of the peso, or
promotion of domestic investment of bank
resources?
A: The Monetary Board may require the banks to sell
to the Bangko Sentral or to other banks all or part of
their surplus holdings of foreign exchange. (Sec. 76,
NCBA)
Q: X maintains a savings deposit in the amount of
Php1 Million with ABC Bank Corporation. X also has
obtained a loan from ABC Bank Corporation in the
amount of Php1 Million. In case of default, (2012 Bar
Question)
a) ABC Bank can set-off the loan from the savings
account being maintained by X with ABC Bank.
b) Set-off is not possible because legal compensation
is not allowed in banking transaction.
c) Deposit accounts are usually earmarked for
specific purpose hence offsetting is not legally
possible.
d) Off -setting is not possible because the obligation
of X is a "simple loan".
A: A. The relationship between a bank and its
depositor is that of creditor and debtor. For this
reason, a bank has the right to set-off the deposits in
its hands for the payment of a depositors
indebtedness (Equitable PCI Bank vs. Ng Sheung
Ngor, et al., 171545, Dec. 19, 2007).
LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405)
PURPOSE
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
The purpose of RA 1405 is to:
1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may
lend such funds and assist in the economic
development of the country.
PROHIBITED ACTS
The following are the prohibited acts under this law:
1. Examination/inquiry/looking into all deposits of
whatever nature with banks or banking
institutions in the Philippines (including
investment in bonds issued by the government) by
any person, government official or office (Sec. 2,
RA 1405)
2. Disclosure by any official or employee of any
banking institution to any authorized person of
any information concerning said deposit (Sec. 3,
RA 1405)
DEPOSITS COVERED
The following are the deposits covered by RA 1405:
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines; or
2. Investments in bonds issued by the Philippine
government, its branches, and institutions.(Sec. 2,
R.A. 1405)
3. Trust accounts are included in the scope of the
law.
Q: Are trust funds covered by the term deposit?
A: Yes, the money deposited under the trust
agreement (Trust account) is intended not merely
to remain with the bank but to be invested by it
elsewhere. To hold that this type of account is not
protected by R.A. 1405 would encourage private
hoarding of funds that could otherwise be invested
by banks in other ventures, contrary to the policy
behind the law. (Ejercito vs. Sandiganbayan, 509
SCRA 590,G.R. No. 157294-95, Nov. 30, 2006.)
Note: Despite such pronouncement that trust funds are
considered deposits, trust funds remain not covered by
PDIC.
Q: Does the confidentiality granted by RA 1405
extend to L/Cs and TRs?
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 BANKING LAWS
A: No. The confidentiality granted by the law does
NOT extend to other documents and records like
L/Cs, TRs, bank drafts and promissory notes.
(Opinion of the Secretary of Justice No. 5, Series of
1982; Opinion of the Secretary of Justice No. 126,
Series of 1989.)
EXCEPTIONS
Q: What are the instances where examination or
disclosure of information about deposits can be
allowed?
A:
1. Upon written consent of the depositor. (Sec. 2, RA
1405)
2. In cases of impeachment. (ibid.)
3. Upon order of competent court in cases of bribery
or dereliction of duty of public officials. (ibid.)
4. In cases where the money deposited or invested is
the subject matter of the litigation. (ibid.)
5. Upon order of the Commissioner of Internal
Revenue in respect of the bank deposits of a
decedent for the purpose of determining such
decedents gross estate. (Sec. 6[F][1], NIRC)
6. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a taxpayer
who has filed an application for compromise of his
tax liability by reason of financial incapacity to pay
his tax liability. (ibid.)
7. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of a
specific taxpayer upon request for tax information
from a foreign tax authority pursuant to an
international convention or agreement on tax
matters to which the Philippines is a party. (ibid.)
8. In case of dormant accounts/deposits for at least
10 years under the Unclaimed Balances Act. (Sec. 2,
Act No. 3936).
9. The prohibition against examination of bank
deposit does not preclude its garnishment to
satisfy a judgment against the depositor. (Oate
vs. Abrogar, 230 SCRA 181.)
10. Presidential Commission on Good Government
may require the production of bank records
material to its investigation. (Opinion of the
Secretary of Justice, Feb. 27, 1987.)
11. The Anti-Money Laundering Council (AMLC) may
inquire into any deposit with any bank in case of
violation of the RA 9160 or the AMLA if there is
probable cause that it is related to an unlawful
activity. (Sec. 11, RA 9160, as amended by RA
9194, 10167, and 10365.)
12. The PDIC and the BSP may examine deposit
accounts and all information related to them in
265
case of a finding of unsafe or unsound banking
practices. (Sec. 8, RA 3591, as amended.)
13. With court order:
a. In cases of unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt Practices Act (PNB
v. Gancayco, L-18343, Sept. 30, 1965)
b. In cases filed by the Ombudsman and upon the
latters authority to examine and have access
to bank accounts and records (Marquez v.
Desierto, GR 138569, Sept. 11, 2003)
14. Without court order: If the AMLC determines that
a particular deposit or investment with any
banking institution is related to the following: HK-
MADS
a. Hijacking,
b. Kidnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of Human
Security Act.
Q: The Bank Secrecy Law (RA 1405) prohibits
disclosing any information about deposit records of
an individual without court order except --- (2012
Bar Question)
a) in an examination to determine gross estate of a
decedent.
b) in an investigation for violation of Anti-Graft and
Corrupt Practices.
c) in an investigation by the Ombudsman.
d) in an impeachment proceeding
A: C. In order that the Ombudsman may inspect a
bank deposit:
1. there must be a case pending in court,
2. the account must be clearly identified,
3. the inspection must be limited to the subject
matter of the pending case,
4. the inspection may cover only the account
identified, and
5. the bank personnel and the account holder must
be notified to be present during the inspection.
(Marquez vs. Desierto, 359 SCRA 772; Office of the
Ombudsman vs. Ibay, 364 SCRA 281.)
Q: Are foreign currency deposits covered by the RA
1405?
A: No. Foreign currency deposits are covered by R.A.
6426 otherwise known as the Foreign Currency Act.
Q: Can the foreign currency deposits be inquired or
looked into?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A: GR: No. All foreign currency deposits are
absolutely confidential. (Sec. 8, RA 6426.)
XPNs:
1. The depositor has given his written permission
(ibid.)
2. Where the funds deposited in a joint foreign
currency savings account belonged exclusively to
one of the depositors and were held in trust for
him by the other depositor and the other
depositor unilaterally closed the joint account
and transferred the funds to her personal
account, the latter cannot invoke the exemption
from court processes under RA 6426 because she
is not the owner of the deposit in the account.
Consequently, the depositor who owned the
funds can have her enjoined from making
withdrawals from her personal account. (Van
Twest vs. CA, 230 SCRA 42 [1994].)
3. A father who sued his daughter for illegally
withdrawing funds from his foreign currency
deposit and transferring to another bank in the
name of her sister, can inquire into the deposit of
the sister, because the money deposited belongs
to him. (China Banking Corp. vs. CA, 511 SCRA
110.)
4. The exemption from court process of foreign
currency deposits under RA 6426 cannot be
invoked by a foreign transient who raped a
minor, escaped and was held liable for damages
to the victim. The garnishment of his foreign
currency deposit should be allowed to prevent an
injustice and for equitable grounds. The law was
enacted to encourage foreign currency deposit
and not to benefit a wrongdoer. (Salvacion vs.
Central Bank of the Philippines, 278 SCRA 27
[1997].)
5. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the
following:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application
for compromise of his tax liability
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (Sec. 6 [f], NIRC.)
6. AMLC may inquire into any deposit with a
bank or financial institution in case of
violation of RA 9160 if there is probable
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
cause that it is related to an unlawful
activity. (Sec. 11, RA 9160.)
7. Upon ex parte application by a law enforcer
authorized by the Anti-Terrorism Council,
the justices of the CA designated as special
court to handle anti-terrorism cases may
authorize the examination of deposits in a
financial institution upon finding probable
cause of the commission of terrorism or
conspiracy to commit terrorism. (Sec. 27, 28,
RA 9372.)
8. PDIC and BSP may examine deposit accounts
and all information related to them in case
of a finding of unsafe or unsound banking
practices. (Sec. 8, RA 3591, as amended.)
9. AMLC can investigate (a) any property of
funds related to financing terrorism; (b)
property or funds of any person if there is
probable cause to believe he is committing
or attempting or conspiring to commit
terrorism or financing terrorism. (Sec. 10, RA
10168.)
Q: X, a private individual, maintains a dollar deposit
with ABC Bank. X is suspected to be the leader of a
Kidnap for Ransom Gang and he is suspected of
depositing all ransom money in said deposit account
which are all in US Dollars. The police want to open
said account to know if there are really deposits in
big amounts. Which statement is most accurate?
(2012 Bar Question)
a) The same rules under Secrecy of Bank Deposit Act
will apply.
b) An approval from the Monetary Board is
necessary to open the account.
c) Because the deposit is in US Dollars, it is covered
by the Foreign Currency Deposit Act which allows
disclosure only upon the written permission of
the depositor.
d) Approval from the Court is necessary to order
disclosure of the account.(2012 Bar)
A: C. The deposit being in US Dollars, is covered by
the Foreign Currency Deposit Act which allows
disclosure only upon the written permission of the
depositor.
Q: Can a bank be compelled to disclose the records
of the accounts of a depositor under the
investigation for unexplained wealth?
A: Yes, since cases of unexplained wealth are similar
to cases of bribery and dereliction of duty, no reason
is seen why it cannot be excepted from the rule
making bank deposits confidential. In this connection,
266
 BANKING LAWS
inquiry into illegally acquired property in anti-graft
cases extends to cases where such property is
concealed by being held or recorded in the name of
other persons. This is also because the Anti-Graft and
Corrupt Practices Act, bank deposits shall be taken
into consideration in determining whether or not a
public officer has acquired property manifestly out of
proportion with his lawful income (PNB v. Gancayco,
G.R. No. L-18343, Sept. 30, 1965).
Q: In an action filed by the bank to recover the
money transmitted by mistake, can the bank be
allowed to present the accounts which it believed
were responsible for the acquisition of the money?
A: Yes, R.A. 1405 allows the disclosure of bank
deposits in cases where the money deposited is the
subject matter of litigation. In an action filed by the
bank to recover the money transmitted by mistake,
necessarily, an inquiry into the whereabouts of the
amount extends to whatever is concealed by being
held or recorded in the name of the persons other
than the one responsible for the illegal acquisition.
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN
DEPOSITS
Q: Does garnishment of a bank deposit violate the
law?
A: The prohibition against examination or inquiry
does not preclude its being garnished for satisfaction
of judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the
legislature to place bank deposits beyond the reach
of judgment creditor. (PCIB v. CA, G.R. No. 84526, Jan.
28, 1991)
Q: How about foreign currency deposits, can they be
subject to garnishment?
A: GR: Foreign currency deposits shall be exempt
from attachment, garnishment, or any other order or
process of any court, legislative body, government
agency or any administrative body whatsoever. (Sec
8. R.A. 6426)
XPN:The application of Section 8 of R.A. 6426
depends on the extent of its justice. The
garnishment of a foreign currency deposit should
be allowed to prevent injustice and for equitable
grounds, otherwise, it would negate Article 10 of
the New Civil Code which provides that in case of
doubt in the interpretation or application of laws,
it is presumed that the lawmaking body intended
267
right and justice to prevail. (Salvacion vs. Central
Bank of the Philippines, G.R. 94723, August 21,
1997)
Q: Can the foreign currency deposit of a transient
foreigner who illegally detained and raped a minor
Filipina, be garnished to satisfy the award for
damages to the victim?
A: The exemption from garnishment of foreign
currency deposits under R.A. 6426 cannot be invoked
to escape liability for the damages to the victim. The
garnishment of the transient foreigners foreign
currency deposit should be allowed to prevent
injustice and for equitable grounds. The law was
enacted to encourage foreign currency deposit and
not to benefit a wrongdoer. (Salvacion vs. Central
Bank of the Philippines, G.R. 94723, August 21, 1997)
Q: What are the penalties for violation of R.A. 1405?
A:
1. Imprisonment of not more than five (5) years
2. Fine of not more than P20,000.00
3. Both, in the discretion of the court. (Sec. 5, RA
1405.)
GENERAL BANKING LAW OF 2000 (R.A. 8791)
Q: What is the policy of the state behind the General
Banking Act (RA 8791)
A: The State recognizes the vital role of banks in
providing an environment conducive to the sustained
development of the national economy and the
fiduciary nature of banking that requires high
standards of integrity and performance. In
furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
responsive to the demands of a developing economy.
(Sec 2, RA 8791)
DEFINITION AND CLASSIFICATION OF BANKS
Q: What is a Bank?
A: A bank is an entity engaged in the lending of funds
obtained from the public in the form of deposits.
Q: What are the elements for an entity to be
considered doing business as a bank?
A:
1. The entity is engaged in the lending of funds
2. Funds obtained from the public with at least 20
depositors
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

3. Funds are in the form of deposits
Q: What is the extent of ownership of foreign
individuals and non-bank corporations in a bank?
A: Foreign individuals may own or control up to forty
percent (40%) of the voting stock of a domestic bank.
(Sec 2, GBL)
c) Private development banks, which are primarily
governed by the Thrift Banks Act (R.A. 7906).
4. Rural banks these are 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).

Q: What is the extent of non-banking corporations in 5. Cooperative banks banks whose majority shares
a bank? are owned and controlled by cooperatives
primarily to provide financial and credit services to
A: GR: A corporation may only own 40% of the bank cooperatives. It shall include cooperative rural
banks. They are governed primarily by the
XPN: Cooperative Code (RA 6938).
1. A universal bank can own up to 100% of a thrift
bank 6. Islamic banks Banks whose business dealings
2. A corporation whose shares are listed in the and activities are subject to the basic principles
stock exchange can own up to 60% of the bank. and rulings of Islamic Shari a, such as the Al
This privilege can be exercised only once. Amanah Islamic Investment Bank of the
3. If the corporation is in existence for 10 years it Philippines which was created by RA 6848.
can own up to 60% of the bank. This privilege can 7. Other classification of banks as determined by
only exercised once the Monetary Board of the Bangko Sentral ng
4. Under Foreign Bank Liberalization Law (RA 7721), Pilipinas.
the Monetary Board may authorize foreign banks
to operate in the Philippines Q: Distinguish between universal banks, commercial
banks and thrift banks.
Q: Can foreign individuals own of banks?
A:
A: The percentage of foreign-owned voting stocks in a UNIVERSAL COMMERCIAL THRIFT BANKS
bank shall be determined by the citizenship of the BANKS BANKS
individual stockholders in that bank. The citizenship Governing laws
of the corporation which is a stockholder in a bank General Banking GBL Thrift Banks
shall follow the citizenship of the controlling Law (GBL) Act (R.A. 7906)
stockholders of the corporation, irrespective of the Powers
place of incorporation.(Sec 2) 1. Has the To engage in All the powers
authority to allied of a
exercise the undertakings commercial
powers of a and, in addition bank, except:
Q: What are the different classifications of banks? commercial to the general
bank. powers incident 1. To issue
A: to a imported LC
1. Universal banks- Primarily governed by the 2. To act as an corporation,
General Banking Law (GBL). They can exercise the investment house may exercise all 2. To accept or
powers of an investment house and invest in non- a corporation such powers as open
allied enterprises and have the highest that sells and may be checking
capitalization requirement. guarantees sale necessary to account
of securities and carry on the except with
2. Commercial banks- Ordinary banks governed by shares of stocks. business of prior
the GBL which have a lower capitalization i.e. Petron will commercial approval by
requirement than universal banks and can neither tap an banking. the
exercise the powers of an investment house nor investment Monetary
invest in non-allied enterprises. house in order to Note: Allied Board (MB
sell its stocks. undertakings are requires at
3. Thrift banks These are a) Savings and mortgage those activities or least a net
banks; b) Stock savings and loan associations; and entities which
3. To engage in a asset worth

UNIVERSITY OF SANTO TOMAS 268

2013 GOLDEN NOTES
 BANKING LAWS

non-allied enhance or of 28M) behoof of others (Sec. 79). A bank does not act as a
undertaking complement trustee.
which is not banking.
related at all to Q: What are financial intermediaries?
banking. e.g.
Realty A: Persons or entities whose principal functions
Capitalization include the lending, investing, or placement of funds
4.95 Billion 2.4 Billion 1. Metro on pieces of evidence of indebtedness or equity
Manila 1 deposited with them, acquired by them or otherwise
Billion coursed through them, either for their own account
2. Cebu and or for the account of others.
Davao
500 Million Q: What are deposit substitutes?
3. Elsewhere
250 Million A: It is an alternative form of obtaining funds from
(BSP Circular the public, other than deposits, through the issuance,
No. 0715, Apr endorsement, or acceptance of debt instruments, for
2011) the borrower's own account, for the purpose of
Equity investment relending or purchasing of receivables and other
Can be a stock Only allied Only allied obligations. These instruments may include, but need
holder in both undertaking undertaking not be limited to, bankers acceptances, promissory
allied and non- notes, participations, certificates of assignment and
allied similar instruments with recourse, and repurchase
undertaking agreements.
Non-allied transactions
Can invest Cannot invest Cannot invest Q: XYZ Corporation is engaged in lending funds to
butshall not small vendors in various public markets. To fund the
exceed 25% of lending, XYZ Corporation raised funds
the investee throughborrowings from friends and investors.
(receiving) Which statement is most accurate? (2012 Bar
corporation. Question)
Total amount of investment equity
Not to exceed Not to exceed Not to exceed a) XYZ Corporation is a bank.
50% of the 35% of banks 35% of banks b) XYZ Corporation is a quasi-bank.
banks net worth. net worth. net worth. c) XYZ Corporation is an Investment Company.
Single equity investment d) XYZ is none of the above.
Not to exceed 25% of banks net worth
A: B. XYZ Corporation is a quasi bank

DISTINCTION OF BANKS FROM QUASI-BANKS AND

BANK POWERS AND LIABILITIES
TRUST ENTITIES

Q: What is a quasi-bank? CORPORATE POWERS

A: These are entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit
substitutes for purposes of re-lending or purchasing
of receivables and other obligations (Sec 4). Unlike
banks, quasi-banks do not accept deposits.
3. BANK POWERS AND LIABILITIES
Q: What are the corporate powers of a bank?
A: All powers provided by the corporation code, like
issuance of stocks and entering into merger or
consolidation with other corporation or banks.

Q: What are trust entities?

