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5) Registration of the documents in Bureau of


STUDY GUIDE OF THE Trade Regulation and Consumer Protection
(Sec. 9).
SPECIAL COMMERCIAL D. When Law not Applicable
LAWS 1) All creditors give written waiver (Sec. 2);
2) Judicial sales (Sec. 8)

Prof. Tristan A. Catindig E. Consequences of non-compliance with duties

From San Beda reviewer


I. BULK SALES LAW 1. Between the parties Valid contract
Act 3952 (1932), as amended by RA 2. Between persons Valid contract
111 (1947) other than the creditor
3. As to effected Void contract
creditors of the
1.1. Topics seller/mortgagor
A. Purpose
F. Interpretation of Statute
To prevent the defrauding of creditors by the
The law is penal in nature and in derogation of
secret sale or disposal or mortgage in bulk of all
the right to alienate property without
or substantially all of merchants stock of goods
restriction. Thus, its provisions must be strictly
in bulk
construed against the State and liberally in
favor of the accused.
B. Types of Sales in Bulk
1.2 Case
Sec. 2
1) Any sale, transfer, mortgage or assignment Sale Of Foundry Shop Not Covered By BLS
of a stock of goods, wares, merchandise,
provisions, or materials otherwise than in the
PEOPLE V WONG SZU TUNG (1954)
ordinary course of trade and the regular
prosecution of the business of the vendor,
The object of the sale a foundry shop is not
mortgagor, transferor, or assignor; or
covered by the provisions of the Bulk sales law.
2) sale, transfer, mortgage or assignment of all,
What was sold was the shop itself, together with
or substantially all, of the business or
the goodwill and credits, equipment, tools and
trade theretofore conducted by the vendor,
machinery thereof (including a Dodge truck),
mortgagor, transferor, or assignor, or
which are not the stock of merchandise, goods,
3) of all, or substantially all, of the fixtures
wares, provisions or materials in bulk referred
and equipment used in and about the
to in the law. A foundry shop manufactures iron
business of the vendor, mortgagor, transferor,
works or processes or casts metals. It does not
or assignor, shall be deemed to be a sale and
sell merchandise.
transfer in bulk, in contemplation of this Act:

C. Duties of Person Selling in Bulk


II. GENERAL BONDED WAREHOUSE
Sec 3, 4, 5 and 9 ACT
1) Deliver a sworn written statement of the Act 3893 (1931), as amended by RA
names and addresses of all creditors to whom 237 (1948)
the vendor or mortgagor may be indebted,
indicating the amount of indebtedness due or
2.1 Topics
owing, or to become due or owing (Sec. 3);
2) To apply the proceeds of the sale or
A. Purpose
mortgage pro-rata to creditors (Sec. 4);
1) regulate the business of receiving
3) At least 10 days before
commodities for storage;
sale/transfer/execution of mortgage, make
2) to protect persons who may want to avail of
detailed inventory and to preserve the same
the services;
showing the quantity and, to the extent
3) to encourage the establishment of more
possible, the cost price to the vendor, etc. of
warehouses.
each article to be included in the sale, etc. (Sec.
5);
B. Business of receiving commodity for storage
4) Give notice to every creditor at least 10 days
before the sale or transfer (Sec. 5);
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Sec. 2 2.2 Cases


1) the warehouseman is obligated to return the
very same commodity delivered to him or to Receipt of Palay for Milling
pay its value;
2) the commodity delivered is to be milled for LIMJOCO V DIRECTOR OF COMMERCE
the owner thereof; (1965)
3) the commodity delivered is commingled with
the commodity belonging to other persons, and FACTS: Petitioner and husband are owners of a
the warehouseman is obligate to return rice mill. The issue was whether of not the
commodity of the same kind or to pay its value. General Bonded Warehouse Act is applicable to
her business. Petitioner argues that since her
C. Requirement of License business is the milling of palay, the delivery
thereof to her is merely incidental to such
Sec. 3 business and does not constitute storage within
To achieve the purposes mentioned above, any the meaning of the statute.
person who wants to engage in the business of
receiving commodities for storage is required HELD: The General Bonded Warehouse Act is
by the Act to first secure a license therefore applicable. SEC 2 is too clear to permit of any
from the DTI exercise in construction or semantics. It does
not stop at the bare use of the word "storage,"
D. Duties of Bonded Warehouseman but expressly provides that any contract or
1) insure the commodity received for storage transaction wherein the palay delivered is to be
against fire (Sec. 6); milled for and on account of the owner shall be
2) receive for storage any commodity of the deemed included in the business of receiving
kind customarily stored by him in the rice for storage for the purpose of the Act. In
warehouse, so far as his license and the other words, it is enough that the palay is
capacity of his warehouse will permit, without delivered, even if only to have it milled. The
making any discrimination between the persons main intention of the lawmaker is to give
desiring to avail themselves of warehouse protection to the owner of the commodity
facilities (Sec. 8); against possible abuses (and we might add
3) keep a complete record of all commodities negligence) of the person to whom the physical
received by him, of the receipts issued control of his properties is delivered.
therefore, of the withdrawals, of the liquidation,
and of al the receipts returned to and cancelled GOZALES V GO TIONG (1958)
by him (Sec. 9)
FACTS: Prior to the issuance of the license to Go
Tiong to operate as bonded warehouseman, he
had on several occasions received palay for
deposit from plaintiff Gonzales, totaling 368
sacks, for which he issued .After he was
licensed as bonded warehouseman, Go Tiong
again received various deliveries of palay from
plaintiff, totaling 492 sacks, for which he issued
the corresponding receipts, all the grand total
of 860 sacks, valued at P8,600 at the rate of
P10 per sack.

On or about March 15, 1953, plaintiff demanded


from Go Tiong the value of his deposits in the
amount of P8,600, but he was told to return
after two days, which he did, but Go Tiong
again told him to come back. A few days later,
the warehouse burned to the ground. When
plaintiff filed suit co claim his losses, Go Tiong
argued that the formers claim is governed by
the Civil Code and not by the Bonded
Warehouse Act (Act No. 3893, as amended by
Republic Act No. 247), for the reason that, as
already stated, what Go Tiong issued to plaintiff
were ordinary receipts, not the warehouse
receipts contemplated by the Warehouse
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Receipts Law, and because the deposits of 7. Signature of the warehouseman or his
palay of plaintiff were gratuitous. agentLanguage indicating if the warehouseman
is an owner solely or jointly with others, of the
HELD: Bonded Warehouse Act applicable. Act goods deposited and
No. 3893 as amended is a special law regulating 8. Statement of advances made by the
the business of receiving commodities for warehouseman for which he claims a lien
storage and defining the rights and obligations
of a bonded warehouseman and those C. Degree of Care
transacting business with him. Consequently,
any deposit made with him as a bonded Sec. 3
warehouseman must necessarily be governed That degree of care which a reasonably careful
by the provisions of Act No. 3893. The kind or man would exercise in regard to similar goods
nature of the receipts issued by him for the of his own.
deposits is not very material much less
decisive. Though it is desirable that receipts D. Kinds or Receipts (Sec. 4-7)
issued by a bonded warehouseman should 1) Non-negotiable receipt
conform to the provisions of the Warehouse a. one which states that the goods received by
Receipts Law, said provisions in our opinion are the warehouseman will be delivered to the
not mandatory and indispensable in the sense depositor or to any other specified person
that if they fell short of the requirements of the b. the word non-negotiable should be placed
Warehouse Receipts Act, then the commodities plainly upon its face
delivered for storage become ordinary deposits 2) Negotiable receipt
and will not be governed by the provisions of a. One which states that the goods received by
the Bonded Warehouse Act. Under SEC 1 of the the warehouseman will be delivered to the
Warehouse Receipts Act, one would gather the bearer or to the order of any person named in
impression that the issuance of a warehouse such receipt.
receipt in the form provided by it is merely b. Can not be converted to non-negotiable
permissive and directory and not obligatory.
E. Obligation to Deliver Goods (Sec. 8-9)
1) Deliver to whom upon demand
III. WAREHOUSE RECEIPTS ACT a. Holder of the receipt for the goods
Act 2137 (1912) b. Depositor
2) The demand should be accompanied by:
a. An offer to satisfy the warehousemans lien
3.1 Topics b. An offer to surrender the receipt if it is
negotiable
A. Purpose c. A readiness and willingness to sign an
To prescribe the rights and duties of a acknowledgement, when the goods are
warehouseman and to regulate the relationship delivered, that they have been delivered if such
between a warehouseman and: is requested by the warehouseman.
1) the depositor of goods; F. Liability for Misdelivery or Conversion (Sec.
2) holder of a warehouse receipt for the goods; 10, 17-18)
3) person lawfully entitled to the possession of 1) Where a warehouseman delivers the goods
the goods; or to one who is not in fact lawfully entitled to the
4) other persons. possession of them
2) He would also be liable for misdelivery even
B. Obligation to issue receipt if he delivers to a person holding a non-
negotiable receipt or a negotiable receipt, as
Sec. 2 provided in SEC 9(b) or (c) of the Act, if prior to
A warehouseman is required to issue a receipt such delivery he had either:
for the commodity he receives for storage. No a. Been requested, by or on behalf of the
form is prescribed, but it should at least contain person lawfully entitled to a right of property or
the following information: possession in the goods, not to make such
1. Location of the warehouse deliver; or
2. Date of Issue b. Had information that the delivery about to be
3. Receipt number made was to one not lawfully entitled to the
4. Language to indicate if the receipt were possession of the goods.
negotiable or non-negotiable
5. Rate of storage charges G. Rights of Holder of Receipt Covering Goods
6. Description of goods or packages containing vs. Owner of Goods
them Not being a negotiable instrument (but a
Document of Title), the holder of the receipt can
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only acquire such rights /title to the goods as depositor for which a separate receipt has been
the person negotiating the receipt had. Thus, as issued.
between the owner of the good, and a holder of 2) Rationale: permit the inspection and
the receipt of the good which was apparently redelivery of the goods deposited at all times
stolen, the former has a better right. 3) EXCEPT:
a. The goods are fungible, AND
H. When negotiable receipt not required to be b. The commingling is authorized by agreement
surrendered (Sec. 9, 14 and 16) or by custom.
1) Warehouseman is justified in delivering
goods to the following persons (Sec. 9): J. Other Liabilities of Warehouseman
a. the person lawfully entitled to the possession 1) Failure to mark a receipt intended to be non-
of the goods, or his agent; negotiable as non-negotiable (Sec. 7)
b. A person who is either himself entitled to a. Because the holder of the receipt may treat
delivery by the terms of a non-negotiable the same as negotiable.
receipt issued for the goods, or who has written 2) Failure to take up and cancel a negotiable
authority from the person so entitled either receipt when goods are delivered (Sec. 11)
indorsed upon the receipt or written upon a. The warehouseman shall be liable for failure
another paper; or to deliver the goods to any one who purchases
c. A person in possession of a negotiable receipt for value in good faith
by the terms of which the goods are deliverable i. WON such purchaser acquired title to the
to him or order, or to bearer, or which has been receipt before or after the delivery of the goods
indorsed to him or in blank by the person to by the warehouseman.
whom delivery was promised by the terms of ii. Shall be guilty of a crime punishable by fine
the receipt or by his mediate or immediate or imprisonment.
indorser. b. EXCEPT:
2) Where a negotiable receipt has been lost or i. Goods have been lawfully sold to satisfy a
destroyed (Sec. 14) warehousemans lien.
a. A court of competent jurisdiction may order ii. Goods have been lawfully sold or disposed of
the delivery of the goods upon: because of their perishable or hazardous
i. satisfactory proof of such loss or destruction nature.
and 3) Failure to take up and cancel a negotiable
ii. upon the giving of a bond with sufficient receipt or to place upon it a statement of what
sureties to be approved by the court to protect goods have been delivered, when goods are
the warehouseman from any liability or expense partly delivered (Sec. 12)
b. The court may also in its discretion order the a. Same as #2.
payment of the warehouseman's reasonable 4) For altered receipts
costs and counsel fees. Kind of Alteration Warehousemans
c. The delivery of the goods under an order of Liability
the court as provided in this SEC, shall not Immaterial Liable according to the
relieve the warehouseman from liability to a terms of the receipts as
person to whom the negotiable receipt has originally issued
been or shall be negotiated for value without Authorized Liable according to the
notice of the proceedings or of the delivery of terms of the receipts as
the goods. authorized
3) Warehouseman cannot set up title in himself Unauthorized but Liable according to the
(Sec. 16) without fraudulent terms of the receipts as
a. No title or right to the possession of the intent they were before the
goods, on the part of the warehouseman shall alteration
excuse the warehouseman from liability for Unauthorized but Liable according to the
refusing to deliver the goods according to the with fraudulent intent terms of the receipts as
terms of the receipt. originally issued, even
b. EXECEPT: such title or right is derived directly against: i) a purchaser
or indirectly from a transfer made by the of the receipt for value
depositor at the time of or subsequent to the with notice of the
deposit for storage, or from the alteration; 2) to the
warehouseman's lien, person who made the
alteration and to any
I. Commingling of Goods (Sec. 22-23) person who took it with
1) A warehouseman must keep the goods of a notice of the alteration.
depositor separate from the goods of other
depositors, or from the goods of the same However, in the latter
case, such material and
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fraudulent alteration i. Goods have been lawfully sold to satisfy a


shall excuse the warehousemans lien.
warehouseman from ii. Goods have been lawfully sold or disposed of
any other liability to the because of their perishable or hazardous
said persons. nature.
iii. In the case of lost or destroyed receipt after
5) For non-existence or misdescription of goods proceedings (Sec. 14)
(Sec. 20)
a. Liable for damages to holder of a receipt if at K. Warehousemans Lien (Sec. 27, 28, 29, and
time of its issue, goods not yet existed or by 31)
failure of the goods to match desciption 1) Definition
b. EXCEPT: a. A warehouseman has a lien on the goods
i. Statement of the marks or labels upon them deposited with him or on the proceeds thereof
or upon the packages containing them; in the his hands for all lawful charges for
ii. Statement that the goods are of a certain storage and preservation of the goods, money
kind at that the packages containing the goods advanced by him in relation to such goods such
contain goods of a certain kinds or by words of as the expenses of transportation or labor, etc.
similar import 2) Against what property
Eg: received box said to contain... and not a. All goods belonging to the person liable for
box containing the charges
6) For commingling goods (Sec. 24) b. All goods belonging to others deposited by
a. Shall be liable severally to each depositor for the person liable for the charges who has been
the care and redelivery of the depositors share entrusted with the possession of the goods and
of the mass of commingled goods to the same could have validly pledged the same
extent and under the same circumstances as if 3) Lose Lien
the goods had been kept separate a. Warehouseman may lose lien by:
7) For issuing receipts for goods not received i. surrendering the possession of the goods
(Sec. 50) because it is possessory in nature
a. Shall be guilty of a crime if he issues a ii. refusing to deliver the goods when a demand
receipt for goods that have not actually been is made with which he is bound to comply
received by him or are not under his actual 4) Effect of sale to satisfy lien
control at the time of the issuance of the receipt a. The warehouseman shall not, after the sale,
8) For issuing receipts containing false be liable for failure to deliver the goods to the
statements (Sec. 51) depositor or owner of the goods or to the holder
a. Shall be guilty of a crime if he fraudulently of the receipt
issues a receipt for goods knowing that it
contains any false statement 3.2 Case
9) For issuing duplicate receipts not so marked
(Sec. 52) PNB V JUDGE BENITO C. SE, JR. (1996)
a. Guilty of crime if issues a duplicate or
additional negotiable receipt for goods knowing FACTS: PNB filed for attachment of several
that a former negotiable receipt for the same quedans of sugar in the possession of Noahs
goods or any part of them is outstanding and Ark Sugar refinery. The sugar was security for
uncancelled, without plainly placing upon the loans of PNBs clients which they failed to pay.
face of the receipt the word duplicate Noahs Ark claimed that they were the owners
b. EXCEPT: in the case of a lost or destroyed of the sugar.
receipt after proceedings as provided for in Sec.
14 HELD: While the PNB is entitled to the stocks of
10) For issuing receipts for the warehousemans sugar as the endorsee of the quedans, delivery
goods which do not state that fact (Sec. 53) to it shall be effected only upon payment of the
a. Guilty of a crime if he issues a negotiable storage fees. Imperative is the right of the
receipt for oods deposited with or held by him warehouseman to demand payment of his lien
of which he knows that he is the owner, solely at this juncture, because, in accordance with
or jointly or in common with others, if he fails to SEC 29 of the Warehouse Receipts Law, the
state such ownership in the receipt warehouseman loses his lien upon goods by
11) For delivery of goods without obtaining surrendering possession thereof. In other words,
negotiable receipt (sec. 54) the lien may be lost where the warehouseman
a. Guilty of a crime if he delivers gods our of his surrenders the possession of the goods without
possession knowing that a negotiable receipt is requiring payment of his lien, because a
oustanding and cancelled warehousemans lien is possessory in nature.
b. EXCEPT:
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SEC 14. Lost or destroyed receipts. Where property is situated in a different province from
a negotiable receipt has been lost or destroyed, that in which the mortgagor resides, the
a court of competent jurisdiction may order the mortgage shall be recorded in the office of the
delivery of the goods upon satisfactory proof of register of deeds of both the province in which
such loss or destruction and upon the giving of the mortgagor resides and that in which the
a bond with sufficient sureties to be approved property is situated, and for the purposes of this
by the court to protect the warehouseman from Act the city of Manila shall be deemed to be a
any liability or expense, which he or any person province.
injured by such delivery may incur by reason of
the original receipt remaining outstanding. The Sec 5 Form. A chattel mortgage shall be
court may also in its discretion order the deemed to be sufficient when made
payment of the warehouseman's reasonable substantially in accordance with the following
costs and counsel fees. form, and shall be signed by the person or
persons executing the same, in the presence of
The delivery of the goods under an order of the two witnesses, who shall sign the mortgage as
court as provided in this SEC, shall not relieve witnesses to the execution thereof, and each
the warehouseman from liability to a person to mortgagor and mortgagee, or, in the absence of
whom the negotiable receipt has been or shall the mortgagee, his agent or attorney, shall
be negotiated for value without notice of the make and subscribe an affidavit in substance as
proceedings or of the delivery of the goods. hereinafter set forth, which affidavit, signed by
the parties to the mortgage as above stated,
SEC 36. Effect of sale. After goods have and the certificate of the oath signed by the
been lawfully sold to satisfy a warehouseman's authority administering the same, shall be
lien, or have been lawfully sold or disposed of appended to such mortgage and recorded
because of their perishable or hazardous therewith.
nature, the warehouseman shall not thereafter
be liable for failure to deliver the goods to the FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
depositor or owner of the goods or to a holder
of the receipt given for the goods when they "This mortgage made this ____ day of
were deposited, even if such receipt be ______19____ by _______________, a resident of
negotiable. the municipality of ______________, Province of
____________, Philippine Islands mortgagor, to
____________, a resident of the municipality of
___________, Province of ______________,
IV. CHATTEL MORTGAGE LAW Philippine Islands, mortgagee, witnesseth:
Act 1508 (1906), in relation to Articles
1484, 1485, 2140 and 2140 Civil Code "That the said mortgagor hereby conveys and
mortgages to the said mortgagee all of the
following-described personal property situated
Act 1508
in the municipality of ______________, Province of
Sec. 3 Chattel mortgage defined. A chattel
____________ and now in the possession of said
mortgage is a conditional sale of personal
mortgagor, to wit:
property as security for the payment of a debt,
or the performance of some other obligation
(Here insert specific description of the property
specified therein, the condition being that the
mortgaged.)
sale shall be void upon the seller paying to the
purchaser a sum of money or doing some other
"This mortgage is given as security for the
act named. If the condition is performed
payment to the said ______, mortgagee, of
according to its terms the mortgage and sale
promissory notes for the sum of ____________
immediately become void, and the mortgagee
pesos, with (or without, as the case may be)
is thereby divested of his title.
interest thereon at the rate of ___________ per
centum per annum, according to the terms of
Sec 4 Validity. A chattel mortgage shall not
__________, certain promissory notes, dated
be valid against any person except the
_________, and in the words and figures following
mortgagor, his executors or administrators,
(here insert copy of the note or notes secured).
unless the possession of the property is
delivered to and retained by the mortgagee or
"(If the mortgage is given for the performance
unless the mortgage is recorded in the office of
of some other obligation aside from the
the register of deeds of the province in which
payment of promissory notes, describe correctly
the mortgagor resides at the time of making the
but concisely the obligation to be performed.)
same, or, if he resides without the Philippine
"The conditions of this obligation are such that
Islands, in the province in which the property is
if the mortgagor, his heirs, executors, or
situated: Provided, however, That if the
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administrators shall well and truly perform the issue of such certificates of ownership.
full obligation (or obligations) above stated
according to the terms thereof, then this If growing crops be mortgaged the mortgage
obligation shall be null and void. may contain an agreement stipulating that the
mortgagor binds himself properly to tend, care
"Executed at the municipality of _________, in for and protect the crop while growing, and
the Province of ________, this _____ day of faithfully and without delay to harvest the
19_____ same, and that in default of the performance of
such duties the mortgage may enter upon the
____________________ premises, take all the necessary measures for
(Signature of mortgagor.) the protection of said crop, and retain
possession thereof and sell the same, and from
"In the presence of the proceeds of such sale pay all expenses
incurred in caring for, harvesting, and selling
the crop and the amount of the indebtedness or
"_________________ obligation secured by the mortgage, and the
"_________________ surplus thereof, if any shall be paid to the
(Two witnesses sign here.) mortgagor or those entitled to the same.
FORM OF OATH.
"We severally swear that the foregoing A chattel mortgage shall be deemed to cover
mortgage is made for the purpose of securing only the property described therein and not like
the obligation specified in the conditions or substituted property thereafter acquired by
thereof, and for no other purpose, and that the the mortgagor and placed in the same
same is a just and valid obligation, and one not depository as the property originally
entered into for the purpose of fraud." mortgaged, anything in the mortgage to the
contrary notwithstanding.
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, Sec. 8 Failure of mortgagee to discharge the
personally appeared ____________, the parties mortgage. If the mortgagee, assign,
who signed the foregoing affidavit and made administrator, executor, or either of them, after
oath to the truth thereof before me. performance of the condition before or after the
breach thereof, or after tender of the
"_____________________________" performance of the condition, at or after the
(Notary public, justice of the peace, 1 or other time fixed for the performance, does not within
officer, as the case may be.) ten days after being requested thereto by any
person entitled to redeem, discharge the
Sec 6 Corporations. When a corporation is a mortgage in the manner provided by law, the
party to such mortgage the affidavit required person entitled to redeem may recover of the
may be made and subscribed by a director, person whose duty it is to discharge the same
trustee, cashier, treasurer, or manager thereof, twenty pesos for his neglect and all damages
or by a person authorized on the part of such occasioned thereby in an action in any court
corporation to make or to receive such having jurisdiction of the subject-matter
mortgage. When a partnership is a party to the thereof.
mortgage the affidavit may be made and
subscribed by one member thereof. Sec. 13 When the condition of a chattel
mortgage is broken, a mortgagor or person
Sec 7 Descriptions of property. The holding a subsequent mortgage, or a
description of the mortgaged property shall be subsequent attaching creditor may redeem the
such as to enable the parties to the mortgage, same by paying or delivering to the mortgagee
or any other person, after reasonable inquiry the amount due on such mortgage and the
and investigation, to identify the same. reasonable costs and expenses incurred by
such breach of condition before the sale
If the property mortgaged be large cattle," as thereof. An attaching creditor who so redeems
defined by SEC one of Act Numbered Eleven shall be subrogated to the rights of the
and forty-seven, 2 and the amendments mortgagee and entitled to foreclose the
thereof, the description of said property in the mortgage in the same manner that the
mortgage shall contain the brands, class, sex, mortgagee could foreclose it by the terms of
age, knots of radiated hair commonly known as this Act.
remolinos, or cowlicks, and other marks of
ownership as described and set forth in the Sec. 14 Sale of property at public auction;
certificate of ownership of said animal or Officer's return; Fees; Disposition of proceeds.
animals, together with the number and place of The mortgagee, his executor, administrator,
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or assign, may, after thirty days from the time (3) Foreclose the chattel mortgage on the thing
of condition broken, cause the mortgaged sold, if one has been constituted, should the
property, or any part thereof, to be sold at vendee's failure to pay cover two or more
public auction by a public officer at a public installments. In this case, he shall have no
place in the municipality where the mortgagor further action against the purchaser to recover
resides, or where the property is situated, any unpaid balance of the price. Any agreement
provided at least ten days' notice of the time, to the contrary shall be void. (1454-A-a)
place, and purpose of such sale has been
posted at two or more public places in such Art. 1485. The preceding article shall be
municipality, and the mortgagee, his executor, applied to contracts purporting to be leases of
administrator, or assign, shall notify the personal property with option to buy, when the
mortgagor or person holding under him and the lessor has deprived the lessee of the possession
persons holding subsequent mortgages of the or enjoyment of the thing. (1454-A-a)
time and place of sale, either by notice in
writing directed to him or left at his abode, if Art. 2140. By a chattel mortgage, personal
within the municipality, or sent by mail if he property is recorded in the Chattel Mortgage
does not reside in such municipality, at least Register as a security for the performance of an
ten days previous to the sale. obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third
The officer making the sale shall, within thirty person, the contract is a pledge and not a
days thereafter, make in writing a return of his chattel mortgage. (n)
doings and file the same in the office of the
register of deeds where the mortgage is Art. 2141. The provisions of this Code on
recorded, and the register of deeds shall record pledge, insofar as they are not in conflict with
the same. The fees of the officer for selling the the Chattel Mortgage Law shall be applicable to
property shall be the same as in the case of chattel mortgages. (n)
sale on execution as provided in Act Numbered
One hundred and ninety, 4 and the 4.1 Topics
amendments thereto, and the fees of the
register of deeds for registering the officer's Essential Requisites
return shall be taxed as a part of the costs of 1) That it be constituted to secure the fulfilment
sale, which the officer shall pay to the register of a principal obligation;
of deeds. The return shall particularly describe 2) That the mortgagor be the absolute owner of
the articles sold, and state the amount received the thing mortgaged;
for each article, and shall operate as a 3) That the persons constituting the mortgage
discharge of the lien thereon created by the have the free disposal of their property or, in
mortgage. The proceeds of such sale shall be the absence thereof, that they be legally
applied to the payment, first, of the costs and authorized for the purpose; and
expenses of keeping and sale, and then to the 4) That the object be personal and movable
payment of the demand or obligation secured property.
by such mortgage, and the residue shall be paid
to persons holding subsequent mortgages in Formal Requirements
their order, and the balance, after paying the 1) Signed by the person executing the same in
mortgages, shall be paid to the mortgagor or the presence of two witnesses;
person holding under him on demand. 2) Accompanied by an affidavit of good faith
and a certificate of oath;
If the sale includes any "large cattle," a 3) Mortgaged property must be described in
certificate of transfer as required by SEC such a manner as to enable anybody reading
sixteen of Act Numbered Eleven hundred and the document, after reasonable inquiry and
forty-seven 5 shall be issued by the treasurer of investigation, to be able to identify the same.
the municipality where the sale was held to the
purchaser thereof. Registration: When And Where
When
Art. 1484. In a contract of sale of personal No specific time is provided under the law.
property the price of which is payable in However, such registration must be made:
installments, the vendor may exercise any of 1) before the mortgagor has complied with his
the following remedies: principal obligation; and
(1) Exact fulfillment of the obligation, should the 2) no right of an innocent third person is
vendee fail to pay; prejudiced.
(2) Cancel the sale, should the vendee's failure
to pay cover two or more installments; Where
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1) Where the mortgagor resides in the