A: These are entities engaged in trust business that

act as a trustee or administer any trust or hold
property in trust or on deposit for the use, benefit, or

269 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
BANKING AND INCIDENTAL POWERS
Q: What are the general powers and functions of a
bank?
A:
1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes,
drafts, bills of exchange and other instrument
evidencing debt
3. Accepting or creating demand deposits, receiving
other types of deposit and deposit substitutes
4. Buying and selling FOREX and gold or silver
bullion
5. Acquiring marketable bonds and other debt
securities
6. Extending credit
7. Determination of bonds and other debt securities
eligible for investment including maturities and
aggregate amount of such investment, subject to
such rules as the Monetary Board may
promulgate.
8. And all other powers as may be necessary to
carry on the business of a bank.(Sec. 29, GBL)
Q: How many independent directors are required in
banks?
A: 2 (Sec. 16, GBL)
Q: What are the rules regarding the issuance of
stocks by a bank?
A:
1. The Monetary Board may prescribe rules and
regulations on the types of stock a bank may
issue.
2. Banks shall issue par value stocks only .(Sec. 9,
GBL)
3. GR: No bank shall purchase or acquire shares of its
own capital stock or accept its own shares as a
security for a loan
XPN: when authorized by the Monetary Board
Note: That in every case the stock so purchased or
acquired shall, within six months from the time of its
purchase or acquisition, be sold or disposed of at a
public or private sale. (Sec 10, GBL)
4. Foreign individuals and non-bank corporations
may own or control up to 40% of the voting stock
of a domestic bank. This rule shall apply to
Filipinos and domestic non-bank corporations.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Note: The percentage of foreign-owned voting stocks in
a bank shall be determined by the citizenship of the
individual stockholders in that bank. The citizenship of
the corporation which is a stockholder in a bank shall
follow the citizenship of the controlling stockholders of
the corporation, irrespective of the place of
incorporation. (Sec 11, GBL)
5. Stockholdings of individuals related to each other
within the fourth degree of consanguinity or
affinity, legitimate or common-law, shall be
considered family groups or related interests and
must be fully disclosed in all transactions by such
corporations or related groups of persons with the
bank. (Sec 12, GBL)
6. Two or more corporations owned or controlled by
the same family group or same group of persons
(Corporate Stockholdings)shall be considered
related interests and must be fully disclosed in all
transactions by such corporations or related group
of persons with the bank. (Sec 13, GBL)
Q: What is the effect of merger or consolidation of
banks to the number of directors allowed?
A: The number of directors may be more than 15 but
should not exceed 21 (Sec. 17, GBL.).
Q: XXX Bank Corporation and ZZZ Corporation were
merged into XX ZZ Bank Corporation. So as not to
create any unnecessary conflict, all the former
directors of both banks wanted to be appointed
/elected as members of the Board of Directors of the
merged bank. Each bank used to have eleven (11)
members of the board. The maximum number of
directors of the merged bank is --- (2012 Bar
Question)
a) 15;
b) 22;
c) 21;
d) 11.
A: C. In case of a merged bank, the maximum number
of directors is 21.
Q: When may the Monetary Board limit the grant of
compensation to the directors?
A: Only in exceptional cases and when the
circumstances warrant, such as but not limited to the
following:
1. When a bank is under comptrollership or
conservatorship
270
 BANKING LAWS
2. When a bank is found by the Monetary Board to
be conducting business in an unsafe or unsound
manner
3. When a bank is found by the Monetary Board to
be in an unsatisfactory financial condition (Sec. 18,
GBL)
Q: What is required before a bank may register or
amend their articles of incorporation with SEC?
A: Certificate of Authority to Register issued by the
Monetary Board. (sec. 14, GBL)
Q: What should be proven by banks to satisfy the
Monetary Board and grant that certificate?
A:
1. All requirements of existing laws and regulations
to engage in the business for which the applicant
is proposed to be incorporated have been
complied with
2. That the public interest and economic conditions,
both general and local, justify the authorization
3. The amount of capital, the financing, organization,
direction and administration, as well as the
integrity and responsibility of the organizers and
administrators reasonably assure the safety of
deposits and the public interest. (ibid.)
Q: When are the banks prohibited from declaring
dividends?
A: When:
1. Its clearing account with the Bangko Sentral is
overdrawn; or
2. It is deficient in the required liquidity floor for
government deposits for five or more consecutive
days, or
3. It does not comply with the liquidity
standards/ratios prescribed by the Bangko Sentral
for purposes of determining funds available for
dividend declaration; or
4. It has committed a major violation as may be
determined by the Bangko Sentral (Sec. 57, GBL)
Q: What are the additional powers given to a
universal bank aside from those mentioned in
section 29?
A:
1. Act as investment house
2. Ability invest in non-allied enterprises. (Sec 24,
GBL)
271
DILIGENCE REQUIRED BY BANKS
Q: What is the degree of diligence required of banks
in handling deposits?
A: Banks are expected to exercise extraordinary
diligence in its dealings with depositors.
Consequently, the diligence required of banks is more
than that of a Roman pater familias or a good father
of a family. (PCI Bank v Balcameda G.R. No. 158143,
September 21, 2011)
Q: Should the bank exercise the same degree of
diligence with its other dealings?
A: No, diligence more than that of a Roman pater
familias only applies only to cases where banks act
under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. The same degree of
diligence is not expected to be exerted by banks in
commercial transactions. (Reyes v CA G.R. No.
118492. August 15, 2001)
Q: What is the effect when the teller gave the
passbook to a wrong person?
A: Banks must exercise a high degree of diligence in
insuring that they return the passbook only to the
depositor of his authorized representative. For failing
to return the passbook to authorized representative
of the depositor, the bank presumptively failed to
observe such high degree of diligence in safeguarding
the passbook and insuring its return to the party
authorized to receive the same.
However, a banks liability may be mitigated by the
depositors contributory negligence such as allowing
a withdrawal slip signed by authorized signatories to
fall into the hands of an impostor. (Consolidated Bank
and Trust Corporation vs. CA, GR No, 138569,
September 11, 2003).
Q: Is the bank liable when an employee encashed a
check without the required indorsement?
A: Yes. The fiduciary nature of the relationship
between the bank and the depositors must always be
of paramount concern (Philippine Savings Bank vs.
Chowking, G.R. No. 177526, July 04, 2008).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NATURE OF BANK FUNDS AND BANK DEPOSITS
Q: What is the deposit function of banks?
A: The function of the bank to receive a thing,
primarily money, from depositors with the obligation
of safely keeping it and returning the same.
Q: What are the kinds of deposits between a bank
and its depositors?
A:
1. As debtor-creditor:
2. Special Kinds of Deposits
a. Demand deposits all those liabilities of banks
which are denominated in the Philippine
currency and are subject to payment in legal
tender upon demand by representation of
checks.
b. Savings deposits the most common type of
deposit and is usually evidenced by a
passbook.
Note: The requirement of presentation of passbooks is
required by the Manual of Regulations for Banks. A
bank is negligent if it allows the withdrawal without
requiring the presentation of passbook (BPI v. CA, GR
No. 112392, Feb. 29, 2000).
c. Negotiable order of withdrawal account
(NOWA) Interest-bearing deposit accounts
that combine the payable on demand feature
of checks and investment feature of saving
accounts.
d. Time deposit an account with fixed term;
payment of which cannot be legally required
within such a specified number of days.
3. As trustee-trustor:
a. Trust account a savings account, established
under a trust agreement containing funds
administered by the bank for the benefit of the
trustor or another person or persons.
4. As agent-principal:
a. Deposit of checks for collection
b. Deposit for specific purpose
c. Deposit for safekeeping
Q: What are the types of deposit accounts?
A:
1. Savings
2. Current
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
3. Time
Note: Deposit accounts may also be classified as:
1. Individual; or
2. Joint:
a. And account 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.
Joint accounts may be subject of a survivorship agreement
whereby the co-depositors agree to permit either of them
to withdraw the whole deposit during their lifetime and
transferring the balance to the survivor upon the death of
one of them. (Vitug v. CA, G.R. No. 82027, March 29, 1990)
Q: Is an anonymous account prohibited?
A: GR: Anonymous accounts or those under fictitious
names are prohibited. (R.A. 9160 as amended by by
R.A. 9194; BSP Circular No. 251, July 21, 2000)
XPN: In case where numbered accounts is allowed
such as in foreign currency deposits. However,
banks/non-bank financial institutions should
ensure that the client is identified in an official or
other identifying documents. (Sec. 8, R.A. 6426 as
amended, FCDA)
Q: What is the nature of a bank deposit?
A: All kinds of bank deposits are loan. The bank can
make use as its own the money deposited. Said
amount is not being held in trust for the depositor
nor is it being kept for safekeeping. (Tang Tiong Tick
v. American Apothecaries, G.R. No. 43682, Mar. 31,
1938)
Q: In the enforcement of obligations concerning
deposit, will the remedy of mandamus lie?
A: No, because all kinds of deposit are loans. Thus,
the relationship being contractual in nature,
mandamus cannot be availed of because mandamus
will not lie to enforce the performance of contractual
obligations. (Lucman v. Alimatar Malawi, G.R. No.
159794, Dec. 19, 2006)
Q: Does the fiduciary nature of the bank-depositor
relationship convert the contract between banks
and depositors to a trust agreement?
A: No, thus, failure by the bank to pay the depositor is
failure to pay simple loan, and not a breach of trust.
(Consolidated Bank and Trust Corp. v. CA, G.R. No.
138569, Sept. 11, 2003)
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 BANKING LAWS
Q: Is a safety deposit box a form of deposit or lease?
A: The contract for the use of a safety deposit box
should be governed by the law on lease.
Under the old banking law, a safety deposit box is a
special deposit. However, the new General Banking
Law, while retaining the renting of safe deposit box as
one of the services that the bank may render, deleted
reference to depository function (Divina, Handbook
on Philippine Commercial Law)
Q: After procuring a checking account, the depositor
issued several checks. He was surprised to learn
later that they had been dishonored for insufficient
funds. Investigation disclosed that deposits made by
the depositor were not credited to its account. Is the
bank liable for damages?
A: Yes, the depositor expects the bank to treat his
account with utmost fidelity, whether such account
consist only of a few hundred pesos or of millions.
The bank must record every single transaction
accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to
reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that
the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as
the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not
also financial loss and perhaps even civil and criminal
litigation (Simex Intl. v. CA, G.R. No. 88013, Mar. 19,
1990).
STIPULATION ON INTERESTS
Q: What are the rules on stipulation of interests?
A:
1. Central Bank Circular 416 12% per annum in
cases of:
a. Loans
b. Forbearance of money, goods and credits
c. Judgement involving such loan or forbearance,
in the absence of express agreement as to such
rate of interest
2. Interest accruing from unpaid interest interest
due shall earn interest from the time it is judicially
demanded although the obligation may be silent
upon this point.
Q: If the bank was forbidden by Central Bank to do
business, does it still have the obligation to pay
interest on deposit?
273
A: No, because a bank lends money, engages in
international transactions, acquires foreclosed
mortgaged properties or their proceeds and generally
engages in other banking and financing activities in
order that it can derive income therefrom. Therefore,
unless a bank can engage in those activities from
which it can derive income, it is inconceivable how it
can carry on as a depository obligated to pay interest
on money deposited with it.(Fidelity & Savings and
Mortgage Bank v. Cenzon, G.R. No. L-46208, Apr. 5,
1990)
GRANT OF LOANS AND SECURITY REQUIREMENTS
RATIO OF NET WORTH TO TOTAL RISK ASSETS
Q: What is net worth?
A: The total of the unimpaired paid-in surplus,
retained earnings and undivided profit, net of
valuation reserves and other adjustments as may be
required by the BSP. (Sec. 24.2)
Q: What is risked based capital?
A: 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.
Note: The Monetary Board may require or suspend
compliance with such ratio whenever necessary for a
maximum period of one year and that such ratio shall be
applied uniformly to banks of the same category (Sec. 34).
Q: What is the effect of non-compliance with the
ratio?
A:
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. GR: Acquisition of major assets and making of new
investments may be restricted.
XPN: Purchases of evidence of indebtedness
guaranteed by the Government can be exempted
from restrictions (Sec. 34).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
SINGLE BORROWERS LIMIT
Q: What are the limitations imposed upon banks
with respect to its loan function?
A:
1. GR: Single borrowers limit The total amount of
loans, credit accommodations and guarantees
that the bank could grant should at no time
exceed 25% of the banks net worth. (Sec 35.1,
GBL)
XPN:
a. As the Monetary Board may otherwise
prescribe for reasons of national interest
b. Deposits of rural banks with government-
owned or controlled financial institutions
like LBP, DBP, and PNB.
2. The total amount of loans, credit
accommodations and guarantees prescribed in
(a) may be increased by an additional 10% of the
net worth of such bank provided that additional
liabilities are adequately secured by trust receipt,
shipping documents, warehouse receipts and
other similar documents which must be fully
covered by an insurance. (Sec. 35.2, GBL)
3. Loans and other credit accommodations secured
by REM shall not exceed 75% of the appraised
value of the real estate security plus 60% of the
appraised value of the insured improvements
(Sec. 37, GBL)
CM/intangible property such as patents,
trademarks, etc. shall not exceed 75% of the
appraised value of the security (Sec. 38, GBL)
4. Loans being contractual, the period of payment
may be subject to stipulation by the parties. In
the case of amortization, the amortization
schedule has no fixed period as it depends on the
project to be financed such that if it was capable
of raising revenues, it should be at least once a
year with a grace period of 3 years if the project
to be financed is not that profitable which could
be deferred up to 5 years if the project was not
capable of raising revenues. (Sec. 44, GBL)
5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership
over the bank
d. Related Interests, such as DOSs spouses,
their relatives within the first degree
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
whether by consanguinity or affinity,
partnership whereby DOS is a partner or a
corporation where DOS owns at least 20%.
Q: What are excluded from such loan limitations?
A: Non-risk loans, such as:
1. Loans secured by obligations of the Bangko
Sentral ng Pilipinas or the Philippine Government
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits
maintained in the lending bank and held in the
Philippines
4. Loans, credit accommodations and acceptances
under letters of credit to the extent covered by
margin deposits
5. Other loans or credit accommodations which the
MB may specify as non-risk items.
Q: What is joint and solidary signature (JSS)
practice?
A: It is a common banking practice requiring as an
additional security for a loan granted to a corporation
the joint and solidary signature of a major
stockholder or corporate officer of the borrowing
corporation. (Security Bank v. Cuenca, G.R. No.
138544, Oct. 3, 2000)
RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR
RELATED INTERESTS)
Q: In case of DOSRI accounts, what are the
requirements that must be complied with?
A:
1. Procedural requirement - Loan must be approved
by the majority of all the directors not including
the director concerned. CB approval is not
necessary; however, there is a need to inform
them prior to the transaction. Loan must be
entered in the books of the corporation. (Sec. 36)
2. Substantive requirement - Loan must not exceed
the paid in contribution and unencumbered
deposits. (Not to exceed 15% of the portfolio or
100% of the net worth, whichever is lower.) (Sec.
36 [4])
Q: What is the effect of non-compliance with the
foregoing requirements?
A: Violation of DOSRI is a crime and carries with it
penal sanction.
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 BANKING LAWS

Q: What are the transactions covered by the DOSRI

regulation?

A: The transactions covered are loan and credit

accommodation. Not being a loan, the ceiling will not
apply to lease and sale. However, it should still
comply with the procedural requirement.

Q: What is the arms-length rule?

A: It provides that any dealings of a bank with any of

its DOSRI shall be upon terms not less favorable to
the bank than those offered to others. [Sec. 36 (2)]

Q: Can the bank terminate the loan and demand

immediate payment if the borrower used the funds
for purposes other than that agreed upon?

A: If the bank finds that the borrower has not

employed the funds borrowed for the purpose
agreed upon between the bank and the borrower,
the bank may terminate the loan and demand
immediate payment. (Banco de Oro v. Bayuga, G.R.
No. L-49568, Oct. 17, 1979)

275 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
INTELLECTUAL PROPERTY LAWS
INTELLECTUAL PROPERTY RIGHTS IN GENERAL
INTELLECTUAL PROPERTY RIGHTS
Q: What are covered by intellectual property rights?
A:CTG- IPLP
1. Copyright and Related Rights
2. Trademarks and Service Marks
3. Geographic indications
4. Industrial designs
5. Patents
6. Layout designs (Topographies) of Integrated
Circuits
7. Protection of Undisclosed Information. (TRIPS)
DIFFERENCES BETWEEN COPYRIGHTS TRADEMARKS
AND PATENT
Q: What are the distinctions among trademark,
patent and copyright?
A:
INTELLECTUAL
DEFINITION
PROPERTIES
Any visible sign capable
of distinguishing the
goods (trademark) or
services (service mark) of
Trademark
an enterprise and shall
include a stamped or
marked container of
goods.
The name or designation
identifying or
Tradename
distinguishing an
enterprise.
Literary and artistic
works which are original
intellectual creations in
Copyright the literary and artistic
domain protected from
the moment of their
creation.
Any technical solution of
a problem in any field of
human activity which is
Patentable Inventions
new, involves an
inventive step and is
industrially applicable.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
(Kho v. CA, G.R. No. 115758, Mar. 19, 2002.)
TECHNOLOGY TRANSFER ARRANGEMENTS
Q: What is a technology transfer arrangement?
A: Contracts or arrangements involving the transfer
of systematic knowledge for the manufacture of a
product, the application of the process, or rendering
a service including management contracts; and the
transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
computer software except computer software
developed for mass market. (Sec. 4.2, IPC)
Q: What is undisclosed information?
A: It is an information which:
1. Is a secret in the sense that it is not, as a body or
in precise configuration and assembly of
components, generally known among, or readily
accessible to persons within the circles that
normally deal with the kind of information in
question.
2. Has commercial value because it is a secret
3. Has been subjected to reasonable steps under the
circumstances, by the person lawfully in control of
the information, to keep it a secret. (Article 39,
TRIPS Agreement)
Q: What is the nature of undisclosed
information/trade secret?
A: Those trade secrets are of a privileged nature. The
protection of industrial property encourages
investments in new ideas and inventions and
stimulates creative efforts for the satisfaction of
human needs. It speeds up transfer of technology
and industrialization, and thereby bring about social
and economic progress.
Verily, the protection of industrial secrets is
inextricably linked to the advancement of our
economy and fosters healthy competition in trade.
(Air Philippines Corporation v. Pennswell, Inc., G.R.
No. 172835, Dec. 13, 2007.)
PATENTS
Q: What is a patent?
A: A set of exclusive rights conferred by the State to
an inventor or his legal successor, for a limited period
276
 INTELLECTUAL PROPERTY LAWS

of time to exclude others from making, using, selling
or importing the invention within the territory of the
country that grants the patent, in exchange for the
disclosure of the invention to the public.
PATENTABLE INVENTIONS
Q: What are the patentable inventions?
A: Any technical solution of a problem in any field of
human activity which is new, involves an inventive
step and is industrially applicable. It may be, or may
relate to, a product, or process, or an improvement of
any of the foregoing. (Sec. 21, IPC.)
2. The whole contents of a published application,
filed or effective in the Philippines, with a filing or
priority date that is earlier than the filing or
priority date of the application. Provided, that the
application which has validly claimed the filing
date of an earlier application under Section 31 of
the IPC, there shall be a prior art with effect as of
the filing date of such earlier application: Provided
further, that the applicant or the inventor
identified in both applications are not one and the
same. (Sec. 24, IPC)
Q: What are the items that can be covered by a
patent?

Q: Distinguish product patent from process patent A:

A:
PRODUCT PATENT PROCESS PATENT
The right to make, use, The right to restrain,
sell and import the prevent or prohibit any
product. 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. (Sec. 71, IPC)
1. Invention creation of an object which does not
exist in nature; it requires novelty, inventive step
and industrial application for patentability
2. Utility Model - any technical solution of a problem
in any field of human activity which is new and
industrially applicable. It may be, or may relate to,
a product, or process, or an improvement of any of
the aforesaid. It is sometimes referred to as a
device or useful object.
3. Industrial Design the utility value or
ornamental/aesthetic aspect of a useful article.
(Vicente Amador, Intellectual Property
Fundamentals, 2007.)

Q: What are the conditions for patentability?
A: NIA
1. Novelty An invention shall not be considered
new if it forms part of a prior art. (Sec. 23, IPC)
2. Inventive step if, having regard to prior art, it is
not obvious to a person skilled in the art at the
time of the filing date or priority date of the
application claiming the invention.
3. Industrially Applicable An invention that can be
produced and used in any industry (Sec. 27, IPC).
Q: What is prior art?
A:
1. Everything which has been made available to the
public anywhere in the world, before the filing
date or the priority date of the application
claiming the invention
Q: What is meant by made available to the public
and what are its effects?
A:
GR: When a work has already been made available to
the public, it shall be non-patentable for absence of
novelty.
XPN: Non-prejudicial disclosure the disclosure of
information contained in the application during the
12-month period before the filing date or the priority
date of the application if such disclosure was made
by:
1. The inventor;
2. A patent office and the information was
contained:
a. In another application filed by the inventor and
should have not have been disclosed by the
office, or
b. In an application filed without the knowledge or
consent of the inventor by a third party which

277 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
obtained the information directly or indirectly
from the inventor;
3. A third party which obtained the information
directly or indirectly from the inventor. (Sec. 25,
IPC)
Q: Who has the burden of proving want of novelty
of an invention?
A: The burden of proving want of novelty is on him
who avers it and the burden is a heavy one which is
met only by clear and satisfactory proof which
overcomes every reasonable doubt. (Manzano v. CA,
G.R. No. 113388. Sept. 5, 1997)
Q: X invented a device which, through the use of
noise, can recharge a cellphone battery. He applied
for and was granted a patent on his device, effective
within the Philippines. As it turns out, a year before
the grant of X's patent, Y, also an inventor, invented
a similar device which he used in his cellphone
business in Manila. But X files an injunctive suit
against Y to stop him from using the device on the
ground of patent infringement. Will the suit
prosper? (2011 Bar Question)
A: No, since Y is a prior user in good faith.
Q: What is inventive step?
A: GR: An invention involves an inventive step if,
having regard to prior art, it is not obvious to a
person skilled in the art at the time of the filing date
or priority date of the application claiming the
invention. (Sec. 26, IPC)
XPN: In the case of drugs and medicines, there is
no inventive step if the invention results from the
mere discovery of a new form or new property of a
known substance which does not result in the
enhancement of the known efficacy of that
substance. (Sec. 26.2, as amended by R.A. 9502)
Q: What is the test of non-obviousness?
A: If any person possessing ordinary skill in the art
was able to draw the inferences and he constructs
that the supposed inventor drew from prior art, then
the latter did not really invent.
Q: Who is considered a person of ordinary skill?
A: A person who is presumed to:
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
1. Be an ordinary practitioner aware of what was
common general knowledge in the art at the
relevant date.
2. Have knowledge of all references that are
sufficiently related to one another and to the
pertinent art and to have knowledge of all arts
reasonably pertinent to the particular problems
with which the inventor was involved.
3. Have had at his disposal the normal means and
capacity for routine work and experimentation.
(Rules and Regulations on Inventions, Rule 207)
Q: What are other forms of patentable inventions?
A:
1. Industrial design Any composition of lines or
colors or any three-dimensional form, whether or
not associated with lines or colors. Provided that
such composition or form gives a special
appearance to and can serve as pattern for an
industrial product or handicraft.(Sec. 112, IPC)
Note: Generally speaking, an industrial design is the
ornamental or aesthetic aspect of a useful article.
(Vicente Amador, Intellectual Property Fundamentals,
2007)
2. Integrated circuit A product, in its final form, or
an intermediate form, in which the elements, at
least one of which is an active elements and some
of all of the interconnections are integrally formed
in and or on a piece of material, and in which is
intended to perform an electronic function.
3. Layout design/topography The three dimensional
disposition, however expressed, of the elements, at
least one of which is an active element, and of
some or all of the interconnections of an integrated
circuit, or such a three-dimensional disposition
prepared for an integrated circuit intended for
manufacture. Registration is valid for 10 years
without renewal counted from date of
commencement of protection.
4. Utility model A name given to inventions in the
mechanical field
Q: When does an invention qualify as a utility
model?
A: If it is new and industrially applicable. A model of
implement or tools of any industrial product even if
not possessed of the quality of invention but which is
of practical utility. (Sec. 109.1, IPC)
278
 INTELLECTUAL PROPERTY LAWS
Q: What is the term of a utility model?
A: 7 years from date of filing of the application (Sec.
109.3, IPC).
NON-PATENTABLE INVENTIONS
Q: What are not patentable inventions?
A: PAD-SCAD
1. Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals. This provision shall not apply to micro-
organisms and non-biological and microbiological
processes
2. Aesthetic creations
3. Discoveries, scientific theories and mathematical
methods
4. Schemes, rules and methods of performing
mental acts, playing games or doing business,
and programs for computers
5. Anything which is Contrary to public order or
morality. (Sec. 22, IPC as amended by R.A. 9502)
6. Methods for treatment of the human or Animal
body
7. In the case of Drugs and medicines, mere
discovery of a new form or new property of a
known substance which does not result in the
enhancement of the efficacy of that substance
Q: Are computer programs patentable?
A:
GR: Computer programs are not patentable but
are copyrightable.
XPN: They can be patentable if they are part of a
process (e.g. business process with a step
involving the use of a computer program).
Q: Supposing Albert Einstein were alive today and
he filed with the Intellectual Property Office (IPO) an
application for patent for his theory of relativity
expressed in the formula E=mc2. The IPO
disapproved Einstein's application on the ground
that his theory of relativity is not patentable. Is the
IPO's action correct? (2006 Bar Question)
A: Yes, the IPO is correct because under the
Intellectual Property Code, discoveries, scientific
279
theories and mathematical methods, are classified to
be as "nonpatentable inventions." Eintein's theory
of relativity falls within the category of being a non-
patentable "scientific theory".
OWNERSHIP OF A PATENT
RIGHT TO A PATENT
Q: Who is entitled to a patent?
A:
1. Inventor, his heirs, or assigns. (Sec 29 s.28)
2. Joint invention Jointly by the inventors. (Sec.
28, IPC)
3. 2 or more persons invented separately and
independently of each other To the person who
filed an application;
4. 2 or more applications are filed the applicant
who has the earliest filing date or, the earliest
priority date. First to file rule.(Sec. 29, IPC)
5. Inventions created pursuant to a commission
Person who commissions the work, unless
otherwise provided in the contract. (Sec. 30.1,
IPC)
6. Employee made the invention in the course of his
employment contract:
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.
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. (Sec. 30.2, IPC)
Q. X works as a research computer engineer with
the Institute of Computer Technology, a government
agency. When not busy with his work, but during
office hours, he developed a software program for
law firms that will allow efficient monitoring of the
cases, which software is not at all related to his
work. Assuming the program is patentable, who has
the right over the patent? (2012 MCQ Bar Question
No.82)
A. X. In case the employee made the invention in the
course of his employment contract, the patent
belongs to the employee, if the inventive activity is
not part of his regular duties even if the employee
uses the time, facilities and materials of the
employer.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
FIRST-TO-FILE RULE
The First-to-File rule states that:
1. 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
2. Where two or more applications are filed for the
same invention, to the applicant which has the
earliest filing date. (Sec. 29, IPC)
Q: Who may apply for a patent?
A: Any person who is a national or who is domiciled
or has a real and effective industrial establishment in
a country which is a party to any convention, treaty
or agreement relating to intellectual property rights
or the repression of unfair competition, to which the
Philippines is also a party, or extends reciprocal rights
to nationals of the Philippines by law. (Sec. 3, IPC)
Q: What are the steps in the registration of a
patent?
A: The procedure for the grant of patent may be
summarized as follows: ( FAFCS PuSGraPI)
1. Filing of the application
2. Accordance of the filing date
3. Formality examination
4. Classification and Search
5. Publication of application
6. Substantive examination
7. Grant of Patent
8. Publication upon grant
9. Issuance of certificate (Salao, Essentials of
Intellectual Property Law: a Guidebook on
Republic Act No. 8293 and Related Laws., 2008)
Q: How is disclosure made?
A: The application shall disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by a person skilled in the art.
Q: What is a claim?
A: Defines the matter for which protection is sought.
Each claim shall be clear and concise, and shall be
supported by the description.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is an abstract?
A: A concise summary of the disclosure of the
invention as contained in the description, claims and
merely serves as technical information.
INVENTIONS CREATED PURSUANT TO A
COMMISSION
Q: What is unity of invention?
A: The application shall relate to one invention only or
to a group of inventions forming a single general
inventive concept.(Sec. 38.1) If several independent
inventions which do not form a single general
inventive concept are claimed in one application, the
application must be restricted to a single invention.
(Sec. 38.2, IPC)
Q: What is the concept of divisional applications?
A: Divisional applications come into play when two or
more inventions are claimed in a single application
but are of such a nature that a single patent may not
be issued for them. The applicant, is thus required to
divide, that is, to limit the claims to whichever
invention he may elect, whereas those inventions not
elected may be made the subject of separate
applications which are called divisional applications
(Smith-Kline Beckman Corp. v. CA, GR No. 126627,
Aug. 14,2003).
RIGHT OF PRIORITY
Q: What is priority date?
A: 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. (Sec. 31, IPC)
Q: What are the conditions in availing of priority
date?
A:
1. The local application expressly claims priority;
2. It is filed within 12 months from the date the
earliest foreign application was filed; and
3. A certified copy of the foreign application together
with an English translation is filed within 6 months
from the date of filing in the Philippines. (Sec. 31,
IPC)
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 INTELLECTUAL PROPERTY LAWS

Q: Leonard and Marvin applied for Letters Patent Q: When shall the patent take effect?
claiming the right of priority granted to foreign
applicants. Receipt of petitioners application was A: A patent shall take effect on the date of the
acknowledged by respondent Director on March 6, publication of the grant of the patent in the IPO
1954. Their Application for Letters Patent in the US Gazette. (Sec. 50.3, IPC)
for the same invention indicated that the
application in the US was filed on March 16, 1953. Q: What is the duration of protection of an
They were advised that the "Specification" they had invention, utility model and industrial design?
submitted was "incomplete" and that responsive
action should be filed with them four months from A:
date of mailing, which was August 5, 1959. On July 3, FORM TERM OF
1962, petitioners submitted two complete copies of PROTECTION
the Specification. Director of patents held that INVENTION Letters 20 years from
petitioners' application may not be treated as filed.
patent date of filing of
Is the director correct?
application
A: Yes, it is imperative that the application be without renewal.
complete in order that it may be accepted. It is (Sec. 54, IPC
essential to the validity of Letters Patent that the UTILITY Utility 7 years from the
specifications be full, definite, and specific. The MODEL Model filing date of the
purpose of requiring a definite and accurate application
Registration
description of the process is to apprise the public of without renewal.
what the patentee claims as his invention, to inform (Sec. 109.3, IPC)
the Courts as to what they are called upon to
construe, and to convey to competing manufacturers INDUSTRIAL Certificate of 5 years from the
and dealers information of exactly what they are
DESIGN registration filing date of the
bound to avoid.To be entitled to the filing date of the
patent application, an invention disclosed in a application,
previously filed application must be described within renewable for not
the instant application in such a manner as to enable more than two (2)
one skilled in the art to use the same for a legally consecutive
adequate utility (Boothe v. Director of Patents, G.R. periods of five (5)
No. L-24919, Jan. 28, 1980). years each. (Sec.
118.2, IPC)
Q: What are the rights conferred by a patent
application after the first publication?
GROUNDS FOR CANCELATION OF A PATENT
A: The applicant shall have all the rights of a patentee
against any person who, without his authorization, Q: What are the grounds for the cancellation of
exercised any of the rights conferred under Section patents?
71 in relation to the invention claimed in the
published patent application, as if a patent had been Any interested party may petition to cancel any
granted for that invention, provided that the said patent or any claim or parts of a claim any of the
person had: following grounds:

1. Actual knowledge that the invention that he was A: NDCIS

using was the subject matter of a published
application; or
2. Received written notice that the invention was the
subject matter of a published application being
identified in the said notice by its serial number
1. The invention is Not new or patentable;
2. 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

Note: That the action may not be filed until after the grant 3. Contrary to public order or morality.(Sec. 61.1,
of a patent on the published application and within four (4) IPC)
years from the commission of the acts complained of (Sec.
46, IPC).

281 UNIVERSITY OF SANTO TOMAS

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4. Patent is found Invalid in an action for
infringement (Sec. 82, IPC)
5. The patent includes matters outside the Scope of
the disclosure contained in the application (Sec
21, IPC, Sec.1, Regulations on Inter Partes
Proceeding)
Q: What if the ground/s for cancellation relate to
some of the claims or parts of the claim only?
A: Cancellation may be effected to such extent only.
(Sec. 61.2, IPC)
Q: What are the grounds for cancellation of a utility
model?
A: QCNO
1. The invention does not Qualify for registration as
a utility model
2. That the description and the claims do notComply
with the prescribed requirements
3. Any drawing which is Necessary for the
understanding of the invention has not been
furnished
4. That the Owner of the utility model registration is
not the inventor or his successor in title. (Sec.
109.4, IPC)
Q: What are the grounds for cancellation of an
industrial design?
A:
1. The subject matter of the industrial design is not
registrable;
2. The subject matter is not new; or
3. The subject matter of the industrial design extends
beyond the content of the application as originally
filed (Sec. 120IPC).
REMEDY OF THE TRUE AND ACTUAL INVENTOR
Q: What are the remedies of persons not having the
right to a patent?
A: If a person other than the applicant is declared by
final court order or decision as having the right to a
patent, he may within 3 months after such decision
has become final:
1. Prosecute the application as his own
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. File a new patent application
3. Request the application to be refused; or
4. Seek cancellation of the patent. (Sec.67.1, IPC)
Q: What is the remedy of a true inventor?
A: He may only ask the court to substitute him as a
patentee or to cancel the patent and ask for damages
when the application of the false inventor is granted.
He may not the IPO of processing the false
application.
RIGHTS CONFERED BY A PATENT
Q: What are the rights conferred by a patent?
A:
1. Subject matter is a product Right to restrain,
prohibit and prevent any unauthorized person or
entity from making, using, offering for sale, selling
or importing the product.
2. Subject matter is a process Right to restrain
prohibit and prevent any unauthorized person or
entity from manufacturing, dealing in, using,
offering for sale, selling or importing any product
obtained directly or indirectly from such process
(Sec. 71, IPC).
3. Right to assign the patent, to transfer by
succession, and to conclude licensing contracts.
(Sec. 71.2, IPC)
Q: When does the rights conferred by a patent take
effect?
A: The rights conferred by a patent application take
effect after publication in the Official Gazette (Sec 46)
LIMITATIONS OF PATENT RIGHTS
Q: What are the exceptions to the rights conferred
by a patent?
A:
1. In general
a. GR: If put on the market in the Philippines by the
owner of the product, or with his express
consent.
XPN: Drugs and medicines - introduced in the
Philippines or anywhere else in the world by the
patent owner, or by any party authorized to use
the invention (Sec. 72.1, as amended by R.A.
9502)
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 INTELLECTUAL PROPERTY LAWS
b. Where the act is done privately and on a non-
commercial scale or for a non-commercial
purpose. (Sec. 72.2, IPC)
c. Exclusively for experimental use of the invention
for scientific purposes or educational purposes
(experimental use provision). (Sec. 72.3, IPC)
d. Bolar Provision - In the case of drugs and
medicines, where the act includes testing, using,
making or selling the invention including any data
related thereto, solely for purposes reasonably
related to the development and submission of
information and issuance of approvals by
government regulatory agencies required under
any law of the Philippines or of another country
that regulates the manufacture, construction,
use or sale of any product.(Sec. 72.4, IPC)
e. 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. (Sec. 72.5, IPC)
f. 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. (Sec. 72.5, IPC)
2. Prior user Person other than the applicant, who in
good faith, started using the invention in the
Philippines, or undertaken serious preparations to
use the same, before the filing date or priority date
of the application shall have the right to continue
the use thereof, but this right shall only be
transferred or assigned further with his enterprise
or business. (Sec. 73, IPC)
. PATENT INFRINGEMENT
3. Use by Government A government agency or third
person authorized by the government may exploit
invention even without agreement of a patent
owner where:
a. Public interest, 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 owner of
patent is anti-competitive. (Sec. 74, IPC)
4. Reverse reciprocity of foreign law Any condition,
restriction, limitation, diminution, requirement,
penalty or any similar burden imposed by the law
of a foreign country on a Philippine national
seeking protection of intellectual property rights in
that country, shall reciprocally be enforceable upon
283
nationals of said country, within Philippine
jurisdiction.(Sec. 231, IPC)
Q: Who is a parallel importer?
A: One which imports, distributes, and sells genuine
products in the market, independently of an exclusive
distributorship or agency agreement with the
manufacturer.
Q: What is the doctrine of exhaustion?
A: Also known as the doctrine of first sale, it provides
that the patent holder has control of the first sale of
his invention. He has the opportunity to receive the
full consideration for his invention from his sale.
Hence, he exhausts his rights in the future control of
his invention.
It espouses that the patentee who has already sold
his invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The
invention thus becomes open to the use of the
purchaser without further restriction. (Adams v.
Burke, 84 U.S. 17, 1873)
Q: How does the Doctrine of exhaustion apply in
Philippine jurisdiction?
A:
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner
thereof (International exhaustion) (R.A. 9502).
Q: What constitutes infringement of patent?
A:
1. Making, using, offering for sale, selling or
importing a patented product or a product
obtained directly or indirectly from a patented
process; or
2. Use of a patented process without authorization
of the owner of the patent (Sec. 76, IPC)
THE TEST IN PATENT INFRINGEMENT
1. Literal infringement Test Resort must be had, in
the first instance, to words of the claim. If the
accused matter clearly falls within the claim,
infringement is committed.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Minor modifications are sufficient to put the item
beyond literal infringement (Godines v. CA, G.R. No.
L-97343, Sept. 13, 1993).
2. Doctrine of Equivalents There is infringement
where a device appropriates a prior invention by
incorporating its innovative concept and, although
with some modification and change, performs
substantially the same function in substantially the
same way to achieve substantially the same result
(Ibid.).
3. Economic interest testwhen the process-
discoverers economic interest are compromised,
i.e., when others can import the products that
result from the process, such an act is said to be
prohibited.
Q: Does the use of a patented process by a third
person constitute an infringement when the alleged
infringer has substituted, in lieu of some unessential
part of the patented process, a well-known
mechanical equivalent."
A: Yes, under the doctrine of mechanical equivalents,
the patentee is protected from colorable invasions of
his patent under the guise of substitution of some
part of his invention by some well-known mechanical
equivalent. It is an infringement of the patent, if the
substitute performs the same function and was well
known at the date of the patent as a proper
substitute for the omitted ingredient (Gsell v. Yap-
Jue, G.R. No. L-4720, Jan. 19, 1909).
Q: What is meant by equivalent device?
A: It is such as a mechanic of ordinary skill in
construction of similar machinery, having the forms,
specifications and machine before him, could
substitute in the place of the mechanism described
without the exercise of the inventive faculty.
Q: What is the doctrine of file wrapper estoppel?
A: This doctrine balances the doctrine of equivalents.
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection, and
he may omit any additions that he was compelled to
add by patent office regulations.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the doctrine of contributory
infringement?
A: Aside from the infringer, 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 adapted for infringing the
patented invention and not suitable for substantial
non-infringing use is liable jointly and severally with
the infringer as a contributory infringer. It must be
proven that the product can only be used for
infringement purposes. If it can be used for
legitimate purposes, the action shall not prosper.
Q: What are the remedies of the owner of the
patent against infringers?
A:
1. Civil action for infringement The owner may bring
a civil action with the appropriate Regional Trial
Court to recover from infringer the damages
sustained by the former, plus attorneys fees and
other litigation expenses, and to secure an
injunction for the protection of his rights. (Sec 76.2,
IPC) If the damages are inadequate or cannot be
reasonably ascertained with reasonable certainty,
the court may award by way of damages a sum
equivalent to reasonable royalty (Sec 76.3, IPC)
2. Criminal action for infringement If the
infringement is repeated, the infringer shall be
criminally liable and upon conviction, shall suffer
imprisonment of not less than six (6) months but
not more than three (3) years and/or a fine not less
than P100,000.00 but not more than P300,000.00
3. Administrative remedy Where the amount of
damages claimed is not less than P200,000.00, the
patentee may choose to file an administrative
action against the infringer with the Bureau of
Legal Affairs (BLA). The BLA can issue injunctions,
direct infringer to pay patentee damages, but
unlike regular courts, the BLA may not issue search
and seizure warrants or warrants of arrest.
4. Destruction of Infringing material- 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 of destroyed, without
compensation. Sec.76.5, IPC)
284
 INTELLECTUAL PROPERTY LAWS
Q: What are the limitations to the civil/criminal
action?
A:
1. No damages can be recovered for acts of
infringement committed more than four (4) years
before the filing of the action for infringement.
(Sec. 79, IPC)
2. The criminal action prescribes in three (3) years
from the commission of the crime. (Sec. 84, IPC)
Q: Who can file an action for infringement?
A:
1. The patentee or his successors-in-interest may file
an action for infringement. (Creser Precision
Systems, Inc. v. CA, G.R. No. 118708, Feb. 2, 1998)
2. Any foreign national or juridical entity who meets
the requirements of Sec. 3 and not engaged in
business in the Philippines, to which a patent has
been granted or assigned, whether or not it is
licensed to do business in the Philippines. (Sec. 77,
IPC)
DEFENSES IN ACTION FOR INFRINGEMENT
IGNDC
1. Invalidity of the patent; (Sec. 81, IPC);
2. Any of the Grounds for cancellation of patents:
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. (Sec. 61, IPC)
3. Prescription
LICENSING
Q: What are the modes of obtaining license to
exploit patent rights?
A:
1. Voluntary licensing (Sec. 85, IPC) and
2. Compulsory licensing (Sec. 93, IPC)
VOLUNTARY LICENSING
The grant by the patent owner to a third person of
the right to exploit a patented invention.
285
Q: What are the rights of a licensor in voluntary
licensing?
A: In the absence of any provision to the contrary in
the technology transfer arrangement, the grant of a
license shall not prevent the licensor from granting
further licenses to third person nor from exploiting
the subject matter of the technology transfer
arrangement himself (Sec. 89, IPC).
Q: Who can grant a compulsory license?
A:
1. The Director of Legal Affairs may grant a license to
exploit a patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
invention(Sec. 93, IPC).
2. R.A. 9502 (Universally Accessible Cheaper and
Quality Medicines Act of 2008) however amended
Sec. 93 so that it is the Director General of the IPO
who may grant a license to exploit patented
invention under the grounds enumerated therein.
Note: Clarification either by legislation of judicial
interpretation as to who has jurisdiction should be made
to avoid confusion. (Salao, Essential of Intellectual
Property Law, 2008)
Q: What are the grounds for compulsory licensing
and the period for filing a petition?
A:
1. National emergency or other circumstances of
extreme urgency
2. Where the public interest, in particular, national
security, nutrition, health or the development of
other vital sectors of the national economy as
determined by the appropriate agency of the
Government, so requires; at any time after the
grant of the patent
3. Where a judicial or administrative body has
determined that the manner of exploitation by
the owner of the patent or his licensee is anti-
competitive at any time after the grant of the
patent
4. In case of public non-commercial use of the patent
by the patentee, without satisfactory reason at
any time after the grant of the patent
5. If the patented invention is not being worked in
the Philippines on a commercial scale, although
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
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capable of being worked, without satisfactory
reasonafter the expiration of 4 years from the
date of filing of the application or 3 years from the
date of the patent whichever is later. (Sec. 93 in
relation to Sec. 94)
6. Where the demand for patented drugs and
medicines is not being met to an adequate extent
and on reasonable terms, as determined by the
Secretary of the Department of Health (Sec. 10,
R.A. 9502)
Q: Grounds for cancellation of the compulsory
license?
A:
1. Ground for the grant of the compulsory license no
longer exists and is unlikely to recur;
2. Licensee has neither begun to supply the domestic
market nor made serious preparation therefore;
3. Licensee has not complied with the prescribed
terms of the license.
Q: Cezar works in a car manufacturing company
owned by Joab. Cezar is quite innovative and loves
to tinker with things. With the materials and parts of
the car, he was able to invent a gas-saving device
that will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar created the
device and likewise, came up with a similar gadget,
also using scrap materials and spare parts of the
company. Thereafter, Francis filed an application for
registration of his device with the Bureau of Patents.
Eighteen months later, Cezar filed his application for
the registration of his device with the Bureau of
Patents.
Q: Is the gas-saving device patentable? Explain.
A: Yes because it is new, it involves an inventive step
and it is industrially applicable.
Q: Assuming that it is patentable, who is entitled to
the patent? What, if any, is the remedy of the losing
party?(2005 Bar Question)
A: Francis is entitled to the patent, because he had
the earlier filing date. The remedy of Cezar is to file a
petition in court for the cancellation of the patent of
Francis on the ground that he is the true and actual
inventor, and ask for his substitution as patentee.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
ASSIGNMENT AND TRANSMISSION OF RIGHTS
Q: What are the forms of assignment?
A:
1. Total assignment of entire right, title or interest
in and to the patent and the invention covered
thereby.
2. Partial
a. Separate rights assignment of a specific right
(ex: right to sell)
b. Pro Indiviso assignment of an aliquot part
which results in co-ownership
Q: How is the transfer of rights effected?
A:
1. By inheritance or bequest
2. License contract
Q: What is the effect of an assignment of a patent?
A: The assignment works as an estoppel by deed,
preventing the assignor from denying the novelty and
utility of the patented invention when sued y the
assignee for infringement.
Q What should be the form of an assignment?
A:
1. In writing
2. Acknowledged and certified before a notary public
or other officer authorized to perform notarial
acts
3. Recorded in the IPO
Q: What is the effect if the assignment was not
recorded in the IPO?
A: A deed of assignment affecting title shall be void as
against any subsequent purchaser or mortgagee for
valuable consideration and without notice unless, it is
so recorded in the Office, within three (3) months
from the date of said instrument, or prior to the
subsequent purchase or mortgage. However, even
without recording, the instruments are binding upon
the parties.
Q: May a licensee maintain a suit for infringement?
A: No. GR: Only the patentees, his heirs, assignee,
grantee or personal representatives may bring an
action for infringement.
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 INTELLECTUAL PROPERTY LAWS