Philippines, in his place of residence; One of the requisites of a chattel mortgage is
2) Where the mortgagor resides abroad, in the the execution of an affidavit of good faith,
place where the property is situated; which requires an oath that the mortgage is for
3) Where the mortgagor resides in a place the purpose of securing the obligation specified
different from where the property is situated, in in the conditions thereof, and for no other
the place where the mortgagor resides and purpose, and that the same is a just and valid
where the property is situated, except where obligation, and one not entered into for the
the amount of the mortgage is more than purpose of fraud.
Php50,000 in which case the registration of the
mortgage in the province where the property is This requirement makes it obvious that the debt
situated shall be sufficient registration. referred to in the law is a current, not an
obligation that is yet merely contemplated.
For motor vehicles, the chattel mortgage must (Acme Shoe v CA)
also be registered with the Land Transportation
Office to bind third persons. Right Of Junior Mortgagee

After-Acquired, Future Or Substituted Property Art. 13


Future or after-acquired property can be After a first mortgage is executed, there
subject of a chattel mortgage if: remains in the mortgagor a mere right of
1) The properties mortgaged are: redemption and only this right passes to the
a. Perishable; or second mortgagee by virtue of the second
b. Subject to inevitable wear and tear; or mortgage.
c. Intended to be sold or used but with the
understanding that they would be replaced with Foreclosure Procedure
similar properties to be thereafter acquired by
the mortgagor Art 14; SC Circular No. 7-2002, Dated January
2) In the case of other properties, if the 22, 2002
inclusion of such future or after-acquired 1) 30 days after the condition of a chattel
properties is expressly stipulated and a mortgage is broken, the mortgagee may cause
supplement to the mortgage specifically listing the mortgaged property or any part thereof to
and describing such property is executed and be sold at public auction by a public officer at a
registered in the chattel mortgage register. public place in the municipality where the
Like or substituted property cannot be deemed mortgagor resides or where the property is
covered by a chattel mortgage, unless the situated.
property is described in a supplement to the 2) The application for the foreclosure of the
mortgage. mortgage should be filed with the Executive
Judge through the Clerk of Court.
After-Incurred Obligation 3) After receipt of the application, the Clerk of
While a pledge, real estate mortgage, or Court shall, among other duties:
antichresis may exceptionally secure after- a. Raffle the application among the Sheriffs; and
incurred obligations so long as these future b. Cause the posting of the notice of sale.
debts are accurately described, a chattel 4) Notice of the time, place and purpose of such
mortgage, however, can only cover obligations sale must be posted, at least 10 days before the
existing at the time the mortgage is date of sale, at 2 or more public places in the
constituted. Although a promise expressed in a municipality where the mortgagor resides or
chattel mortgage to include debts that are yet where the property is situated.
to be contracted can be a binding that can be 5) The mortgagee shall notify the mortgagor
compelled upon, the security itself, however, and the persons holding subsequent mortgages
does not come into existence or arise until after of the time and place of sale, at least 10 days
a chattel amending the old contract before the sale, either by notice in writing
conformably with the form prescribed by the directed to him or left at his abode, if within the
Chattel Mortgage Law. Refusal on the part of municipality, or sent by mail if he does not
the borrower to execute the agreement so as to reside in such municipality.
cover the after-incurred obligation can 6) The officer making the sale shall, within 30
constitute an act of default on the part of the days thereafter, make in writing a return of his
borrower of the financing agreement whereon doings and file the same in the office of the
the promise is written but, of course, the registry of deeds where the mortgage is
remedy of foreclosure can only cover the debts recorded, and the registry of deeds shall record
extant at the time of constitution and during the the same. The return shall particularly describe
life of the chattel mortgage sought to be the articles sold and state the amount received
foreclosed. for each article.
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unsecured loan. Therefore, the contract of sale


Redemption between Claudia and Salvador was of no effect.
There is no right of redemption in Chattel
Mortgage. There is only an EQUITY of Regardless of the validity of a contract
REDEMPTION. constituting a chattel mortgage on a house, as
1) Period within which equity of redemption between the parties to said contract, the same
may be exercised. cannot and does not bind third persons, who
From the date the condition of the Chattel are not parties to the aforementioned contract
Mortgage is broken but BEFORE the foreclosure or their privies. As a consequence, the sale of
sale of the collateral thereof. the house is null and void insofar is Marcos
> The 30-day period to foreclose a Chattel Mangubat is concerned.
Mortgage is the minimum period after violation
of the mortgage condition for the mortgage Chattel Mortgage Over House Built On Another
creditor to cause the sale at public auction of Persons Land
the mortgaged chattel AND is a period of grace
for the mortgagor to discharge the mortgage
TUMALAD V VIVENCIO (1971)
obligation.
2) Amount to be paid.
FACTS: Petitioners executed a chattel
a. The amount due on such mortgage; and
mortgage in favor of respondents over their
b. The costs and expenses incurred by such
house, which is located in a land that is being
breach of condition before the sale thereof.
rented by petitioners from Madrigal & Company,
3) Persons entitled to redeem.
Inc. The mortgage was registered in the
a. Mortgagor;
Registry of Deeds and was executed to
b. A person holding a subsequent mortgage;
guarantee a loan.
c. A subsequent attaching creditor.
Since the petitioners defaulted on their loan,
Claim For Deficiency; Rule And Exception
the mortgage was extrajudicially foreclosed and
Rule: A chattel mortgagee may sue for a
the house was sold to respondents at a public
deficiency following foreclosure.
auction.
Exception: in the case of personal property sold
in installments where the chattel
Respondents commenced a civil case in the
mortgagor/vendees failure to pay covers 2 or
municipal court, which decided against the
more installments.
petitioners and ordered the latter to vacate the
premises and to pay rent until the premises is
4.2 Cases
completely vacated.
Chattel Mortgage On House Not Binding On
Petitioners argue that the chattel mortgage is
Third Persons Not Parties To Contract
void ab initio relying on the following grounds:
1) That their signatures on the chattel mortgage
PIANSAY V DAVID (1964) was obtained through fraud, deceit or trickery;
and
FACTS: Conrado David received a loan from 2) That the subject matter of the chattel
Claudia Vda. De Uy Kim. In order to secure the mortgage is a house, and being an immovable,
loan, he executed a chattel mortgage on a it can only be subject of a real estate mortgage
house. The chattel mortgage was registered and not a chattel mortgage.
with the Register of Deeds. The mortgaged
house was sold to Claudia at a public auction, ISSUE: WON the chattel mortgage is valid
which Claudia, in turn, sold to Salvador Piansay.
HELD: YES. That parties to a deed of chattel
Meanwhile, Marcos Mangubat filed a complaint mortgage may agree to consider a house as
against Conrado for collection of a loan. Marcos personal property for the purposes of said
levied upon the house that was in possession of contract is good only insofar as the contracting
Salvador, and at the same time, demanded parties are concerned. This is based partly upon
payment of rentals from Salvador. the principle of estoppel.
ISSUE: WON the chattel mortgage constituted in In a case, the SC held that a mortgaged house
favour of Claudia is valid built on a rented land was held to be a personal
property, not only because the deed of
HELD: NO. Claudia had no right to foreclose the mortgage considered it as such, but also
chattel mortgage constituted in her favor, because it did not form part of the land, for it
because it was in reality a mere contract of an now settled that an object placed on land by
one who had only a temporary right to the
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same, does not become immobilized by machinery in suit cannot be subject of a chattel
attachment. Hence, if a house belonging to a mortgage because it is real property pursuant
person stands on a rented land belonging to to Art. 415 of the New of Civil Code, the same
another person, it may be mortgaged as a being attached to the ground by means of bolts
personal property as so stipulated in the and the only way to remove it would be to drill
document of mortgage. It should be noted, out or destroy the concrete floor.
however that the principle is predicated on
statements by the owner declaring his house to ISSUE: WON the machinery in suit is real or
be a chattel, a conduct that may conceivably personal property
estop him from subsequently claiming
otherwise. HELD: It is personal property. As the parties to
the contract so agree and no innocent third
In the case at bar, the house on rented land is party will be prejudiced thereby, there is
expressly designated as chattel mortgage. absolutely no reason why a machinery, which is
Although there is no specific statement movable in its nature and becomes immobilized
referring to the subject house as personal only by destination or purpose, may not be
property, yet by ceding, selling or transferring a likewise treated as such. This is because one
property by way of chattel mortgage, who has so agreed is stopped from denying the
petitioners could only have meant to convey existence of the chattel mortgage.
the house as chattel, or at least, intended to
treat the same as such, so that they should not The characterization of the subject machinery
now be allowed to make an inconsistent stand as chattel by the private respondent is
by claiming otherwise. indicative of intention and impresses upon the
property the character as determined by the
Moreover, the subject house stood on a rented parties. In other words, the parties to a contract
lot to which petitioners merely ad a temporary may by agreement treat as personal property
right as lessee, and although this cannot in that which by nature would be real property, as
itself determine the status of the property, it long as no interest of third parties would be
does so when combined with other factors to prejudiced thereby.
sustain the interpretation that the parties,
particularly the mortgagors, intended to treat In addition, records show that no steps were
the house as personalty. taken to nullify the mortgage and that the
private respondent has benefited from the
Finally, it is the petitioners themselves, as contract. Equity dictates that one should not
debtor-mortgagors, who are attacking the benefit at the expense of another. Private
validity of the chattel mortgage. The doctrine of respondent could not now therefore, be allowed
estoppels applied to petitioners. to impugn the efficacy of the chattel mortgage
after it has benefited therefrom.
Chattel Mortgage Over Machinery
After-Acquired Property
MAKATI LEASING V WEAREVER TEXTILE
MILLS (1983) TORRES V LIMJAP

FACTS: In order to obtain financial FACTS: Jose B. Henson executed in favor of the
accommodations from petitioner Makati Leasing respondents a chattel mortgage on his drug
and Finance Corp., private respondent store in order to secure a loan. In the
Wearever Textile Mills, discounted and assigned instrument of the chattel mortgage, it was
several receivables with the former. To secure stipulated that the mortgagor was authorized to
the collection of the receivables assigned, sell the goods covered thereby and to replace
private respondent executed a Chattel them with other goods thereafter acquired.
Mortgage over certain raw materials inventory
as well as a machinery. Petitioner attacks the validity of the stipulation
and insists that a stipulation authorizing the
Upon private respondents default, petitioner disposal and substitution of the chattels
filed a complaint to effect the seizure of the mortgaged does not operate to extend the
machinery. The lower court issued a writ of mortgage to after-acquired property, and that
seizure and in order to enforce the said writ, the such stipulation is in contravention of the
sheriff went to the premises and removed the express provision of the last paragraph of SEC 7
main drive motor of the subject machinery. Act No. 1508.

Private respondent questions the act of the ISSUE: WON the chattel mortgage on the after-
sheriff arguing that the drive motor the acquired property is valid
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In due time, the petitioner paid the Php3M loan.


HELD: YES. In the interpretation and Subsequently, however, it obtained additional
construction of a statute, the intent of the law- financial accommodations from respondent and
maker should always be ascertained and given failed to settle this additional loan.
effect. In enacting Act No. 1508, the primary
aim of the law-making body was undoubtedly to Respondent then applied for an extrajudicial
promote business and trade and to give foreclosure of the chattel mortgage. The
impetus to the economic development of the petitioner seeks to enjoin the foreclosure.
country. Bearing this in mind, it could not have
been the intention of the Philippine Commission ISSUE: WON a clause in a chattel mortgage,
to apply the provision of SEC 7 to stores open to which extend its coverage to obligations yet to
the public for retail business, where the goods be contracted or incurred, is valid and effective
are constantly sold and substituted with new
stock. HELD: NO. While a pledge, real estate
mortgage, or antichresis may exceptionally
A stipulation in the mortgage, extending its secure after-incurred obligations so long as
scope and effect to after-acquired property, is these future debts are accurately described, a
valid and binding where the after-acquired chattel mortgage, however, can only cover
property is in renewal of, or in substitution for, obligations existing at the time the mortgage is
goods on hand when the mortgage was constituted. Although a promise expressed in a
executed, or is purchased with the proceeds of chattel mortgage to include debts that are yet
the sale of such goods. to be contracted can be a binding that can be
compelled upon, the security itself, however,
In other words, a mortgage may be made to does not come into existence or arise until after
include future acquisitions of goods to be added a chattel amending the old contract
to the original stock mortgaged, but the conformably with the form prescribed by the
mortgage must expressly provide that such Chattel Mortgage Law. Refusal on the part of
future acquisitions shall be held as included in the borrower to execute the agreement so as to
the mortgage. cover the after-incurred obligation can
constitute an act of default on the part of the
In sum, the court held: borrower of the financing agreement whereon
1) That the provision of the last paragraph of the promise is written but, of course, the
SEC 7 of Act No. 1508 is not applicable to drug remedy of foreclosure can only cover the debts
stores, bazaars and all other stores in the extant at the time of constitution and during the
nature of a revolving and floating business; and life of the chattel mortgage sought to be
2) That the stipulation in the chattel mortgages foreclosed.
in question, extending their effect to after-
acquired property, is valid and binding. One of the requisites of a chattel mortgage is
the execution of an affidavit of good faith,
which requires an oath that the mortgage is for
the purpose of securing the obligation specified
in the conditions thereof, and for no other
purpose, and that the same is a just and valid
obligation, and one not entered into for the
After-Incurred Obligation purpose of fraud.

This requirement makes it obvious that the debt


ACME SHOE V CA (1996) referred to in the law is a current, not an
obligation that is yet merely contemplated. In
FACTS: Petitioner Chua Pac, the president and the chattel mortgage here involved, the only
general manager of co-petitioner Acme Shoe, obligation specified in the chattel mortgage
Rubber & Plastic Corporation, executed for and contract was the Php3M loan which petitioner
in behalf of the company, a chattel mortgage in corporation later fully paid. By virtue of SEC 3 of
favor of private respondent Producers Bank. the Chattel Mortgage Law, the payment of the
The mortgage stands as a security for obligation automatically rendered the chattel
petitioners corporate loan of Php3M. However, mortgage void or terminated.
a provision in the chattel mortgage agreement
states that the mortgage shall also stand as a With the full payment of the Php3M loan, there
security for the payment of subsequent was no longer any chattel mortgage that could
promissory note or notes, either as a renewal or cover the new loans that were concluded
a new loan. thereafter.
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property of the latter not exempt from


execution sufficient to satisfy the judgment.
Specific Performance
Attachment is merely an incident to an ordinary
SOUTHERN MOTORS V MOSCOSO (1961) civil action. Therefore, the mortgage creditor
may recover judgment on the mortgage debt
FACTS: Private respondent Southern Motors, and cause an execution on the mortgaged
Inc. sold to petitioner Angel Moscoso a property and may cause an attachment to be
Chevrolet truck. Upon making a down payment, issued and levied on such property, upon
Angel executed a promissory note and a chattel beginning his civil action.
mortgage on the truck.

Upon the failure of Angel to pay the


installments, Southern Motors filed a complaint
against Angel, to recover the unpaid balance of
the purchase price. A writ of attachment was
issued by the lower court and the Chevrolet No Recourse Against Additional Mortgaged
truck and a house and lot belonging to Angel Property
were attached by the sheriff. The sheriff then
sold the truck at a public auction in which 1) Residential house and lot
Southern Motors was the only bidder.
LEVY HERMANOS V PACIFIC COMMERCIAL
The trial court then condemned Angel to pay (1941)
Southern Motors the deficiency.
FACTS: In addition to a chattel mortgage on the
Angel questions this order of the court and motor vehicles that they bought, the Hermanos
alleged that the attachment caused to be levied also executed a mortgage on a residential lot
on the truck and its immediate sale at public and house of strong materials.
auction, was tantamount to the foreclosure of
the chattel mortgage on said truck. HELD: The SC held that the mortgage is void
insofar as it included the house and lot of
Southern Motors counters and claims that in vendees. It said that the vendor cannot be
filing the complaint, it chose to exact fulfilment allowed to insist on the sale of the house and lot
of the obligation (specific performance) and is of the vendees for to do so would be equivalent
thus entitled to sue for the unpaid balance of to obtaining a writ of execution against them
the purchase price. concerning other properties which are separate
and distinct from those which are sold on
ISSUE: WON the deficiency of the purchase installment. This would be contrary to public
price can still be recovered policy limiting the vendors right to foreclose
the chattel mortgage only on the thing sold.
HELD: YES. The case is governed by Art. 1484
of the New Civil Code. (SEE Art. 1484, NCC)
2) Parcel of land mortgaged by third party
Southern Motors had chosen the first remedy.
The complaint is an ordinary civil action for CRUZ V FILIPINAS INVESTMENT (1968)
recovery of the remaining unpaid balance die
on the promissory note. This is shown by the FACTS: Plaintiff Ruperto G. Cruz purchased on
following circumstances: installments, from Far East Motor Corporation,
1) Southern Motors had not adopted the an Isuzu Diesel Bus, for which Ruperto executed
procedure or methods outlined by Sec. 14 of a promissory note and a chattel mortgage on
the Chattel Mortgage Law but those prescribed the same vehicle.
for ordinary civil actions
2) Southern Motors not only attached the truck As an additional security, Felicidad Vda. De
but also the house and lot of Angel. Reyes, in the form of a SECOND MORTGAGE, a
parcel of land and a building.
Nothing unlawful or irregular in Southern
Motors act of attaching the mortgaged truck Far East Motor Corp. then assigned all its rights
itself. As Southern Motors has chosen to exact and interest in the Deeds of Chattel Mortgage
the fulfilment of Angels obligation, the former and in the Deed of Real Estate Mortgage to
may enforce execution of the judgment Filipinas Investment and Finance Corp.
rendered in its favor on the personal and real
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Ruperto defaulted. Filipinas took steps to recovery of the supposed unsatisfied balance of
foreclose the chattel mortgage, however, the the purchase price from the purchaser or his
vehicle had been damaged in an accident. This privy. Certainly, an extrajudicial foreclosure of
is the reason why after the foreclosure sale of real estate mortgage is one such proceeding.
the chattel, the proceeds were not sufficient to
discharge fully indebtedness of Ruperto. Right Of Recourse Against Seller/Assignor

Therefore, Filipinas prepared to foreclose the FILIPINAS INVESTMENT V VITUG (1969)


real estate mortgage on Mrs. Reyes land by
paying the mortgage indebtedness of Mrs. FACTS: Julian R. Vitug executed and delivered
Reyes to DBP, requesting the sheriff to take to Supreme Sales & Development Corp. a
possession, and by posting notices of sale. promissory note, accompanied by a chattel
mortgage to secure his purchase of a 4-door
Although Filipinas admits that the remedies in consul sedan. Then, Supreme Sales negotiated
Art. 1484 of the New Civil Code is alternative, it and assigned all its rights, title, and interests to
claims that what is being withheld from the the same to Filipinas Investment & Finance
vendor therein is only the right to recover Corp., the assignment indicating that it is with
against the purchaser, and not a recourse to recourse against Supreme Sales.
the additional security put up, not by the
purchaser himself, but by a third person. Julian defaulted in the payment of 4
installments due which resulted in the entire
ISSUE: WON Filipinas, which has already obligation becoming due and demandable.
extrajudicially foreclosed the chattel mortgage Pursuant to this, Filipinas obtained a writ of
executed by the buyer, Ruperto, may also replevin but this became unnecessary as Julian
extrajudicially foreclose the real estate voluntarily surrendered possession of the car.
mortgage constituted by Mrs. Reyes on her own The car was sold at a public auction but since
land, as additional security, for the payment of the proceeds still left a deficiency, Filipinas
the balance of Rupertos obligation, still wants to hold Supreme Sales liable.
remaining unpaid
Supreme Sales claims that the with-recourse
HELD: The remedies in Art. 1484 of the NCC provision in the assignment is violative of the
are alternative, not cumulative, that the Recto Law, which declares null and void any
exercise of one would bar the exercise of the agreement in contravention thereof.
others. The reason for this doctrine was to
remedy the abuses committed in connection ISSUE: WON the Recto Law is applicable in the
with the foreclosure of chattel mortgages. case at bar, making the with recourse provision
contained in the agreement null and void
To sustain Filipinas argument is to overlook the
fact that if the guarantor should be compelled HELD: NO. The remedy presently being sought
to pay the balance of the purchase price, the is not against the buyer of the car but against
guarantor will in turn be entitled to recover the seller. Under the Recto Law, what Congress
what she has paid from the debtor vendee; so seeks to protect are only the buyers on
ultimately, it will be the vendee who will be installment who more often than not have been
made to bear the payment of the balance of the victimized by sellers who, before the enactment
price, despite the earlier foreclosure of the of this law, succeeded in unjustly enriching
chattel mortgage given by him. Thus, the themselves at the expense of the buyers
protection given by Art. 1484 would be because aside from recovering the goods sold,
indirectly subverted, and public policy upon default of the buyer in the payment of two
overturned. instalments, still retained for themselves all
amounts already paid, in addition, furthermore,
Neither is there validity to Filipinas allegation to other damages, such as attorneys fees, and
that, since the law speaks of action, the costs. Surely, Congress could not have intended
restriction should be confined only to the to impair and much less do away with the right
bringing of judicial suits or proceedings in court. of the seller to make commercial use of his
credit against the buyer, provided said buyer is
The word action is without a definite or not burdened beyond what this law allows.
exclusive meaning. Considering the purpose for
which the prohibition contained in Art. 1484 was In the case at bar, the assignment made by
intended, the word action used therein may Supreme Sales to Filipinas of the promissory
be construed as referring to any judicial or note and mortgage of Julian Vitug precisely
extrajudicial proceeding by virtue of which the stipulated that Filipinas had a right of recourse
vendor may lawfully be enabled to exact against the seller should the buyer fail to pay.
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Since the Recto Law is not applicable in this balance of their account under the promissory
case, the said provision remains valid. note, with a plea for writ of replevin. By
securing a writ of replevin, the respondent did
The case is remanded for further proceedings. not thereby foreclose the chattel mortgage. If
there has been no foreclosure of the chattel
Right Of Unpaid Seller Under Art. 1484, Civil mortgage or a foreclosure sale, then the
Code, Alternative Not Cumulative prohibition against further collection of the
balance price does not apply.
SPOUSES ROSARIO V PCI LEASING AND
FINANCE, INC. (2005) A creditor is not obliged to foreclose a chattel
mortgage even if there is one; precisely the law
FACTS: Spouses Rosario purchased an Isuzu Elf says that any of the remedies may be exercised
pick up utility vehicle from Car Merchants, Inc. by the seller.
covered by a Purchase Agreement. In order to
pay the balance of the purchase price, the Only Actual Sale Of Mortgaged Chattel Bars
spouses contracted a loan with PCI Leasing Foreclosing Creditor From Recovering Unpaid
wherein they executed a promissory note in Balance
favor of PCI Leasing agreeing that in case of
default, the sum and interest shall immediately MAGNA FINANCIAL SERVICES GROUP, INC.
become due and demandable. In addition, the V COLARINA (2005)
spouses also executed a chattel mortgage in
favor of PCI Leasing over the vehicle. FACTS: Elias Colarina bought on installment a
Suzuki Multicab from Magna Financial Services
Since the spouses failed to pay their loan, PCI Group, Inc. whereby he executed an integrated
Leasing instituted a complaint that led to the promissory note and deed of chattel mortgage
issuance of the trial court of a writ of replevin, over the vehicle.
in pursuance of which the sheriff seized the
vehicle and turned over the possession to PCI Since Colarina failed to pay the monthly
Leasing. amortization, Magna filed a Complaint for
Foreclosure of Chattel Mortgage with Replevin.
The spouses Car Merchants had assigned to PCI From the complaint, it will show that Magna
Leasing its right to collect the balance; hence, it availed itself of the first and third remedies
was subrogated to the rights of Car Merchants under Art. 1484 of the NCC.
subject to the limitations of Art. 1484NCC.
Furthermore, they allege that since PCI Leasing A writ of replevin was issued by the court and
opted to foreclose the chattel mortgage, it was upon service of the same to Colarina, he
estopped from collecting the unpaid balance of voluntarily surrendered possession of the
the purchase price. vehicle to the sheriff, who in turn, surrendered
possession to Magna.
ISSUE: WON PCI Leasing is the assignee of Car
Merchant; WON Art. 1484 of the NCC is Colarina points to the inconsistency of the
applicable remedies or reliefs sought by the Magna in its
Complaint where it prayed for the custody of
HELD: NO. There is no factual basis on the the chattel mortgage and at the same time
claim that Car Merchants had assigned its rights asked for the payment of the unpaid balance on
to collect the balance of the purchase price to the motor vehicle.
PCI Leasing. In fact, what the evidence shows is
that the spouses secured a loan from PCI ISSUE: WON Magna opted to foreclose the
Leasing and even executed a promissory note chattel mortgage
and a chattel mortgage in its favor.
Under Art. 1625 of the NCC, an assignment of HELD: YES. A contract of chattel mortgage is in
credit, right or action must appear in a public the nature of a conditional sale of personal
document to bind third persons. Since there is property given as a security for the payment of
no evidence that Car Merchants executed such a debt, or the performance of some other
a deed, Art 1484 of the NCC does not apply in obligation specified therein, the condition being
this case. that the sale shall be void upon the seller
paying to the purchaser a sum of money or
Even assuming that Art 1484 is applicable, PCI doing some other act named. If the condition is
Leasing is not proscribed from suing the performed according to its terms, the mortgage
spouses for their unpaid balance. The fact is and sale immediately become void, and the
that PCI Leasing did not foreclose the chattel mortgagee is thereby divested of his title. On
mortgage, but opted to sue the spouses for the the other hand, in case of non payment,
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foreclosure is one of the remedies available to a the Land Registration Commission through its
mortgagee by which he subjects the mortgaged registries of deeds be adjusted accordingly.
property to the satisfaction of the obligation to NOW, THEREFORE, I, FERDINAND E. MARCOS,
secure that for which the mortgage was given. President of the Philippines, by virtue of the
powers in me vested by the Constitution, do
Foreclosure may be effected either judicially or hereby decree and order:
extrajudicially, that is, by ordinary action or by SEC 1. SEC 198 of the Revised Administrative
foreclosure under power of sale contained in Code, as amended by Republic Act Nos. 116
the mortgage. Extrajudicial foreclosure, as and 2711, is hereby further amended to read as
chosen by the petitioner, is attained by causing follows:
the mortgaged property to be seized by the "Sec. 198. Registration of chattel mortgages
sheriff, as agent of the mortgagee, and have it and fees collectible in connection therewith.
sold at public auction in the manner prescribed Every register of deeds shall keep a primary
by SEC 14 of Act No. 1508, or the Chattel entry book and a registration book for chattel
Mortgage Law. This rule governs extrajudicial mortgages; shall certify on each mortgage filed
foreclosure of chattel mortgage. for record, as well as on its duplicate, the date,
hour, and minute when the same was by him
In sum, since the petitioner has undeniably received; and shall record in such books any
elected a remedy of foreclosure under Article chattel mortgage, assignment, or discharge
1484(3) of the Civil Code, it is bound by its thereof, and any other instruments relating to a
election and thus may not be allowed to change recorded mortgage, and all such instruments
what it has opted for. shall be presented to him in duplicate the
original to be filed and the duplicate to be
ISSUE: WON there has been an actual returned to the person concerned.
foreclosure of the subject vehicle The recording of a mortgage shall be effected
by making an entry, which shall be given a
HELD: NO. Where the mortgagee elects a correlative number, setting forth the names of
remedy of foreclosure, the law requires the the mortgages and the mortgagor, the sum or
actual foreclosure of the mortgaged chattel. obligation guaranteed, date of the instrument,
name of the notary before whom it was sworn
It is actual sale of the mortgaged chattel in to or acknowledged, and a note that the
accordance with Sec. 14 of Act No. 1508 that property mortgaged, as well as the terms and
would bar the creditor (who chooses to conditions of the mortgage, is mentioned in
foreclose) from recovering any unpaid balance. detail in the instrument filed, giving the proper
And it is deemed that there has been file number thereof. The recording of other
foreclosure of the mortgage when all the instruments relating to a recorded mortgage
proceedings of the foreclosure, including the shall be effected by way of annotations on the
sale of the property at public auction, have space provided therefor in the registration
been accomplished. book, after the same shall have been entered in
the primary entry book.
Be that as it may, although no actual The register of deeds shall also certify the
foreclosure as contemplated under the law has officer's return of sale upon any mortgage,
taken place in this case, since the vehicle is making reference upon the record of such
already in the possession of Magna and it has officer's return to the volume and page of the
persistently and consistently elected the record of the mortgage, and a reference of such
remedy of foreclosure, the Court of Appeals, return on the record of the mortgage itself, and
thus, ruled correctly in directing the foreclosure give a certified copy thereof, when requested,
of the said vehicle without more. upon payment of the lawful fees for such copy;
and certify upon each mortgage officer's return
PD 1417 of sale or discharge of mortgage, and upon any
Further Amending SEC 198 Of The Revised other instrument relating to such a recorded
Administrative Code As Amended By mortgage, both on the original and on the
Republic Act Nos. 116 And 2711, By duplicate, the date, hour and minute when the
Increasing The Fees Collectible In same is received for record and record such
Connection With Registration Of Chattel certificate with the return itself and keep an
Mortgages alphabetical index or mortgagors and
WHEREAS, there has been an unprecedented mortgagees, which record and index shall be
increase in the cost of equipment, materials open to public inspection.
and supplies used by the Land Registration Duly certified copies of such records and of filed
Commission; instruments shall be receivable as evidence in
WHEREAS, it is in consonance with sound fiscal any court.
policy that the registration fees collectible by
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The register of deeds shall collect the following "(c) For recording each instrument of sale,
fees for services rendered by him under this conveyance, or transfer of the property which is
SEC: subject of a recorded mortgage, or of the
(a) For entry or presentation of any document in assignment of mortgage credit, the fees
the primary entry book, five pesos. Supporting established in the preceding schedule shall be
papers presented together with the principal collected on the basis of ten per centum of the
document need not be charged any entry or amount of the mortgage or unpaid balance
presentation fee unless the party in interest thereof: Provided, That the latter is stated in the
desires that they be likewise entered. instrument.
(b) For filing and recording each chattel "(d) For recording each notice of attachment,
mortgage, including the necessary certificates including the necessary index and annotations,
and affidavits, the fees established in the eight pesos.
following schedule shall be collected: "(e) For recording each release of mortgage,
"1. When the amount of the mortgage does not including the necessary index and reference,
exceed six thousand pesos, seven pesos for the the fees established in the schedule under
first five hundred pesos or fractional part paragraph (b) above shall be collected on the
thereof, and three pesos for each additional five basis of five per centum of the amount of the
hundred pesos or fractional part thereof. mortgage.
"2. When the amount of the mortgage is more "(f) For recording each release of attachment,
than six thousand pesos but does not exceed including the proper annotations, five pesos.
thirty thousand pesos, forty-eight pesos for the "(g) For recording each sheriff's return of sale,
initial amount not exceeding eight thousand including the index and reference, seven pesos.
pesos, and eight pesos for each additional two "(h) For recording a power of attorney,
thousand pesos or fractional part thereof. appointment of judicial guardian, administrator,
"3. When the amount of the mortgage is more or trustee, or any other instrument in which a
than thirty thousand pesos but does not exceed person is given power to act in behalf of
one hundred thousand pesos, one hundred fifty another in connection with a mortgage, ten
pesos for initial amount not exceeding thirty- pesos.
five thousand pesos, and fourteen pesos for "(i) For recording each instrument or order
each additional five thousand pesos or relating to a recorded mortgage, including the
fractional part thereof. necessary index and reference, for which no
"4. When the amount of the mortgage is more specific fee is provided above five pesos.
than one hundred thousand pesos but does not "(j) For certified copies of records, such fees as
exceed five hundred thousand pesos, three are allowed by law for copies kept by the
hundred fifty-two pesos for the initial amount register of deeds.
not exceeding one hundred ten thousand pesos "(k) For issuing a certificate relative to, or
and twenty pesos for each additional ten showing the existence or non-existence of, and
thousand pesos or fractional part thereof. entry in the registration book, or a document on
"5. When the amount of the mortgage is more file, for each such certificate containing not
than five hundred thousand pesos, one more than two hundred words, five pesos; if it
thousand one hundred sixty-two pesos for the exceeds that number, an additional fee of one
initial amount not exceeding five hundred peso shall collected for every one hundred
twenty thousand pesos, and thirty pesos for words or fractional part thereof, in excess of the
each additional twenty thousand pesos or first two hundred words.
fractional part thereof: Provided, however, That "(l) For services rendered in attending to
registration of the mortgage in the province requests for references to, or researches on any
where the property is situated shall be sufficient document on file in the registry, there shall be
registration: And provided, further, That if the collected a fee of two pesos per document."
mortgage is to be registered in more than one SEC 2. This decree shall take effect upon its
city or province, the register of deeds of the city approval.
or province where the instrument is first Done in the City of Manila, this 9th day of June,
presented for registration shall collect the full in the year of Our Lord, nineteen hundred and
amount of the fees due in accordance with the seventy-eight
schedule prescribed above, and the register of
deeds of the other city or province where the
same instrument is also to be registered shall Circular No. 7-2002
collect only a sum equivalent to twenty per To: All Executive Judges, Clerks Of Court,
centum of the amount of fees due and paid in Sheriffs In The Office Of The Clerk Of
the first city or province, but in no case shall the Court And Branch Sheriffs In The Regional
fees payable in any registry be less than the Trial Courts
minimum fixed in this schedule. Subject: Guidelines For The
Enforcement Of Supreme Court Resolution
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Of December 14, 1999 In Administrative P300,000.00 .. 1,250.00