XPN: If the licensing agreement provides that the Q: S Development Corporation sued Shangrila
licensee may bring an action for infringement or if Corporation for using the "S" logo and the
he was authorized to do so by the patentee tradename "Shangrila". The former claims that it
through a special power of attorney. was the first to register the logo and the tradename
in the Philippines and that it had been using the
TRADEMARKS same in its restaurant business. Shangrila
Corporation counters that it is an affiliate of an
DEFINITION OF MARKS, COLLECTIVE MARKS, international organization which has been using
TRADENAMES such logo and tradename "Shangrila" for over 20
years.
Q: What is a trademark and how does it differ from
a trade name? However, Shangrila Corporation registered the
A: Any visible sign capable of distinguishing the goods tradename and logo in the Philippines only after the
(trademark) or services (service mark) of an suit was filed. Which of the two corporations has a
enterprise (Sec 121.1, IPC). A trade name is a name or better right to use the logo and the tradename?
designation identifying or distinguishing an Explain. (2005 Bar Question)
enterprise.
A: S Development Corporation has a better right to
TRADEMARK TRADE NAME use the logo and tradename, because its certificate of
A natural or artificial registration upon which the infringement case is
Goods or services offered based remains valid and subsisting for as long as it
person who does
by a proprietor or has not been cancelled. (Shangrila International Hotel
business and produces or
enterprise are Management v. CA, G.R. No. 111580, June 21, 2001.)
performs the goods or
designated by trademark
services designated by
(goods) or service marks Note: Registration, without more, does not confer upon
trademark or service
(services). the registrant an absolute right to the registered mark. The
mark.
certificate of registration is merely a prima facie proof that
Refers to business and its the registrant is the owner of the registered mark or trade
Refers to the goods.
goodwill. name. Evidence of prior and continuous use of the mark or
Acquired only by trade name by another can overcome the presumptive
Need not be registered.
registration. ownership of the registrant and may very well entitle the
former to be declared owner in an appropriate case.
Q: What is a collective mark and collective trade-
name? Among the effects of registration of a mark, as catalogued
by the Court in Lorenzana v. Macagba,are:
A: A "collective mark" is any visible sign designated as 1. Registration in the Principal Register gives rise to
such in the application for registration and capable of a presumption of the validity of the registration, the
distinguishing the origin or any other common registrant's ownership of the mark, and his right to the
characteristic, including the quality of goods or exclusive use thereof. x x x
services of different enterprises (Sec. 121.2 of R.A.
8293). 2. Registration in the Principal Register is limited to the
actual owner of the trademark and proceedings therein
Q: What are the functions of trademark? pass on the issue of ownership, which may be contested
through opposition or interference proceedings, or,
after registration, in a petition for cancellation. xxx
A: [Emphasis supplied]
1. To point out distinctly the origin or ownership of
the articles to which it is affixed. Ownership of a mark or trade name may be acquired not
necessarily by registration but by adoption and use in trade
2. To secure to him who has been instrumental in or commerce. As between actual use of a mark without
bringing into market a superior article or registration, and registration of the mark without actual use
merchandise the fruit of his industry and skill thereof, the former prevails over the latter. For a rule
widely accepted and firmly entrenched, because it has
come down through the years, is that actual use in
3. To prevent fraud and imposition. (Etepha v.
commerce or business is a pre-requisite to the acquisition
Director of Patents, G.R. No. L-20635, Mar. 31, of the right of ownership.
1966)
While the present law on trademarks has dispensed with
the requirement of prior actual use at the time of

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FACULTY OF CIVIL LAW
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registration, the law in force at the time of registration
must be applied, and thereunder it was held that as a
condition precedent to registration of trademark, trade
name or service mark, the same must have been in actual
use in the Philippines before the filing of the application for
registration. Trademark is a creation of use and therefore
actual use is a pre-requisite to exclusive ownership and its
registration with the Philippine Patent Office is a mere
administrative confirmation of the existence of such right.
By itself, registration is not a mode of acquiring ownership.
When the applicant is not the owner of the trademark
being applied for, he has no right to apply for registration of
the same. Registration merely creates a prima
facie presumption of the validity of the registration, of the
registrant's ownership of the trademark and of the
exclusive right to the use thereof. Such presumption, just
like the presumptive regularity in the performance of
official functions, is rebuttable and must give way to
evidence to the contrary.
Here, respondent's own witness, Ramon Syhunliong,
testified that a jeepney signboard artist allegedly
commissioned to create the mark and logo submitted his
designs only in December 1982. This was two-and-a-half
months after the filing of the respondent's trademark
application on October 18, 1982 with the BPTTT. It was also
only in December 1982 when the respondent's restaurant
was opened for business. Respondent cannot now claim
before the Court that the certificate of registration itself is
proof that the two-month prior use requirement was
complied with, what with the fact that its very own witness
testified otherwise in the trial court. And because at the
time (October 18, 1982) the respondent filed its application
for trademark registration of the "Shangri-La" mark and "S"
logo, respondent was not using these in the Philippines
commercially, the registration is void.
When a trademark copycat adopts the word portion of
another's trademark as his own, there may still be some
doubt that the adoption is intentional. But if he copies not
only the word but also the word's exact font and lettering
style and in addition, he copies also the logo portion of the
trademark, the slightest doubt vanishes. It is then replaced
by the certainty that the adoption was deliberate, malicious
and in bad faith. (SHANGRI-LA INTERNATIONAL HOTEL
MANAGEMENT, LTD., SHANGRI-LA PROPERTIES, INC.,
MAKATI SHANGRI-LA HOTEL & RESORT, INC., AND KUOK
PHILIPPINES PROPERTIES, INC., vs. DEVELOPERS GROUP OF
COMPANIES, INC. [G.R. No. 159938, March 31, 2006])
Q: What are the salient features of the Paris
convention of trademarks?
A:
1. National Treatment Principle foreign nationals
are to be given the same treatment in each of the
member countries as that country makes available
in its own citizens.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. Right of Priority any person who has duly filed
registration for trademark shall enjoy a right of
priority of 6 months (Rule 203, Trademark Rules)
3. Protection against Unfair Competition
4. Protection of Tradenames protected in all
countries without obligation of filing or
registration.
5. Protection of Well-Known Marks
6. Most favored nation treatment - any advantage,
favour, privilege or immunity granted by a
Member to the nationals of any other country
shall be accorded immediately and
unconditionally to the nationals of all other
Members.
ACQUISITION OF OWNERSHIP OF MARK
Q: How are marks acquired?
A: Marks are acquired solely through registration.
(Sec. 122, IPC)
Q: What marks may be registered?
A: Any word, name, symbol, emblem, device, figure,
sign, phrase, or any combination thereof except those
enumerated under Section 123, IPC.
Q: What are the requirements for a mark to be
registered?
A:
1. A visible sign (not sounds or scents); and
2. Capable of distinguishing ones goods and
services from another.
Q: What is the doctrine of secondary meaning?
A: This doctrine is to the effect that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because it is
geographical or otherwise descriptive, may
nevertheless be used exclusively by one producer
with reference to his article so long as in that trade
and to that branch of the purchasing public, the word
or phrase has come to mean that the article was his
product (G. and C. Merriam Co. v. Saalfield, 198 F.
369, 373, cited in Ang v. Teodoro, G.R. No. L-48226,
Dec. 14, 1942).
Q: Is there an infringement of trademark when two
similar goods use the same words, PALE PILSEN?
288
 INTELLECTUAL PROPERTY LAWS
A: No, because pale pilsen are generic words
descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with strong
hops flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically
descriptive word, hence, non-registrable and not
appropriable by any beer manufacturer(Asia Brewery,
Inc. v. CA, G.R. No. 103543, July 5, 1993).
Q: Who may file an opposition to trademark
registration and on what ground?
A: Any person who believes that he would be
damaged by the registration of a mark may, upon
payment of the required fee and within thirty (30)
days after the publication referred to in Subsection
133.2, file with the Office an opposition to the
application (Sec. 134, IPC).
ACQUISITION AND OWNERSHIP OF TRADE NAME
Q: How are trade names acquired?
A: Trade names or business names are acquired
through adoption and use. Registration is not
required. (Sec. 165, IPC). It is the actual use in
commerce or business is a pre-requisite to the
acquisition of the right of ownership (Shangri-la Hotel
Management Ltd. v Developers Group of companies,
May 10, 2006 G.R. No. 159938).
Q: Can a previously used trade name of a business in
a foreign country bar its appropriation by another in
the Philippines?
A: Yes. The IPC does not require that the actual use of
a trademark must be within the Philippines. For a
person to have ownership of a mark, the mark must
not have been already appropriated (i.e., used) by
someone else. The Intellectual Property Code (IPC)
embodies the firm resolve of the Philippines to
observe and follow the Paris Convention (Shangri-la
Hotel Management Ltd. v Developers Group of
companies, supra).
NON-REGISTRABLE MARKS
Q: What marks may not be registered?
A: (IFNIIIM-GCDS)
1. Consists of Immoral,deceptive or scandalous
matter or falsely suggest a connection with
persons, institutions, beliefs, or national symbols
289
2. 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
3. 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 except by written
consent of the widow
4. Identical with a registered mark belonging to a
different proprietor or a mark with an earlier filing
or priority date, in respect of:
1. The same goods or services, or
2. Closely related goods or services, or
3. If it nearly resembles such a mark as to be likely to
deceive or cause confusion;
5. Is Identical with an internationally well-known
mark, whether or not it is registered here, used for
identical or similar goods or services
6. Is Identical with an internationally well-known
mark which is registered in the Philippines with
respect to non-similar goods or services. Provided,
that the interests of the owner of the registered
mark are likely to be damaged by such use
7. Is likely to Mislead the public as to the nature,
quality, characteristics or geographical origin of
the goods or services
8. Consists exclusively of signs that are Generic for
the goods or services that they seek to identify
9. Consists exclusively of signs that have become
Customary or usual to designate the goods or
services in everyday language and established
trade practice
10. Consists exclusively 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
11. 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
12. Consists of Color alone, unless defined by a given
form; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
13. Is Contrary to public order or morality. (Sec. 123)
Q: Laberge, Inc., manufactures and markets after-
shave lotion, shaving cream, and deodorants using
the trademark PRUT, which is registered with the
Intellectual Property Office. Laberge does not
manufacture briefs and underwear and these items
are not specified in the certificate of registration. JG
who manufactures briefs and underwear, wants to
know whether, under our laws, he can use and
register the trademark PRUTE for his merchandise.
Can JG register the trademark?
A: Yes. The trademark registered in the name of
Laberge Inc covers only after-shave lotion, shaving
cream, deodorant, talcum powder and toilet soap. It
does not cover briefs and underwear. The limit of the
trademark is stated in the certificate issued to
Laberge Inc. It does not include briefs and underwear
which are different products protected by Larberges
trademark. JG can register the trademark PRUTE to
cover its briefs and underwear (Faberge Inc v IAC,
G.R. No. 71189, November 4, 1992)
PRIOR USE OF MARK AS A REQUIREMENT
Q: Is the prior use of the mark still a requirement for
registration?
A: No. Actual prior use in commerce in the Philippines
has been abolished as a condition for the registration
of a trademark. (RA 8293)
Q: When is non-use excused?
A:
1. If caused by circumstances arising independently
of the will of the owner. Lack of funds is not an
excuse.
2. A use which does not alter its distinctive
character though the use is different from the
form in which it is registered.
3. Use of mark in connection with one or more of
the goods/services belonging to the class in
which the mark is registered.
4. The use of a mark by a company related to the
applicant/registrant.
5. The use of a mark by a person controlled by the
registrant. (Section 152, IPC)
TEST TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS
The tests in determining trademark infringement are
the following:
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
1. Dominancy and
2. Holistic Test
Dominancy Test
Focuses on the similarity of the prevalent features of
the competing marks. If the competing trademark
contains the main or essential or dominant features
of another, and confusion is likely to result,
infringement takes place. (Asia Brewery v. CA, G.R.
No. 103543, 5 July 1993)
Totality or Holistic test
Confusing similarity is to be determined on the basis
of visual, aural, connotative comparisons and
overall impressions engendered by the marks in
controversy as they are encountered in the
marketplace.
Note: The dominancy test only relies on visual comparisons
between two trademarks whereas the totality or holistic
test relies not only on the visual but also on the aural and
connotative comparisons and overall impressions between
the two trademarks.(Societe Des Produits Nestl, S.A. v. CA,
G.R. No. 112012, Apr. 4, 2001)
Q: N Corporation manufactures rubber shoes under
the trademark Jordann which hit the Philippine
market in 1985, and registered its trademark with
the Bureau of Patents, Trademarks and Technology
in 1990. PK Company also manufactures rubber
shoes with the trademark Javorski which it
registered with BPTTT in 1978. In 1992, PK Co
adopted and copied the design of N Corporations
Jordann rubber shoes, both as to shape and color,
but retained the trademark Javorski on its
products. May PK Company be held liable to N Co?
Explain. (1996 Bar Question)
A: PK Co may be liable for unfairly competing against
N Co. By copying the design, shape and color of N
Corporations Jordann rubber shoes and using the
same in its rubber shoes trademarked Javorski, PK
is obviously trying to pass off its shoes for those of N.
It is of no moment that the trademark Javorski was
registered ahead of the trademark Jordann.
Priority in registration is not material in an action for
unfair competition as distinguished from an action for
infringement of trademark. The basis of an action for
unfair competition is confusing and misleading
similarity in general appearance, not similarity of
trademarks. (Converse Rubber Co. v. Jacinto Rubber &
Plastics Co., G.R. Nos. 27425, 30505, Apr. 28, 1980)
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 INTELLECTUAL PROPERTY LAWS
Q: The Test of Dominancy in the Law on
Trademarks, is a way to determine whether there
exist an infringement of a trademark by ---(2012
MCQ Bar Question)
A: Focusing on the similarity of the prevalent features
of the competing trademarks that might cause
confusion (Intellectual Property Fundamentals by
Vicente Amador,p.156 c. 2007)
Q: What is the so-called related goods principle?
A: Goods are related when they:
1. Belong to the same class or have the same
descriptive properties; or
2. When they possess the same physical attributes or
essential characteristics with reference to their
form, composition, texture or quality.
Q: What is the rule ofidem sonans?
A: Two names are said to be "idem sonantes" if the
attentive ear finds difficulty in distinguishing them
when pronounced. (Martin v. State, 541 S.W. 2d 605)
Q: In what instance may the idem sonans rule
apply?
A: Similarity of sound is sufficient to rule that the two
marks are confusingly similar when applied to
merchandise of the same descriptive properties.
(Marvex Commercial v. Director of Patent, G.R. No. L-
19297, Dec. 22, 1966)
Q: What are the types of confusion that arise from
the use of similar or colorable imitation marks?
A:
1. Confusion of goods/product confusion - there is
confusion of goods when the products are
competing
2. Confusion of business/source or origin confusion -
the products are non-competing but related
enough to produce confusion of affiliation.
(McDonalds Corp. v. L.C. Big Mak Burger, Inc.,
G.R. No. 143993, Aug. 18, 2004)
Q: What is colorable imitation?
A: Such a close or ingenious imitation as to be
calculated to deceive ordinary persons, or such a
resemblance to the original as to deceive an ordinary
purchaser giving such attention as a purchaser usually
gives, as to cause him to purchase the one supposing
291
it to be the other. (Societe des Produits Nestl, S.A. v.
CA, G.R. No. 112012, Apr. 4, 2001)
WELL-KNOWN MARKS
Q: What constitutes an internationally well-known
mark?
A:
1. Considered by the competent authority of the
Philippines to be well-known internationally and
in the Philippines as the mark of a person other
than the applicant or registrant
2. Need not be used or registered in the Philippines
3. Need not be known by the public at large but only
by relevant sector of the public.
Q: What does the law provide as regards
internationally-well known marks?
A: GR: Prohibition on subsequent registration does
not include services and goods of different nature or
kind.
XPN:
1. If the internationally well-known mark isnot
registered in the Philippines, the application for
registration of a subsequent or similar mark can be
rejected only if the goods or services specified in
the application are similar to those of the
internationally well-known mark
2. If the internationally well-known markis registered
in the Philippines, the application for registration of
a subsequent or similar mark can be refused even if
the goods or services specified in the application
are not identical or similar to those of the
internationally well-known mark.
RIGHTS CONFERRED BY REGISTRATION
Q: What is the duration of a certificate of trademark
registration?
A: 10 years, renewable for a period of another 10
years. Each request for renewal must be made within
6 months before the expiration of the registration or
within 6 months after such expiration on payment of
the additional fee prescribed. Sec 146.2, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What are the rights of a registered mark owner?
A:
1. Protection against reproduction, or imitation or
unauthorized use of the mark (infringement of
mark)
2. To stop entry of imported merchandise into the
country containing a mark identical or similar to
the registered mark
3. To transfer or license out the mark.
USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO
REGISTERED MARK
Q: What is the effect of use of Indications by third
parties for purposes other than those for which the
mark is used?
A:Registration of the mark shall not confer on the
registered owner the right to preclude third parties
from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact
indications concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or services.
INFRINGEMENT AND REMEDIES
Q: What is trademark infringement?
A: Use without consent of the trademark owner of
any reproduction, counterfeit, copy or colorable
limitation of any registered mark or trade name. Such
use is likely to cause confusion or mistake or to
deceive purchasers or others as to the source or
origin of such goods or services, or Identity of such
business (Esso Standard Eastern v. CA, G.R. No. L-
29971, Aug. 31, 1982)
Q: What are the elements to be established in
trademark infringement?
A:
1. That it is duly registered in the Intellectual
Property Office
2. The validity of the mark
3. The plaintiffs ownership of the mark
4. The use of the mark or its colorable imitation by
the alleged infringer results in likelihood of
confusion. (McDonalds Corp v. L.C. Big Mak
Burger, Inc., G.R. No. 143993, Aug 18, 2004)
5. Used without the consent of the owner. (
Prosource International Inc.v. Horphag Research
Management SA 605 SCRA 523
Q: What is meant by non-competing goods?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A: Those which, though they are not in actual
competition, are so related to each other that it
might reasonably be assumed that they originate
from one manufacturer. Non-competing goods may
also be those which, being entirely unrelated,
could not reasonably be assumed to have a common
source. In the case of related goods, confusion of
business could arise out of the use of similar marks; in
the lattercase of non-related goods, it could
not. (Esso Standard Eastern, Inc. v. CA, G.R. No. L-
29971, Aug. 31, 1982)
Q: Is there infringement even if the goods are non-
competing?
A: GR: Yes.
XPN: If it prevents the natural expansion of his
business. (Mcdonalds Corporation v. L & C Big
Mak Burger, Inc. 437 SCRA 10)
Q: What are the remedies of the owner of the
trademark against infringers?
A:
1. Civil filed with the Regional Trial Courts. The
owner of the registered mark may ask the court to
issue a preliminary injunction to quickly prevent
infringer from causing damage to his business.
Furthermore, the court will require infringer to pay
damages to the owner of the mark provided
defendant is shown to have had notice of the
registration of the mark (which is presumed if a
letter R within a circle is appended) and stop him
permanently from using the mark.
2. Criminal the owner of the trademark may ask the
court to issue a search warrant and in appropriate
cases, remedies available shall also include the
seizure, forfeiture and destruction of the infringing
goods and of any materials and implements the
predominant use of which has been in the
commission of the offense.
3. Administrativesame as in patent infringement
cases. If the amount of damages claimed is not less
than P200,000.00, the registrant may choose to
seek redress against the infringer by filing an
administrative action against the infringer with
the Bureau of Legal Affairs.
292
 INTELLECTUAL PROPERTY LAWS