Matter No. 99-10-05-0 (Re: Procedure In (7) P300,000.00 or more but less
Extra-Judicial Foreclosure Of than
Mortgage), As Amended By The P400,000.00 .. 1,500.00
Resolutions Dated January 30, 2001 And (8) P400,000 or more but less than
August 7, 2001 P500,000.00 .. 1,750.00
(9) P500,000.00 or more but not
These guidelines are issued pursuant to the more than
Supreme Court En Banc Resolution of December P100,000,000.00 ... 2,000.00
14, 1999 in Administrative Matter No. 99-10-05- (10) For each P1,000.00 in excess of
0, as amended by the resolutions of January 30, P1,000,000.00.. 10.00
2001 and August 7, 2001, directing the Office of (SEC 7 (c), Rule 141, Rules of Court, as
the Court Administrator to prepare the amended by A.M. No. 00-2-01-SC, February 1,
guidelines for the enforcement of A.M. No. 99- 2000).
10-05-0 on the extra-judicial foreclosure of Cooperatives, thrift banks, and rural banks are
mortgages. not exempt from the payment of filing fees and
Sec. 1. All applications for extra-judicial other fees under these guidelines (A.M. No. 98-
foreclosure of mortgage, whether under the 9-280-RTC, September 29, 1998; A.M. No. 99-3-
direction of the Sheriff or a notary public 93-RTC, April 20, 1999; and A.M. No. 92-9-408-
pursuant to Art. No. 3135, as amended, and Act 0).
1508, as amended, shall be filed with the d. In case the application is for the extra-judicial
Executive Judge, through the Clerk of Court, foreclosure of mortgages of real estates and/or
who is also the Ex-Officio Sheriff (A.M. No. 99- chattels in different locations covering one
10-05-0, as amended, March 1, 2001). indebtedness, issue, apart from the official
Sec. 2. Upon receipt of the application, the receipt for the fees, a certificate of payment
Clerk of Court shall: indicating the amount of indebtedness, the
a. Examine the same to ensure that the filing fees collected, the mortgages sought to
special power of attorney authorizing the extra- be foreclosed, the real estates and/or chattels
judicial foreclosure of the real property is either mortgaged and their respective locations, for
inserted into or attached to the deed of real purposes of having the application docketed
estate mortgage (Act No. 3135, Sec. 1, as with the Clerks of Court in the places where the
amended); other properties are located and of allowing the
b. Give a file number to the application and extra-judicial foreclosure to proceed thereat.
endorse the date and time of its filing and (A.M. No. 99-10-05-0, par. 2(e)).
thereafter docket the same, keeping, in this Sec. 3. The application for extra-judicial
connection, separate docket books for extra- foreclosure shall be raffled under the
judicial foreclosure sales conducted by the supervision of the Executive Judge, with the
Sheriff and those conducted by notaries public; assistance of the Clerk of Court and Ex-Oficio
c. For the conduct of extra-judicial Sheriff, among all Sheriffs including those
foreclosure of real estate or chattel mortgage assigned to the Office of the Clerk of court and
under the direction of the sheriff, collect the Sheriffs assigned in the branches of the court. A
appropriate filing fees and issues the Sheriff to whom the case has been raffled shall
corresponding official receipt pursuant to the be excluded in the succeeding raffles and shall
following schedule: participate again only after all other Sheriffs
If the amount of the indebtedness or the shall have been assigned a case by raffle
mortgagees claim is: (Administrative Circular No. 3-98, Feb. 5, 1998).
(1) Less than P50,000.00 Sec. 4. The Sheriff to whom the application for
.. P275.00 extra-judicial foreclosure of mortgage was
(2) P50,000.00 or more but less raffled shall do the following:
than a. Prepare a Notice of Extra-judicial Sale
P100,000.00 ..... 400.00 using the following form:
(3) P100,000.00 or more but less NOTICE OF EXTRA-JUDICIAL SALE
than Upon extra-judicial petition for sale under Act
P150,000.00 . 500.00 3135 / 1508 filed __________________ against
(4) P150,000.00 or more but less (name and address of Mortgator/s) to satisfy the
than mortgage indebtedness which as of ___________
P200,000.00 . 650.00 amounts to P _________________, excluding
(5) P200,000.00 or more but less penalties, charges, attorneys fees and
than expenses of foreclosure, the undersigned or his
P250,000.00 .. 1,000.00 duly authorized deputy will sell at public auction
(6) P250,000.00 or more but less on (date of sale) _______________ at 10:00 A.M.
than or soon thereafter at the main entrance of the
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___________ (place of sale) to the highest bidder, Sheriff who shall conduct the sale between the
for cash or managers check and in Philippine hours of 9 a.m. and 4 p.m. of the date of the
Currency, the following property with all its auction (Act 3135, Sec. 4). The property
improvements, to wit: mortgaged shall be awarded to the party
(Description of Property) submitting the highest bid and, in case of a tie,
All sealed bids must be submitted to the an open bidding shall be conducted between
undersigned on the above stated time and the highest bidders. Payments of the winning
date. bid shall be made either in cash or in managers
In the event the public auction should check, in Philippine currency, within five (5)
not take place on the said date, it shall be days from notice.
held on _______________, _______________ b. The sale must be made in the province
without further notice. in which the real property is situated and, in
________________ (date) case the place within the said province in which
SHERIFF the sale is to be made is the subject of
b. (1) In case of foreclosure of real estate stipulation, such sale shall be made in said
mortgage, cause the publication of the notice of place in the municipal building of the
sale by posting it for not less than twenty (20) municipality in which the property or part
days in at least three (3) public places in the thereof is situated (Act No. 3135, as amended,
municipality or city where the property is Sec. 2);
situated and if such property is worth more than in case of a chattel mortgage, the sale shall be
four hundred (P400.00) pesos, by having such made at a place in the municipality where the
notice published once a week for at least three mortgagor resides or where the property is
(3) consecutive weeks in a newspaper of situated (Sec. 14, Act No. 1508, as amended).
general circulation in the municipality or city Sec. 6. After the sale, the Clerk of Courts shall
(Sec. 3, Act No. 3135, as amended). The collect the appropriate fees pursuant to Sec.
Executive Judge shall designate a regular 9(1), Rule 141, as amended by A.M No. 00-2-01-
working day and definite time each week during SC, computed on the basis of the amount
which said notice shall be distributed personally actually collected by him, which fee shall not
by him for publication to qualified newspapers exceed P100,000.00 (A.M. No. 99-10-05-0,
or periodicals as defined in Sec. 1 of P.D. No. March 1, 2001, 2[d]). The amount paid shall not
1079, which distribution shall be effected by be subject to a refund even if the foreclosed
raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001). property is subsequently redeemed.
Unless otherwise stipulated by the parties to Sec. 7. In case of foreclosure under Act No.
the mortgage contract, the debtor-mortgagor 1508, the Sheriff shall, within thirty (30) days
need not be personally served a copy of the from the sale, prepare a return and file the
notice of the extra-judicial foreclosure. same in the Office of the Registry of Deeds
For real estate mortgages covering loans not where the mortgage is recorded.
exceeding P100,000.00, exclusive of interests Sec. 8. The Sheriff or the notary public who
due and unpaid, granted by rural banks (RA No. conducted the sale shall report the name/s of
7353, Sec. 6) or thrift banks (RA No. 7906, Sec. the bidder/s to the Clerk of Court.
18),publication in a newspaper shall be Sec. 9. Upon presentation of the appropriate
dispensed with, it being sufficient that the receipts, the Clerk of Court shall issue and sign
notices of foreclosure are posted for a period of the Certificate of Sale, subject to the approval
sixty (60) days immediately preceding the of the Executive Judge or, in the latters
public auction in the most conspicuous areas of absence, the Vice-Executive Judge. Prior to the
the municipal building, the municipal public issuance of the certificate of Sale, the Clerk of
market, the rural bank, the barangay hall, and court shall, in extra-judicial foreclosure
the barangay public market, if any, where the conducted under the direction of the sheriff,
land mortgaged is situated. Proof of publication collect P300.00 as provided in SEC 20(d), Rule
shall be accomplished by an affidavit of the 141, as amended, and in extra-judicial
Sheriff and shall be attached to the records of foreclosure sales conducted under the direction
the case. of a notary public, collect the appropriate fees
(2) In case of foreclosure of a chattel mortgage, pursuant to Rule 141, 20(e), which amount
post the notice for at least ten (10) days in two shall not exceed P100,000.00 (Minute Res., A.M.
(2) or more public places in the municipality No. 99-10-05-0, August 7, 2001).
where the mortgagor resides or where the Sec. 10. After the Certificate of Sale has been
property is situated (Sec. 14, Act No. 1508, as issued, the Clerk of Court shall keep the
amended). complete records for a period of one (1) year
Sec. 5. Conduct of the extra-judicial foreclosure from the date of registration of the certificate of
sale sale with the Register of Deeds, after which the
a. The bidding shall be made through records shall be archived. Notwithstanding the
sealed bids which must be submitted to the foregoing, juridical persons whose property is
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sold pursuant to an extra-judicial foreclosure property is either inserted or attached to the


shall have the right to redeem the property deed of real estate mortgage.
until, but not later than, the registration of the 2) raffle the application among the Sheriffs
certificate of foreclosure sale which in no case 3) cause the posting and /or publication of the
shall be more than three (3) months after notice of sale
foreclosure, whichever is earlier (R.A. 8791, SEC
47). In case the property is redeemed, the Clerk Where to sell
of Court shall assess the redemptioners fee as > place where each of the mortgaged property
provided in SEC 7 (k), Rule 141, as amended. If is located.
the property is not redeemed, the Clerk of Court > The sale must be made in the province where
shall, as a requisite for the issuance of the final the property to be sold is situated. Sale outside
Deed of Sale, assess the highest bidder the the province is illegal.
amount of P300.00 as provided in SEC 20(d), > If the mortgage deed specified a place in
Rule 141, as amended. the municipality in the province where the sale
Sec. 11. These guidelines shall take effect on would be made, such sale shall be made in such
April 22, 2002. place.
Issued this 22nd day of January 2002 > If the place of sale in the municipality was not
stipulated, the sale shall be made in the
municipal building of the municipality in
which the property or part thereof is situated.
V. AN ACT TO REGULATE THE SALE
OF PROPERTY UNDER SPECIAL Posting Requirement/ Publication
POWERS INSERTED IN OR ANNEXED Requirement
TO REAL ESTATE MORTGAGES 1) Notices of the sale shall be posted for not
Act 3135, as amended by Act 4118 less than 20 days in at least 3 public
places in the city or municipality where the
(1933), Sec 6 RA 7353 (1992), Sec 18 property is situated.
RA 7906 (1995), Sec 47 RA 8791 (2000) 2) If property is worth more than P400, the
notice of the sale shall also be published once
5.1 Topics a week for 3 consecutive weeks in a
newspaper of general circulation in the city
Remedies Available To Mortgagee Upon Default or municipality.
Of Mortgagor
Foreclosure: A remedy available to the EXCEPTION to the requirement of
mortgagee where he subjects the mortgaged newspaper publication
property to the satisfaction of the obligation to even if mortgaged property is worth more than
secure for which the mortgage was given. It P400:
may be effected either judicially or > For real estate mortgages covering loans not
extrajudicially. exceeding P100,000, exclusive of interests due
and unpaid, granted by rural or thrift banks,
Authority To Foreclose Mortgage Extrajudicially publication in a newspaper shall be dispensed
1) The only instance when an extrajudicial with, it being sufficient that notices of
foreclosure may be effected is when a sale is foreclosure are posted for a period of 60 days
made and a Special Power of Attorney to immediately preceding the public auction in the
extrajudicially foreclose is inserted or attached most conspicuous areas at the premises of the
to the Real Estate Mortgage (REM). rural bank or thrift bank, as the case may be,
2) If the REM is silent as to the manner of and at the municipal building, municipal public
foreclosing the mortgage, extrajudicial market, barangay hall and barangay public
foreclosure may not be effected and Rule 68 of market if any or where the land is situated
the Rules of Court in Judicial Foreclosure shall
apply. Unless otherwise stipulated by the parties
in the mortgage contract, the
Procedure debtor/mortgagor need not be personally
served a copy of the notice of extrajudicial
Where to file foreclosure.
> Application should be filed with the Executive No personal notice is required because an EJF is
Judge through the Clerk of Court. an action in rem requiring only the publication
> After the receipt of the application, the Clerk of the notice of the sale to bind the parties
of Court shall: interested.
1) examine the same to ensure that the special > Failure to post notice is NOT per se a ground
power if attorney authorizing the EJF of the real for invalidating the sale provided that the notice
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thereof is duly published in a newspaper of use of the property for a period of 12 months.
general circulation. (DBP vs. Aguirre) Upon approval of the bond, the court shall order
> The object of the notice is to inform the the issuance of a writ of possession.
public of the sale and to secure as many However, a writ of possession may be issued in
bidders as possible to get the best price for the an EJF of REM, only if the debtor is in possession
property. and no third party has intervened. (PNB vs. CA)
> Republication: Republication in the manner
prescribed by Act 3135 is necessary for the 2. After the lapse of the redemption
validity of a postponed EJF sale. The absence of period
such republication invalidates the foreclosure Consolidation of the title becomes a matter of
sale. right on the part of the purchaser and the
issuance of a certificate of sale in his favor
Conduct Of Sale becomes ministerial upon the Registry of
1) Sale shall be by public auction or bidding Deeds.
made through sealed bids. To obtain possession, the purchaser may either
2) Sealed bids are submitted to the Sheriff who ask for a writ of possession or bring an
shall conduct the sale between the hours of independent action such as a suit of ejectment.
9:00 A.M. to 4:00 P.M. of the date of auction.
The sale shall be under the direction of: Remedy Of Debtor If Foreclosure Not Proper
a. Sheriff of the province; or The debtor, in the proceedings in which
b. Municipality or auxiliary municipal judge of possession was requested, but not later than 30
the municipality in which the sale is to be days after the purchaser was given possession,
made; or petition the sale to be set aside and the writ of
c. Notary public of the said municipality possession cancelled, specifying the damages
3) Property shall be awarded to the highest suffered by him, because the mortgage was not
bidder, in case of a tie, an open bidding shall be violated or the sale was not made in
conducted between the highest bidders. accordance with the provisions hereof, and the
> No auction sale shall be held unless there are court shall take cognizance of this petition in
at least 2 participating bidders (in case of accordance with the summary procedure
second sale, if there is only one bidder, the sale provided in SEC 112 of Act 496 (now SEC 108 of
shall proceed) PD 1529) and if it finds the complaint of the
4) Payment of the winning bid shall be made debtor justified, it shall dispose in his favor of all
either in cash or in managers check, in or part of the bond which the parties may have
Philippine currency, within 5 days from notice. furnished by the person who obtained the
> Inadequacy of the price would not nullify the possession. Either of the parties may appeal
sale unless the price is so inadequate as to from the order of the judge in accordance with
shock the conscience of the court. In fact the SEC 14 of Act 496 (no SEC 33 of PD 1529), but
property may be sold for less than its FMV the order of possession shall continue in effect
because the lesser the price the easier for the during the pendency of the appeal.
owner to effect redemption. (Valmonte v CA)
> If the proceeds of the sale are in excess of
the amount claimed by the mortgagee, the
excess shall be turned over to the mortgagor.
5) Creditor may be barred from participating in Redemption
the bidding, only IF so provided in the mortgage
deed. Hence, creditor or any of his Who may redeem
representatives may participate absent any 1) the debtor
express provision in the mortgage or trust deed 2) his successor in interest
barring him. 3) any judicial creditor having an interest
6) Certificate of sale issued by the clerk of court 4) any person having a lien on the property
must be approved by the executive judge or in subsequent to the mortgage under which the
his absence the vice-executive judge. No property is sold.
certificate of sale shall be issued in favor of the
highest bidder until all fees have been paid Period of Redemption
One year from the date of the registration of
Possession By Purchaser Of Foreclosed Property certificate of sale.

1. During redemption period SEC 6. In all cases in which an extrajudicial sale


The purchaser of the foreclosed property is not is made under the special power hereinbefore
automatically entitled to possession of the referred to, the debtor, his successors in
property. He must file an ex parte application interest or any judicial creditor or judgment
and give a bond in the amount equivalent to the creditor of said debtor, or any person having a
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lien on the property subsequent to the Governing Law


mortgage or deed of trust under which the Governed by Rule 68 Governed by SEC 29-
property is sold, may redeem the same at any of the Rules of Court 31 of Rule 39
time within the term of one year from and Applicability
after the date of the sale, and such 1. in judicial 1. in judicial
redemption shall be governed by the provisions foreclosure of REM; foreclosure of REM
of SECs 29-31 and 35 of the Rules of Court. 2. in EJF of REM involving a bank as a
involving a bank as a mortgagee, whether
Date of Sale: has been construed by the mortgagee and a the mortgagor is a
Supreme Court as the date of registration of the juridical person as a natural or a juridical
sheriffs certificate of foreclosure sale in the mortgagor person;
office of the Register of Deeds concerned. 2. in EJF of REM
Where the mortgaged property sold to third However, no right of
party by the mortgagor: transfers only the right redemption exists if it
to redeem the property and the right to involves a bank as a
possess, use and enjoy the same during the mortgagee and a
redemption period. juridical person as a
Where the mortgaged property sold to third mortgagor.
party by mortgagee after the foreclosure: the To whom conferred
mortgagor may still redeem it at the amount of Conferred by law only Conferred by law to
the principal obligation plus interest until the to the mortgagor but the mortgagor, his
time of actual redemption and not of the acquired by second successors-in-interest
purchase price. mortgagee since his or any judgment
right is subordinate to creditor of the
Requisites For A Valid Exercise Of Right Of the first mortgagee. mortgagor.
Redemption Period
1) The redemption must have been made within Can be exercised Can be exercised
a year from the date of registration of the within a period of not within 1 year from
certificate of sale. less than 90 days nor date of registration of
2) Payment of the Purchase price of the more than 120 days certificate of sale.
property plus 1% interest per month with the from entry of
taxes, if paid by the purchaser and the amount judgment or even after
of his prior lien, if any computed from the date foreclosure of sale but
of the registration of the sale up to the time of prior to confirmation.
redemption. When Exercised
3) Written notice of the redemption must be Can be exercised after Can be exercised ONLY
served on the officer who made the sale and a entry of judgment but after the foreclosure
duplicate filed with the proper Registry of before foreclosure sale sale.
Deeds. and after foreclosure
4) The redemption must be made before the sale but prior to
sale is confirmed by the court. confirmation of sale.
5. Tender of payment must be made for the full Redemption Price
amount of the purchase price, otherwise, to Redemption price Redemption price
allow payment by instalments would be to allow depends on the depends on the
the extension of the redemption period. judgment of the court purchase price as fixed
as to the amount due in Sec 26 Rule 39 ROC
2 Kinds of Redemption to plaintiff upon except in cases under
1) Equity of Redemption right of the mortgage debt with SEC 78 of the General
mortgagor in case of a judicial foreclosure to interest and charges Banking Law, the
recover the mortgaged property after his approved by the court amount and the
default in the performance the conditions of the and costs. interest to be paid by
mortgage but before the confirmation of sale of the mortgagor will be
the mortgaged property. the amount due and
2) Right of redemption right of the mortgagor the rate stipulated in
in case of extrajudicial foreclosure to the mortgage loan not
redeem the mortgaged property within a the purchase price and
certain period after it was sold for the legal interest under
satisfaction of the mortgage debt. This is the the ROC.
kind of redemption contemplated in ACT 3135.
5.2 Cases
Equity of Right of Redemption
Redemption
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Action For Foreclosure Of Mortgage Prescribes he will not have priority over the latter and
After 10 Years From The Time The Right Of there may be other creditors who have better
Action Accrued, I.E. When The Mortgagor lien on the properties of the mortgagor.
Defaults In The Payment Of His Obligation
CALTEX submits that the principles enunciated
CANDO V SPOUSES OLAZO (2007) in the Bachrach case are not applicable nor
determinative of the case at bar for the reason
Even from a cursory reading of the appeal, it is that the factual circumstances obtained in the
indelibly clear that the trial court committed an said case are totally different from the instant
appalling blunder when it ruled that an action case. In the Bachrach case, the plaintiff
for foreclosure of mortgage prescribes after ten instituted an action to foreclose the mortgage
(10) years from the date of the mortgage after the money judgment in its favor remained
contract. Under Article 1142 of the Civil Code, a unsatisfied whereas in the present case,
mortgage action prescribes after ten (10) years. CALTEX initially filed a complaint for collection
Jurisprudence, however, has clarified this rule of the debt and during the pendency thereof
by holding that a mortgage action prescribes foreclosed extrajudicially the mortgage.
after ten (10) years from the time the right of
action accrued, which is obviously not the same We disagree. Although the facts in the Bachrach
as the date of the mortgage contract. Stated case and in the present case are not identical,
differently, an action to enforce a right arising there is similarity in the fact that the plaintiffs in
from a mortgage should be enforced within ten these two cases availed of both remedies
(10) years from the time the right of action although they are entitled to a choice of only
accrues; otherwise, it will be barred by one.
prescription and the mortgage creditor will lose
his rights under the mortgage. The right of BANK OF AMERICA NT & SA V AMERICAN
action accrues when the mortgagor defaults in REALTY CORP (1999)
the payment of his obligation to the mortgagee.
Anent real properties in particular, the Court
Remedies Available To Mortgagee Alternative, has laid down the rule that a mortgage creditor
Not Successive Or Cumulative may institute against the mortgage debtor
either a personal action for debt or a real action
CALTEX PHILS v IAC (1989) to foreclose the mortgage.

Where a debt is secured by a mortgage and In our jurisdiction, the remedies available to the
there is a default in payment on the part of the mortgage creditor are deemed alternative and
mortgagor, the mortgagee has a choice of one not cumulative. Notably, an election of one
(1) of two (2) remedies, but he cannot have remedy operates as a waiver of the other. For
both. The mortgagee may: 1) foreclosure the this purpose, a remedy is deemed chosen upon
mortgage; or 2) file an ordinary action to collect the filing of the suit for collection or upon the
the debt. filing of the complaint in an action for
foreclosure of mortgage, pursuant to the
When the mortgagee chooses the foreclosure of provision of Rule 68 of the of the 1997 Rules of
the mortgage as a remedy, he enforces his lien Civil Procedure. As to extrajudicial foreclosure,
by the sale on foreclosure of the mortgaged such remedy is deemed elected by the
property. The proceeds of the sale will be mortgage creditor upon filing of the petition not
applied to the satisfaction of the debt. With this with any court of justice but with the Office of
remedy, he has a prior lien on the property. In the Sheriff of the province where the sale is to
case of a deficiency, the mortgagee has the be made, in accordance with the provisions of
right to claim for the deficiency resulting from Act No. 3135, as amended by Act No. 4118.
the price obtained in the sale of the real In the case at bench, private respondent ARC
property at public auction and the outstanding constituted real estate mortgages over its
obligation at the time of the foreclosure properties as security for the debt of the
proceedings principal debtors. By doing so, private
respondent subjected itself to the liabilities of a
On the other hand, if the mortgagee resorts to third party mortgagor. Under the law, third
an action to collect the debt, he thereby waives persons who are not parties to a loan may
his mortgage lien. He will have no more priority secure the latter by pledging or mortgaging
over the mortgaged property. If the judgment in their own property. Notwithstanding, there is no
the action to collect is favorable to him, and it legal provision nor jurisprudence in our
becomes final and executory, he can enforce jurisdiction which makes a third person who
said judgment by execution. He can even levy secures the fulfillment of another's obligation by
execution on the same mortgaged property, but mortgaging his own property, to be solidarily
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bound with the principal obligor. The signatory applied and will not benefit a mortgagee no
to the principal contract - loan - remains to be matter how large is his or her reservoir of good
primarily bound. It is only upon default of the faith and diligence. Such mortgage is void and
latter that the creditor may have recourse on cannot prejudice the registered owner whose
the mortgagors by foreclosing the mortgaged signature to the deed is falsified. When the
properties in lieu of an action for the recovery instrument presented is forged, even if
of the amount of the loan. accompanied by the owners duplicate
certificate of title, the registered owner does
SUICO RATTAN & BURI INTERIORS V CA not lose his title, and neither does the assignee
(2006) in the forged deed acquire any right or title to
the property. An innocent purchaser for value is
The remedy of extrajudicial foreclosure is one who purchases a titled land bay virtue of a
deemed chosen not on the day of the sale but deed executed by the registered owner himself
on the day of the filing of a petition for not a forged deed.
foreclosure with the office of the Provincial
Chief. Since the filing of petition for foreclosure Newspaper of General Circulation
was earlier than the filing of action for sum of
money, the remedy of foreclosure was chosen PEREZ V PEREZ (2005)
first, even if the actual foreclosure sale was
conducted after the filing of action for sum of To be newspaper of general circulation, it is
money. enough that it is published for the
dissemination of local news and general
The rule is that the remedies of action for sum information; that it has a bona fide subscription
of money and foreclosure are alternative and list of paying subscribers and that it is published
not cumulative. Hence, the action for sum of at regular intervals.
money by Metrobank was validly dismissed
because it already filed a petition for The newspaper must not also be devoted to the
foreclosure before it filed the action. If it had interests or published for the entertainment of a
filed an action for recovery of deficiency instead particular class, profession, trade, calling, race,
of collection of sum of money, it would not have or religious denomination. The newspaper need
been dismissed. (Because recovery of not have the largest circulation as long as it is
deficiency is allowed for Real Estate Mortgage of general circulation.
within 10 years after foreclosure)
In this case, the Olongapo News was the only
Mortgage invalid if mortgagor not the property newspaper in general circulation in Bataan at
owner; doctrine of mortgagee in good faith not the time the notice of auction was published
applicable
Waiver By Parties Of Posting And Publication
ERENA V QUERRER-KAUFFMAN (2006) Requirements Void

One of the essential requisites of a mortgage PNB V NEPOMUCENO PRODUCTIONS, INC.


contract is that the mortgagor must be the (2002)
absolute owner of the thing mortgaged. A FACTS: Petitioner PNB granted respondents a 4
mortgage is thus invalid if the mortgagor is not Million Pesos credit line to finance the filming of
the property owner. In this case, the trial court the movie Pacific Connection. The loan was
and the CA are one in finding that based on the secured by mortgages on respondents real and
evidence on record, the owner of the property is personal properties, to wit: (1) the Malugay
Kauffman who was not the one who mortgaged property; (2) the Forbes property; and (3)
the same to Erena. several motion picture equipments. The credit
line was later increased to 6 Million Pesos and
The doctrine of mortgagee in good faith cannot finally to 7.5 Million Pesos. Respondents
apply in this case. This doctrine is based on the defaulted in their obligation. Petitioner sought
rule that persons dealing with properties foreclosure of the mortgaged properties. The
covered by a TCT are not required to go beyond auction sale was re-scheduled several times
what appears on the face of the title. But this is without need of republication of the notice of
only in a situation where the mortgagor has a sale, as stipulated in the Agreement to
fraudulent or defective title, but not when the Postpone Sale, until finally, the auction sale
mortgagor is an impostor and a forger. proceeded, with petitioner as the highest bidder
in the amount of P10,432,776.97. Aggrieved,
In a forged mortgage, as in this case, the respondents filed a Civil Case with the RTC, an
doctrine of mortgagee in good faith cannot be action for annulment of foreclosure sale and
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damages with injunction. Respondents of the nature and condition of the property to
contended that the foreclosure sale is null and be sold, and of the time, place, and terms of the
void because: (1) the obligation is yet to mature sale. Notices are given to secure bidders and
as there were negotiations for an additional prevent a sacrifice of the property. Clearly, the
loan amount; (2) lack of publication; (3) the statutory requirements of posting and
purchase price was grossly inadequate and publication are mandated, not for the
unconscionable; and (4) the foreclosure mortgagors benefit, but for the public or third
proceedings were initiated by petitioner in bad persons. In fact, personal notice to the
faith. mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless
RTC ordered the annulment and setting aside of stipulated. As such, it is imbued with public
the foreclosure proceedings and auction sale on policy considerations and any waiver thereon
the ground that there was lack of would be inconsistent with the intent and letter
publication of the notice of sale. Petitioner of Act No. 3135. Moreover, statutory provisions
appealed to the CA. CA dismissed petitioners governing publication of notice of mortgage
appeal with regard to the Forbes Park property foreclosure sales must be strictly complied with
as the same was already the subject of a Deed and slight deviations therefrom will invalidate
of Reconveyance executed by petitioner in the notice and render the sale at the very least
favor of respondents as well as a Compromise voidable.
Agreement dated between the same parties.
As to the Malugay property, CA affirmed the Thus, in the recent case of Development Bank
RTC decision. of the Philippines v. Aguirre, the foreclosure
sale held more than two (2) months after the
ISSUE: WON the parties to the mortgage can published date of sale was considered void for
validly waive the posting and publication lack of republication. Similarly, in the instant
requirements mandated by Act No. 3135. case, the lack of republication of the notice of
the subject foreclosure sale renders it void.
HELD NO. Act. No. 3135, as amended,
governing extrajudicial foreclosure of
mortgages on real property is specific with OUANO V CA (2003)
regard to the posting and publication
requirements of the notice of sale, to wit: FACTS: Julieta M. Ouano obtained a loan from
Sec. 3. Notice shall be given by posting notices the PNB in the amount of P104,280.00. As
of the sale for not less than twenty days in at security for said loan, she executed a real
least three public places of the municipality or estate mortgage over two parcels of land. She
city where the property is situated, and if such defaulted on her obligation. PNB filed a petition
property is worth more than four hundred for extrajudicial foreclosure with the City Sheriff
pesos, such notice shall also be published once of Mandaue City. The sheriff prepared a notice
a week for at least three consecutive weeks in a of sale setting the date of public auction of the
newspaper of general circulation in the two parcels of land on December 5, 1980 at
municipality or city. 9:00 a.m. to 4:00 p.m. He caused the notice to
be published in the Cebu Daily Times, a
On this score, it is well settled that what Act No. newspaper of general circulation in Mandaue
3135 requires is: (1) the posting of notices of City, in its issues of November 13, 20 and 27,
sale in three public places; and, (2) the 1980. He likewise posted copies thereof in
publication of the same in a newspaper of public places in Mandaue City and in the place
general circulation. Failure to publish the notice where the properties are located. However, the
of sale constitutes a jurisdictional defect, which sale as scheduled and published did not take
invalidates the sale. Petitioner and place as the parties, on four separate dates,
respondents have absolutely no right to waive executed Agreements to Postpone Sale
the posting and publication requirements of Act (Agreements). These Agreements were
No. 3135. While it is established that rights addressed to the sheriff, requesting the latter to
may be waived, Article 6 of the Civil Code defer the auction sale to another date at the
explicitly provides that such waiver is subject to same time and place, without any further
the condition that it is not contrary to law, republication of the Notice. In all the
public order, public policy, morals, or good postponements, no new notice of sale was
customs, or prejudicial to a third person with a issued, nor was there any republication or
right recognized by law. reposting of notice for the rescheduled dates.
Finally, on May 29, 1981, the sheriff conducted
The principal object of a notice of sale in a the auction sale, awarding the two parcels of
foreclosure of mortgage is not so much to notify land to PNB, the only bidder. He executed a
the mortgagor as to inform the public generally
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Certificate of Sale certifying the sale for and in invalidating the sale. Consequently, such defect
consideration of P195, 510.50. renders the sale absolutely void and no title
passes.
As Julieta failed to redeem the properties within Ouano, however, insists that there was
the one year period from registration of sale, substantial compliance with the publication
PNB consolidated its title on February 12, 1983. requirement, considering that prior publication
On February 23 of the same year, it conveyed and posting of the notice of the first date were
the properties to Alfredo Ouano, the brother of made.
Julieta, under a Deed of Promise to Sell payable
in five years. On March 28, 1983, Julieta sent
demand letters to PNB and Ouano, pointing out
irregularities in the foreclosure sale. On April In Tambunting v. Court of Appeals, we held that
18, 1983, Julieta filed a complaint with the RTC republication in the manner prescribed by Act
of Cebu for the nullification of the May 29, 1981 No. 3135 is necessary for the validity of a
foreclosure sale. Ouano filed a motion for postponed extrajudicial foreclosure sale. Thus
leave to intervene, and filed his Answer in we stated:
Intervention to protect his rights over the
properties.

While the case was pending, on February 25, Where required by the statute or by the terms
1986, PNB executed a Deed of Sale in favor of of the foreclosure decree, public notice of the
Ouano. The Register of Deeds of Mandaue City place and time of the mortgage foreclosure sale
accordingly cancelled the TCTs in PNBs name must be given, a statute requiring it being held
and issued in lieu thereof TCTs in the name of applicable to subsequent sales as well as to the
petitioner over the two parcels of land. On first advertised sale of the property
January 29, 1990, the Regional Trial Court of
Cebu rendered a decision in favor of Julieta,
holding that the lack of republication rendered
Ouano further contends that republication may
the foreclosure sale void. Not satisfied, PNB be waived voluntarily by the parties.
and Ouano brought the case to the CA. In its
decision, said court affirmed the trial courts
ruling on the same ground that there was no
compliance with the mandatory requirements of This argument has no basis in law.
posting and publication of notice of sale. Ouano
filed a motion for reconsideration, which was
denied for lack of merit by the same court on
April 15, 1997. See PNB vs. Nepomuceno

ISSUE: WON requirements of Act No. 3135 were The principal object of a notice of sale in a
complied with in the May 29, 1981 foreclosure foreclosure of mortgage is not so much to notify
sale the mortgagor as to inform the public generally
of the nature and condition of the property to
HELD: NO. Act No. 3135 (as amended by Act be sold, and of the time, place, and terms of the
No. 4118) SEC 3, which provides: sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the
SEC. 3. Notice shall be given by posting notices statutory requirements of posting and
of the sale for not less than twenty (20) days in publication are mandated, not for the
at least three public places of the municipality mortgagors benefit, but for the public or third
or city where the property is situated, and if persons. In fact, personal notice to the
such property is worth more than four hundred mortgagor in extrajudicial foreclosure
pesos, such notice shall also be published once proceedings is not even necessary, unless
a week for at least three consecutive weeks in a stipulated. As such, it is imbued with public
newspaper of general circulation in the policy considerations and any waiver thereon
municipality of city. would be inconsistent with the intent and letter
of Act No. 3135. Publication, therefore, is
It is a well-settled rule that statutory provisions required to give the foreclosure sale a
governing publication of notice of mortgage reasonably wide publicity such that those
foreclosure sales must be strictly complied interested might attend the public sale. To allow
with, and that even slight deviations therefrom the parties to waive this jurisdictional
will invalidate the notice and render the sale at requirement would result in converting into a
least voidable. Failure to advertise a mortgage private sale what ought to be a public auction.
foreclosure sale in compliance with statutory
requirements constitutes a jurisdictional defect
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Moreover, assuming arguendo that the written extrajudicial foreclosure sale. Moreover, even
waivers are valid, we find noticeable flaws that assuming that the aforecited provision applies,
would nevertheless invalidate the foreclosure all it authorizes is the adjournment of the
proceedings. First, the Agreements, as worded, execution sale by agreement of the parties.
only waived further republication of the notice Nowhere does it state that republication and
of sale. Nothing in the Agreements indicates reposting of notice for the postponed sale may
that the parties likewise dispensed with the be waived. Thus, it cannot, by any means,
reposting of the notices of sale. As there was no sanction the waiver in the case at bar.
reposting of notice of the May 29, 1981 sale,
the foreclosure fell short of the requirements of
Act No. 3135. Second, we observe that the Publication Of Notice Of Foreclosure Sale More
Agreements were executed and filed with the Than Sufficient Compliance With The Posting
sheriff several days after each rescheduled Notice Requirement Of The Law
date. The first agreement was timely filed, two
days prior to the originally scheduled sale on OLIZON V CA(1994)
December 5, 1980. The subsequent
agreements, however, was executed and filed We take judicial notice of the fact that
several days after the rescheduled sales. On the newspaper publications have more far-reaching
rescheduled dates, therefore, no public sale effects than posting on bulletin boards in public
occurred, nor was there any request to places. There is a greater probability that an
postpone filed with the sheriff, except for the announcement or notice published in a
first one. In short, the Agreements are clearly newspaper of general circulation, which is
defective for having been belatedly executed distributed nationwide, shall have a readership
and filed with the sheriff. PNB is at fault. It is the of more people than that posted in a public
mortgagee who causes the mortgaged property bulletin board, no matter how strategic its
to be sold, and the date of sale is fixed upon his location may be, which caters only to a limited
instruction. PNBs inaction on the scheduled few. Hence, the publication of the notice of sale
date of sale and belated filing of requests to in the newspaper of general circulation alone is
postpone may be deemed as an abandonment more than sufficient compliance with the notice-
of the petition to foreclose it filed with the posting requirement of the law. By such
sheriff. Consequently, its right to foreclose the publication, a reasonably wide publicity had
mortgage based on said petition lapsed. been effected such that those interested might
Ouano asserts that Rule 39, SEC 24 of the Rules attend the public sale, and the purpose of the
of Court, which allows adjournment of execution law had been thereby subserved.
sales by agreement of the parties should be
applied. The object of a notice of sale is to inform the
public of the nature and condition of the
property to be sold, and of the time, place and
terms of the sale. Notices are given for the
The said provision provides:
purpose of securing bidders and to prevent a
Sec. 24. Adjournment of Sale By written sacrifice of the property. If these objects are
consent of debtor and creditor, the officer may attained, immaterial errors and mistakes will
adjourn any sale upon execution to any date not affect the sufficiency of the notice; but if
agreed upon in writing by the parties. Without mistakes or omissions occur in the notices of
such agreement, he may adjourn the sale from sale, which are calculated to deter or mislead
day to day, if it becomes necessary to do so for bidders, to depreciate the value of the property,
lack of time to complete the sale on the day or to prevent it from bringing a fair price, such
fixed in the notice. mistakes or omissions will be fatal to the
validity of the notice, and also to the sale made
Distinction should be made of the three pursuant thereto.
different kinds of sales under the law, namely:
In the instant case, the aforesaid objective was
an ordinary execution sale (ROC Rule 39) attained since there was sufficient publicity of
the sale through the newspaper publication.
a judicial foreclosure sale (ROC Rule 68) There is completely no showing that the
property was sold for a price far below its value
an extrajudicial foreclosure sale (Act 3135) as to insinuate any bad faith, nor was there any
showing or even an intimation of collusion
between the sheriff who conducted the sale and
A different set of law applies to each class of respondent bank. This being so, the alleged
sale mentioned. The cited provision in the non-compliance with the posting requirement,
Rules of Court hence does not apply to an
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even if true, will not justify the setting aside of such that those interested might attend the
the sale. public sale. To allow the parties to waive this
jurisdictional requirement would result in
Foreclosure Void If Sale Does Not Take Place On converting into a private sale what ought to be
The Date Specified In Published Notice a public auction.

DBP V AGUIRRE (2001) Foreclosure Of Mortgage Arising Out Of A


Settlement Of Estate Not Covered By Act 3135
Failure to post notice is not per se a ground for
invalidating the sale, provided notice is duly PNB V CA (2001)
published in a newspaper of general circulation.
In Olizon vs. CA, the Court held that newspaper WON Act 3135 is applicable in the case? NO.
have more-far-reaching effects than posting on
bulletin boards in public places. Because of the WON PNB may still recover deficiency from the
greater probability of readership of more people estate? NO. Since it elected to extra-judicially
and that newspapers are distributed foreclose the mortgage.
nationwide, there is a reasonably wide publicity.
Those interested might attend the public sale. The case at bar involves a foreclosure of
Publication in the newspaper of general mortgage arising out of a settlement of estate,
circulation alone is more than sufficient wherein the administrator mortgaged a
compliance with the notice-posting requirement property belonging to the estate of the
of the law. decedent, pursuant to an authority given by the
probate court. The Rules of Court on Special
Here, the sale was held more than two months Proceedings comes into play decisively. SEC 7,
after the published date of the sale, rendering Rule 86 of the Rules of Court is appropriately
the sale void. In Masantol Rural Bank, Inc. v. applicable to the case at hand and not Act
CA the Court stated that failure to publish the 3135.
notice of auction sale as required by the statute
constitutes a jurisdictional defect which Case law now holds that this rule grants to the
invalidates the sale. Masantol squarely applies. mortgagee three distinct, independent and
Although lack of republication of notice of sale mutually exclusive remedies that can be
has not been raised, SC may rule on the alternatively pursued by the mortgagee creditor
relevant issue of DBPs lack of jurisdiction to for the satisfaction of his credit in case the
hold the foreclosure sale. mortgagor dies, among them:
Republication Of Notice Of Sale 1. To waive the mortgage and claim the entire
debt from the estate of the mortgagor as an
DBP V CA (2003) ordinary claim;
2. To foreclose the mortgage judicially and
Posting requirement was complied with in this prove any deficiency as an ordinary claim; and
case but not the publication requirement. DBP 3. To rely on the mortgage exclusively,
published the notice of auction sale scheduled foreclosing the same at any time before it is
on 12 August 1986. However, no auction sale barred by prescription without right to file a
took place on 12 August 1986 because DBP, at claim for deficiency.
the instance of ERHC, agreed to postpone the
same to 11 September 1986. The plain result of adopting the last mode of
foreclosure, which PNB did in this case, is that
The Court held recently in Ouano v. Court of the creditor waives his right to recover any
Appeals that republication in the manner deficiency from the estate.
prescribed by Act No. 3135 is necessary for the
validity of a postponed extrajudicial foreclosure
sale. Another publication is required in case the
auction sale is rescheduled, and the absence of
such republication invalidates the foreclosure Inadequacy of Bid Price
sale.
VALMONTE V CA (1999)
The Court also ruled in Ouano that the parties
have no right to waive the publication It is well-settled that when there is right to
requirement in Act No. 3135. redeem, inadequacy of price is of no moment
for the reason that the judgment debtor has
Publication, therefore, is required to give the always had the chance to redeem and reacquire
foreclosure sale a reasonably wide publicity the property. In fact, the property may be sold
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for less of its fair market value precisely Sec 33, Rule 39 of the ROC: if no redemption be
because the lesser the price, the easier for the made within a year from the date of the
owner to effect redemption. registration of the certificate of sale, the
purchaser is entitled to a conveyance and
Issuance Of A Writ Of Possession possession of the property,

SAMSON V RIVERA (2004) Here, no redemption was made within a year


from January 1996. So in August, 1997, more
This Court has consistently held that the duty of than a year after, DBP filed a petition for writ of
the trial court to grant a writ of possession is possession. This is in order.
ministerial. Such writ issues as a matter of
course upon the filing of the proper motion and Where, as here, the title is consolidated in the
the approval of the corresponding bond. No name of the mortgagee, the writ of possession
discretion is left to the trial court. Any question becomes a matter of right on the part of the
regarding the regularity and validity of the sale, mortgagee, and a ministerial duty on the part of
as well as the consequent cancellation of the the court to issue the same.
writ, is to be determined in a subsequent
proceeding as outlined in SEC 8 of Act 3135. The pendency of a separate civil suit
Such question cannot be raised to oppose the questioning the validity of the sale of the
issuance of the writ, since the proceeding is ex mortgaged property cannot bar the issuance of
parte. The recourse is available even before the the writ of possession.
expiration of the redemption period provided by
law and the Rules of Court. Posting Of Bond Not Necessary If Writ Of
Possession Applied For After Ownership Has
The purchaser, who has a right to possession Vested On The Creditor-Mortgagee
that extends after the expiration of the
redemption period, becomes the absolute METROPOLITAN BANK AND TRUST
owner of the property when no redemption is COMPANY V SPOUSES BANCE (2008)
made. Hence, at any time following the
consolidation of ownership and the issuance of The writ of possession was not irregular despite
a new transfer certificate of title in the name of the fact that petitioner did not post a bond. The
the purchaser, he or she is even more entitled posting of a bond as a condition for the
to possession of the property. In such a case, issuance of the writ of possession becomes
the bond required under SEC 7 of Act 3135 is no necessary only if it is applied for within one year
longer necessary, since possession becomes an from the registration of the sale with the
absolute right of the purchaser as the confirmed register of deeds, i.e., during the redemption
owner. period inasmuch as ownership has not yet
vested on the creditor-mortgagee. After the
This Court has long settled that a pending one-year period, and no redemption was made,
action for annulment of mortgage or foreclosure the mortgagor loses all interest over it. In this
does not stay the issuance of a writ of case, respondents were already stripped of
possession. Therefore, the contention of their rights over the properties when they failed
petitioners that the RTC should have to redeem the same within one year from May
consolidated Civil Case No. 01-6219 with LR 3, 1999, the date of registration of the sale.
Case No. 01-2698 and resolved the annulment Hence, when petitioner applied for the writ after
case prior to the issuance of the Writ of the expiration of the redemption period there
Possession is unavailing. was even more reason to issue the writ.