Q: How is the amount of damages in a civil action for UNFAIR COMPETITION

infringement ascertained?
Q: What distinguishes infringement of trademark
A: The owner of a trademark which has been from unfair competition?
infringed is entitled to actual damages:
A:
1. The reasonable profit which the complaining INFRINGEMENT OF UNFAIR
partywould have made, had the defendant not TRADEMARK COMPETITION
infringed his said rights; or The passing off of ones
2. The profit which the defendant actually made Unauthorized use of a
goods as those of
out of infringement; or trademark.
another.
3. The court may award as damages a reasonable
percentage based upon the amount of gross Fraudulent intent is Fraudulent intent is
sales of the defendant or the value of the unnecessary. essential.
services in connection with which the mark or GR: Prior registration of Registration is not
trade name was issued. the trademark is a
necessary. (Del Monte
prerequisite to the
Q: What court has jurisdiction over violations of Corp. v. CA, G.R. No.
action.
intellectual property rights? XPN: Well-known marks 78325, Jan. 23, 1990)

A: It is properly lodged with the Regional Trial Court
even if the penalty therefore is imprisonment of less
than six years, or from 2 to 5 years and a fine ranging
from P50,000 to P200,000.
Note: R.A. 8293 and R.A. 166 are special laws conferring
jurisdiction over violations of intellectual property rights to
the Regional Trial Court. They should therefore prevail over
R.A. No. 7691, which is a general law. (Samson v. Daway,
G.R. No. 160054-55, July 21, 2004)
Q: What are the limitations on the actions for
infringement?
A:
1. Right of prior user registered mark shall be
without affect against any person who, in good
faith, before filing or priority date, was using the
mark for purposes of his business. (Sec 159.1,
IPC)
2. Relief against publisher injunction against future
printing against an innocent infringer who is
engaged solely in the business of printing the
mark. (Sec. 159.2, IPC)
3. Relief against newspaper injunction against the
presentation of advertising matter in future
issues of the newspaper, magazine or in
electronic communications in case the
infringement complained of is contained in or is
part of paid advertisement in such materials.
(Sec. 159.3, IPC)
Q: What is the right protected under unfair
competition?
A: 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.(Sec. 168.1,
IPC)
Q: Who are guilty of unfair competition?
A:
1. 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 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;
2. 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;

293 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. 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.(Sec. 168.3)
Q: Is the law on unfair competition broader than the
law on trademark?
A: Trademark infringement 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, G.R. No. 154342, July 14, 2004)
Q: What are the elements of an action for unfair
competition?
A:
1. Confusing similarity in the general appearance of
the goods; and
Note: 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.
2. Intent to deceive the public and defraud a
competitor.
Note: The intent to deceive and defraud may be inferred
from the similarity in appearance of the goods as offered
for sale to the public. (McDonalds Corporation v. L.C. Big
Mak Burger, Inc., et al., G.R. No. 143993, Aug. 18, 2004)
Q: The NBI found that SG Inc. is engaged in the
reproduction and distribution of counterfeit
"playstation games" and thus applied with the
Manila RTC warrants to search respondent's
premises in Cavite. RTC granted such warrants and
thus, the NBI served the search warrants on the
subject premises. SG Inc. questioned the validity of
the warrants due to wrong venue since the RTC of
Manila had no jurisdiction to issue a search warrant
enforceable in Cavite. Is the contention of SG Inc.
correct?
A: No, unfair competition is a transitory or continuing
offense under Section 168 of Republic Act No. 8293.
As such, petitioner may apply for a search warrant in
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
any court where any element of the alleged offense
was committed, including any of the courts within
Metro Manila and may be validly enforced in Cavite.
(Sony Computer Entertainment Inc. v. Supergreen Inc.
G.R. No. 161823, Mar. 22, 2007)
TRADE NAMES OR BUSSINESS NAMES
Q: What is a trade name or business name?
A: Any individual name or surname, firm name,
device nor word used by manufacturers,
industrialists, merchants, and others to identify their
businesses, vocations or occupants (Converse rubber
Corp. vs. Universal Rubber Products, GR No. L-27425,
L-30505, April 28, 1980).
Q: What are the limitations on use of trade name or
business name?
A: A person may not:
1. Use a name if the word is generic. ( Lyceum of the
Philippines v. CA, 219 SCRA 610)
2. Use any name indicating a geographical locations. (
Ang Si Heng vs. Wellington Department Store 92
Phil.448)
3. Use any name or designation contrary to public
order or morals
4. Use a name if it is liable to deceive trade circles or
the public as to the nature of the enterprise
identified by that name. (Sec. 165.1, IPC)
5. Subsequently use a trade name likely to mislead
the public as a third party. (Sec. 165.2, b, IPC)
6. Copy or simulate the name of any domestic
product (for imported products).
7. Copy or simulate a mark registered in accordance
with the provisions of IPC (for imported products).
8. Use mark or trade name calculated to induce the
public to believe that the article is manufactured in
the Philippines, or that it is manufactured in any
foreign country or locality other than the country
or locality where it is in fact manufactured.
Note: Items 4, 5 and 6 only applies to imported products
and those imported articles shall not be admitted to entry
at any customhouse of the Philippines (Sec. 166, IPC).
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 INTELLECTUAL PROPERTY LAWS
Q: How is the change in the ownership of a trade
name made?
A: It shall be made with the transfer of the enterprise
or part thereof identified by that name. (Sec. 165.4,
IPC)
COLLECTIVE MARKS
Q: What is a collective mark?
A: A "collective mark" or collective trade-name" is a
mark or trade-name used by the members of a
cooperative, an association or other collective group
or organization. (Sec. 40, R.A. 166)
Q: What should an application for registration of a
collective mark contain?
A:
1. The application shall designate the mark as a
collective mark
2. Accompanied by a copy of the agreement, if any,
governing the use of the collective mark (Sec.
167.2, IPC)
Q: What are the grounds for the cancellation of
collective marks?
A:
1. 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,
2. Or that he uses or permits its use in
contravention of the agreements referred to in
Subsection 166.2,
3. 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 (Sec 167.3).
Note: The registration of a collective mark, or an
application therefor shall not be the subject of a license
contract.
Q: What are the criminal penalties under the
Intellectual Property Code for unfair competition,
infringement, false designation of origin and false
representations?
A: 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.
295
The penalty shall be independent of the civil and
administrative sanctions imposed by law. (Sec 170)
Q: Can trademark registration be cancelled?
A: Yes, by any person who believes that he will be
damaged by the registration of the mark:
1. Within 5 years, from the date of the registration
of the mark; or
2. At any time;
a. If the registered mark becomes the generic
name for the goods or services, or a portion
thereof, for which it is registered;
b. If the mark has been abandoned;
c. If its registration was obtained fraudulently
or contrary to the provisions of the IPC;
d. If the registered mark is being used by, or
with the permission of, the registrant so as
to misrepresent the source of the goods or
services on or in connection with which the
mark is used;
e. Non-use of the mark within the Philippines,
without legitimate reason, for an
uninterrupted period of 3 years.
Note: If in a petition for cancellation of a trademark, it was
established that the petitioner was not its owner, prior
registration can be cancelled without need of filing a
separate petition. (E.Y. Industrial Sales, Inc. V Shen Dar
Electricity and Machinery Co. Ltd. 634 SCRA 363)
COPYRIGHTS
Q: What is copyright?
A: A right over literary and artistic works which are
original intellectual creations in the literary and
artistic domain protected from the moment of
creation. (Sec. 171.1, IPC)
BASIC PRINCIPLES
Q: What are the elements of copyrightability?
A:
1. Originality Must have been created by the
authors own skill, labor, and judgment without
directly copying or evasively imitating the work of
another. (Ching Kian Chuan v. CA, G.R. No. 130360,
Aug. 15, 2001)
2. Expression Must be embodied in a medium
sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a
period more than a transitory duration.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What are the elements of originality?
A:
1. It is independently created by the author, and
2. It possesses some minimal degree of creativity
Q: When does copyright vest?
A: Works are protected from the time of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality and
purpose.
COPYRIGHTABLE WORKS
Q: What are copyrightable works?
A:
1. Literary and Artistic Works
(BOLD-MAN-GAS-PAP-CO)
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic works
m. Pictorial illustrations and
advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic
works. (Sec. 172.1, IPC)
2. Derivative Works
a. Dramatizations, translations, adaptations,
abridgements, arrangements, and other
alterations of literary or artistic works;
b. Collections of literary, scholarly, or artistic
works and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. (Sec. 173)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Note: Derivative Works shall be protected as new
works, provided 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. (Sec. 173.2, IPC)
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display
units". SMI, however, manufactured similar or
identical to the light box illustrated in the technical
drawings copyrighted by P&D for leasing out to
different advertisers. Was this an infringement of
P&Ds copyright over the technical drawings?
A: No, P&Ds copyright protection extended only to
the technical drawings and not to the light box itself.
The light box was not a literary or artistic piece which
could be copyrighted under the copyright law. If SMI
reprinted P&Ds technical drawings for sale to the
public without license from P&D, then no doubt they
would have been guilty of copyright infringement.
Only the expression of an idea is protected by
copyright, not the idea itself. If what P&D sought was
exclusivity over the light boxes, it should have instead
procured a patent over the light boxes itself. (Pearl
and Dean Inc. v. Shoe Mart Inc., GR No. 148222, Aug.
15, 2003)
Q: Juan Xavier wrote and published a story similar to
an unpublished copyrighted story of Manoling
Santiago. It was, however, conclusively proven that
Juan Xavier was not aware that the story of
Manoling Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for
infringement of copyright. Is Juan Xavier liable?
(1998 Bar Question)
A: Yes. Juan Xavier isliable for infringement of
copyright. It is not necessary that Juan Xavier is aware
that the story of Manoling Santiago was protected by
copyright. The work of Manoling Santiago is
protected from the time of its creation. (Habana v.
Robles, 310 SCRA 511)
Note: There will still be originality sufficient to warrant
copyright protection if the author, through his skill and
effort, has contributed a distinguishable variation from the
older works. In such a case, of course, only those parts
which are new are protected by the new copyright. Hence,
in such a case, there is no case of infringement. Juan Xavier
is no less an author because others have preceded him.
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 INTELLECTUAL PROPERTY LAWS
NON-COPYRIGHTABLE WORKS
Q: What are the subjects not protected?
A: (INOD-PGTSS)
1. Idea, procedure, system, method or operation,
concept, principle, discovery or mere data as
such
2. News of the day and other items of press
information
3. Any Official text of a legislative, administrative or
legal nature, as well as any official translation
thereof
4. Pleadings
5. Decisions of courts and tribunals this refers to
original decisions and not to annotated decisions
such as the SCRA or SCAD as these already fall
under the classification of derivative works,
hence copyrightable
6. Any work of the Government of the Philippines
GR: Conditions imposed prior the 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 condition the
payment of royalties.
XPN: 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 administration agencies, in
deliberative assemblies and in meetings of public
character. (Section 176, IPC)
7. TV programs, format of TV programs (Joaquin v.
Drilon, G.R. No. 108946, Jan. 28, 1999)
8. Systems of bookkeeping; and
9. Statutes.
Q: BJ Productions, Inc. (BJPI) is the holder/grantee of
a copyright of Rhoda and Me, a dating game show
aired from 1970 to 1977. Subsequently, however,
RPN aired the game show Its a Date, which was
produced by IXL Productions, Inc. (IXL). As such, an
information for copyright infringement was filed
against RPN. The DOJ Secretary directed the
297
prosecutor to dismiss the case for lack of probable
cause. Was the decision of the DOJ Secretary
correct?
A: Yes, the format of a show is not copyrightable. The
copyright law enumerates the classes of work entitled
to copyright protection. The format or mechanics of a
television show is not included in the list of protected
works. For this reason, the protection afforded by the
law cannot be extended to cover them. Copyright, in
the strict sense of the term, is purely a statutory
right. It is a new or independent right granted by the
statute, and not simply a pre-existing right regulated
by the statute. Being a statutory grant, the rights are
only such as the statute confers, and may be obtained
and enjoyed only with respect to the subjects and by
the persons, and on terms and conditions specified in
the statute.(Joaquin v. Drilon, G.R. No. 108946, Jan.
28, 1999)
Q: Rural is a certified public utility providing
telephone service to several communities in Manila.
It obtains data for the directory from subscribers,
who must provide their names and addresses to
obtain telephone service. Feist Publications, Inc., is a
publishing company that specializes in area-wide
telephone directories covering a much larger
geographic range than directories such as Rural's.
Feist extracted the listings it needed from Ruralss
directory without its consent. Are directories
copyrightable?
A: No, directories are not copyrightable and therefore
the use of them does not constitute infringement.
The Intellectual Property Code mandates originality
as a prerequisite for copyright protection. This
requirement necessitates independent creation plus
a modicum of creativity. Since facts do not owe their
origin to an act of authorship, they are not original,
and thus are not copyrightable. A compilation is not
copyrightable per se, but is copyrightable only if its
facts have been "selected, coordinated, or arranged
in such a way that the resulting work as a whole
constitutes an original work of authorship." Thus, the
statute envisions that some ways of selecting,
coordinating, and arranging data are not sufficiently
original to trigger copyright protection. Even a
compilation that is copyrightable receives only
limited protection, for the copyright does not extend
to facts contained in the compilation. (Feist
Publications, Inc. v. Rural Telephone Service Co., 499
U.S. 340)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
RIGHTS OF A COPYRIGHT OWNER
Q: What is the presumption of authorship?
A: The natural person whose name is indicated on a
work in the usual manner as the author shall, in the
absence of proof to the contrary, presumed to be the
author of the work. This is applicable even if the
name is a pseudonym, where the pseudonym leaves
no doubt as to identity of the author. (Sec. 219.1, IPC)
The person or body corporate, whose name appears
on the audio-visual work in the usual manner shall, in
the absence of proof to the contrary, be presumed to
be the maker of said work. (Sec. 219.2, IPC)
Q: What are the rights of an author?
A:
1. Economic rights The right to carry out, authorize
or prevent the following acts:
a. Reproduction of the work or substantial
portion thereof
b. Carry-out derivative work (dramatization,
translation, adaptation, abridgement,
arrangement or other transformation of the
work)
c. First distribution of the original and each copy
of the work by sale or other forms of transfer
of ownership
d. Rental right
e. Public display
f. Public performance
g. Other communications to the public.
2. Moral rights For reasons of professionalism and
propriety, the author has the right:
a. To require that the authorship of the works be
attributed to him (attribution right)
b. To make any alterations of his work prior to, or
to withhold it from publication
c. Right to preserve integrity of work, object to
any distortion, mutilation or other
modification which would be prejudicial to his
honor or reputation; and
d. To restrain the use of his name with respect to
any work not of his own creation or in a
distorted version of his work. (Sec.193, IPC)
3. Droit de suite (Right to proceeds in subsequent
transfers or follow up rights) This is an inalienable
right of the author or his heirs to receive to the
extent of 5% of the gross proceeds of the sale or
lease of a work of painting or sculpture or of the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
original manuscript of a writer or composer,
subsequent to its first disposition by the author.
Q: What are the rights which are not covered under
a Droit de suite
A: PEEWS
a. Prints
b. Etchings
c. Engravings
d. Works of applied art
e. Similar works wherein the author primarily derives
gain from the proceeds of reproductions. (Sec. 201,
IPC)
Q: ABC is the owner of certain musical compositions
among which are the songs entitled: "Dahil Sa Iyo",
"Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao
Lamang" and "The Nearness Of You. Soda Fountain
Restaurant hired a combo with professional singers
to play and sing musical compositions to entertain
and amuse customers. They performed the above-
mentioned compositions without any license or
permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
payment of the necessary license fee for the playing
and singing of aforesaid compositions but the
demand was ignored. ABC filed an infringement case
against Soda Fountain. Does the playing and singing
of musical compositions inside an establishment
constitute public performance for profit?
A: Yes. The patrons of the Soda Fountain pay only for
the food and drinks and apparently not for listening
to the music, but the music provided is for the
purpose of entertaining and amusing the customers
in order to make the establishment more attractive
and desirable. For the playing and singing the musical
compositions involved, the combo was paid as
independent contractors by Soda Fountain. It is
therefore obvious that the expenses entailed thereby
are added to the overhead of the restaurant which
are either eventually charged in the price of the food
and drinks or to the overall total of additional income
produced by the bigger volume of business which the
entertainment was programmed to attract.
Consequently, it is beyond question that the playing
and singing of the combo in defendant-appellee's
restaurant constituted performance for profit.
(FILSCAP v. Tan, G.R., No. L-36402, Mar. 16, 1987)
Q: May an author be compelled to perform his
contract?
A: An author cannot be compelled to perform his
contract to create a work or for the publication of his
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 INTELLECTUAL PROPERTY LAWS
work already in existence. However, he may be held
liable for damages for breach of such contract. (Sec.
195, IPC)
Q: X, an amateur astronomer, stumbled upon what
appeared to be a massive volcanic eruption in
Jupiter while peering at the planet through his
telescope. The following week, X, without notes,
presented a lecture on his findings before the
Association of Astronomers of the Philippines. To his
dismay, he later read an article in a science journal
written by Y, a professional astronomer, repeating
exactly what X discovered without any attribution to
him. Has Y infringed on X's copyright, if any?(2011
Bar Question)
A: No, since no protection extends to any discovery,
even if expressed, explained, illustrated, or embodied
in a work.
Q: What is the nature of moral rights?
A: These are personal rights independent from the
economic rights. Being a personal right, it can only be
given to a natural person. Hence, even if he has
licensed or assigned his economic rights, he continues
to enjoy the above-mentioned moral rights. (Amador,
Intellectual Property Fundamentals, 2007)
Q: What is the term of moral rights?
A: It shall last during the lifetime of the author and
for fifty (50) years after his death and shall not be
assignable or subject to license. (Sec. 198, IPC)
Note: The person/s to be charged with the posthumous
enforcement of moral rights shall be named in writing to be
filed with the National Library. In default of such person or
persons, such enforcement shall devolve upon either the
author's heirs, and in default of the heirs, the Director of
the National Library. (ibid.)
Q: What are the exceptions to moral rights?
A:
a. Absent any special contract at the time creator
licenses/permits another to use his work, the
following are deemed not to contravene
creators moral rights, provided they are done in
accordance with reasonable customary standards
or requisites of the medium:
a. Editing
b. Arranging
c. Adaptation
d. Dramatization
e. Mechanical and electric reproduction
299
b. Complete destruction of work unconditionally
transferred by creators. (Sec. 197, IPC)
Q: Can moral rights be waived?
A:
GR: Moral rights can be waived in writing, expressly
so stating such waiver.
XPN: Even in writing, waiver is not valid if:
1. Use the name of the author, title of his work, or
his reputation with respect to any
version/adaptation of his work, which because of
alterations, substantially tend to injure
literary/artistic reputation of another author
2. Use name of author in a work that he did not
create
Q: What are the neighboring rights?
A: These are the rights of performers, producers of
sound recording and broadcasting organizations.
Q: What is the scope of a performers rights?
A: Performers shall enjoy the following exclusive
rights:
1. As regards their performances, the right of
authorizing:
a. The broadcasting and other communication to
the public of their performance; and
b. The fixation of their unfixed performance.
2. The right of authorizing the direct or indirect
reproduction of their performances fixed in sound
recordings, in any manner or form;
3. The right of authorizing the first public distribution
of the original and copies of their performance
fixed in the sound recording through sale or rental
or other forms of transfer of ownership;
4. The right of authorizing the commercial rental to
the public of the original and copies of their
performances fixed in sound recordings, even after
distribution of them by, or pursuant to the
authorization by the performer; and
5. The right of authorizing the making available to the
public of their performances fixed in sound
recordings, by wire or wireless means, in such a
way that members of the public may access them
from a place and time individually chosen by them.
(Sec. 203, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What are the moral rights of performers?
A: The performer, shall, as regards his live aural
performances or performances fixed in sound
recordings, have the right to claim to be identified as
the performer of his performances, except where the
omission is dictated by the manner of the use of the
performance, and to object to any distortion,
mutilation or other modification of his performances
that would be prejudicial to his reputation.
Q: When are performers rights lost?
A: Once a performer has authorized broadcasting or
fixation of his performance. (Sec 205, IPC)
Note: Fair use and limitations to copyrights shall apply
mutatis mutandis to performers. (Ibid.)
Q: When are performers entitled to additional
remuneration on their performance?
A: The performer shall be entitled to an additional
remuneration equivalent to at least 5% of the original
compensation he received for the first
communication or broadcast in every communication
to the public or broadcast of a performance
subsequent to the first communication or broadcast,
unless otherwise provided in the contract. (Sec. 206,
IPC)
Q: What is the scope of the rights of producers on
sound recordings?
A: Producers of sound recordings shall enjoy the
following exclusive rights:
1. The right to authorize the direct or indirect
reproduction of their sound recordings, in any
manner or form; the placing of these reproductions
in the market and the right of rental or lending
2. The right to authorize the first public distribution of
the original and copies of their sound recordings
through sale or rental or other forms of transferring
ownership; and
3. The right to authorize the commercial rental to the
public of the original and copies of their sound
recordings, even after distribution by them by or
pursuant to authorization by the producer. (Sec.
208, IPC)
Note: Fair use and limitations to copyrights shall apply
mutatis mutandis to performers. (Sec. 210, IPC)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: What is the scope of the rights of broadcasting
organizations?
A: Broadcasting organizations shall enjoy the
exclusive right to carry out, authorize or prevent any
of the following acts:
1. The rebroadcasting of their broadcasts
2. The recording in any manner, including the making
of films or the use of video tape, of their broadcasts
for the purpose of communication to the public of
television broadcasts of the same
3. The use of such records for fresh transmissions or
for fresh recording. (Sec. 211, IPC)
Q: When are neighboring rights not applicable?
A:
1. Exclusive use of a natural person for own
personal purposes
2. Short excerpts for reporting current events
3. Sole use for the purpose of teaching or for
scientific research
4. Fair use of the broadcast
Q: What are the term of protection given to
performers, producers and broadcasting
organizations?
A:
1. For performances not incorporated in recordings,
50 years from the end of the year in which the
performance took place; and
2. For sound or image and sound recordings and
for performances incorporated therein, 50 years
from the end of the year in which the recording
took place.
3. In case of broadcasts, the term shall be 20 years
from the date the broadcast took place. The
extended term shall be applied only to old works
with subsisting protection under the prior law.
(Sec. 215, IPC)
Q: To whom are the rights granted to copyrightable
works applicable (points of attachment)?
A:
1. For literary and artistic works and derivative works
a. Works of authors who are nationals of, or have
their habitual residence in, the Philippines;
300
 INTELLECTUAL PROPERTY LAWS