DBP V SPOUSES GATAL (2005) Exception To The Rule That Issuance Of Writ Of
Possession Ministerial And May Be Done Ex
WON the RTC validly dismissed the petition for Parte
writ of possession on the ground of Litis
Pendentia given that a complaint for injunction CHINA BANKING CORP V SPOUSES LOZADA
with TRO was pending, in which action sought (2008)
to declare the sale to Torrefranca as void and to
uphold the spouses right to pre-emption. NO. The exception provided under SEC 33 of Rule
39 of the Revised Rules of Court (to the general
The rights asserted and the reliefs sought by rule that issuance of a writ of possession is
the parties in both cases are not identical. Thus, ministerial and may be done ex parte)
Litis Pendentia is unavailing. contemplates a situation in which a third party
holds the property by adverse title or right,
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such as that of a co-owner, tenant or the concept of legal redemption be converted


usufructuary. The co-owner, agricultural into one of conventional redemption.
tenant, and usufructuary possess the property
in their own right, and they are not merely the Here, there is no showing whatsoever that
successor or transferee of the right of petitioners agreed to pay the redemption price.
possession of another co-owner or the owner of On the contrary, their act of filing their
the property. The spouses Lozada cannot claim complaint to declare the nullity of the
that their right of possession over Unit No. 402 foreclosure sale is indicative of their refusal to
is analogous to any of these. pay the redemption price on the alleged
It is true that in the case presently before this deadline set by the husband. At the very least,
Court, PPGI executed in favor of the spouses if they so believed that their loan obligation was
Lozada the Contract to Sell covering Unit No. only for P1,000,000.00, petitioners should have
402 before it constituted in favor of CBC the made an offer to redeem within one (1) year
real estate mortgages on 51 Project units from the registration of the sheriffs certificate
including Unit No. 402. Nonetheless, it must be of sale, together with a tender of the same
emphasized that what PPGI executed in favor of amount. This, they never did.
the spouses Lozada was a Contract to Sell, a
mere promise to sell, which, at the moment of It must be remembered that the period of
its execution, did not yet transfer possession, redemption is not a prescriptive period but a
much less, title to Unit No. 402 from PPGI to the condition precedent provided by law to restrict
spouses Lozada. When PPGI constituted the the right of the person exercising redemption.
real estate mortgage on Unit No. 402 in favor of Correspondingly, if a person exercising the right
CBC six months later, possession of and title to of redemption has offered to redeem the
the property still resided in PPGI. And when property within the period fixed, he is
PPGI subsequently ceded possession of Unit No. considered to have complied with the condition
402, upon its completion, to the spouses precedent prescribed by law and may
Lozada, such right was already burdened by the thereafter bring an action to enforce
terms and conditions of the mortgage redemption. If, on the other hand, the period is
constituted thereon. By merely stepping into allowed to lapse before the right of redemption
the shoes of PPGI, the spouses Lozadas right of is exercised, then the action to enforce
possession to Unit No. 402 cannot be less or redemption will not prosper, even if the action
more than PPGIs. is brought within the ordinary prescriptive
period. Moreover, the period within which to
The spouses Lozada, having succeeded PPGI in redeem the property sold at a sheriffs sale is
the possession of Unit No. 402, cannot be not suspended by the institution of an action to
considered a third party holding the said annul the foreclosure sale. It is clear, then, that
property adversely to PPGI, the defaulting petitioners have lost any right or interest over
debtor/mortgagor. Resultantly, the general the subject property primarily because of their
rule, and not the exception, applies to the failure to redeem the same in the manner and
instant Petition. It was the mandatory and within the period prescribed by law. Their
ministerial duty of the Makati City RTC to grant belated attempts to question the legality and
the ex parte petition of CBC and order the validity of the foreclosure proceedings and
issuance of a writ of possession in the latters public auction must accordingly fail.
favor over Unit No. 402. It was likewise
mandatory and ministerial for the Clerk of Court One Year Of Period Of Redemption Computed
to comply with the Makati City RTC order by From Date Of Registration Of Certificate Of
issuing the writ of possession, and for the Foreclosure Sale
Sheriff to implement the writ by first issuing a
notice to vacate to the occupants of Unit No. REYES V NOBLEJAS (1967)
402.
Redemption is not the concern merely of the
Nature Of Redemption Period auction-vendee and the mortgagor, but also of
the latters successors in interest or any judicial
SPOUSES LANDRITO V CA (2005) creditor or judgment creditor of said mortgagor,
or any person having a lien on the property
In Lazo v. Republic Surety & Insurance Co., Inc., subsequent to the mortgage under which the
this Court has made it clear that it is only property has been sold. It is precisely for this
where, by voluntary agreement of the parties, reason that the certificate of sale should be
consisting of extensions of the redemption registered, for only upon such registration may
period, followed by commitment by the debtor it legally be said that proper notice, though
to pay the redemption price at a fixed date, will constructive, has been served unto possible
redemptioners contemplated in the law. It is for
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this reason that the date of sale mentioned in inaction, petitioner misled private respondents
SEC 6 of Act 3135 should be construed to mean to believe that they had two years within which
the date of registration of the certificate of sale to redeem the mortgage. After the lapse of two
in the office of the register of deeds concerned. years, petitioner is estopped from asserting that
The Land Registration Commissioner was right the period for redemption was only one year
in ordering the Register of Deeds of Rizal to and that the period had already lapsed.
deny the registration of the Deed of Sale and
the Affidavit of Consolidation of Ownership, the The doctrine in Lazo vs. Republic Surety and
simultaneous registration of which documents Insurance Co., Inc. does not apply in this case.
was sought by herein petitioner even before the In that case the court held that the one year
certificate of sale issued by the sheriff was period of redemption provided in Act No. 3135
registered. is only directory and can be extended by
agreement of the parties. But it bears noting
Extension Of 1-Year Redemption Period that in Lazo the parties voluntarily agreed to
extend the redemption period. Thus, the
LAZO V REPUBLIC SURETY (1970) concept of legal redemption was converted by
the parties in Lazo into conventional
The parties had abandoned entirely the concept redemption. This is not so in the instant case.
of legal redemption in this case and converted There was no voluntary agreement. In fact, the
it into one of conventional redemption, in which sheriff unilaterally and arbitrarily extended the
the only governing factor was the agreement period of redemption to two (2) years in the
between them. Certificate of Sale. The parties were not even
privy to the extension made by the sheriff.
The plaintiffs' repeated requests for time within Nonetheless, as above discussed, the bank
which to redeem, each with a definite date of cannot after the lapse of two years insist that
expiration, generated binding contracts when the redemption period was one year only.
approved by the defendant company. A
contract, needless to say, has the force of law Additionally, the rule on redemption is liberally
between the parties. In any event, the principle interpreted in favor of the original owner of a
of estoppel would step in to prevent the property. The fact alone that he is allowed the
plaintiffs from going back upon their own acts right to redeem clearly demonstrates the
and representations to the prejudice of the solicitousness of the law in giving him another
other party who relied upon them. This is a opportunity, should his fortune improve, to
principle of equity and natural justice, expressly recover his lost property.
adopted in our Civil Code (Arts. 1431 et seq.)
and articulated as one of the conclusive Right Of Redemption Distinguished From Equity
presumptions in Rule 31, Sec. 3(a), of our Rules Of Redemption
of Court as follows:
HUERTA ALBA RESORT V CA (2000)
Whenever a party has, by his own declaration,
act, or omission, intentionally and deliberately From the various decisions, resolutions and
led another to believe a particular thing true, orders a quo it can be gleaned that what
and to act upon such belief, he cannot, in any petitioner has been adjudged to have was only
litigation arising out of such declaration, act, or the equity of redemption over subject
omission, be permitted to falsify it. properties. On the distinction between the
equity of redemption and right of redemption,
IBAAN RURAL BANK V CA (1999) the case of Gregorio Y. Limpin vs. Intermediate
Appellate Court,7 [166 SCRA 87.] comes to the
When petitioner received a copy of the fore:
Certificate of Sale registered in the Office of the
Register of Deeds of Lipa City, it had actual and The equity of redemption is, to be sure,
constructive knowledge of the certificate and its different from and should not be confused with
contents. For two years, it did not object to the the right of redemption.
two-year redemption period provided in the
certificate. Thus, it could be said that petitioner The right of redemption in relation to a
consented to the two-year redemption period mortgage - understood in the sense of a
especially since it had time to object and did prerogative to re-acquire mortgaged property
not. When circumstances imply a duty to speak after registration of the foreclosure sale - exists
on the part of the person for whom an only in the case of the extrajudicial foreclosure
obligation is proposed, his silence can be of the mortgage. No such right is recognized in
construed as consent. By its silence and a judicial foreclosure except only where the
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mortgagee is the Philippine National Bank or a


bank or banking institution. Eduardo Belo, assignor of the petitioners, is an
accommodation mortgagor. Accommodation
Where a mortgage is foreclosed extrajudicially, mortgagors as such are not in any way liable for
Act 3135 grants to the mortgagor the right of the payment of the loan or principal obligation
redemption within one (1) year from the of the debtor/borrower. The liability of the
registration of the sheriffs certificate of accommodation mortgagor extends only up to
foreclosure sale. the loan value of their mortgaged property and
not to the entire loan itself. Hence, it is only just
Where the foreclosure is judicially effected, that they be allowed to redeem their mortgaged
however, no equivalent right of redemption property by paying only the winning bid price
exists. The law declares that a judicial plus interest at the public auction sale with
foreclosure sale, when confirmed by an order respect only to the property belonging to the
of the court, x x shall operate to divest the accommodation mortgagor.
rights of all the parties to the action and to vest
their rights in the purchaser, subject to such The principle of indivisibility of mortgage
rights of redemption as may be allowed by law. contracts does not apply to the right of
Such rights exceptionally allowed by law (i.e., redemption of an accommodation mortgagor
even after confirmation by an order of the and her assignees. Indivisibility arises only
court) are those granted by the charter of the where there is a debt, that is, there is a debtor-
Philippine National Bank (Acts No. 2747 and creditor relationship. But, this relationship is
2938), and the General Banking Act (R.A. 337). wanting in the case at bar in the sense that
These laws confer on the mortgagor, his petitioners are assignees of an accommodation
successors in interest or any judgment creditor mortgagor and not of a debtor-mortgagor.
of the mortgagor, the right to redeem the Hence, it is fair and logical to allow the
property sold on foreclosure - after confirmation petitioners to redeem only the property
by the court of the foreclosure sale - which right belonging to their assignor, Eduardo Belo.
may be exercised within a period of one (1)
year, counted from the date of registration of With respect to the 4 parcels of land belonging
the certificate of sale in the Registry of to Eslabon Spouses, petitioners being total
Property. strangers to said lots lack legal personality to
redeem the same. Fair play and justice demand
But, to repeat, no such right of redemption that respondent PNBs interest of recovering its
exists in case of judicial foreclosure of a entire bank claim should not be at the expense
mortgage if the mortgagee is not the PNB or a of petitioners, as assignees of Belo, who is not
bank or banking institution. In such a case, the indebted to it.
foreclosure sale, when confirmed by an order
of the court. x x shall operate to divest the Preserving The Right Of Redemption Beyond
rights of all the parties to the action and to vest Redemption Period
their rights in the purchaser. There then exists
only what is known as the equity of redemption. HI-YIELD REALTY V CA (2002)
This is simply the right of the defendant
mortgagor to extinguish the mortgage and What is the redemptioners option therefore
retain ownership of the property by paying the when the redemption period is about to expire
secured debt within the 90-day period after the and the redemption cannot take place on
judgment becomes final, in accordance with account of disagreement over the redemption
Rule 68, or even after the foreclosure sale but price?
prior to its confirmation.
According to jurisprudence, the redemptioner
This is the mortgagors equity (not right) of faced with such a problem may preserve his
redemption which, as above stated, may be right of redemption through judicial action
exercised by him even beyond the 90-day which in every case must be filed within the
period from the date of service of the order, one-year period of redemption. The filing of the
and even after the foreclosure sale itself, court action to enforce redemption, being
provided it be before the order of confirmation equivalent to a formal offer to redeem, would
of the sale. After such order of confirmation, no have the effect of preserving his redemptive
redemption can be effected any longer. rights and "freezing" the expiration of the one-
year period. This is a fair interpretation
Redemption Price To Be Paid By provided the action is filed on time and in good
Accommodation Mortgagors faith, the redemption price is finally determined
and paid within a reasonable time, and the
BELO V PNB (2001) rights of the parties are respected.
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unreasonably delay the final resolution of


Stated otherwise, the foregoing interpretation, ownership of the subject property.
as applied to the case at bar, has three critical
dimensions: (1) timely redemption or In this case, no definite tender of payment was
redemption by expiration date (or, as what made since there is no consignation.
happened in this case, the redemptioner was Consignation should have been made to show
forced to resort to judicial action to "freeze" the good faith and financial capability to redeem.
expiration of the redemption period); (2) good Failure to consign was downright reflective of
faith as always, meaning, the filing of the Franciscos incapability to pay from the very
private respondents action on August 13, 1993 start
must have been for the sole purpose of
determining the redemption price and not to Case For Judicial Redemption Not Filed In Good
stretch the redemptive period indefinitely; and Faith But For The Purpose Of Stretching The
(3) once the redemption price is determined Period Of Redemption Indefinitely
within a reasonable time, the redemptioner
must make prompt payment in full. TOLENTINO V CA (2007)
In the instant case, the respondents did not The general rule in redemption is that it is not
tender payment within the period set by the sufficient that a person offering to redeem
trial court. Instead, they asked for a 45-day simply manifests his/her desire to do so. The
extension to tender payment. Such 45-day statement of intention must be accompanied by
extension for payment must be denied. an actual and simultaneous tender of payment.
This constitutes the exercise of the right to
The pendency of the right of redemption repurchase. Bona fide redemption necessarily
depresses the market value of the land until the implies a reasonable and valid tender of the
period expires. Permitting private respondent to entire purchase price, otherwise the rule on the
file a suit for redemption, with either party redemption period fixed by law can easily be
unable to foresee when final judgment will circumvented.
come, renders meaningless the period fixed by
the statute for effecting the redemption. It The records show that the correct redemption
makes the redemptive period indefinite and price had been determined prior to the filing of
cripples any effort of the landowner to realize the complaint for judicial redemption. Petitioner
the value of his land. In the same way, the had been furnished updated Statements of
buyer cannot immediately recover his Account specifying the redemption price even
investment. Thus, unless and until the prior to the consolidation of the title of the
redemption is resolved with finality, both the foreclosed property in the bank's name. The
landowners and buyers needs cannot be met. inclusion of late payment charges, foreclosure
Petitioner and private respondent herein were expense, attorney's fees, liquidated damages,
thus basically posed on similar footing before foreclosure fee, and interests therein was
redemption. But whoever of them stands to be pursuant to the Loan Agreement. Considering
irreparably injured in the long run deserves the that the Loan Agreement was read and freely
Courts equitable protection. adhered to by petitioner, the stipulations
therein are binding on her. Based on the
In the instant case, the fact that private foregoing, it is clear that petitioner did not file
respondent made a formal offer to redeem the instant case for judicial redemption in good
before the expiration of the period to redeem faith. It was not filed for the purpose of
was not squarely at issue. The focal issue here determining the correct redemption price but to
is whether or not the extension of the stretch the redemption period indefinitely,
redemptive period by the trial court was well which is not allowed by law.
within private respondents preserved right to

redeem. The circumstances clearly show it was
not.
VI. BANGKO SENTRAL NG
The opportunity to redeem the subject property PILIPINAS LAW
was never denied to private respondent. His RA 7653
timely formal offer through judicial action to
redeem was likewise recognized. But that is
6.1 Topics
where it ends. We cannot sanction and grant
every succeeding motion or petition - specially
State Policies
if frivolous or unreasonable - filed by him
because this would manifestly and
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SEC 1 Declaration of Policy. The State (c) five (5) members who shall come from the
shall maintain a central monetary authority that private sector, all of whom shall serve full-time:
shall function and operate as an independent Provided, however, That of the members first
and accountable body corporate in the appointed under the provisions of this subSEC,
discharge of its mandated responsibilities three (3) shall have a term of six (6) years, and
concerning money, banking and credit. In line the other two (2), three (3) years. No member
with this policy, and considering its unique of the Monetary Board may be reappointed
functions and responsibilities, the central more than once.
monetary authority established under this Act,
while being a government-owned corporation, SEC 9. Disqualifications. In addition to the
shall enjoy fiscal and administrative autonomy. disqualifications imposed by Republic Act No.
6713, a member of the Monetary Board is
disqualified from being a director, officer,
How State Policies Are To Be Achieved employee, consultant, lawyer, agent or
stockholder of any bank, quasi-bank or any
SEC 2 Creation of the Bangko Sentral. other institution which is subject to supervision
There is hereby established an independent or examination by the Bangko Sentral, in which
central monetary authority, which shall be a case such member shall resign from, and divest
body corporate known as the Bangko Sentral ng himself of any and all interests in such
Pilipinas, hereafter referred to as the Bangko institution before assumption of office as
Sentral. The capital of the Bangko Sentral shall member of the Monetary Board.
be Fifty billion pesos (P50,000,000,000), to be
fully subscribed by the Government of the The members of the Monetary Board coming
Republic, hereafter referred to as the from the private sector shall not hold any other
Government, Ten billion pesos public office or public employment during their
(P10,000,000,000) of which shall be fully paid tenure. No person shall be a member of the
for by the Government upon the effectivity of Monetary Board if he has been connected
this Act and the balance to be paid for within a directly with any multilateral banking or
period of two (2) years from the effectivity of financial institution or has a substantial interest
this Act in such manner and form as the in any private bank in the Philippines, within
Government, through the Secretary of Finance one (1) year prior to his appointment; likewise,
and the Secretary of Budget and Management, no member of the Monetary Board shall be
may thereafter determine. employed in any such institution within two (2)
years after the expiration of his term except
SEC 6. Composition of the Monetary when he serves as an official representative of
Board. The powers and functions of the the Philippine Government to such institution.
Bangko Sentral shall be exercised by the
Bangko Sentral Monetary Board, hereafter SEC 11. Meetings. The Monetary Board
referred to as the Monetary Board, composed of shall meet at least once a week. The Board may
seven (7) members appointed by the President be called to a meeting by the Governor of the
of the Philippines for a term of six (6) years. Bangko Sentral or by two (2) other members of
the Board.
The seven (7) members are:
(a) the Governor of the Bangko Sentral, who The presence of four (4) members shall
shall be the Chairman of the Monetary Board. constitute a quorum: Provided, That in all cases
The Governor of the Bangko Sentral shall be the Governor or his duly designated alternate
head of a department and his appointment shall shall be among the four (4).
be subject to confirmation by the Commission
on Appointments. Whenever the Governor is Unless otherwise provided in this Act, all
unable to attend a meeting of the Board, he decisions of the Monetary Board shall require
shall designate a Deputy Governor to act as his the concurrence of at least four (4) members.
alternate: Provided, That in such event, the
Monetary Board shall designate one of its The Bangko Sentral shall maintain and preserve
members as acting Chairman; a complete record of the proceedings and
deliberations of the Monetary Board, including
(b) a member of the Cabinet to be designated the tapes and transcripts of the stenographic
by the President of the Philippines. Whenever notes, either in their original form or in
the designated Cabinet Member is unable to microfilm.
attend a meeting of the Board, he shall
designate an Undersecretary in his Department SEC 15. Exercise of Authority. In the
to attend as his alternate; and exercise of its authority, the Monetary Board
shall:
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(a) issue rules and regulations it considers departments performing supervision and
necessary for the effective discharge of the examination functions against all costs and
responsibilities and exercise of the powers expenses reasonably incurred by such persons
vested upon the Monetary Board and the in connection with any civil or criminal action,
Bangko Sentral. The rules and regulations suit or proceedings to which he may be, or is,
issued shall be reported to the President and made a party by reason of the performance of
the Congress within fifteen (15) days from the his functions or duties, unless he is finally
date of their issuance; adjudged in such action or proceeding to be
liable for negligence or misconduct.
(b) direct the management, operations, and
administration of the Bangko Sentral, In the event of a settlement or compromise,
reorganize its personnel, and issue such rules indemnification shall be provided only in
and regulations as it may deem necessary or connection with such matters covered by the
convenient for this purpose. The legal units of settlement as to which the Bangko Sentral is
the Bangko Sentral shall be under the exclusive advised by external counsel that the person to
supervision and control of the Monetary Board; be indemnified did not commit any negligence
or misconduct.
(c) establish a human resource management
system which shall govern the selection, hiring, The costs and expenses incurred in defending
appointment, transfer, promotion, or dismissal the aforementioned action, suit or proceeding
of all personnel. Such system shall aim to may be paid by the Bangko Sentral in advance
establish professionalism and excellence at all of the final disposition of such action, suit or
levels of the Bangko Sentral in accordance with proceeding upon receipt of an undertaking by
sound principles of management. or on behalf of the member, officer, or
employee to repay the amount advanced
A compensation structure, based on job should it ultimately be determined by the
evaluation studies and wage surveys an subject Monetary Board that he is not entitled to be
to the Board's approval, shall be instituted as indemnified as provided in this subSEC.
an integral component of the Bangko Sentral's
human resource development program: SEC 16. Responsibility. Members of the
Provided, That the Monetary Board shal make Monetary Board, officials, examiners, and
its own system conform as closely as possible employees of the Bangko Sentral who willfully
with the principles provided for under Republic violate this Act or who are guilty of negligence,
Act No. 6758: Provided, however, That abuses or acts of malfeasance or misfeasance
compensation and wage structure of employees or fail to exercise extraordinary diligence in the
whose positions fall under salary grade 19 and performance of hi duties shall be held liable for
below shall be in accordance with the rates any loss or injury suffered by the Bangko
prescribed under Republic Act No. 6758. Sentral or other banking institutions as a result
of such violation, negligence, abuse,
On the recommendation of the Governor, malfeasance, misfeasance or failure to exercise
appoint, fix the remunerations and other extraordinary diligence.
emoluments, and remove personnel of the
Bangko Sentral, subject to pertinent civil service Similar responsibility shall apply to members,
laws: Provided, That the Monetary Board shall officers, and employees of the Bangko Sentral
have exclusive and final authority to promote, for:
transfer, assign, or reassign personnel of the (1) the disclosure of any information of a
Bangko Sentral and these personnel actions are confidential nature, or any information on the
deemed made in the interest of the service and discussions or resolutions of the Monetary
not disciplinary: Provided, further, That the Board, or about the confidential operations of
Monetary Board may delegate such authority to the Bangko Sentral, unless the disclosure is in
the Governor under such guidelines as it may connection with the performance of official
determine. functions with the Bangko Sentral, or is with
prior authorization of the Monetary Board or the
(d) adopt an annual budget for and authorize Governor; or
such expenditures by the Bangko Sentral as are
in the interest of the effective administration (2) the use of such information for personal gain
and operations of or to the detriment of the Government, the
Bangko Sentral or third parties: Provided,
(e) the Bangko Sentral in accordance with however, That any data or information required
applicable laws and regulations; and to be submitted to the President and/or the
(f) indemnify its members and other officials of Congress, or to be published under the
the Bangko Sentral, including personnel of the
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provisions of this Act shall not be considered accountant with at least ten (10) years
confidential. experience as such. No relative of any member
of the Monetary Board or the Chairman of the
SEC 18. Representation of the Monetary Commission within the sixth degree of
Board and the Bangko Sentral. The consanguinity or affinity shall be appointed
Governor of the Bangko Sentral shall be the such representative.
principal representative of the Monetary Board
and of the Bangko Sentral and, in such capacity
and in accordance with the instructions of the How The BSP Handles In Distress?
Monetary Board, he shall be empowered to:
(a) represent the Monetary Board and the Conservatorship (RA 7653 SEC 29 and RA
Bangko Sentral in all dealings with other offices, 8971 SEC 67)
agencies and instrumentalities of the
Government and all other persons or entities, SEC 29. Appointment of Conservator.
public or private, whether domestic, foreign or Whenever, on the basis of a report submitted
international; by the appropriate supervising or examining
department, the Monetary Board finds that a
(b) sign contracts entered into by the Bangko bank or a quasi-bank is in a state of continuing
Sentral, notes and securities issued by the inability or unwillingness to maintain a condition
Bangko Sentral, all reports, balance sheets, of liquidity deemed adequate to protect the
profit and loss statements, correspondence and interest of depositors and creditors, the
other documents of the Bangko Sentral. Monetary Board may appoint a conservator with
such powers as the Monetary Board shall deem
The signature of the Governor may be in necessary to take charge of the assets,
facsimile whenever appropriate; liabilities, and the management thereof,
reorganize the management, collect all monies
(c) represent the Bangko Sentral, either and debts due said institution, and exercise all
personally or through counsel, including private powers necessary to restore its viability. The
counsel, as may be authorized by the Monetary conservator shall report and be responsible to
Board, in any legal proceedings, action or the Monetary Board and shall have the power to
specialized legal studies; and overrule or revoke the actions of the previous
management and board of directors of the bank
(d) delegate his power to represent the Bangko or quasi-bank. The conservator should be
Sentral, as provided in subSECs (a), (b) and (c) competent and knowledgeable in bank
of this SEC, to other officers upon his own operations and management.
responsibility: Provided, however, That in order
to preserve the integrity and the prestige of his The conservatorship shall not exceed one (1)
office, the Governor of the Bangko Sentral may year.
choose not to participate in preliminary
discussions with any multilateral banking or The conservator shall receive remuneration to
financial institution on any negotiations for the be fixed by the Monetary Board in an amount
Government within or outside the Philippines. not to exceed two-thirds (2/3) of the salary of
During the negotiations, he may instead be the president of the institution in one (1) year,
represented by a permanent negotiator. payable in twelve (12) equal monthly
payments: Provided, That, if at any time within
SEC 47. Appointment and Personnel. The one-year period, the conservatorship is
Chairman of the Commission on Audit shall act terminated on the ground that the institution
as the ex officio auditor of the Bangko Sentral can operate on its own, the conservator shall
and, as such, he is empowered and authorized receive the balance of the remuneration which
to appoint a representative who shall be the he would have received up to the end of the
auditor of the Bangko Sentral and, in year; but if the conservatorship is terminated
accordance with law, fix his salary, and to on other grounds, the conservator shall not be
appoint and fix salaries and number of entitled to such remaining balance. The
personnel to assist said representative in his Monetary Board may appoint a conservator
work. The salaries and other emoluments shall connected with the Bangko Sentral, in which
be paid by the Commission. The auditor of the case he shall not be entitled to receive any
Bangko Sentral and personnel under him may remuneration or emolument from the Bangko
be removed only by the Chairman of the Sentral during the conservatorship. The
Commission. expenses attendant to the conservatorship shall
be borne by the bank or quasi-bank concerned.
The representative of the Chairman of the
Commission must be a certified public
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The Monetary Board shall terminate the For a quasi-bank, any person of recognized
conservatorship when it is satisfied that the competence in banking or finance may be
institution can continue to operate on its own designed as receiver.
and the conservatorship is no longer necessary.
The conservatorship shall likewise be The receiver shall immediately gather and take
terminated should the Monetary Board, on the charge of all the assets and liabilities of the
basis of the report of the conservator or of its institution, administer the same for the benefit
own findings, determine that the continuance in of its creditors, and exercise the general powers
business of the institution would involve of a receiver under the Revised Rules of Court
probable loss to its depositors or creditors, in but shall not, with the exception of
which case the provisions of SEC 30 shall apply. administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
SEC 67. Conservatorship. The grounds any asset of the institution: Provided, That the
and procedures for placing a bank under receiver may deposit or place the funds of the
conservatorship, as well as, the powers and institution in nonspeculative investments. The
duties of the conservator appointed for the receiver shall determine as soon as possible,
bank shall be governed by the provisions of SEC but not later than ninety (90) days from take
29 and the last two paragraphs of SEC 30 of the over, whether the institution may be
New Central rehabilitated or otherwise placed in such a
Bank Act: Provided, That this SEC shall also condition so that it may be permitted to resume
apply to conservatorship proceedings of quasi- business with safety to its depositors and
banks. (n) creditors and the general public: Provided, That
any determination for the resumption of
business of the institution shall be subject to
Closure (SEC 30 and R.A. 8791 SECs 53 & prior approval of the Monetary Board.
56.4)
If the receiver determines that the institution
SEC 30. Proceedings in Receivership and cannot be rehabilitated or permitted to resume
Liquidation. Whenever, upon report of the business in accordance with the next preceding
head of the supervising or examining paragraph, the Monetary Board shall notify in
department, the Monetary Board finds that a writing the board of directors of its findings and
bank or quasibank: direct the receiver to proceed with the
liquidation of the
institution. The receiver shall:
(a) is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, That this shall 1. file ex parte with the proper regional
not include inability to pay caused by trial court, and without requirement
extraordinary demands induced by of prior notice or any other action, a
financial panic in the banking petition for assistance in the
community; liquidation of the institution pursuant
(b) by the Bangko Sentral, to meet its to a liquidation plan adopted by the
liabilities; or Philippine Deposit Insurance
(c) cannot continue in business without Corporation for general application to
involving probable losses to its all closed banks. In case of quasi-
depositors or creditors; or banks, the liquidation plan shall be
(d) has willfully violated a cease and adopted by the Monetary Board.
desist order under SEC 37 that has Upon acquiring jurisdiction, the court
become final, involving acts or shall, upon motion by the receiver
transactions which amount to fraud after due notice, adjudicate disputed
or a dissipation of the assets of the claims against the institution, assist
institution; in which cases, the the enforcement of individual
Monetary Board may summarily and liabilities of the stockholders,
without need for prior hearing forbid directors and officers, and decide on
the institution from doing business in other issues as may be material to
the Philippines and designate the implement the liquidation plan
Philippine Deposit Insurance adopted. The receiver shall pay the
Corporation as receiver of the cost of the proceedings from the
banking institution. assets of the institution.
2. convert the assets of the institutions
to money, dispose of the same to
creditors and other parties, for the
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purpose of paying the debts of such The bank shall perform the services permitted
institution in accordance with the under SubSECs 53.1, 53.2, 53.3 and 53.4 as
rules on concurrence and preference depositary or as an agent. Accordingly, it shall
of credit under the Civil Code of the keep the funds, securities and other effects
Philippines and he may, in the name which it receives duly separate from the bank's
of the institution, and with the own assets and liabilities.
assistance of counsel as he may The Monetary Board may regulate the
retain, institute such actions as may operations authorized by this SEC in order to
be necessary to collect and recover ensure that such operations do not endanger
accounts and assets of, or defend the interests of the depositors and other
any action against, the institution. creditors of the bank.
The assets of an institution under In case a bank or quasi-bank notifies the
receivership or liquidation shall be Bangko Sentral or publicly announces a bank
deemed in custodia legis in the holiday, or in any manner suspends the
hands of the receiver and shall, from payment of its deposit liabilities continuously
the moment the institution was for more than thirty (30) days, the Monetary
placed under such receivership or Board may summarily and without need for
liquidation, be exempt from any prior hearing close such banking institution and
order of garnishment, levy, place it under receivership of the Philippine
attachment, or execution. Deposit Insurance Corporation. (72a)