b. Audio-visual works the producer of which has

his headquarters or habitual residence in the
Philippines;
c. Works of architecture erected in the
Philippines or other artistic works incorporated
in a building or other structure located in the
Philippines;
d. Works first published in the Philippines; and
e. Works first published in another country but
also published in the Philippines within thirty
days, irrespective of the nationality or
residence of the authors. (Sec. 221, IPC)

2. For perfomers
a. Performers who are nationals of the
Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
i. Take place in the Philippines; or
ii. Are incorporated in sound recordings that
are protected under IPC; or
iii. Which has not been fixed in sound
recording but are carried by broadcast
qualifying for protection under IPC. (Sec.
222, IPC)

3. Of sound recordings
a. Sound recordings the producers of which are
nationals of the Philippines; and
b. Sound recordings that were first published in
the Philippines. (Sec. 223, IPC)

4. For broadcast
a. Broadcasts of broadcasting organizations the
headquarters of which are situated in the
Philippines; and
b. Broadcasts transmitted from transmitters
situated in the Philippines. (Sec. 224, IPC)

Note: The provisions of IPC shall also apply to works,

performers, producers of sound recordings and
broadcasting organizations that are to be protected by
virtue of and in accordance with any international
convention or other international agreement to which
the Philippines is a party. (Sec. 221.2 and 224.2, IPC)

301 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

RULES ON OWNERSHIP OF COPYRIGHT

Q: Give a brief summary on the rules on copyright ownership?

A:
TYPE OF WORK OWNER
ORIGINAL LITERARY AND Author (Sec. 178.1, IPC)
ARTISTIC WORKS
JOINT AUTHORSHIP Co-authors in case of works of joint authorship; in the absence of
agreement, their rights shall be governed by the rules on co-ownership.

Note: If work of joint authorship consists of parts that can be used separately, then
the author of each part shall be the original owner of the copyright in the part that
he has created. (Sec. 178.2, IPC)

AUDIOVISUAL WORK GR: Producer, the author of the scenario, the composer of the music, the
film director, and the author of the work so adapted
XPN:The producers shall exercise the copyright to an extent required for
the exhibition of the work in any manner. (Sec. 178.5, IPC)

ANONYMOUS AND GR: Publishers deemed representatives of the author in case of

PSEUDONYMOUS WORKS anonymous and pseudonymous works.
XPN: When the contrary appears or where the pseudonym or adopted
name leaves no doubt as to the authors identity; or author discloses his
identity.

COMMISSIONED WORK The person who commissioned the work shall own the work but the
copyright thereto shall remain with the creator, unless there is a written
stipulation to the contrary. (Sec. 178.4, IPC)

COLLECTIVE WORKS Contributor is deemed to have waived his right unless he expressly reserves
it. (Sec. 196, IPC)

IN THE COURSE OF GR: The employee, if not a part of his regular duties even if the employee
EMPLOYMENT uses the time, facilities and materials of the employer. (Sec. 178.3, IPC)

XPN: 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.

LETTERS Writer provisions of Article 723, Civil Code govern [ownership shall pertain
to the person to whom they are addressed and delivered] (Sec. 178.6, IPC)

UNIVERSITY OF SANTO TOMAS 302

2013 GOLDEN NOTES
 INTELLECTUAL PROPERTY LAWS

Q: Distinguish collective work from joint work. 2. The Making of quotations from a published work
if they are compatible with fair use and only to
A: the extent justified for the purpose.
COLLECTIVE WORK JOINT WORK
3. Communication to the public by mass media of
Elements remain Separate elements
articles on current political, social, economic,
unintegrated and merge into a unified scientific or religious topic, lectures, addresses
disparate. whole. and other works of the same nature
Work created by 2 or more
persons at the initiative 4. As Part of reports of current events (e.g. music
Work prepared by 2 or played or tunes on the occasion of a sporting
and under the direction of
more authors with the event and such tunes were picked up during a
another with the
intention that their new coverage of the event).
understanding that it will
contributions be merged
be disclosed by the latter 5. For Teaching purposes, provided that the source
into inseparable or
under his own name and and of the name of the author, if appearing in
independent parts of the
that of the contributions of the work, are mentioned.
unitary whole.
natural persons will NOT
be identified 6. Recording made in Educational institutions of a
work included in a broadcast for the use of such
Each author shall enjoy Joint authors shall be co- educational institutions, provided that such
copyright to his own owners. Co-ownership recording must be deleted within a reasonable
contribution shall apply. period after they were first broadcast.
The work will be attributed
to the person under whose Joint authors shall be 7. The making of Ephemeral recordings by a
initiative and direction it both entitled to the broadcasting organization by means of its own
facilities and for use in its own broadcast.
was created unless the acknowledgment as
contributor expressly authors of the work. 8. The Use made of a work by or under the
reserves his right. direction or control of the government, by the
National Library or by educational, scientific or
Q: T, an associate attorney in XYZ Law Office, wrote professional institutions where such use is in the
a newspaper publisher a letter disputing a public interest and is compatible with fair use.
columnists claim about an incident in the attorneys
family. T used the law firms letterhead and its 9. The Public performance of a work, in a place
computer in preparing the letter. T also requested where no admission fee is charged.
the firms messenger to deliver the letter to the
publisher. Who owns the copyright to the letter? 10. Public Display of the original or a copy of the
(2011 Bar Question) work not made by means of a film, slide,
television image or otherwise on screen or by
A: T, since he is the original creator of the contents of means of any other device or process (e.g. Public
the letter. display using posters mounted on walls and
LIMITATIONS ON COPYRIGHT display boards.

Q: What are the general limitations on copyright?
A: The following acts shall not constitute
infringement of copyright: (PeMaCoP-TEEUP-DJ)
1. Performance of a work, once it has been lawfully
made accessible to the public, if done privately
and free of charge or for a charitable or religious
institution or society.
11. Any use made of a work for the purpose of any
Judicial proceedings or for the giving of
professional advice by a legal practitioner.
Q: What is the principle of automatic protection?
A: Works are protected by the sole fact of their
creation irrespective of their content, quality or
purpose. Such rights are conferred from the moment
of creation.

303 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Can decompilation be considered fair use?
A: Decompilation, which is the reproduction of the
code and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with other
programs, may also constitute fair use
Q: What are the other limitations on copyright?
A:
1. 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. (Sec. 185, IPC)
2. Copyright in a work of architecture shall include the
right to control the erection of any building which
reproduces the whole or a substantial part of the
work either in its original form or in any form
recognizably derived from the original, provided,
that the copyright in any such work shall not
include the right to control the reconstruction or
rehabilitation in the same style as the original of a
building to which that copyright relates. (Sec. 186,
IPC)
3. The private reproduction of a published work in a
single copy, where the reproduction is made by a
natural person exclusively for research and private
study, shall be permitted, without the
authorization of the owner of copyright in the work
but shall not extend to the reproduction of:
a. A work of architecture in the form of building or
other construction;
b. An entire book, or a substantial part thereof, or
of a musical work in graphic form by
reprographic means;
c. A compilation of data and other materials;
d. A computer program except as provided in
Section 189; and
e. Any work in cases where reproduction would
unreasonably conflict with a normal exploitation
of the work or would otherwise unreasonably
prejudice the legitimate interests of the author.
(Sec. 187, IPC)
4. Any library or archive whose activities are not for
profit may, without the authorization of the author
of copyright owner, make a single copy of the work
by reprographic reproduction:
a. Where the work by reason of its fragile
character or rarity cannot be lent to user in its
original form;
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
b. Where the works are isolated articles contained
in composite works or brief portions of other
published works and the reproduction is
necessary to supply them, when this is
considered expedient, to persons requesting
their loan for purposes of research or study
instead of lending the volumes or booklets
which contain them; and
c. Where the making of such a copy is in order to
preserve and, if necessary in the event that it is
lost, destroyed or rendered unusable, replace a
copy, or to replace, in the permanent collection
of another similar library or archive, a copy
which has been lost, destroyed or rendered
unusable and copies are not available with the
publisher.
But it shall not be permissible to produce a volume
of a work published in several volumes or to
produce missing tomes or pages of magazines or
similar works, unless the volume, tome or part is
out of stock. (Sec. 188, IPC)
5. The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the author
of, or other owner of copyright in, a computer
program, by the lawful owner of that computer
program, provided, the copy or adaptation is
necessary for:
a. The use of the computer program in
conjunction with a computer for the purpose,
and to the extent, for which the computer
program has been obtained; and
b. Archival purposes, and, for the replacement of
the lawfully owned copy of the computer
program in the event that the lawfully obtained
copy of the computer program is lost, destroyed
or rendered unusable. (Sec. 187, IPC)
6. The importation of a copy of a work by an
individual for his personal purposes shall be
permitted without the authorization of the author
of, or other owner of copyright in, the work under
the following circumstances:
a. When copies of the work are not available in the
Philippines and:
i. Not more than one copy at one time is
imported for strictly individual use only; or
ii. The importation is by authority of and for the
use of the Philippine Government; or
iii. The importation, consisting of not more than
three such copies or likenesses in any one
invoice, is not for sale but for the use only of
any religious, charitable, or educational
society or institution duly incorporated or
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 INTELLECTUAL PROPERTY LAWS

registered, or is for the encouragement of the Lifetime of the author and 50

fine arts, or for any state school, college,
university, or free public library in the
Philippines.
b. When such copies form parts of libraries and
personal baggage belonging to persons or
families arriving from foreign countries and are
not intended for sale, provided, that such copies
do not exceed three. (Sec. 190, IPC)
Q: What is the term of protection of copyright?
Newspaper Article
years after. (Sec. 213, IPC)
DOCTRINE OF FAIR USE
Q: What is the doctrine of fair use?
A: Fair use permits a secondary use that serves the
copyright objective of stimulating productive thought
and public instruction without excessively diminishing
the incentives for creativity.

A: Q: What are the factors that should be considered in

order to determine fair use?
TYPE OF WORK DURATION
Lifetime of the creator and for A:
Single creation 1. The purpose and character of the use, including
50 years after his death
whether such use is of a commercial nature or is
Lifetime of the last surviving
for non-profit educational purpose;
Joint creation co-creator and for 50 years 2. The nature of the copyrighted work;
after his death. 3. The amount and substantiality of the portion used
50 years after the date of their in relation to the copyrighted work as a whole;
first publication; except where and
before the expiration of said 4. The effect of the use upon the potential market
for or value of the copyrighted work.
Anonymous or period, the authors identity is
pseudonymous revealed or is no longer in Note: The fact that a work is unpublished shall not by
st
work doubt, the 1 two mentioned itself bar a finding of fair use if such finding is made
rules shall apply; or if upon consideration of all the above factors. (Sec. 182.2,
IPC)
unpublished, 50 years from
their making. Q: What is the must carry rule?
Work of an applied
art of an artistic A: Must-carry rule is another limitation on copyright.
creation with It obligates operators to carry the signals of local
utilitarian channels within their respective systems. This is to
give the people wider access to more sources of
functions or
news, information, education, sports event and
incorporated in a
entertainment programs other than those provided
useful article 25 years from the time of the
for by mass media and afforded television programs
whether made by making. to attain a well informed, well-versed and culturally
hand or produced refined citizenry and enhance their socio-economic
on an industrial growth. (ABS-CBN Broadcasting Corporation v.
scale Philippine Multimedia System, G.R. No. 175769-70,
Jan. 19, 2009)
Audio-visual works
including those
produced by Q: What are published works?
process analogous 50 years from date of
to photography or publication and, if A: Those works which, with the consent of the
any process for unpublished, from the date of authors, are made available to the public by wire or
making audio- making. wireless means in such a way that members of the
public may access these works from a place and time
visual recordings
individually chosen by them: provided, that
availability of such copies has been such, as to satisfy

305 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
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the reasonable requirement of the public, having A: Unless a greater right is expressly granted, such
regard to the nature of the work. (Sec. 171.7, IPC) submission shall constitute only a license to make a
single publication. (Sec. 180.3, IPC)
Q: What is the difference between public
performance and communication to the public of a Note: If two or more persons jointly own a copyright or any
performance? part thereof, neither of the owners shall be entitled to
grant licenses without the prior written consent of the
other owner or owners. (Ibid.)
A:
COMMUNICATIONS TO
PUBLIC COPYRIGHT INFRINGEMENT
THE PUBLIC OF A
PERFORMANCE
PERFORMANCE Q: What is copyright infringement?
Performance at a place
The transmission to the A: It is the doing by any person, without the consent
or at places where
public, by any medium, of the owner of the copyright, of anything the sole
persons outside the
otherwise than by right to do which is conferred by statute on the
normal circle of a
broadcasting, of sounds of a owner of the copyright. The act of lifting from
family and that
performance or the anothers book substantial portions of discussions
familys closest social
representations of sounds and examples and the failure to acknowledge the
acquaintances are or
fixed in a sound recording. same is an infringement of copyright. (Habana v.
can be present.
The communication can be Robles, G.R. No. 131522, July 19, 1999)
It is performed at a
accessed through wired or
specific time and Q: What does substantial reproduction mean?
wireless means at a time
place. (e.g. The
and place convenient to the
Pacquiao-Clottey A: It is not necessarily required that the entire
viewer (e.g. The Pacquiao-
Match in Dallas Texas copyrighted work, or even a large portion of it, be
Clottey Match watched via
Stadium) copied. If so much is taken that the value of the
YouTube)
original work is substantially diminished, there is an
Q: May a copyright be transferred/assigned? infringement of copyright and to an injurious extent,
the work is appropriated. It is no defense that the
A: It may be assigned in whole or in part. Within the pirate did not know whether or not he was infringing
scope of the assignment, the assignee is entitled to all any copyright; he at least knew that what he was
the rights and remedies which the assignor had with copying was not his, and he copied at his peril. In
respect to the copyright. (Sec. 180.1, IPC) cases of infringement, copying alone is not what is
prohibited. The copying must produce an injurious
Q: What are the requisites for a transfer of copyright effect. (Habana v. Robles, G.R. No. 131522, July 19,
to take effect? 1999)
A:
1. If inter vivos, must be in writing; and Q: What is plagiarism?
2. Filed in National Library upon payment of
prescribed fees. (Sec. 182, IPC) A: It is the practice of claiming or implying original
authorship of (or incorporating material from)
Q: Is filing of the assignment or license of copyright a someone elses written or creative work, in whole or
mandatory requirement? in part, into ones own without adequate
acknowledgment.
A: No, Section 182 uses the permissive word may in
reference to the filing of the deed of assignment or Q: What is the difference between copyright
transfer of copyright, this filing should not be infringement and plagiarism?
understood as mandatory for validity and
enforceability. The filing is entirely optional for the A:
parties and may be useful only for evidentiary and COPYRIGHT
PLAGIARISM
notification purposes. (Amador, Intellectual Property INFRINGEMENT
Fundamentals, 2007) The unauthorized use The use of anothers
of copyrighted information,
Q: What is the limitation regarding submission of a material in a manner language, or writing,
literary, photographic or artistic work to a that violates one of when done without
newspaper, magazine or periodical for publication?

UNIVERSITY OF SANTO TOMAS 306

2013 GOLDEN NOTES
 INTELLECTUAL PROPERTY LAWS

the copyright owners proper Q: What are the criminal penalties in case of
exclusive rights, such acknowledgment of copyright infringement?
as the right to the original source.
reproduce or perform A:
the copyrighted work, 1. Imprisonment of one (1) year to three (3) years
or to make derivative plus a fine ranging from Fifty thousand pesos
works that build upon (P50,000) to One hundred fifty thousand pesos
it. (P150,000) for the first offense.
Copyright 2. Imprisonment of three (3) years and one (1) day
infringement is a very to six (6) years plus a fine ranging from One
broad term that hundred fifty thousand pesos to Five hundred
describes a variety of thousand (P500,000) for the second offense.
acts. It may be 3. Imprisonment of six (6) years and one day to nine
Plagiarism is specific
duplication of a work, (9) years plus a fine ranging from Five hundred
as it refers only to
rewriting a piece, thousand pesos (P500,000) to P1,500,000 for the
using someone elses
performing a written third offense.
work without proper
work or doing 4. In all cases, subsidiary imprisonment in cases of
acknowledgement.
anything that is insolvency.
normally considered
to be the exclusive Q: What is affidavit evidence?
right of the copyright
holder. A: An affidavit made before the notary public in
Public documents can actions for infringement, reciting the facts required to
There is no copyright be stated under the IPC. (Sec. 216.1)
be plagiarized so long
infringement on public
as it is not
documents. Note: As a prima facie proof, the affidavit shifts the burden
acknowledged.
of proof to the defendant, to prove the ownership of the
In copyright copyrighted work.
In plagiarism the
infringement, the
copying need not be
copying must be Q: Due to the amendment of the IP Code under R.A.
substantial
substantial 10372 APPROVED ON FEBRUARY 28, 2013, deleting
In copyright the provision entitling importation in the Philippines
Plagiarism, may exist
infringement, the of up to three (3) copies of copyrighted works in a
even if none of the
copying must refer to personal baggage, can one still be allowed to import
same words are used
the expression of an books, DVDs, and CDs from abroad?
to express an idea.
idea.
A: Yes. In fact, the amendments to the Intellectual
Q: What are the available remedies in case of Property Code have removed the original limitation
copyright infringement? of three copies when bringing legitimately acquired
copies of copyrighted material into the country. Only
A: (IDID-MS) the importation of pirated or infringed material is
1. Injunction illegal. As long as they were legally purchased, you
2. Damages, including legal costs and other can bring as many copies you want, subject to
expenses, as he may have incurred due to the Customs regulations (pcdspo.gov.ph).
infringement as well as the profits the infringer
may have made due to such infringement Q: Is the reproduction of copyrighted material for
3. Impounding during the pendency of the action personal purposes punishable by this law?
sales invoices and other documents evidencing
sales A: No. Infringement in this context refers to the
4. Destruction without any compensation all economic rights of the copyright owner. Transferring
infringing copies music from a lawfully acquired CD into a computer,
5. Moral and Exemplary damages (Sec. 216.1); or then downloading it to a portable device for personal
6. Seizure and impounding of any article, which may use, is not infringement. But if, multiple copies of the
serve as evidence in the court proceedings. (Sec. CD were reproduced for sale, then infringement
216.2) occurs (Ibid).

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Q: Is the possession of, for example, a music le
procured through an infringing activity a violation of
this law?
A: Only if it can be proven that the person benefitting
from the music file has knowledge of the
infringement, and the power and ability to control
the person committing the infringement (Ibid).
Q: Is jailbreaking or rooting a phone or device
illegal?
A: No. Jailbreaking or rooting by themselves are not
illegal. However, downloading pirated material, or
committing infringement with a jailbroken phone
increases the penalty and damages imposed on the
person found guilty of infringement (Ibid).
Note: Jailbreaking (for iOS) and rooting (for Android) are
examples of decompilation, the process of removing the
vendor-imposed limitations of tablets, mobile devices and
other electronic gadgets. Though not illegal, decompilation
may be in violation of your operating systems terms of use,
and therefore may void your warranty (Ibid).
Q: Are mall owners liable for infringement activities
of their tenants?
A: Mall owners are not automatically penalized for
the infringing acts of their tenants. When a mall
owner or lessor finds out about an infringement
activity, he or she must give notice to the tenant,
then he or she will be afforded time to act upon this
knowledge. The law requires that one must have both
proven knowledge of the infringement, and the
ability to control the activities of the infringing
person, to be held liable. The mall owner must also
have benefitted from the infringement (Ibid).
Q: What are the other beneficial provisions brought
by R.A. 10372?
A:
1. Grant of enforcement powers to IPOPHL (Sec. 2)
The law grants visitorial powers to IPOPHL and
allows it to undertake enforcement functions
with the support of concerned agencies such as
PNP, NBI, BOC, OMB and LGUs. IPOPHL itself will
not be conducting raids or seizures but will be
coordinating with the said agencies. However, as
IP rights remain to be private rights, there must
be a complaint from the IP right owner. So, if an
author sees pirated copies of his book in a
certain store, he may notify IPOPHL. IPOPHL can
now initiate together with any of the said
agencies to address the problem.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
2. Establishment of the Bureau of Copyright and
Other
Related Rights (Secs. 1 and 3)
At present there is no entity performing the
more substantial function of policy formulation,
rule making, adjudication, research and
education, which is envisioned to be handled by
the Bureau of Copyright. Although a Copyright
Division exists in the National Library, the
function of such office is merely to accept
deposits of copyrighted works. The Copyright
Bureau is dedicated to serving the needs of the
copyright-based industries and stakeholders
could give more focus and rally more resources
and support for the creative industry, which is
very important for protection of works by
Filipinos both here and abroad.
3. Accreditation of collective management
organizations or CMOs (Sec. 10)
CMOs are organizations that enforce the
copyright of the copyright holders. Through this
mandate, IPOPHL will be able to monitor and
promote good corporate governance among
CMOs, benefitting not only the rights holders
themselves but also the users of copyrighted
works. Members of the Philippine Retailers
Association (PRA), mall owners, restaurants, and
other heavy users of music in their
establishments will greatly benefit from this
provision, as they are ensured that only
legitimate collecting agencies can collect
royalties from them on behalf of copyright
owners.
4. Clarification of the concept of copyright
infringement, including secondary liability (Secs. 22
and 23)
The provisions on copyright infringement have
been refined to include contributory
infringement (secondary liability), circumvention
of technological measures and rights
management information as aggravating
circumstances, and the option to collect
statutory damages instead of actual damages.
However, under Sec. 22 of the amendments, to
be secondarily liable, a landlord or mall must: (1)
benefit from the infringing activity; (2) must have
been given notice of the infringing activity and a
grace period to act on the same; and (3) has the
right and ability to control the activities of the
person who is doing the infringement. The
308
 INTELLECTUAL PROPERTY LAWS

complainant has the burden of proof to provide

evidence that all 3 elements are present. If a
landlord or mall owner is not aware of the
infringement, he cannot be liable for
infringement, even if he benefits from it (from
rental payments) or has control over the
premises.

5. Fair use for the blind, visually- and reading-

impaired (Sec. 11)

This provision would give a special fair use

exemption for the non-commercial reproduction
of works for use by visually-impaired persons.
Before this amendment, hundreds of thousands
of blind Filipinos could not buy Braille works at
cheap prices because copyright protection
operates. Now with this amendment, blind and
visually impaired Filipinos can have easier access
to copyrighted works in Braille.

6. Formulation of IP Policies within universities and

colleges (Sec. 27)

This will ensure that the rights of the academic

community (professors, researchers, students)
over their literary, scholarly and artistic works
are clearly delineated and respected. With an IP
Policy in existence, these sectors within the
academe will have a clear delineation of their
respective rights and benefits, thus, avoiding
disputes and costly litigation within their ranks
which would be detrimental to education,
research and development.
(http://www.ipophil.gov.ph/index.php/20-what-s-
new/135-fact-sheet-on-ip-code-amendments)

309 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
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SPECIAL LAWS

ANTI-MONEY LAUNDERING ACT OF 2001

(R.A. 9160 AS AMENDED BY RA 9194, 10167, 10365)

POLICY OF THE LAW

It is the policy of the State:

1. To protect and preserve the integrity and

confidentiality of bank accounts and to ensure that
the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful
activity.

2. To pursue the States foreign policy to extend

cooperation in transnational investigation and
prosecutions of persons involved in money
laundering activities wherever committed. (Sec. 1, RA
9160.)

OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160)

CATEGORY RA 9160, as amended by RA 9194 and

RA 10365, amending RA 9160
(Based on 10167
(Amendments and New Provisions)
Bar 2013 Syllabus)
COVERED Covered institution refers to: Note:Covered Institutions was changed to
INSTITUTION Covered Persons
(1) banks, non-banks, quasi-banks, trust
entities, and all other institutions and Covered persons, natural or juridical, refer
their subsidiaries and affiliates to:
supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP); (1) banks, non-banks, quasi-banks, trust
entities, foreign exchange dealers,
(2) Insurance companies and all other pawnshops, money changers,
institutions supervised or regulated by remittance and transfer companies and
the Insurance Commission; and other similar entities and all other
persons and their subsidiaries and
affiliates supervised or regulated by the
(3) (i) securities dealers, brokers,
Bangko Sentral ng Pilipinas (BSP);
salesmen, investment houses and
other similar entities managing
(2) insurance companies, pre-need
securities or rendering services as
companies and all other persons
investment agent, advisor, or
supervised or regulated by the
consultant,
Insurance Commission (IC);
(ii) mutual funds, close and
investment companies, common trust
(3) (i) securities dealers, brokers,
funds, pre-need companies and other
salesmen, investment houses and other
similar entities,
similar persons managing securities or
(iii) foreign exchange corporations,
rendering services as investment agent,
money changers, money payment,
advisor, or consultant,
remittance, and transfer companies
(ii) mutual funds, close-end investment
and other similar entities, and

UNIVERSITY OF SANTO TOMAS 310

2013 GOLDEN NOTES
SPECIAL LAWS ANTI-MONEY LAUNDERING ACT
(iv) other entities administering or
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar
monetary instruments or property
supervised or regulated by Securities
and Exchange Commission.
311
companies, common trust funds, and
other similar persons, and
(iii) other entities administering or
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar monetary
instruments or property supervised or
regulated by the Securities and
Exchange Commission (SEC);
(4) jewelry dealers in precious metals,
who, as a business, trade in precious
metals, for transactions in excess of
One million pesos (P1,000,000.00);
(5) jewelry dealers in precious stones,
who, as a business, trade in precious
stones, for transactions in excess of
One million pesos (P1,000,000.00);
(6) company service providers which, as a
business, provide any of the following
services to third parties:
(i) acting as a formation agent of
juridical persons;
(ii) acting as (or arranging for another
person to act as) a director or
corporate secretary of a company, a
partner of a partnership, or a similar
position in relation to other juridical
persons;
(iii) providing a registered office,
business address or accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and
(iv) acting as (or arranging for another
person to act as) a nominee
shareholder for another person; and
(7) persons who provide any of the
following services:
(i) managing of client money,
securities or other assets;
(ii) management of bank, savings or
securities accounts;
(iii) organization of contributions for
the creation, operation or management
of companies; and
(iv) creation, operation or management
of juridical persons or arrangements,
and buying and selling business
entities.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
OBLIGATIONS OF a. Customer Identification - Covered
COVERED institutions shall establish and record the
INSTITUTIONS true identity of its clients based on official
documents. They shall maintain a system
of verifying the true identity of their
clients and, in case of corporate clients,
require a system of verifying their legal
existence and organizational structure, as
well as the authority and identification of
all persons purporting to act on their
behalf.
The provisions of existing laws to the
contrary notwithstanding, anonymous
accounts, accounts under fictitious names,
and all other similar accounts shall be
absolutely prohibited. Peso and foreign
currency non-checking numbered
accounts shall be allowed. The BSP may
conduct annual testing solely limited to
the determination of the existence and
true identity of the owners of such
accounts.
b) Record Keeping All records of all
transactions of covered institutions shall
be maintained and safely stored for five
(5) years from the date of transactions.
With respect to closed accounts, the
records on customer identification,
account files and business
correspondence, shall be preserved and
safety stored for at least five (5) years
from the dates when they were closed.
c) Reporting of Covered and Suspicious
Transactions. -- Covered institutions shall
report to the AMLC all covered
transactions and suspicious transactions
within five(5) working days from
occurrences thereof, unless the
Supervising Authority prescribes a longer
period not exceeding ten (10) working
UNIVERSITY OF SANTO TOMAS 312
2013 GOLDEN NOTES
Exclusions: The term covered persons shall
exclude lawyers and accountants(Requisites
for exclusion)
1. acting as independent legal
professionals
2. in relation to information concerning
their clients or
3. where disclosure of information would
compromise client confidences or the
attorney-client relationship. (Sec. 1, RA
10365, amending Sec. 3[a] of RA 9160.)
a. (same; not amended)
b. (same; not amended)
c. Reporting of Covered and Suspicious
Transactions. Covered persons shall report
to the AMLC all covered transactions and
suspicious transactions within five (5)
working days from occurrence thereof,
unless the AMLC prescribes a different
period not exceeding fifteen (15) working
days.
Lawyers and accountants acting as
independent legal professionals are not
required to report covered and suspicious
transactions if the relevant information was
obtained in circumstances where they are
subject to professional secrecy or legal
professional privilege.
x x x
x x x
When reporting covered or suspicious
transactions to the AMLC, covered persons
and their officers and employees are
prohibited from communicating, directly or
indirectly, in any manner or by any means, to
any person or entity, the media, the fact that
a covered or suspicious transaction has been
reported or is about to be reported, the
contents of the report, or any other
information in relation thereto. Neither may
such reporting be published or aired in any
manner or form by the mass media,
electronic mail, or other similar devices. In
case of violation thereof, the concerned
officer and employee of the covered person
and media shall be held criminally
liable.(Sec. 7, RA 10365 amending Sec. 9, RA
9160.)
 SPECIAL LAWS ANTI-MONEY LAUNDERING ACT

days.

"Should a transaction be determined to be

both a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.

When reporting covered or suspicious

transactions to the AMLC, covered
institutions and their officers and employees
shall not be deemed to have violated
Republic Act No. 1405, as amended,
Republic Act No. 6426, as amended,
Republic Act No. 8791 and other similar
laws, but are prohibited from
communicating, directly or indirectly, in any
manner or by an means, to any person, the
fact that a covered or suspicious transaction
report was made, the contents thereof, or
any other information in relation thereto. In
case of violation thereof, the concerned
officer and employee of the covered
institution shall be criminally liable.
However, no administrative, criminal or civil
proceedings, shall lie against any person for
having made a covered or suspicious
transaction report in the regular
performance of his duties in good faith,
whether or not such reporting results in any
criminal prosecution under this Act of any
other law.

"When reporting covered or suspicious

transactions to the AMLC, covered
instituting and their officers and employees
are prohibited from communicating directly
or indirectly, in any manner or by any
means, to any person or entity, the media,
the fact that a covered or suspicious
transaction report was made, the contents
thereof, or any other information in relation
thereto. Neither may such reporting be
published or aired in any manner or form by
the mass media, electronic mail, or other
similar devices. In case of violation thereof,
the concerned officer and employee of the
covered institution and media shall be held
criminally liable.(Sec. 9, RA 9160 as amended
by RA 9194.)
COVERED 'Covered transaction' is a transaction in cash
TRANSACTIONS or other equivalent monetary instrument
involving a total amount in excess of Five
Same; not amended
hundred thousand pesos (PhP 500,000.00)
within one (1) banking day.(Sec. 3 [b], RA
9160)

313 UNIVERSITY OF SANTO TOMAS

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SUSPICIOUS 'Suspicious transaction' are transactions

TRANSACTIONS with covered institutions, regardless of the
amounts involved, where any of the
following circumstances exist:

1. there is no underlying legal or trade

obligation, purpose or economic
justification;

2. the client is not properly identified;

3. the amount involved is not commensurate

with the business or financial capacity of the
client;

4. taking into account all known

circumstances, it may be perceived that the
client's transaction is structured in order to Same; not amended
avoid being the subject of reporting
requirements under the Act;

5. any circumstances relating to the

transaction which is observed to deviate
from the profile of the client and/or the
client's past transactions with the covered
institution;

6. the transactions is in a way related to an

unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or

7. any transactions that is similar or

analogous to any of the foregoing." (Sec.
3[b-1], RA 9160)
WHEN IS MONEY Money laundering is a crime whereby the
LAUNDERING proceeds of an unlawful activity as herein
COMMITTED defined are transacted, thereby making
(DEFINITION OF them appear to have originated from
MONEY legitimate sources. It is committed by the
LAUNDERING.) following:
(a) Any person knowing that any monetary
instrument or property represents, involves,
or relates to, the proceeds of any unlawful
activity, transacts or attempts to transacts
said monetary instrument or property.
Money laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves,
or relates to the proceeds of any unlawful
activity:
(a) transacts said monetary instrument or
property;
(b) converts, transfers, disposes of, moves,
acquires, possesses or uses said monetary
instrument or property;

(b) Any person knowing that any monetary
instrument or property involves the
proceeds of any unlawful activity, performs
or fails to perform any act as a result of
which he falicitates the offense of money
laundering referred to in paragraph (a)
(c) conceals or disguises the true nature,
source, location, disposition, movement or
ownership of or rights with respect to said
monetary instrument or property;
(d) attempts or conspires to commit money
laundering offenses referred to in

UNIVERSITY OF SANTO TOMAS 314

2013 GOLDEN NOTES
 SPECIAL LAWS ANTI-MONEY LAUNDERING ACT
above.
(c) Any person knowing that any monetary
instrument or property is required under
this Act to be disclosed and filed with the
Anti-Money Laundering Council (AMLC), fails
to do so."(Sec. 4, RA 9160, as amended by
RA 9194)
UNLAWFUL 'Unlawful activity' refers to any act or
ACTIVITIES OR omission or series or combination thereof
PREDICATE involving or having direct relation to
CRIMES following:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Act
of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
under the Revised Penal Code, as amended
and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the
315
paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a), (b) or
(c) above; and
(f) performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in paragraphs
(a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered
or suspicious transaction is required under
this Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so.
(Sec. 4, RA 10365, amending Sec. 4, RA
9160.)
Unlawful activity refers to any act or
omission or series or combination thereof
involving or having direct relation to the
following:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Revised penal Code, as amended;
(9) Swindling under Article 315 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations under Republic Act No. 8792,
otherwise known as the Electrinic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
(13) Fraudulent practices and other
violations under Republic Act No. 8799,
otherwise known as the Securities
Regulation Code of 2000;
(14) Felonies or offenses of a similar nature
that are punishable under the penal laws of
other countries."
UNIVERSITY OF SANTO TOMAS 316
2013 GOLDEN NOTES
(9) Swindling under Article 315 and Other
Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations of Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal
Code, as amended;
(13) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4
and offenses punishable under Sections 5, 6,
7 and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing
Prevention and Suppression Act of 2012:
(15) Bribery under Articles 210, 211 and 211-
A of the Revised Penal Code, as amended,
and Corruption of Public Officers under
Article 212 of the Revised Penal Code, as
amended;
(16) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as
amended;
(17) Malversation of Public Funds and
Property under Articles 217 and 222 of the
Revised Penal Code, as amended;
(18) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176 of
the Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic
Act No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry
Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of
Chapter VI, of Republic Act No. 8550,
SPECIAL LAWS ANTI-MONEY LAUNDERING ACT

otherwise known as the Philippine Fisheries

Code of 1998;

(22) Violations of Sections 101 to 107, and

110 of Republic Act No. 7942, otherwise
known as the Philippine Mining Act of 1995;

(23) Violations of Section 27(c), (e), (f), (g)

and (i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources
Conservation and Protection Act;

(24) Violation of Section 7(b) of Republic Act

No. 9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;

(25) Violation of Republic Act No. 6539,

otherwise known as the Anti-Carnapping Act
of 2002, as amended;

(26) Violations of Sections 1, 3 and 5 of

Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;

(27) Violation of Presidential Decree No.

1612, otherwise known as the Anti-Fencing
Law;

(28) Violation of Section 6 of Republic Act

No. 8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995,
as amended by Republic Act No. 10022;

(29) Violation of Republic Act No. 8293,

otherwise known as the Intellectual Property
Code of the Philippines;

(30) Violation of Section 4 of Republic Act

No. 9995, otherwise known as the Anti-
Photo and Video Voyeurism Act of 2009;

(31) Violation of Section 4 of Republic Act

No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;

(32) Violations of Sections 5, 7, 8, 9, 10(c),

(d) and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination;

317 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
ANTI-MONEY The Anti-Money Laundering Council is
LAUNDERING hereby created and shall be composed of
COUNCIL (AMLC) 1. the Governor of the Bangko Sentral ng
Pilipinas as Chairman,
2. the Commissioner of the Insurance
Commission and
3. the Chairman of the Securities and
Exchange Commission as members. (Sec. 7,
RA 9160, as amended by RA 9194.)
FUNCTIONS The AMLC shall shall act unanimously in the
discharge of its functions as defined
hereunder:
(1) to require and receive covered or
suspicious transaction reports from covered
institutions;
(2) to issue orders addressed to the
appropriate Supervising Authority or the
covered institutions to determine the true
identity of the owner of any monetary
instrument or preperty 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 fo 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 activitity.
(3) to institute civil forfeiture proceedings
and all other remedial proceedings through
the Office of the Solicitor General;
(4) to cause the filing of complaints with the
Department of Justice or the Ombudsman
for the prosecution of money laundering
offenses;
(5) to investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by AMLC, money
laundering activities and other violations of
this Act;
(6) to apply before the Court of Appeals, ex
UNIVERSITY OF SANTO TOMAS 318
2013 GOLDEN NOTES
(33) Fraudulent practices and other
violations under Republic Act No. 8799,
otherwise known as the Securities
Regulation Code of 2000; and
(34) Felonies or offenses of a similar nature
that are punishable under the penal laws of
other countries.
Same; not amended
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
(1) (Same; not amended.)
(2) (Same; not amended.)
(3) (Same; not amended.)
(4) (Same; not amended.)
(5) (Same; not amended.)
(6) to apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be
laundered, proceeds from, or
instrumentalities used in or intended for use
in any unlawful activity as defined in Section
3(i) hereof;
(7) (Same; not amended.)
(8) (Same; not amended.)
(9) (Same; not amended.)
(10) (Same; not amended.)
(11) (Same; not amended.)
(12) to require the Land Registration
Authority and all its Registries of Deedsto
submit to the AMLC, reports on all real
estate transactions involving an amount in
excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from
the date of registration of the transaction, in
 SPECIAL LAWS ANTI-MONEY LAUNDERING ACT

parte, for the freezing of any monetary
instrument or property alleged to be the
proceeds of any unlawful activity as defined
in Section 3(i) hereof;
(7) to implement such measures as may be
necessary and justified under this Act
tocounteract money laundering;
a form to be prescribed by the AMLC. The
AMLC may also require the Land Registration
Authority and all its Registries of Deeds to
submit copies of relevant documents of all
real estate transactions.(Sec. 6, RA 10365
amending Sec. 7, RA 9160.)