The actions of the Monetary Board taken under SEC 56. Conducting Business in an Unsafe
this SEC or under SEC 29 of this Act shall be or Unsound Manner. In determining
final and executory, and may not be restrained whether a particular act or omission, which is
or set aside by the court except on petition for not otherwise prohibited by any law, rule or
certiorari on the ground that the action taken regulation affecting banks, quasi-banks or trust
was in excess of jurisdiction or with such grave entities, may be deemed as conducting
abuse of discretion as to amount to lack or business in an unsafe or unsound manner for
excess of jurisdiction. The petition for certiorari purposes of this SEC, the Monetary Board shall
may only be filed by the stockholders of record consider any of the following circumstances:
representing the majority of the capital stock
within ten (10) days from receipt by the board 56.4. The act or omission involves entering into
of directors of the institution of the order any contract or transaction manifestly and
directing receivership, liquidation or grossly disadvantageous to the bank, quasi-
conservatorship. The designation of a bank or trust entity, whether or not the director
conservator under SEC 29 of this Act or the or officer profited or will profit thereby.
appointment of a receiver under this SEC shall
be vested exclusively with the Monetary Board. Whenever a bank, quasi-bank or trust entity
Furthermore, the designation of a conservator is persists in conducting its business in an unsafe
not a precondition to the designation of a or unsound manner, the Monetary Board may,
receiver. without prejudice to the administrative
sanctions provided in SEC 37 of the New Central
SEC 53. Other Banking Services. In Bank Act, take action under SEC 30 of the same
addition to the operations specifically Act and/or immediately exclude the erring bank
authorized in this Act, a bank may perform the from clearing, the provisions of law to the
following services: contrary notwithstanding. (n)
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell, by Receivership ( SEC 30; and R.A. 8791 SECs
order of and for the account of their customers, 69-70)
shares, evidences of indebtedness and all types
of securities; SEC 30. Proceedings in Receivership and
53.3. Make collections and payments for the Liquidation. Whenever, upon report of the
account of others and perform such other head of the supervising or examining
services for their customers as are not department, the Monetary Board finds that a
incompatible with banking business; bank or quasibank:
53.4. Upon prior approval of the Monetary (a) is unable to pay its liabilities as they
Board, act as managing agent, adviser, become due in the ordinary course of
consultant or administrator of investment business: Provided, That this shall
management/advisory/consultancy accounts; not include inability to pay caused by
and extraordinary demands induced by
53.5. Rent out safety deposit boxes.
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financial panic in the banking Deposit Insurance Corporation for general


community; application to all closed banks. In case of quasi-
(b) by the Bangko Sentral, to meet its banks, the liquidation plan shall be adopted by
liabilities; or the Monetary Board. Upon acquiring jurisdiction,
(c) cannot continue in business without the court shall, upon motion by the receiver
involving probable losses to its after due notice, adjudicate disputed claims
depositors or creditors; or against the institution, assist the enforcement
(d) has willfully violated a cease and of individual liabilities of the stockholders,
desist order under SEC 37 that has directors and officers, and decide on other
become final, involving acts or issues as may be material to implement the
transactions which amount to fraud liquidation plan adopted. The receiver shall pay
or a dissipation of the assets of the the cost of the proceedings from the assets of
institution; in which cases, the the institution.
Monetary Board may summarily and
without need for prior hearing forbid 2. convert the assets of the institutions to
the institution from doing business in money, dispose of the same to creditors and
the Philippines and designate the other parties, for the purpose of paying the
Philippine Deposit Insurance debts of such institution in accordance with the
Corporation as receiver of the rules on concurrence and preference of credit
banking institution. under the Civil Code of the Philippines and he
may, in the name of the institution, and with
the assistance of counsel as he may retain,
For a quasi-bank, any person of recognized
institute such actions as may be necessary to
competence in banking or finance may be
collect and recover accounts and assets of, or
designed as receiver.
defend any action against, the institution. The
assets of an institution under receivership or
The receiver shall immediately gather and take
liquidation shall be deemed in custodia legis in
charge of all the assets and liabilities of the
the hands of the receiver and shall, from the
institution, administer the same for the benefit
moment the institution was placed under such
of its creditors, and exercise the general powers
receivership or liquidation, be exempt from any
of a receiver under the Revised Rules of Court
order of garnishment, levy, attachment, or
but shall not, with the exception of
execution.
administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
The actions of the Monetary Board taken under
any asset of the institution: Provided, That the
this SEC or under SEC 29 of this Act shall be
receiver may deposit or place the funds of the
final and executory, and may not be restrained
institution in nonspeculative investments. The
or set aside by the court except on petition for
receiver shall determine as soon as possible,
certiorari on the ground that the action taken
but not later than ninety (90) days from take
was in excess of jurisdiction or with such grave
over, whether the institution may be
abuse of discretion as to amount to lack or
rehabilitated or otherwise placed in such a
excess of jurisdiction. The petition for certiorari
condition so that it may be permitted to resume
may only be filed by the stockholders of record
business with safety to its depositors and
representing the majority of the capital stock
creditors and the general public: Provided, That
within ten (10) days from receipt by the board
any determination for the resumption of
of directors of the institution of the order
business of the institution shall be subject to
directing receivership, liquidation or
prior approval of the Monetary Board.
conservatorship. The designation of a
conservator under SEC 29 of this Act or the
If the receiver determines that the institution
appointment of a receiver under this SEC shall
cannot be rehabilitated or permitted to resume
be vested exclusively with the Monetary Board.
business in accordance with the next preceding
Furthermore, the designation of a conservator is
paragraph, the Monetary Board shall notify in
not a precondition to the designation of a
writing
receiver.
the board of directors of its findings and direct
the receiver to proceed with the liquidation of
SEC 69. Receivership and Involuntary
the
Liquidation. The grounds and procedures
institution. The receiver shall:
for placing a bank under receivership or
liquidation, as well as the powers and duties of
1. file ex parte with the proper regional trial
the receiver or liquidator appointed for the bank
court, and without requirement of prior notice
shall be governed by the provisions of SECs 30,
or any other action, a petition for assistance in
31, 32, and 33 of the New Central Bank Act:
the liquidation of the institution pursuant to a
Provided, That the petitioner or plaintiff files
liquidation plan adopted by the Philippine
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with the clerk or judge of the court in which the as receiver.


action is pending a bond, executed in favor of
the Bangko Sentral, in an amount to be fixed by The receiver shall immediately gather and take
the court. This SEC shall also apply to the charge of all the assets and liabilities of the
extent possible to the receivership and institution, administer the same for the benefit
liquidation proceedings of quasi-banks. (n) of its creditors, and exercise the general powers
of a
SEC 70. Penalty for Transactions After a receiver under the Revised Rules of Court but
Bank Becomes Insolvent. Any director or shall not, with the exception of administrative
officer of any bank declared insolvent or placed expenditures, pay or commit any act that will
under receivership by the Monetary Board who involve the transfer or disposition of any asset
refuses to turn over the bank's records and of the institution: Provided, That the receiver
assets to the designated receivers, or who may deposit or place the funds of the institution
tampers with banks records, or who in nonspeculative investments. The receiver
appropriates for himself or another party or shall determine as soon as possible, but not
destroys or causes the misappropriation and later than ninety (90) days from take over,
destruction of the bank's assets, or who whether the institution may be rehabilitated or
receives or permits or causes to be received in otherwise placed in such a condition so that it
said bank any deposit, collection of loans and/or may be permitted to resume business with
receivables, or who pays out or permits or safety to its depositors and creditors and
causes to be paid out any funds of said bank, or the general public: Provided, That any
who transfers or permits or causes to be determination for the resumption of business of
transferred any securities or property of said the institution shall be subject to prior approval
bank shall be subject to the penal provisions of of the Monetary Board.
the New Central Bank Act. (85a)
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
Liquidation (SEC 30; and R.A. 8791 SEC business in accordance with the next preceding
69) paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and
SEC 30. Proceedings in Receivership and direct the receiver to proceed with the
Liquidation. Whenever, upon report of the liquidation of the institution. The receiver shall:
head of the supervising or examining 1. file ex parte with the proper regional trial
department, the Monetary Board finds that a court, and without requirement of prior notice
bank or quasibank: or any other action, a petition for assistance in
(a) is unable to pay its liabilities as they become the liquidation of the institution pursuant to a
due in the ordinary course of business: liquidation plan adopted by the Philippine
Provided, Deposit Insurance Corporation for general
That this shall not include inability to pay application to all closed banks. In case of quasi-
caused by extraordinary demands induced by banks, the liquidation plan shall be adopted by
financial panic in the banking community; the Monetary Board. Upon acquiring jurisdiction,
(b) by the Bangko Sentral, to meet its liabilities; the court shall, upon motion by the receiver
or after due notice, adjudicate disputed claims
(c) cannot continue in business without against the institution, assist the enforcement
involving probable losses to its depositors or of individual liabilities of the stockholders,
creditors; or directors and officers, and decide on other
(d) has willfully violated a cease and desist issues as may be material to implement the
order under SEC 37 that has become final, liquidation plan adopted. The receiver shall pay
involving the cost of the proceedings from the assets of
acts or transactions which amount to fraud or a the institution.
dissipation of the assets of the institution; in 2. convert the assets of the institutions to
which cases, the Monetary Board may money, dispose of the same to creditors and
summarily and without need for prior hearing other parties, for the purpose of paying the
forbid the debts of such institution in accordance with the
institution from doing business in the rules on concurrence and preference of credit
Philippines and designate the Philippine Deposit under the Civil Code of the Philippines and he
Insurance Corporation as receiver of the may, in the name of the institution, and with
banking institution. the assistance of counsel as he may retain,
institute such actions as may be necessary to
For a quasi-bank, any person of recognized collect and recover accounts and assets of, or
competence in banking or finance may be defend any action against, the institution. The
designed assets of an institution under receivership or
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liquidation shall be deemed in custodia legis in concurrence of at least five (5) of its members
the hands of the receiver and shall, from the and with the approval of the President of the
moment the institution was placed under such Philippines,
receivership or liquidation, be exempt from any may temporarily suspend or restrict sales of
order of garnishment, levy, attachment, or exchange by the Bangko Sentral, and may
execution. subject all
transactions in gold and foreign exchange to
The actions of the Monetary Board taken under license by the Bangko Sentral, and may require
this SEC or under SEC 29 of this Act shall be that any
final and executory, and may not be restrained foreign exchange thereafter obtained by any
or set aside by the court except on petition for person residing or entity operating in the
certiorari on the ground that the action taken Philippines be
was in excess of jurisdiction or with such grave delivered to the Bangko Sentral or to any bank
abuse of discretion as to amount to lack or or agent designated by the Bangko Sentral for
excess of jurisdiction. The petition for certiorari the
may only be filed by the stockholders of record purpose, at the effective exchange rate or
representing the majority of the capital stock rates: Provided, however, That foreign currency
within ten (10) days from receipt by the board deposits
of directors of the institution of the order made under Republic Act No. 6426 shall be
directing receivership, liquidation or exempt from these requirements.
conservatorship. The designation of a
conservator under SEC 29 of this Act or the
appointment of a receiver under this SEC shall Functions of the BSP
be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is SEC 50. Exclusive Issue Power. The
not a precondition to the designation of a Bangko Sentral shall have the sole power and
receiver. authority to issue currency, within the territory
of the Philippines. No other person or entity,
SEC 69. Receivership and Involuntary public or private, may put into circulation notes,
Liquidation. The grounds and procedures coins or any other object or document which, in
for placing a bank under receivership or the opinion of the Monetary Board, might
liquidation, as well as the powers and duties of circulate as currency, nor reproduce or imitate
the receiver or liquidator appointed for the bank the facsimiles of Bangko Sentral notes without
shall be governed by the provisions of SECs 30, prior authority from the Bangko Sentral.
31, 32, and 33 of the New Central Bank Act:
Provided, That the petitioner or plaintiff files The Monetary Board may issue such regulations
with the clerk or judge of the court in which the as it may deem advisable in order to prevent
action is pending a bond, executed in favor of the circulation of foreign currency or of
the Bangko Sentral, in an amount to be fixed by currency substitutes as well as to prevent the
the court. This SEC shall also apply to the reproduction of facsimiles of Bangko Sentral
extent possible to the receivership and notes.
liquidation proceedings of quasi-banks. (n)
The Bangko Sentral shall have the authority to
investigate, make arrests, conduct searches
How The BSP Handles Exchange Crises? and seizures in accordance with law, for the
purpose of maintaining the integrity of the
SEC 72. Emergency Restrictions on currency.
Exchange Operations. In order to achieve
the Violation of this provision or any regulation
primary objective of the Bangko Sentral as set issued by the Bangko Sentral pursuant thereto
forth in SEC 3 of this Act, or protect the shall constitute an offense punishable by
international imprisonment of not less than five (5) years but
reserves of the Bangko Sentral in the not more than ten(10) years. In case the
imminence of, or during an exchange crisis, or Revised Penal Code provides for a greater
in time of national penalty, then that penalty shall be imposed.
emergency and to give the Monetary Board and SEC 51. Liability for Notes and Coins.
the Government time in which to take Notes and coins issued by the Bangko Sentral
constructive shall be liabilities of the Bangko Sentral and
measures to forestall, combat, or overcome may be issued only against, and in amounts not
such a crisis or emergency, the Monetary exceeding,
Board, with the
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the assets of the Bangko Sentral. Said notes printing of notes and the minting of coins shall
and coins shall be a first and paramount lien on be subject. The Monetary Board shall have the
all assets authority
of the Bangko Sentral. to contract institutions, mints or firms for such
The Bangko Sentral's holdings of its own notes operations.
and coins shall not be considered as part of its
currency issue and, accordingly, shall not form All expenses incurred in the printing of notes
part of the assets or liabilities of the Bangko and the minting of coins shall be for the account
Sentral. of
the Bangko Sentral.
SEC 52. Legal Tender Power. All notes
and coins issued by the Bangko Sentral shall SEC 55. Interconvertibility of Currency.
be fully guaranteed by the Government of the The Bangko Sentral shall exchange, on
Republic of the Philippines and shall be legal demand and without charge, Philippine
tender in the currency of any denomination for Philippine
Philippines for all debts, both public and private: notes and coins of
Provided, however, That, unless otherwise fixed any other denomination requested. If for any
by the reason the Bangko Sentral is temporarily unable
Monetary Board, coins shall be legal tender in to
amounts not exceeding Fifty pesos (P50.00) for provide notes or coins of the denominations
denominations of Twenty-five centavos and requested, it shall meet its obligations by
above, and in amounts not exceeding Twenty delivering notes
pesos and coins of the denominations which most
(P20.00) for denominations of Ten centavos or nearly approximate those requested.
less.
SEC 56. Replacement of Currency Unfit for
SEC 53. Characteristics of the Currency. Circulation. The Bangko Sentral shall
The Monetary Board, with the approval of withdraw from circulation and shall demonetize
the President of the Philippines, shall prescribe all notes and coins which for any reason
the denominations, dimensions, designs, whatsoever are
inscriptions unfit for circulation and shall replace them by
and other characteristics of notes issued by the adequate notes and coins: Provided, however,
Bangko Sentral: Provided, however, That said That the
notes Bangko Sentral shall not replace notes and
shall state that they are liabilities of the Bangko coins the identification of which is impossible,
Sentral and are fully guaranteed by the coins which
Government of show signs of filing, clipping or perforation, and
the Republic of the Philippines. Said notes shall notes which have lost more than two-fifths (2/5)
bear the signatures, in facsimile, of the of their
President of the surface or all of the signatures inscribed
Philippines and of the Governor of the Bangko thereon. Notes and coins in such mutilated
Sentral. conditions shall be
withdrawn from circulation and demonetized
Similarly, the Monetary Board, with the without compensation to the bearer.
approval of the President of the Philippines,
shall SEC 57. Retirement of Old Notes and
prescribe the weight, fineness, designs, Coins. The Bangko Sentral may call in for
denominations and other characteristics of the replacement notes of any series or
coins issued by denomination which are more than five (5)
the Bangko Sentral. In the minting of coins, the years old and coins which
Monetary Board shall give full consideration to are more than (10) years old.
the
availability of suitable metals and to their Notes and coins called in for replacement in
relative prices and cost of minting. accordance with this provision shall remain
legal
SEC 54. Printing of Notes and Mining of tender for a period of one (1) year from the
Coins. The Monetary Board shall prescribe date of call. After this period, they shall cease
the amounts of notes and coins to be printed to be legal
and minted, respectively, and the conditions to tender but during the following year, or for such
which the longer period as the Monetary Board may
determine,
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they may be exchanged at par and without


charge in the Bangko Sentral and by agents SEC 63. Action When Abnormal
duly authorized Movements Occur in the Monetary
by the Bangko Sentral for this purpose. After Aggregates, Credit, or Price Level.
the expiration of this latter period, the notes Whenever abnormal movements in the
and coins monetary aggregates, in credit, or in
which have not been exchanged shall cease to prices endanger the stability of the Philippine
be a liability of the Bangko Sentral and shall be economy or important sectors thereof, the
demonetized. The Bangko Sentral shall also Monetary Board
demonetize all notes and coins which have shall:
been called in (a) take such remedial measures as are
and replaced. appropriate and within the powers granted to
the
Monetary Board and the Bangko Sentral under
B. DEMAND DEPOSITS the provisions of this Act; and
(b) submit to the President of the Philippines
SEC 58. Definition. For purposes of this and the Congress, and make public, a detailed
Act, the term "demand deposits" means all report which shall include, as a minimum, a
those liabilities of the Bangko Sentral and of description and analysis of:
other banks which are denominated in (1) the causes of the rise or fall of the monetary
Philippine currency aggregates, of credit or of prices;
and are subject to payment in legal tender upon (2) the extent to which the changes in the
demand by the presentation of checks. monetary aggregates, in credit, or in prices
have been reflected in changes in the level of
SEC 59. Issue of Demand Deposits. Only domestic output, employment, wages
banks duly authorized to do so may accept and economic activity in general, and the
funds or create liabilities payable in pesos upon nature and significance of any such
demand by the presentation of checks, and changes; and
such (3) the measures which the Monetary Board has
operations shall be subject to the control of the taken and the other monetary, fiscal or
Monetary Board in accordance with the powers administrative measures which it recommends
granted to be adopted.
it with respect thereto under this Act. Whenever the monetary aggregates, or the
level of credit, increases or decreases by more
SEC 60. Legal Character. Checks thanfifteen percent (15%), or the cost of living
representing demand deposits do not have index increases by more than ten percent
legal (10%), in relation to the level existing at the
tender power and their acceptance in the end of the corresponding month of the
payment of debts, both public and private, is at preceding year, or even though any of these
the option of quantitative guidelines have not been reached
the creditor: Provided, however, That a check when in its judgment the circumstances so
which has been cleared and credited to the warrant, the Monetary Board shall submit the
account of the reports mentioned in this SEC, and shall state
creditor shall be equivalent to a delivery to the therein whether, in the opinion of the Board,
creditor of cash in an amount equal to the said changes in the monetary aggregates,
amount credit or cost of living represent a threat to the
credited to his account. stability of the Philippine economy or of
important sectors thereof.
SEC 61. Guiding Principle. The Monetary
Board shall endeavor to control any The Monetary Board shall continue to submit
expansion or contraction in monetary periodic reports to the President of the
aggregates which is prejudicial to the Philippines and to Congress until it considers
attainment or maintenance that the monetary, credit or price disturbances
of price stability. have disappeared or have been adequately
controlled.
SEC 62. Power to Define Terms. For
purposes of this article and of this Act, the SEC 64. International Monetary
Monetary Board shall formulate definitions of Stabilization. The Bangko Sentral shall
monetary aggregates, credit and prices and exercise its powers under this Act to preserve
shall make the international value of the peso and to
public such definitions and any changes maintain its convertibility into other freely
thereof. convertible currencies primarily for, although
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not necessarily limited to, current payments for SEC 81. Guiding Principles. The
foreign trade and invisibles. rediscounts, discounts, loans and advances
which
SEC 65. International Reserves. In order the Bangko Sentral is authorized to extend to
to maintain the international stability and banking institutions under the provisions of the
convertibility of the Philippine peso, the Bangko present
Sentral shall maintain international reserves article of this Act shall be used to influence the
adequate to meet any foreseeable net demands volume of credit consistent with the objective of
on the Bangko Sentral for foreign currencies. price
stability.
In judging the adequacy of the international
reserves, the Monetary Board shall be guided SEC 82. Authorized Types of Operations.
by the prospective receipts and payments of Subject to the principle stated in the
foreign exchange by the Philippines. The Board preceding SEC of this Act, the Bangko Sentral
shall give special attention to the volume and may normally and regularly carry on the
maturity of the Bangko Sentral's own liabilities following
in foreign currencies, to the volume and credit operations with banking institutions
maturity of the foreign exchange assets and operating in the Philippines:
liabilities of other banks operating in the (a) Commercial credits. The Bangko Sentral
Philippines and, insofar as they are known or may rediscount, discount, buy and sell bills,
can be estimated, the volume and maturity of acceptances, promissory notes and other credit
the foreign exchange assets and liabilities of all instruments with maturities of not more than
other persons and entities in the Philippines. one hundred eighty (180) days from the date of
their rediscount, discount or acquisition by
SEC 66. Composition of the International the Bangko Sentral and resulting from
Reserves. The international reserves of transactions related to:
the Bangko Sentral may include but shall not be (1) the importation, exportation, purchase or
limited to the following assets: sale of readily saleable goods and products,
(a) gold; and or their transportation within the Philippines; or
(b) assets in foreign currencies in the form of: (2) the storing of non-perishable goods and
documents and instruments customarily products which are duly insured and
employed deposited, under conditions assuring their
for the international transfer of funds; demand preservation, in authorized bonded
and time deposits in central banks, treasuries warehouses or in other places approved by the
and commercial banks abroad; foreign Monetary Board.
government securities; and foreign notes and (b) Production credits. The Bangko Sentral
coins. may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit
The Monetary Board shall endeavor to hold the instruments having maturities of not more
foreign exchange resources of the Bangko than three hundred sixty (360) days from the
Sentral in freely convertible currencies; date of their rediscount, discount or acquisition
moreover, the Board shall give particular by the Bangko Sentral and resulting from
consideration to the transactions related to the production or
prospects of continued strength and processing
convertibility of the currencies in which the of agricultural, animal, mineral, or industrial
reserve is maintained, products. Documents or instruments acquired in
as well as to the anticipated demands for such accordance with this subSEC shall be secured
currencies. The Monetary Board shall issue by a pledge of the respective crops or
regulations products: Provided, however, That the crops or
determining the other qualifications which products need not be pledged to secure the
foreign exchange assets must meet in order to documents if the original loan granted by the
be included in Bangko Sentral is secured by a lien or mortgage
the international reserves of the Bangko on real estate property seventy percent (70%)
Sentral. of the appraised value of which equals or
exceeds the amount of the loan granted.
The Bangko Sentral shall be free to convert any
of the assets in its international reserves into (c) Other credits. Special credit instruments
other assets as described in subSECs (a) and (b) not otherwise rediscountable under the
of this SEC. immediately preceding subSECs (a) and (b) may
be eligible for rediscounting in
accordance with rules and regulations which the
Bangko Sentral shall prescribe. Whenever
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necessary, the Bangko Sentral shall provide of providing liquidity to the banking system in
funds from non-inflationary sources: Provided, times of need.
however, That the Monetary Board shall
prescribe additional safeguards for disbursing D. EMERGENCY CREDIT OPERATION
these SEC 84. Emergency Loans and Advances.
funds. In periods of national and/or local
emergency or of imminent financial panic which
(d) Advances. The Bangko Sentral may grant directly threaten monetary and banking
advances against the following kinds of stability, the
collaterals for fixed periods which, with the Monetary Board may, by a vote of at least five
exception of advances against collateral named (5) of its members, authorize the Bangko
in Sentral to grant
clause (4) of the present subSEC, shall not extraordinary loans or advances to banking
exceed one hundred eighty (180) days: institutions secured by assets as defined
(1) gold coins or bullion; hereunder:
(2) securities representing obligations of the Provided, That while such loans or advances are
Bangko Sentral or of other domestic outstanding, the debtor institution shall not,
institutions of recognized solvency; except
(3) the credit instruments to which reference is upon prior authorization by the Monetary Board,
made in subSEC (a) of this SEC; expand the total volume of its loans or
(4) the credit instruments to which reference is investments.
made in subSEC (b) of this SEC, for The Monetary Board may, at its discretion,
periods which shall not exceed three hundred likewise authorize the Bangko Sentral to grant
sixty (360) days; emergency loans or advances to banking
(5) utilized portions of advances in current institutions, even during normal periods, for the
amount covered by regular overdraft purpose of
agreements related to operations included assisting a bank in a precarious financial
under subSECs (a) and (b) of this condition or under serious financial pressures
SEC, and certified as to amount and liquidity by brought by
the institution soliciting the unforeseen events, or events which, though
advance; foreseeable, could not be prevented by the
(6) negotiable treasury bills, certificates of bank
indebtedness, notes and other negotiable concerned: Provided, however, That the
obligations of the Government maturing within Monetary Board has ascertained that the bank
three (3) years from the date of the is not insolvent
advance; and and has the assets defined hereunder to secure
(7) negotiable bonds issued by the Government the advances: Provided, further, That a
of the Philippines, by Philippine concurrent vote
provincial, city or municipal governments, or by of at least five (5) members of the Monetary
any Philippine Government Board is obtained.
instrumentality, and having maturities of not
more than ten (10) years from the date of The amount of any emergency loan or advance
advance. shall not exceed the sum of fifty percent (50%)
The rediscounts, discounts, loans and advances of total deposits and deposit substitutes of the
made in accordance with the provisions of this banking institution and shall be disbursed in two
SEC may not be renewed or extended unless (2) or
extraordinary circumstances fully justify such more tranches. The amount of the first tranche
renewal shall be limited to twenty-five percent (25%) of
or extension. the total
Advances made against the collateral named in deposit and deposit substitutes of the institution
clauses (6) and (7) of subSEC (d) of this and shall be secured by government securities
SEC may not exceed eighty percent (80%) of to the
the current market value of the collateral. extent of their applicable loan values and other
unencumbered first class collaterals which the
C. SPECIAL CREDIT OPERATION Monetary
SEC 83. Loans for Liquidity Purposes. Board may approve: Provided, That if as
The Bangko Sentral may extend loans and determined by the Monetary Board, the
advances circumstances
to banking institutions for a period of not more surrounding the emergency warrant a loan or
than seven (7) days without any collateral for advance greater than the amount provided
the purpose hereinabove,
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the amount of the first tranche may exceed same shall be eliminated within the period
twenty-five percent (25%) of the bank's total prescribed in SEC 102 of this Act.
deposit and
deposit substitutes if the same is adequately E. CREDIT TERMS
secured by applicable loan values of SEC 85. Interest and Rediscount. The
government Bangko Sentral shall collect interest and other
securities and unencumbered first class appropriate charges on all loans and advances
collaterals approved by the Monetary Board, it extends, the closure, receivership or
and the principal liquidations of the
stockholders of the institution furnish an debtor-institution notwithstanding. This
acceptable undertaking to indemnify and hold provision shall apply prospectively.
harmless from
suit a conservator whose appointment the The Monetary Board shall fix the interest and
Monetary Board may find necessary at any rediscount rates to be charged by the Bangko
time. Sentral on its credit operations in accordance
with the character and term of the operation,
Prior to the release of the first tranche, the but after due
banking institution shall submit to the Bangko consideration has been given to the credit
Sentral needs of the market, the composition of the
a resolution of its board of directors authorizing Bangko Sentral's
the Bangko Sentral to evaluate other assets of portfolio, and the general requirements of the
the national monetary policy. Interest and
banking institution certified by its external rediscount rates
auditor to be good and available for collateral shall be applied to all banks of the same
purposes category uniformly and without discrimination.
should the release of the subsequent tranche
be thereafter applied for. SEC 86. Endorsement. The documents
rediscounted, discounted, bought or accepted
The Monetary Board may, by a vote of at least as collateral by the Bangko Sentral in the
five (5) of its members, authorize the release of course of the credit operations authorized in
a subsequent tranche on condition that the this article shall
principal stockholders of the institution: bear the endorsement of the institution from
(a) furnish an acceptable undertaking to which they are received.
indemnify and hold harmless from suit a
conservator SEC 87. Repayment of Credits.
whose appointment the Monetary Board may Documents rediscounted, discounted or
find necessary at any time; and accepted as
(b) provide acceptable security which, in the collateral by the Bangko Sentral must be
judgment of the Monetary Board, would be withdrawn by the borrowing institution on the
adequate to supplement, where necessary, the dates of their
assets tendered by the banking institution to maturities, or upon liquidation of the obligations
collateralize the subsequent tranche. which they represent or to which they relate
In connection with the exercise of these powers, whenever
the prohibitions in SEC 128 of this Act shall said obligations have been liquidated prior to
not apply insofar as it refers to acceptance as their dates of maturity.
collateral of shares and their acquisition as a Banks shall have the right at any time to
result of withdraw any documents which they have
foreclosure proceedings, including the exercise presented to
of voting rights pertaining to said shares: the Bangko Sentral as collateral, upon payment
Provided, in full of the corresponding debt to the Bangko
however, That should the Bangko Sentral Sentral,
acquire any of the shares it has accepted as including interest charges.
collateral as a
result of foreclosure proceedings, the Bangko SEC 88. Other requirements. The
Sentral shall dispose of said shares by public Monetary Board may prescribe, within the
bidding general
within one (1) year from the date of powers granted to it under this Act, additional
consolidation of title by the Bangko Sentral. conditions which borrowing institutions must
satisfy in
Whenever a financial institution incurs an order to have access to the credit of the Bangko
overdraft in its account with the Bangko Sentral. These conditions may refer to the rates
Sentral, the of
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interest charged by the banks, to the purposes money, the Bangko Sentral shall not pay
for which their loans in general are destined, interest on the reserves maintained with it
and to any unless the Monetary
other clearly definable aspect of the credit Board decides otherwise as warranted by
policy of the bank. circumstances.

SEC 89. Provisional Advances to the SEC 102. Interbank Settlement. The
National Government. The Bangko Sentral Bangko Sentral shall establish facilities for
may make direct provisional advances with or interbank clearing under such rules and
without interest to the National Government to regulations as the Monetary Board may
finance prescribe: Provided,
expenditures authorized in its annual That the Bangko Sentral may charge
appropriation: Provided, That said advances administrative and other fees for the
shall be repaid before maintenance of such
the end of three (3) months extendible by facilities.
another three (3) months as the Monetary
Board may allow The deposit reserves maintained by the banks
following the date the National Government in the Bangko Sentral in accordance with the
received such provisional advances and shall provisions of SEC 94 of this Act shall serve as
not, in their basis for the clearing of checks and the
aggregate, exceed twenty percent (20%) of the settlement of
average annual income of the borrower for the interbank balances, subject to such rules and
last three regulations as the Monetary Board may issue
(3) preceding fiscal years. with respect
to such operations: Provided, That any bank
SEC 94. Reserve Requirements. In order which incurs on overdrawing in its deposit
to control the volume of money created by account with the
the credit operations of the banking system, all Bangko Sentral shall fully cover said overdraft,
banks operating in the Philippines shall be including interest thereon at a rate equivalent
required to to onetenth
maintain reserves against their deposit of one percent (1/10 of 1%) per day or the
liabilities: Provided, That the Monetary Board prevailing ninety-one-day treasury bill rate plus
may, at its three
discretion, also require all banks and/or quasi- percentage points, whichever is higher, not
banks to maintain reserves against funds held later than the next clearing day: Provided,
in trust and further, That
liabilities for deposit substitutes as defined in settlement of clearing balances shall not be
this Act. The required reserves of each bank effected for any account which continues to be
shall be overdrawn
proportional to the volume of its deposit for five (5) consecutive banking days until such
liabilities and shall ordinarily take the form of a time as the overdrawing is fully covered or
deposit in the otherwise
Bangko Sentral. Reserve requirements shall be converted into an emergency loan or advance
applied to all banks of the same category pursuant to the provisions of SEC 84 of this Act:
uniformly and Provided, finally, That the appropriate clearing
without discrimination. office shall be officially notified of banks with
Reserves against deposit substitutes, if overdrawn
imposed, shall be determined in the same balances. Banks with existing overdrafts with
manner as the Bangko Sentral as of the effectivity of this
provided for reserve requirements against Act shall,
regular bank deposits, with respect to the within such period as may be prescribed by the
imposition, Monetary Board, either convert the overdraft
increase, and computation of reserves. into an
emergency loan or advance with a plan of
The Monetary Board may exempt from reserve payment, or settle such overdrafts, and that,
requirements deposits and deposit substitutes upon failure to
with remaining maturities of two (2) years or so comply herewith, the Bangko Sentral shall
more, as well as interbank borrowings. take such action against the bank as may be
Since the requirement to maintain bank warranted
reserves is imposed primarily to control the under this Act.
volume of
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SEC 103. Exemption from Attachment and whenever such subdivisions or instrumentalities
Other Purposes. Deposits maintained have outstanding loans with said banks.
by banks with the Bangko Sentral as part of The Bangko Sentral may pay interest on
their reserve requirements shall be exempt deposits of the Government or of its political
from subdivisions and instrumentalities, as well as on
attachment, garnishments, or any other order deposits of banks with the Bangko Sentral.
or process of any court, government agency or
any other SEC 114. Fiscal Operations. The Bangko
administrative body issued to satisfy the claim Sentral shall open a general cash account
of a party other than the Government, or its for the Treasurer of the Philippines, in which the
political liquid funds of the Government shall be
subdivisions or instrumentalities. deposited.
Transfers of funds from this account to other
SEC 110. Designation of Bangko Sentral as accounts shall be made only upon order of the
Banker of the Government. The Treasurer of the Philippines.
Bangko Sentral shall act as a banker of the
Government, its political subdivisions and SEC 115. Other Banks as Agents of the
instrumentalities. Bangko Sentral. In the performance of its
functions as fiscal agent, the Bangko Sentral
SEC 111. Representation with the may engage the services of other government-
International Monetary Fund. The Bangko owned and
Sentral shall represent the Government in all controlled banks and of other domestic banks
dealings, negotiations and transactions with the for operations in localities at home or abroad in
International Monetary Fund and shall carry which the
such accounts as may result from Philippine Bangko Sentral does not have offices or
membership agencies adequately equipped to perform said
in, or operations with, said Fund. operations:
Provided, however, That for fiscal operations in
SEC 112. Representation with Other foreign countries, the Bangko Sentral may
Financial Institutions. The Bangko Sentral engage the
may be authorized by the Government to services of foreign banking and financial
represent it in dealings, negotiations or institutions.
transactions with the
International Bank for Reconstruction and SEC 116. Remuneration for Services. The
Development and with other foreign or Bangko Sentral may charge equitable
international financial rates, commissions or fees for services which it
institutions or agencies. The President may, renders to the Government, its political
however, designate any of his other financial subdivisions and
advisors to instrumentalities.
jointly represent the Government in such
dealings, negotiations or transactions.

SEC 113. Official Deposits. The Bangko


Sentral shall be the official depository of the
Government, its political subdivisions and
instrumentalities as well as of government- ARTICLE II. THE MARKETING AND
owned or STABILIZATION OF SECURITIES FOR THE
controlled corporations and, as a general policy, ACCOUNT OF THE GOVERNMENT
their cash balances should be deposited with
the A. THE ISSUE AND PLACING OF
Bangko Sentral, with only minimum working GOVERNMENT SECURITIES
balances to be held by government-owned SEC 117. Issue of Government Obligations.
banks and such The issue of securities representing
other banks incorporated in the Philippines as obligations of the Government, its political
the Monetary Board may designate, subject to subdivisions or instrumentalities, may be made
such rules through the
and regulations as the Board may prescribe: Bangko Sentral, which may act as agent of, and
Provided, That such banks may hold deposits of for the account of, the Government or its
the respective
political subdivisions and instrumentalities of subdivisions or instrumentality, as the case may
the Government beyond their minimum working be: Provided, however, That the Bangko Sentral
balances shall
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not guarantee the placement of said securities, held by the Central Bank under Republic Act No.
and shall not subscribe to their issue except to 265 as of the effective date of this Act.
replace
its maturing holdings of securities with the SEC 122. Profits and Losses of the Fund.
same type as the maturing securities. The Securities Stabilization Fund shall
retain net profits which it may make on its
SEC 118. Methods of Placing Government operations, regardless of whether said profits
Securities. The Bangko Sentral may arise from
place the securities to which the preceding SEC capital gains or from interest earnings. The
refers through direct sale to financial Fund shall correspondingly bear any net losses
institutions and which it
the public. may incur.
The Bangko Sentral shall not be a member of
any stock exchange or syndicate, but may ARTICLE III. FUNCTIONS AS FINANCIAL
intervene therein for the sole purpose of ADVISOR OF THE GOVERNMENT
regulating their operations in the placing of
government SEC 123. Financial Advice on Official
securities. Credit Operations. Before undertaking any
The Government, or its political subdivisions or credit operation abroad, the Government,
instrumentalities, shall reimburse the Bangko through the Secretary of Finance, shall request
Sentral for the expenses incurred in the placing the opinion, in
of the aforesaid securities. writing, of the Monetary Board on the monetary
implications of the contemplated action. Such
SEC 119. Servicing and Redemption of the opinions
Public Debt. The servicing and must similarly be requested by all political
redemption of the public debt shall also be subdivisions and instrumentalities of the
effected through the Bangko Sentral. Government before
any credit operation abroad is undertaken by
B. BANGKO SENTRAL SUPPORT OF THE them.
GOVERNMENT SECURITIES MARKET The opinion of the Monetary Board shall be
SEC 120. The Securities Stabilization Fund. based on the gold and foreign exchange
There shall be established a resources
"Securities Stabilization Fund" which shall be and obligations of the nation and on the effects
administered by the Bangko Sentral for the of the proposed operation on the balance of
account of the payments
Government. and on monetary aggregates.
The operations of the Securities Stabilization Whenever the Government, or any of its
Fund shall consist of purchases and sales, in the political subdivisions or instrumentalities,
open market, of bonds and other evidences of contemplates
indebtedness issued or fully guaranteed by the borrowing within the Philippines, the prior
Government. The purpose of these operations opinion of the Monetary Board shall likewise be
shall be to increase the liquidity and stabilize requested in
the value order that the Board may render an opinion on
of said securities in order thereby to promote the probable effects of the proposed operation
investment in government obligations. on
The Monetary Board shall use the resources of monetary aggregates, the price level, and the
the Fund to prevent, or moderate, sharp balance of payments.
fluctuations in the quotations of said
government obligations, but shall not endeavor SEC 124. Representation on the National
to alter movements Economic and Development Authority.
of the market resulting from basic changes in In order to assure effective coordination
the pattern or level of interest rates. between the economic, financial and fiscal
The Monetary Board shall issue such regulations policies of the
as may be necessary to implement the Government and the monetary, credit and
provisions of this SEC. exchange policies of the Bangko Sentral, the
Deputy
SEC 121. Resources of the Securities Governor designated by the Governor of the
Stabilization Fund. Subject to SEC 132 Bangko Sentral shall be an ex officio member of
of this Act, the resources of the Securities the
Stabilization Fund shall come from the balance National Economic and Development Authority
of the fund as Board.
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Exclusive issue power the President of the Philippines, shall prescribe


the denominations, dimensions, designs,
SEC 50. Exclusive Issue Power. The inscriptions
Bangko Sentral shall have the sole power and and other characteristics of notes issued by the
authority to issue currency, within the territory Bangko Sentral: Provided, however, That said
of the Philippines. No other person or entity, notes
public or shall state that they are liabilities of the Bangko
private, may put into circulation notes, coins or Sentral and are fully guaranteed by the
any other object or document which, in the Government of
opinion of the the Republic of the Philippines. Said notes shall
Monetary Board, might circulate as currency, bear the signatures, in facsimile, of the
nor reproduce or imitate the facsimiles of President of the
Bangko Sentral Philippines and of the Governor of the Bangko
notes without prior authority from the Bangko Sentral.
Sentral.
Similarly, the Monetary Board, with the
The Monetary Board may issue such regulations approval of the President of the Philippines,
as it may deem advisable in order to prevent shall
the circulation of foreign currency or of prescribe the weight, fineness, designs,
currency substitutes as well as to prevent the denominations and other characteristics of the
reproduction of coins issued by
facsimiles of Bangko Sentral notes. the Bangko Sentral. In the minting of coins, the
Monetary Board shall give full consideration to
The Bangko Sentral shall have the authority to the
investigate, make arrests, conduct searches availability of suitable metals and to their
and relative prices and cost of minting.
seizures in accordance with law, for the purpose
of maintaining the integrity of the currency.
Violation of this provision or any regulation
issued by the Bangko Sentral pursuant thereto
shall
constitute an offense punishable by
imprisonment of not less than five (5) years but
not more than ten
(10) years. In case the Revised Penal Code Instruments of action
provides for a greater penalty, then that penalty
shall be Setting of bank reserve requirements
imposed.
SEC 94. Reserve Requirements. In order
Liability for notes and coins to control the volume of money created by
the credit operations of the banking system, all
SEC 51. Liability for Notes and Coins. banks operating in the Philippines shall be
Notes and coins issued by the Bangko Sentral required to
shall be liabilities of the Bangko Sentral and maintain reserves against their deposit
may be issued only against, and in amounts not liabilities: Provided, That the Monetary Board
exceeding, may, at its
the assets of the Bangko Sentral. Said notes discretion, also require all banks and/or quasi-
and coins shall be a first and paramount lien on banks to maintain reserves against funds held
all assets in trust and
of the Bangko Sentral. liabilities for deposit substitutes as defined in
The Bangko Sentral's holdings of its own notes this Act. The required reserves of each bank
and coins shall not be considered as part of its shall be
currency issue and, accordingly, shall not form proportional to the volume of its deposit
part of the assets or liabilities of the Bangko liabilities and shall ordinarily take the form of a
Sentral. deposit in the
Bangko Sentral. Reserve requirements shall be
applied to all banks of the same category
Legal Tender Power uniformly and
without discrimination.
SEC 53. Characteristics of the Currency.
The Monetary Board, with the approval of
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Reserves against deposit substitutes, if SEC 97. Required Reserves Against


imposed, shall be determined in the same Foreign Currency Deposits. The Monetary
manner as Board is similarly authorized to prescribe and
provided for reserve requirements against modify the minimum reserve ratios applicable
regular bank deposits, with respect to the to deposits
imposition, denominated in foreign currencies.
increase, and computation of reserves.
SEC 98. Reserves Against Unused Balances
The Monetary Board may exempt from reserve of Overdraft Lines. In order to
requirements deposits and deposit substitutes facilitate Bangko Sentral control over the
with remaining maturities of two (2) years or volume of bank credit, the Monetary Board may
more, as well as interbank borrowings. establish
Since the requirement to maintain bank minimum reserve requirements for unused
reserves is imposed primarily to control the balances of overdraft lines.
volume of The powers of the Monetary Board to prescribe
money, the Bangko Sentral shall not pay and modify reserve requirements against
interest on the reserves maintained with it unused balances of overdraft lines shall be the
unless the Monetary same as its powers with respect to reserve
Board decides otherwise as warranted by requirements
circumstances. against demand deposits.

SEC 95. Definition of Deposit Substitutes. SEC 99. Increase in Reserve Requirements.
The term "deposit substitutes" is defined Whenever in the opinion of the
as an alternative form of obtaining funds from Monetary Board it becomes necessary to
the public, other than deposits, through the increase reserve requirements against existing
issuance, liabilities, the
endorsement, or acceptance of debt increase shall be made in a gradual manner and
instruments for the borrower's own account, for shall not exceed four percentage points in any
the purpose of thirtyday
relending or purchasing of receivables and period. Banks and other affected financial
other obligations. These instruments may institutions shall be notified reasonably in
include, but need advance of the
not be limited to, bankers acceptances, date on which such increase is to become
promissory notes, participations, certificates of effective.
assignment and
similar instruments with recourse, and SEC 100. Computation on Reserves. The
repurchase agreements. The Monetary Board reserve position of each bank or quasibank
shall determine shall be calculated daily on the basis of the
what specific instruments shall be considered amount, at the close of business for the day, of
as deposit substitutes for the purposes of SEC the
94 of institution's reserves and the amount of its
this Act: Provided, however, That deposit liability accounts against which reserves are
substitutes of commercial, industrial and other required to be
non-financial maintained: Provided, That with reference to
companies for the limited purpose of financing holidays or non-banking days, the reserve
their own needs or the needs of their agents or position as
dealers calculated at the close of the business day
shall not be covered by the provisions of SEC 94 immediately preceding such holidays and non-
of this Act. banking days
shall apply on such days.
SEC 96. Required Reserves Against Peso For the purpose of computing the reserve
Deposits. The Monetary Board may fix position of each bank or quasi-bank, its
and, when it deems necessary, alter the principal
minimum reserve ratios to peso deposits, as office in the Philippines and all its branches and
well as to deposit agencies located therein shall be considered as
substitutes, which each bank and/or quasi-bank a
may maintain, and such ratio shall be applied single unit.
uniformly
to all banks of the same category as well as to SEC 101. Reserve Deficiencies. Whenever
quasi-banks. the reserve position of any bank or quasibank,
computed in the manner specified in the
preceding SEC of this Act, is below the required
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minimum, the bank or quasi-bank shall pay the interbank balances, subject to such rules and
Bangko Sentral one-tenth of one percent (1/10 regulations as the Monetary Board may issue
of 1%) with respect
per day on the amount of the deficiency or the to such operations: Provided, That any bank
prevailing ninety-one-day treasury bill rate plus which incurs on overdrawing in its deposit
three account with the
percentage points, whichever is higher: Bangko Sentral shall fully cover said overdraft,
Provided, however, That banks and quasi-banks including interest thereon at a rate equivalent
shall ordinarily to onetenth
be permitted to offset any reserve deficiency of one percent (1/10 of 1%) per day or the
occurring on one or more days of the week with prevailing ninety-one-day treasury bill rate plus
any three
excess reserves which they may hold on other percentage points, whichever is higher, not
days of the same week and shall be required to later than the next clearing day: Provided,
pay the further, That
penalty only on the average daily deficiency settlement of clearing balances shall not be
during the week. In cases of abuse, the effected for any account which continues to be
Monetary Board overdrawn
may deny any bank or quasi-bank the privilege for five (5) consecutive banking days until such
of offsetting reserve deficiencies in the time as the overdrawing is fully covered or
aforesaid otherwise
manner. converted into an emergency loan or advance
pursuant to the provisions of SEC 84 of this Act:
If a bank or quasi-bank chronically has a Provided, finally, That the appropriate clearing
reserve deficiency, the Monetary Board may office shall be officially notified of banks with
limit or overdrawn
prohibit the making of new loans or investments balances. Banks with existing overdrafts with
by the institution and may require that part or the Bangko Sentral as of the effectivity of this
all of the Act shall,
net profits of the institution be assigned to within such period as may be prescribed by the
surplus. Monetary Board, either convert the overdraft
into an
The Monetary Board may modify or set aside emergency loan or advance with a plan of
the reserve deficiency penalties provided in this payment, or settle such overdrafts, and that,
SEC, for part or the entire period of a strike or upon failure to
lockout affecting a bank or a quasi-bank as so comply herewith, the Bangko Sentral shall
defined in take such action against the bank as may be
the Labor Code, or of a national emergency warranted
affecting operations of banks or quasi-banks. under this Act.
The
Monetary Board may also modify or set aside SEC 103. Exemption from Attachment and
reserved deficiency penalties for rehabilitation Other Purposes. Deposits maintained
program of by banks with the Bangko Sentral as part of
a bank. their reserve requirements shall be exempt
from
SEC 102. Interbank Settlement. The attachment, garnishments, or any other order
Bangko Sentral shall establish facilities for or process of any court, government agency or
interbank clearing under such rules and any other
regulations as the Monetary Board may administrative body issued to satisfy the claim
prescribe: Provided, of a party other than the Government, or its
That the Bangko Sentral may charge political
administrative and other fees for the subdivisions or instrumentalities.
maintenance of such
facilities. Control of bank credit