(8) to receive and take action in respect of,

any request from foreign states for
assistance in their own anti-money
laundering operations provided in this Act;

(9) to develop educational programs on the

pernicious effects of money laundering, the
methods and techniques used in the money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;

(10) 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 offenses and prosecution
of offenders; and

(11) to impose administrative sanctions for

the violation of laws, rules, regulations, and
orders and resolutions issued pursuant
thereto. (Sec. 7, RA 9160 as amended by RA
9194.)
FREEZING OF Upon verified ex parte petition by the AMLC
MONEY and after determination that probable cause
INSTRUMENT OR exists that any monetary instrument or
PROPERTY property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, the
Court of Appeals may issue a freeze order,
which shall be effective immediately. The
freeze order shall be for a period of twenty
(20) days unless extended by the court. In
any case, the court should act on the
petition to freeze within twenty-four (24)
hours from filing of the petition. If the
application is filed a day before a
nonworking day, the computation of the
twenty-four (24)-hour period shall exclude
the nonworking days."
Upon a verified ex parte petition by the
AMLC and after determination that probable
cause exists that any monetary instrument
or property is in any way related to an
unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a
freeze order which shall be effective
immediately, and which shall not exceed six
(6) months depending upon the
circumstances of the case: Provided, That if
there is no case filed against a person whose
account has been frozen within the period
determined by the court, the freeze order
shall be deemed ipso facto lifted: Provided,
further, That this new rule shall not apply to
pending cases in the courts. In any case, the
court should act on the petition to freeze

319 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

"A person whose account has been frozen
may file a motion to lift the freeze order and
the court must resolve this motion before
the expiration of the twenty (20)-day
original freeze order."
within twenty-four (24) hours from filing of
the petition. If the application is filed a day
before a nonworking day, the computation
of the twenty-four (24)-hour period shall
exclude the nonworking days.

"No court shall issue a temporary restraining A person whose account has been frozen
order or a writ of injunction against any may file a motion to lift the freeze order and
freeze order, except the Supreme Court. the court must resolve this motion before
(Sec. 10, RA 9160 as amended by RA 10167.) the expiration of the freeze order.

No court shall issue a temporary restraining

AUTHORITY TO Notwithstanding the provisions of Republic
INQUIRE INTO Act No. 1405, as amended; Republic Act No.
BANK DEPOSITS 6426, as amended; Republic Act No. 8791;
and other laws, the AMLC may inquire into
or examine any particular deposit or
investment, including related accounts, with
any banking institution or non-bank financial
institution upon order of any competent
court based on an ex parte application in
cases of violations of this Act, when it has
been established that there is probable
cause that the deposits or investments,
including related accounts involved, are
related to an unlawful activity as defined in
Section 3(i) hereof or a money laundering
offense under Section 4 hereof; except that
no court order shall be required in cases
involving activities defined in Section 3(i)(1),
(2), and (12) hereof, and felonies or offenses
of a nature similar to those mentioned in
Section 3(i)(1), (2), and (12), which are
Punishable under the penal laws of other
countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
under Republic Act No. 9372.
order or a writ of injunction against any
freeze order, except the Supreme Court.
(Sec. 8, RA 10365, amending RA 9160.)
Same; but the following new provisions were
inserted:
Nothing contained in this Act nor in related
antecedent laws or existing agreements shall
be construed to allow the AMLC to
participate in any manner in the operations
of the BIR. (Sec. 20, RA 10365, amending RA
9160.)
The authority to inquire into or examine the
main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution,
which are hereby incorporated by reference.
Likewise, the constitutional injunction
against ex post factolaws and bills of
attainder shall be respected in the
implementation of this Act.(Sec. 21, RA
10365 amending RA 9160.)

The Court of Appeals shall act on the

application to inquire into or examine any
deposit or investment with any banking
institution or non-bank financial institution
within twenty-four (24) hours from filing of
the application.

To ensure compliance with this Act, the

Bangko Sentral ng Pilipinas may, in the
course of a periodic or special examination,
check the compliance of a Covered
institution with the requirements of the
AMLA and its implementing rules and
regulations.

UNIVERSITY OF SANTO TOMAS 320

2013 GOLDEN NOTES
SPECIAL LAWS ANTI-MONEY LAUNDERING ACT

For purposes of this section, related

accounts shall refer to accounts, the funds
and sources of which originated from and/or
are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s).

A court order ex parte must first be obtained

before the AMLC can inquire into these
related Accounts: Provided, That the
procedure for the ex parte application of
the ex parte court order for the principal
account shall be the same with that of the
related accounts.

"The authority to inquire into or examine

the main account and the related accounts
shall comply with the requirements of
Article III, Sections 2 and 3 of the 1987
Constitution, which are hereby incorporated
by reference. (Sec. 11, RA 9160, as amended
by RA 10167.)

321 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: What is Safe Harbor Provision?
A: No administrative, criminal or civil proceedings,
shall lie against any person for having made a
COVERED transaction report or a SUSPICIOUS
transaction report in the regular performance of his
duties and in good faith, whether or not such
reporting results in any criminal prosecution under
this Act or any other Philippine law.
Q: Will the report to AMLC violate the law on
Secrecy of Bank Deposits, Foreign Currency Deposit
Act and General Banking Law?
A: No, but it cannot otherwise communicate to any
person or media, fact of report of covered transaction
or contents of the said report nor can the fact of
reporting be published or aired in mass media,
electronic mail or similar devices (Sec. 11, RA 9160 as
amended by RA 10167).
Q: Alvin is jobless but is reputed to be a jueteng
operator. He has never been charged or convicted of
any crime. He maintains several bank accounts
amounting to P100 Million. AMLC charged Alvin
with violation of the Anti-Money Laundering Law.
Can Alvin move to dismiss the case on the ground
that he has no criminal record?
A: No. The contention of Alvin is not tenable because
under AMLA, "money laundering crime" committed
when the proceeds of an "unlawful activity," like
jueteng operations, are made to appear as having
originated from legitimate sources. Money laundering
crime is separate from the unlawful activity of being a
jueteng operator, and requires no previous conviction
for the unlawful activity (Sec. 4, RA 9160, as amended
by RA 10365).
Q: Who has jurisdiction for violations of AMLA?
A:
1. RTC all cases on money laundering
2. Sandiganbayan Those committed by public
officers and private persons in conspiracy with
them. (Sec. 5 R.A. 9160, as amended)
Q: Who is the party entitled to file freeze order?
A: The AMLC, through the OSG, may file an ex-parte
verified petition for freeze order on any monetary
instrument, property or proceeds relating to or
involving an unlawful activity.
Q: Which court has the jurisdiction to issue a freeze
order?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
A: It is solely the CA which has the authority to issue a
freeze order upon application ex parte by the AMLC
and after determination that probable cause exists.
It also has the exclusive jurisdiction to extend existing
freeze orders previously issued by the AMLC vis--vis
accounts and deposits related to money-laundering
activities. (Republic v. Cabrini Green & Ramos, G.R.
No. 154522, May 5, 2006)
Q: What is probable cause under AMLA?
A: Probable cause includes such facts and
circumstances which would lead a reasonably
discreet, prudent or cautious man to believe that an
unlawful activity and/or a money laundering offense
is about to be, is being or has been committed and
that the account or any monetary instrument or
property subject thereof sought to be frozen is in any
way related to said unlawful activity and/or money
laundering offense. (Rule 10.2 of R.A. 9194 as
amended)
Q: What is the period of effectivity of freeze orders?
A; Freeze orders shall be effective for period not
exceeding 6 months depending upon the
circumstances (Sec. 10, RA 9160 as amended by RA
10365).
Q: What are considered related accounts?
A: Those accounts, the funds and sources of which
originated from and/or are materially linked to the
monetary instrument or property subject of the
freeze order.
Q: When may the Anti-Money Laundering Council
(AMLC) inquire into bank deposits?
A: GR: Only upon order of any competent court in
cases of violation of R.A. 9160, as amended.
XPN: No need of court order in cases of (KHDAM)
1. Kidnapping,
2. Hijacking,
3. Drugs- violation of Dangerous Drugs Act,
4. Arson,
5. Murder. (Sec. 11 R.A. 9160, as amended)
322
 SPECIAL LAWS FOREIGN INVESTMENTS ACT
FOREIGN INVESTMENTS ACT
POLICY OF THE LAW
Q: What is the state policy of the law?
A: NOSE Part
1. It is the policy of the State to attract, promote and
welcome productive investments in activities which
significantly contribute to National industrialization
and socio-economic development to the extent
that foreign investment is allowed in such activity
by the Constitution and relevant laws from:
a. Foreign individuals;
b. Partnerships;
c. Corporations;
d. Governments, including their political
subdivisions.
2. Foreign investments shall be encouraged in the
enterprises that significantly expand livelihood and
employment Opportunities for Filipinos by:
a. Enhancing economic value of farm products;
b. Promoting the welfare of Filipino consumers;
c. Expanding the scope, quality and volume of
exports and their access to foreign markets;
d. And/or transferring relevant technologies in
agriculture, industry and support services.
3. Foreign investments shall be welcome as a
Supplement to Filipino capital and technology in
those enterprises serving mainly the domestic
market.
4. GR: There are no restrictions on extent of foreign
ownership of Export enterprises. In domestic
market enterprises, foreigners can invest as much
as 100% equity
XPN:In areas included in the negative list.
5. 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
a. Taking in Filipino partners;
b. Electing Filipinos to the board of director;
c. Implementing transfer of technology to
Filipinos;
d. Generating more employment for the
economy; and
e. Enhancing skills of Filipino workers. (Sec. 2, RA
7042)
323
DEFINITION OF TERMS
Foreign Investment
Foreign Investment is an equity investment made by
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.
Doing Business in the Philippines
Foreign corporations are considered doing or
transacting business in the Philippines if they are:
1. Soliciting orders, service contracts, and opening
offices whether called liason offices of branches;
2. Appointing representatives, distributors domiciled
in the Philippines or who stay for a period or
periods totaling 180 days or more;
3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
corporation in the Philippines;
4. Doing any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions
normally incident to and in progressive prosecution
of, the purpose and object of its organization.(Sec 3
[d], R.A. 7042.)
Q: What are considered as NOT doing or
transacting business in the Philippines for foreign
corporations?
A:
1. Mere investment as shareholder and exercise of
rights as investor;
2. Having a nominee director or officer to represent
its interest in the corporation;
3. Appointing a representative or distributor which
transacts business in its own name and for its own
account;
4. Publication of a general advertisement through
any print or broadcast media;
5. Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
processed by another entity in the Philippines;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
6. Consignment by the foreign corporation of
equipment with a local company to be used in the
processing of products for export;
7. Collecting information in the Philippines;
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis. (Sec 3 [d], RA 7042.)
Export Enterprise
An Export Enterprise is an enterprise wherein a
manufacturer, processor or service [including
tourism] enterprise exports sixty percent (60%) or
more of its output, or wherein a trader purchases
products domestically and exports sixty per cent
(60%) or more of such purchases. (Sec 3 [e], RA 7042.)
Domestic Market Enterprise
A Domestic Market Enterprise is 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 consistency export at least 60%
thereof (Sec 3 [f], R.A. 7042).
REGISTRATION OF INVESTMENTS OF NON-
PHILIPPINE NATIONALS
Q: Who are considered Philippine nationals?
A:
1. A citizen of the Philippines;
2. A domestic partnership or association wholly
owned by citizens of the Philippines;
3. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens;
4. Corporations organized abroad and registered as
doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos; and
5. Trustee of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
(60%) of the fund will accrue to the benefit of the
Philippine nationals.
Q: Who are considered non-Philippine nationals?
A: Those who do not belong to the definition of a
Philippine national.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
Q: May a non-Philippine national own fully a
domestic market enterprise?
A: Yes. A non-Philippine national may own up to
100% of a domestic market enterprise. (Sec. 7, RA
7042.)
Q: What are required of a non-Philippine national to
own up to 100% of a domestic market enterprise?
A:
1. A non-Philippine national must register with the
SEC or with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of DTI in the case of
single proprietorship for it to do business or invest
in a domestic enterprise up to 100% of its capital.
2. The participation of non-Philippine national in the
enterprise is must not be prohibited or limited to
a smaller percentage by existing law and/ or under
Foreign Investment Negative list (Sec. 5, RA 7042).
Q: May the SEC or BTRCP impose any additional
limitation on the extent of foreign ownership in an
enterprise other than those provided for under RA
7042?
A: GR: 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 R.A. 7042.
XPNs:
1. 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;
2. That a non-Philippine national intending to
engage in the same line of business as an existing
joint venture, in which he or his majority
shareholder is a substantial partner, must
disclose the fact and the names and addresses of
the partners in the existing joint venture in his
application for registration with the SEC.
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
Q: What are rules regarding foreign registration in
export enterprises?
A:
1. Foreign investment in export enterprises whose
products and services do not fall within Lists A and
324
 SPECIAL LAWS FOREIGN INVESTMENTS ACT

B of the Foreign Investment Negative List is

allowed up to 100% ownership.

2. 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.

3. BOI shall advise SEC or BTRCP, as the case may be,

of any export enterprise that fails to meet the
export ratio requirement.

4. The SEC or BTRCP shall thereupon order the non-

complying export enterprise to reduce its sales to
the domestic market to not more than 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 this law. (Sec 6, R.A. 7042)

FOREIGN INVESTMENT DOMESTIC MARKET

ENTERPRISES

Q: Can a domestic market enterprise change its

status to export enterprise?

A: Yes, if the Domestic market enterprise consistently

exports in each year thereof sixty per cent (60%) or
more of its output over a three (3) year period. (Sec.
7, RA 7042.)

FOREIGN INVESTMENT NEGATIVE LIST

Q: What is Foreign Investment Negative List?

A: It is a list of areas of economic activity whose

foreign ownership is limited to a maximum of 40% of
the equity capital of the enterprises engaged therein
(Sec. 3 [g], RA 7042).

325 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW

Q: What are included in the List A of the Foreign Investment Negative List?

A: Filipino Ownership must be: (CODES are as follows)

1. 100% - CoFi AMMaN Co.- ProMiSe -US$2.5M

2. 80% - Prc
3. 75% - LoRD
4. 70% - Ad
5. 60% - Go LEARN CUPID
6. 40% - FI (SEC)

100% Filipino Owned

(Zero percent (0%) foreign equity)

(CODE: CoFi AMMaN Co. ProMiSe- US$2.5M)

l. COoperatives(Ch. III, Art. 26, R.A. 6938);

m. Manufacture of FIrecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183).
n. Manufacture, repair, stockpiling and/or distribution of biological, chemical and
radiological weapons and Anti-personnel mines (Various treaties to which the Philippines
is a signatory and conventions supported by the Philippines).
o. Mass media except recording
p. Utilization of MArine resources (Art. XII, Sec. 2, Constitution);
q. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Art. II, Sec. 8,
Constitution);
r. COckpits (Sec. 5, P.D. 449);
s. Practice of all PROfessions
i. Law
ii. Medicine and allied professions
iii. Accountancy, etc.
t. Small-scale MIning (Sec. 3, R.A. 7076);
u. Private SEcurity agencies (Sec. 4, R.A. 5487);
v. Retail trade enterprises with paid-up capital of less than US$2.5 M(Sec. 5, R.A. 8762);

80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)

(Code: Prc)

a. Private Radio Communications network (R.A. 3846).

75 % Filipino Owned
(Up to twenty-five percent (25%) foreign equity)

(Code: LoRD)

e. Contracts for the construction and repair of LOcally-funded public works (Sec. 1,
CA 541, LOI 630) except:
i. infrastructure/development projects covered in R.A. 7718; and
ii. projects which are foreign funded or assisted and required to undergo
international competitive bidding (Sec. 2[a] , R.A. 7718);
f. Private Recruitment, whether for local or overseas employment (Art. 27, P.D.

UNIVERSITY OF SANTO TOMAS 326

2013 GOLDEN NOTES
 SPECIAL LAWS FOREIGN INVESTMENTS ACT

442);
g. Contracts for the construction of Defense-related structures (Sec. 1, CA 541).
70 % Filipino Owned
(Up to thirty percent (30%) foreign equity)

(Code: Ad)

a. Advertising (Art. XVI, Constitution)

60 % Filipino Owned
(Up to forty percent (40%) foreign equity)

(Code: Go LEARN CUPID)

m. Contracts for the supply of materials, goods and commodities to GOCC, agency or
municipal corporation (Sec. 1, R.A. 5183)
n. Ownership of private Lands (Art. XII, Sec. 7, Constitution; Ch. 5, Sec. 22, CA 141; Sec. 4,
R.A. 9182);
o. Ownership/establishment and administration of Educational institutions (Art. XIV, Sec.
4, Constitution);
p. Adjustment Companies (Sec. 323, P.D. 613)
q. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof
(Sec. 5, P.D. 194;
r. Exploration, development and utilization of Natural resources (Art. XII, Sec. 2 ,
Constitution);
s. Ownership of Condominium units where the common areas in the condominium
project are co-owned by the owners of the separate units or owned by a corporation
(Sec. 5, R.A. 4726).
t. Operation and management of public Utilities (Art. XII, Sec. 11, Const.; Sec. 16 of CA
146);
u. Project Proponent and Facility Operator of a BOT project requiring a public utilities
franchise (Art. XII, Sec. 11, Constitution; Sec. 2a, R.A. 7718);
v. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A. 8179)
w. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550

40 % Filipino Owned
(Up to sixty percent (60%) foreign equity)

(Code: FI [SEC] )

c. Financing companies regulated by the SEC(Sec. 6, R.A. 5980 as amended by R.A. 8556);
d. Investment houses regulated by the SEC(Sec. 5, P.D. 129 as amended by R.A. 8366).

Q: What are included in the List B of the Foreign Department of National Defense to engage in
Investment Negative List? such activity, such as the :
a. Manufacture
A: b. Repair
1. GR: Defense-related activities, requiring prior c. Storage
clearance and authorization from the

327 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 MERCANTILE LAW
d. Distribution of, firearms, ammunition,
lethal weapons, military ordnance,
explosives, pyrotechnics, similar materials
XPN: 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. Those that have implications on public health
and morals, such as the manufacture and
distribution of:
a. Dangerous drugs
b. All forms of gambling
c. Nightclubs
d. Bars
e. Beer houses
f. Dance halls
g. Sauna and steam bathhouses
h. Massage clinics. (Sec. 8, RA 7042.)
Note: There is no significant difference between List A and
List B.
Q: What is the rule regarding small and medium-
sized domestic market enterprises?
A: GR: Small and medium-sized domestic market
enterprises with paid-in equity capital less than the
equivalent of US$200,000.00, are reserved to
Philippine nationals.
XPNs:
1. They involve advanced technology as determined
by the DOST;
2. They employ at 50 direct employees, then a
minimum paid-in capital of US$100,000.00 (Sec.
8, RA 7042)
Q: What are included in the List C of the Foreign
Investment Negative List?
A: 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 and approved by the President
and promulgated in a Presidential Proclamation.
Q: The main feature of the Foreign Investment Act
of 1991 is to introduce the concept of "Negative
Lists". Under the said law, what is a "Negative List"?
(2012 Bar Question)
a. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified
to engage in.
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES
b. It is a list of business activities or enterprises in
the Philippines that foreigners are qualified to
engage in.
c. It is a list of business activities or enterprises
that are open to foreign investments provided it
is with the approval of the Board of Investment.
d. It is a list of business activities or enterprises
that are open to foreign investments provided it
is with the approval of the Securities and
Exchange Commission.
A: A. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified to
engage in.
Q: What are considered as strategic industries?
A: Industries that are characterized by all of the
following:
a) Crucial to the accelerated industrialization of the
country.
b) Require massive capital investments to achieve
economies of scale for efficient operations.
c) Require highly specialized or advanced technology
which necessitates technology transfer and
proven production techniques in operations;
d) Characterized by strong backward and forward
linkages with most industries existing in the
country, and
e) Generate substantial foreign exchange savings
through import substitution and collateral
foreign exchange earnings through export of part
of the output that will result with the
establishment, expansion or development of the
industry.
Q: What are the penalties provided under R.A.
7042?
A:
1. A person who violates any provision of R.A. 7042
or of the terms and conditions of registration or of
the rules and regulations issued pursuant thereto,
or aids or abets in any manner any violation shall
be subject to a fine not exceeding P100,000.
2. If the offense is committed by a juridical entity, it
shall be subject to a fine in an amount not
exceeding 1/2 of 1% of total paid-in capital but
not more than P5,000,000.00 The president
and/or officials responsible therefor shall also be
subject to a fine not exceeding P200,000.00
3. In addition to the foregoing, any person, firm or
juridical entity involved shall be subject to
forfeiture of all benefits granted underR.A. 7042
(Sec 14, RA 7042).
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