The deposit reserves maintained by the banks SEC 104. Guiding Principle. The Monetary
in the Bangko Sentral in accordance with the Board shall use the powers granted to it
provisions of SEC 94 of this Act shall serve as under this Act to ensure that the supply,
basis for the clearing of checks and the availability and cost of money are in accord
settlement of with the needs of
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the Philippine economy and that bank credit is the Monetary Board may otherwise prescribe,
not granted for speculative purposes prejudicial loans and other credit accommodations against
to the real estate
national interests. Regulations on bank shall not exceed seventy-five percent (75%) of
operations shall be applied to all banks of the the appraised value of the respective real
same category estate security,
uniformly and without discrimination. plus sixty percent (60%) of the appraised value
of the insured improvements, and such loans
SEC 105. Margin Requirements Against may be
Letters of Credit. The Monetary Board made to the owner of the real estate or to his
may at any time prescribe minimum cash assignees. (78a)
margins for the opening of letters of credit, and
may relate the SEC 38. Loans and Other Credit
size of the required margin to the nature of the Accommodations on Security of Chattels
transaction to be financed. and
Intangible Properties. Except as the
SEC 106. Required Security Against Bank Monetary Board may otherwise prescribe, loans
Loans. In order to promote liquidity and and other credit
solvency of the banking system, the Monetary accommodations on security of chattels and
Board may issue such regulations as it may intangible properties, such as, but not limited
deem to, patents,
necessary with respect to the maximum trademarks, trade names, and copyrights shall
permissible maturities of the loans and not exceed seventy-five percent (75%) of the
investments which the appraised
banks may make, and the kind and amount of value of the security, and such loans and other
security to be required against the various credit accommodations may be made to the
types of credit title-holder of
operations of the banks. the chattels and intangible properties or his
assignees. (78a)
SEC 107. Portfolio Ceilings. Whenever the
Monetary Board considers it advisable to SEC 43. Authority to Prescribe Terms and
prevent or check an expansion of bank credit, Conditions of Loans and Other Credit
the Board may place an upper limit on the Accommodations. The Monetary Board
amount of may, similarly, in accordance with the authority
loans and investments which the banks may granted to it
hold, or may place a limit on the rate of in SEC 106 of the New Central Bank Act, and
increase of such taking into account the requirements of the
assets within specified periods of time. The economy for
Monetary Board may apply such limits to the the effective utilization of long-term funds,
loans and prescribe the maturities, as well as related
investments of each bank or to specific terms and
categories thereof. conditions for various types of bank loans and
In no case shall the Monetary Board establish other credit accommodations. Any change by
limits which are below the value of the loans or the Board in
investments of the banks on the date on which the maximum maturities shall apply only to
they are notified of such restrictions. The loans and other credit accommodations made
restrictions after the date of
shall be applied to all banks uniformly and such action.
without discrimination. The Monetary Board shall regulate the interest
imposed on microfinance borrowers by lending
SEC 108. Minimum Capital Ratios. The investors and similar lenders, such as, but not
Monetary Board may prescribe minimum limited to, the unconscionable rates of interest
ratios which the capital and surplus of the collected on
banks must bear to the volume of their assets, salary loans and similar credit accommodations.
or to specific (78a)
categories thereof, and may alter said ratios
whenever it deems necessary.
Moral Influence
SEC 37. Loans and Other Credit
Accommodations Against Real Estate. SEC 68. Means of Action. In order to
Except as achieve the primary objective of price stability,
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the Monetary Board shall rely on its moral with the same financial status as when the
influence and the powers granted to it under same was taken over, upon filing of bond
this Act for the Bond was filed, Judge issued writ of execution
management of monetary aggregates. was made directing the sheriff to implement
courts order
Sheriff went to the premises of Buhi but the
CASES: vault was locked and no inventory was made
Buhi filed petitions to:
No Need For Prior Hearing Force open bank vault
(later) order manager of City Trust to allow Buhi
to withdraw rural bank deposits
RURAL BANK OF BUHI vs. CA Order manager of Metrobank to release
G.R. No. L-61689 deposits of Buhi
20 June 1988 All granted by court (wow accommodating
court)
Facts: CB, Odra et al filed a petition for certiorari and
Buhi is a rural bank that started its operations prohibition with CA
only on 26 Dec 1975 CA issued a resolution restraining Judge from
In 1980, an examination of the books and enforcing his order
affairs of Buhi was ordered conducted by the Buhi did not comply with order of CA and file
Rural Banks and Savings and Loan Association MR. MR denied
(DRBSLA), Central Bank of the Philippines CB et al filed a motion with CA to cite Buhi in
which by law, has charge of the supervision and contempt
examination of rural banks and savings and CA gave show cause order to Buhi and directed
loan associations in the Philippines Ministry of National Defense to cause the return
Buhi refused of the possession and management of Buhi to
Financial assistance was suspended CB and Odra
DRBSLA (through Odra) conducted a general Buhi filed objection to both
examination of Buhis affairs and operations Alleging that the properties were already in the
It found , among others, massive irregularities possession of Buhi who is the lawful owner and
in its operations consisting of loans to unknown the return could no longer be done
and fictitious borrowers CA rendered its decision setting aside the order
The money due in favor of Central Bank of lower court and dismissing the petition of
amounted to almost P3M Buhi. MR denied
Promissory notes evidencing these loans were Buhi agreed and promised in open court to
rediscounted by CB for cash restore and return to CB the possession and
Buhi became insolvent and prejudiced its control of the bank within 3 days
depositors and creditors After 3 days, manager of the bank adamantly
Odra recommended the placing of Buhi under refused to surrender the premises
receivership Manager placed under arrest since she still
The Monetary Board placed Buhi under under refused to obey the CA
receivership with Odra as the receiver Buhi filed petition for review on certiorari with
Odra authorized deputied to take control, preliminary injunctionanager also filed a
possession and charge of Buhi petition for the issuance of writ of habeas
Rosario, manager of Buhi, filed a petition for corpus
injunction against Odra and the deputies Manager released
She is assailing the action of Odra in
recommending receivership as against the Issue: WON Monetary Board may place Buhi
Rural Banks Act and done with gadalej under receivership without prior notice
CB Monetary Board ordered the liquidation of
Buhi Held: Yes
OSG filed a petition for Assistance in the Ratio:
Liquidation of Buhi Relevant provision: SEC 29, Republic Act No.
CB filed MTD on the complaint submitted by 265
SEC. 29. Proceedings upon insolvency. Whenever, upon examination
Rosario by the head of the appropriate supervising and examining
Receivership is now moot and academic since department or his examiners or agents into the condition of any
banking institution, it shall be disclosed that the condition of the
the bank is already in liquidation same is one of insolvency, or that its continuance in business would
Judge denied MTD and issued a TRO enjoining involve probable loss to its depositors or creditors, it shall be the
duty of the department head concerned forthwith, in writing, to
CB from further managing and administering inform the Monetary Board of the facts, and the Board may, upon
Buhi and to deliver the possession and control finding the statements of the department head to be true, forbid the
thereof to Buhi under the same conditions and institution to do business in the Philippines and shall designate an
official of the Central Bank, or a person of recognized competence in
banking, as receiver to immediately take charge of its assets and
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liabilities, as expeditiously as possible collect and gather all the Report by said department to the Monetary
assets and administer the same for the benefit of its creditors,
exercising all the powers necessary for these purposes including, but Board; and
not limited to, bringing suits and foreclosing mortgages in the name Prima facie showing that the bank is in a
of the banking institution.
The Monetary Board shall thereupon determine within sixty days condition of insolvency or so situated that its
whether the institution may be recognized or otherwise placed in continuance in business would involve probable
such a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general public and
loss to its depositors or creditors.
shall prescribe the conditions under which such redemption of Whenever it shall appear prima facie that a
business shall take place as the time for fulfillment of such banking institution is in "a condition of
conditions. In such case, the expenses and fees in the collection and
administration of the assets of the institution shall be determined by insolvency" or so situated "that its continuance
the Board and shall be paid to the Central Bank out of the assets of in business would involved probable loss to its
such banking institution.
If the Monetary Board shall determine and confirm within the said depositors or creditors," the Monetary Board
period that the banking institution is insolvent or cannot resume has authority:
business with safety to its depositors, creditors and the general
public, it shall, if the public interest requires, order its liquidation,
To forbid the institution to do business and
indicate the manner of its liquidation and approve a liquidation plan. appoint a receiver therefor; and
The Central Bank shall, by the Solicitor General, file a petition in the To determine, within 60 days, whether or not:
Court of First Instance reciting the proceedings which have been
taken and praying the assistance of the court in the liquidation of The institution may be reorganized and
the banking institution. The Court shall have jurisdiction in the same rehabilitated to such an extent as to be
proceedings to adjudicate disputed claims against the bank and
enforce individual liabilities of the stockholders and do all that is permitted to resume business with safety to
necessary to preserve the assets of the banking institution and to depositors, creditors and the general public; or
implement the liquidation plan approved by the Monetary Board.
The Monetary Board shall designate an official of the Central Bank or
It is indeed insolvent or cannot resume business
a person of recognized competence in banking, as liquidator who with safety to depositors, creditors and the
shall take over the functions of the receiver previously appointed by general public, and public interest requires that
the Monetary Board under this SEC. The liquidator shall, with all
convenient speed, convert the assets of the banking institution to it be liquidated.
money or sell, assign or otherwise dispose of the same to creditors If the bank can no longer resume business with
and other parties for the purpose of paying the debts of such bank
and he may, in the name of the banking institution, institute such safety to depositors, creditors and the public,
actions as may be necessary in the appropriate court to collect and etc., its liquidation will be ordered and a
recover accounts and assets of the banking institution.
The provisions of any law to the contrary notwithstanding the
liquidator appointed by the Monetary Board.
actions of the Monetary Board under this SEC and the second The Central Bank shall thereafter file a petition
paragraph of SEC 34 of this Act shall be final and executory, and can in the Regional Trial Court praying for the
be set aside by the court only if there is convincing proof that the
action is plainly arbitrary and made in bad faith. No restraining order Court's assistance in the liquidation of the bank.
or injunction shall be issued by the court enjoining the Central Bank Buhi argues that there is also that constitutional
from implementing its actions under this SEC and the second
paragraph of SEC 34 of this Act, unless there is convincing proof that guarantee that no property shall be taken
the action of the Monetary Board is plainly arbitrary and made in without due process of law
bad faith and the petitioner or plaintiff files with the clerk or judge of
the court in which the action is pending a bond executed in favor of
The contention is without merit.
the Central Bank, in an amount to be fixed by the court. The It has long been established and recognized in
restraining order or injunction shall be refused or, if granted, shall be this jurisdiction that the closure and liquidation
dissolved upon filing by the Central Bank of a bond, which shall be in
the form of cash or Central Bank cashier's check, in an amount twice of a bank may be considered as an exercise of
the amount of the bond of the petitioner, or plaintiff conditioned that police power.
it will pay the damages which the petitioner or plaintiff may suffer by
the refusal or the dissolution of the injunction. The provisions of Rule Exercise may, however, be subject to judicial
58 of the New Rules of Court insofar as they are applicable and not inquiry and could be set aside if found to be
inconsistent with the provisions of this SEC shall govern the issuance
and dissolution of the restraining order or injunction contemplated in
capricious, discriminatory, whimsical, arbitrary,
this SEC. unjust or a denial of the due process and equal
Insolvency, under this Act, shall be understood to mean the inability protection clauses of the Constitution
of a banking institution to pay its liabilities as they fall due in the
usual and ordinary course of business: Provided, however, that this Courts may interfere with the Central Bank's
shall not include the inability to pay of an otherwise non-insolvent exercise of discretion in determining whether or
bank caused by extraordinary demands induced by financial panic
commonly evidenced by a run on the banks in the banking not a distressed bank shall be supported or
community. liquidated.
The appointment of a conservator under SEC 28-A of this Act or the
appointment of receiver under this SEC shall be vested exclusively
A hearing or an opportunity to be heard may be
with the Monetary Board, the provision of any law, general or subsequent to the closure.
special, to the contrary notwithstanding. One can just imagine the dire consequences of
a prior hearing: bank runs would be the order of
There is no requirement whether express the day, resulting in panic and hysteria. In the
or implied, that a hearing be first conducted process, fortunes may be wiped out, and
before a banking institution may be placed disillusionment will run the gamut of the entire
under receivership. banking community.
Conditions prerequisite to the action of Courts may appoint receivers without prior
the Monetary Board to forbid the institution to presentation of evidence and solely on the basis
do business in the Philippines and to appoint a of the averments of the pleadings. Rule 59 of
receiver to immediately take charge of the the Revised Rules of Court allows the
bank's assets and liabilities. appointment of a receiver upon an ex parte
An examination made by the examining application.
department of the Central Bank;
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Decisions of CB regarding receivership, etc are remain in the trial court where other claims may
final and executory still be pending
Only one ground to set aside: convincing proof In this case of corporate liquidation, there was
that the action is plainly arbitrary and done with failure to file record on appeal. Hence, it being a
bad faith special proceeding, the appeal was not
perfected.

Nature Of Liquidation Proceedings AUTHORITY OF CONSERVATOR TO REVOKE CONTRACTS

FIRST PHILIPPINE INTERNATIONAL BANK


PACIFIC BANKING CORPORATION vs. CA
EMPLOYEES ORGANIZATION, et al vs. CA G.R. No. 115849
G.R. No. 109373 24 January 1996
20 March 1995
Facts:
Held: The defendant Producer Bank of the Philippines
Distinction Between an Ordinary Action and a acquired six parcels of land with a total area of
Special Proceeding: 101 hectares located at Don Jose, Sta. Rose,
It was necessary in this case to classify what Laguna. The original plaintiffs, Demetrio
was filed-- whether it was an ordinary action or Demetria and Jose O. Janolo, wanted to
a special proceedingbecause the two have purchase the property and thus initiated
different periods for appeal. negotiations for that purpose.
Action is the act by which one sues another in a In the early part of August 1987 said plaintiffs,
court of justice for the enforcement or upon the suggestion of BYME (previous owner of
protection of a right, or the prevention or lands who mortgaged it to Producer Bank)
redress of the wrong; while special proceeding investment's legal counsel, Jose Fajardo, met
is the act by which one seeks to establish the with defendant Mercurio Rivera, Manager of the
status or right of a party, or a particular fact. Property Management Department of the
defendant bank. After the meeting, plaintiff
A petition for liquidation of an insolvent Janolo, following the advice of defendant Rivera,
corporation is a special proceeding. made a formal purchase offer to the bank
It does not seek the enforcement or protection through a letter.
of a right nor the prevention or redress of a Rivera replied and made a counter offer of P 5.5
wrong against a party. M. Janolo amended his offer to 4.250 M. There
It does not pray for affirmative relief for an was no reply to Janolo's last offer. What took
injury arising from a partys wrongful act or place was a meeting on September 28, 1987
omission nor state a cause of action that can be between the plaintiffs and Luis Co, the Senior
enforced against any person. Vice-President of defendant bank. Rivera as well
The petition only seeks a declaration of the as Fajardo, the BYME lawyer, attended the
corporations state of insolvency and the meeting.
concomitant right of creditors and the order of Janolo wrote again saying that they are
payment of their claims in the disposition of the accepting the 5.5 offer.
corpos assets. On October 12, 1987, the conservator of the
Different from an Interpleader bank (which has been placed under
An Interpleader involves claims on a subject conservatorship by the Central Bank since
matter against a person who has no interest 1984) was replaced by an Acting Conservator in
therein. the person of defendant Leonida T.
Not the case in liquidation proceedings where Encarnacion. Rivera wrote back to say the
the Liquidator, as representative of the proposal is under consideration.
corporation, takes charge of its assets and What thereafter transpired was a series of
liabilities for the benefit of the creditors. demands by the plaintiffs for compliance by the
Appeal bank with what plaintiff considered as a
As in settlement of the estate of the deceased, perfected contract of sale, which demands were
multiple appeals are allowed. The several in one form or another refused by the bank. As
claims of the creditors are separate ones and a detailed by the trial court in its decision, on
decision or final order with respect to any claim November 17, 1987, plaintiffs through a letter
can be appealed. to defendant Rivera (Exhibit "G") tendered
In special proceedings, unlike in ordinary payment of the amount of P5.5 million
actions, a record on appeal must be filed in "pursuant to (our) perfected sale agreement."
order for the appeal to be perfected. This is Defendants refused to receive both the
because the original record of the case must payment and the letter. Plaintiffs demanded the
execution by the bank of the documents on
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what was considered as a "perfected there can be no other logical conclusion than
agreement." that when, on September 1, 1987, Rivera
However, no response came from the Acting informed plaintiffs by letter that "the bank's
Conservator. On December 14, 1987, Janolo and counter-offer is at P5.5 Million for more than
Demetria made a second tender of payment 101 hectares on lot basis," such counter-offer
this time through the Acting Conservator, price had been determined by the Past Due
defendant Encarnacion. The letter contained Committee and approved by the Conservator
checks and an acknowledgment of the receipt after Rivera had duly presented plaintiffs' offer
of payment. for discussion by the Committee of such
The foregoing letter drew no response for more matters as original loan of borrower, bid price
than four months. Then, on May 3, 1988, during foreclosure, total claim of the bank, and
plaintiff, through counsel, made a final demand market value.
for compliance by the bank with its obligations Article 1318 of the Civil Code enumerates the
under the considered perfected contract of sale. requisites of a valid and perfected contract as
Defendants through Acting Conservator follows: "(1) Consent of the contracting parties;
Encarnacion repudiated the authority of (2) Object certain which is the subject matter of
defendant Rivera and claimed that his dealings the contract; (3) Cause of the obligation which
with the plaintiffs, particularly his counter-offer is established."
of P5.5 Million are unauthorized or illegal. There is no dispute on requisite no. 2. There is,
Plaintiffs filed a suit for specific performance however, a dispute on the first and third
with damages against the bank, its Manager requisites.
Rivers and Acting Conservator Encarnacion. Petitioners allege that "there is no counter-offer
In the course of the proceedings in the made by the Bank, and any supposed counter-
respondent Court, Carlos Ejercito was offer which Rivera (or Co) may have made is
substituted in place of Demetria and Janolo, in unauthorized. Since there was no counter-offer
view of the assignment of the latters' rights. by the Bank, there was nothing for Ejercito (in
substitution of Demetria and Janolo) to accept."
Issue1: WON the Contract Perfected From the evidence found by respondent Court,
Held: Yes it is obvious that petitioner Rivera has apparent
Ratio: or implied authority to act for the Bank in the
There is no dispute that the object of the matter of selling its acquired assets. (evidence:
transaction is that property owned by the letters, meetings, etc)
defendant bank as acquired assets consisting of In the very recent case of Limketkai Sons
six (6) parcels of land. It is likewise beyond Milling, Inc. vs. Court of Appeals, et. al. 32, the
cavil that the bank intended to sell the Court, through Justice Jose A. R. Melo, affirmed
property. The procedure in the sale of acquired the doctrine of apparent authority as it held
assets as well as the nature and scope of the that the apparent authority of the officer of the
authority of Rivera on the matter is clearly Bank of P.I. in charge of acquired assets is
delineated in the testimony of Rivera himself. borne out by similar circumstances surrounding
The plaintiffs, therefore, at that meeting of his dealings with buyers.
August 1987 regarding their purpose of buying To be sure, petitioners attempted to repudiate
the property, dealt with and talked to the right Rivera's apparent authority through documents
person. Necessarily, it being inherent in his and testimony which seek to establish Rivera's
authority, Rivera is the officer from whom actual authority. These pieces of evidence,
official information regarding the price, as however, are inherently weak as they consist of
determined by the Committee and approved by Rivera's self-serving testimony and various
the Conservator, can be had. And Rivera inter-office memoranda that purport to show his
confirmed his authority when he talked with the limited actual authority, of which private
plaintiff in August 1987. respondent cannot be charged with knowledge.
What transpired after the meeting of early In any event, since the issue is apparent
August 1987 are consistent with the authority authority, the existence of which is borne out by
and the duties of Rivera and the bank's internal the respondent Court's findings, the evidence of
procedure in the matter of the sale of bank's actual authority is immaterial insofar as the
assets. Considering an aspect of the official liability of a corporation is concerned
duty of Rivera as some sort of intermediary Petitioners also alleged that Demetria's and
between the plaintiffs-buyers with their Janolo's P4.25 million counter-offer in the letter
proposed buying price on one hand, and the dated September 17, 1987 extinguished the
bank Committee, the Conservator and Bank's offer of P5.5 million 34 .They disputed
ultimately the bank itself with the set price on the respondent Court's finding that "there was a
the other, and considering further the meeting of minds when on 30 September 1987
discussion of price at the meeting of August Demetria and Janolo through Annex "L" (letter
resulting in a formal offer of P3.5 Million in cash, dated September 30, 1987) "accepted" Rivera's
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counter offer of P5.5 million under Annex "J" contended that the conservator has the power
(letter dated September 17, 1987). to revoke or overrule actions of the
However, the above-cited authorities and management or the board of directors of a
precedents cannot apply in the instant case bank, under SEC 28-A of Republic Act No. 265
because, as found by the respondent Court (otherwise known as the Central Bank Act) as
which reviewed the testimonies on this point, follows:
what was "accepted" by Janolo in his letter Whenever, on the basis of a report submitted
dated September 30, 1987 was the Bank's offer by the appropriate supervising or examining
of P5.5 million as confirmed and reiterated to department, the Monetary Board finds that a
Demetria and Atty. Jose Fajardo by Rivera and bank or a non-bank financial intermediary
Co during their meeting on September 28, performing quasi-banking functions is in a state
1987. Note that the said letter of September 30, of continuing inability or unwillingness to
1987 begins with"(p)ursuant to our discussion maintain a state of liquidity deemed adequate
last 28 September 1987 . . . to protect the interest of depositors and
We note that the Bank's repudiation, through creditors, the Monetary Board may appoint a
Conservator Encarnacion, of Rivera's authority conservator to take charge of the assets,
and action, particularly the latter's counter-offer liabilities, and the management of that
of P5.5 million, as being "unauthorized and institution, collect all monies and debts due said
illegal" came only on May 12, 1988 or more institution and exercise all powers necessary to
than seven (7) months after Janolo' acceptance. preserve the assets of the institution,
Such delay, and the absence of any reorganize the management thereof, and
circumstance which might have justifiably restore its viability. He shall have the power to
prevented the Bank from acting earlier, clearly overrule or revoke the actions of the previous
characterizes the repudiation as nothing more management and board of directors of the bank
than a last-minute attempt on the Bank's part or non-bank financial intermediary performing
to get out of a binding contractual obligation. quasi-banking functions, any provision of law to
the contrary notwithstanding, and such other
Issue2: Is the Contract Enforceable? powers as the Monetary Board shall deem
Held: Yes necessary.
Ratio: In the first place, this issue of the Conservator's
The bank's letter of September 1, 1987 alleged authority to revoke or repudiate the
(together with the other letters including perfected contract of sale was raised for the
Janolos first offer) on the official price and the first time in this Petition as this was not litigated
plaintiffs' acceptance of the price on September in the trial court or CA. It cannot be raised for
30, 1987, are not, in themselves, formal the first time on appeal
contracts of sale. They are however clear In the second place, there is absolutely no
embodiments of the fact that a contract of sale evidence that the Conservator, at the time of
was perfected between the parties, such the contract was perfected, actually repudiated
contract being binding in whatever form it may or overruled said contract of sale. The Bank's
have been entered into (case citations omitted). acting conservator at the time, Rodolfo Romey,
But let it be assumed arguendo that the never objected to the sale of the property to
counter-offer during the meeting on September Demetria and Janolo. What petitioners are really
28, 1987 did constitute a "new" offer which was referring to is the letter of Conservator
accepted by Janolo on September 30, 1987. Encarnacion, who took over from Romey after
Still, the statute of frauds will not apply by the sale was perfected on September 30, 1987
reason of the failure of petitioners to object to (Annex V, petition) which unilaterally
oral testimony proving petitioner Bank's repudiated not the contract but the authority of
counter-offer of P5.5 million. Hence, petitioners Rivera to make a binding offer and which
by such utter failure to object are deemed to unarguably came months after the perfection of
have waived any defects of the contract under the contract. It denied the counter offer. It said
the statute of frauds, pursuant to Article 1405 that only only the Board of
of the Civil Code. Directors/Conservator may authorize the sale of
any property of the corportion/bank..
Issue3: May the Conservator Revoke the In the third place, while admittedly, the Central
Perfected and Enforceable Contract? Bank law gives vast and far-reaching powers to
Held: No the conservator of a bank, it must be pointed
Ratio: out that such powers must be related to the
It is not disputed that the petitioner Bank was "(preservation of) the assets of the bank, (the
under a conservator placed by the Central Bank reorganization of) the management thereof and
of the Philippines during the time that the (the restoration of) its viability." Such powers,
negotiation and perfection of the contract of enormous and extensive as they are, cannot
sale took place. Petitioners energetically extend to the post-facto repudiation of
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perfected transactions, otherwise they would Concept of Intermediation


infringe against the non-impairment clause of Distinction between banks and quasibanks
the Constitution. If the legislature itself cannot
revoke an existing valid contract, how can it
delegate such non-existent powers to the SEC 2. Declaration of Policy. The State
conservator under SEC 28-A of said law? recognizes the vital role of banks in providing
Obviously, therefore, SEC 28-A merely gives the an environment conducive to the sustained
conservator power to revoke contracts that are, development of the national economy and the
under existing law, deemed to be defective i.e., fiduciary nature
void, voidable, unenforceable or rescissible. of banking that requires high standards of
Hence, the conservator merely takes the place integrity and performance. In furtherance
of a bank's board of directors. What the said thereof, the State
board cannot do such as repudiating a contract shall promote and maintain a stable and
validly entered into under the doctrine of efficient banking and financial system that is
implied authority the conservator cannot do globally
either. Ineluctably, his power is not unilateral competitive, dynamic and responsive to the
and he cannot simply repudiate valid demands of a developing economy. (n)
obligations of the Bank. His authority would be
only to bring court actions to assail such SEC 4. Supervisory Powers. The
contracts as he has already done so in the operations and activities of banks shall be
instant case. A contrary understanding of the subject to
law would simply not be permitted by the supervision of the Bangko Sentral. "Supervision"
Constitution. Neither by common sense. To rule shall include the following:
otherwise would be to enable a failing bank to 4.1. The issuance of rules of conduct or the
become solvent, at the expense of third parties, establishment of standards of operation for
by simply getting the conservator to unilaterally uniform
revoke all previous dealings which had one way application to all institutions or functions
or another or come to be considered covered, taking into consideration the
unfavorable to the Bank, yielding nothing to distinctive
perfected contractual rights nor vested character of the operations of institutions and
interests of the third parties who had dealt with the substantive similarities of specific functions
the Bank. to which such rules, modes or standards are to
be applied;
ADDITIONAL MATERIAL: 4.2. The conduct of examination to determine
compliance with laws and regulations if the
CIRCULAR NO. 537 circumstances so warrant as determined by the
Series of 2006 Monetary Board;
4.3. Overseeing to ascertain that laws and
Pursuant to SEC 52 of Republic Act No. 7653 regulations are complied with;
and Monetary Board Resolution No. 862 dated 6 4.4. Regular investigation which shall not be
July 2006, the maximum amount of coins to be oftener than once a year from the last date of
considered as legal tender is adjusted as examination to determine whether an
follows: institution is conducting its business on a safe
or
1. One thousand pesos (P1,000.00) for sound basis: Provided, That the
denominations of 1-Piso, 5-Piso and 10- deficiencies/irregularities found by or
Piso coins; and discovered by an audit
2. One hundred pesos (P100.00) for shall be immediately addressed;
denominations of 1-sentimo, 5-sentimo, 4.5. Inquiring into the solvency and liquidity of
10-sentimo, and 25-sentimo coins. the institution (2-D); or
This Circular shall take effect after fifteen (15) 4.6. Enforcing prompt corrective action. (n)
days following its publication in the Official
Gazette or in a newspaper of general The Bangko Sentral shall also have supervision
circulation. over the operations of and exercise regulatory
powers over quasi-banks, trust entities and
other financial institutions which under special
VII. THE GENERAL BANKING LAW laws are
subject to Bangko Sentral supervision. (2-Ca)
OF 2000
For the purposes of this Act, "quasi-banks" shall
7.1 Topics refer to entities engaged in the borrowing of

State Policy
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funds through the issuance, endorsement or


assignment with recourse or acceptance of Distinction between universal banks and
deposit commercial banks
substitutes as defined in SEC 95 of Republic Act
No. 7653 (hereafter the "New Central Bank SEC 23. Powers of a Universal Bank. A
Act") for universal bank shall have the authority to
purposes of relending or purchasing of exercise, in addition to the powers authorized
receivables and other obligations. (2-Da) for a commercial bank in SEC 29, the powers of
an
investment house as provided in existing laws
Classification of banks and the power to invest in non-allied
enterprises as
3.2. Banks shall be classified into: provided in this Act. (21-B)
(a) Universal banks;
(b) Commercial banks; SEC 24. Equity Investments of a Universal
(c) Thrift banks, composed of: (i) Savings and Bank. A universal bank may, subject to
mortgage banks, (ii) Stock savings and loan the conditions stated in the succeeding
associations, and (iii) Private development paragraph, invest in the equities of allied and
banks, as defined in Republic Act No. 7906 non-allied
(hereafter the "Thrift Banks Act"); enterprises as may be determined by the
(d) Rural banks, as defined in Republic Act No. Monetary Board. Allied enterprises may either
7353 (hereafter the "Rural Banks Act"); be financial or
(e) Cooperative banks, as defined in Republic non-financial.
Act No. 6938 (hereafter the "Cooperative Except as the Monetary Board may otherwise
Code"); prescribe:
(f) Islamic banks as defined in Republic Act No. 24.1. The total investment in equities of allied
6848, otherwise known as the "Charter of Al and non-allied enterprises shall not exceed fifty
Amanah Islamic Investment Bank of the percent (50%) of the net worth of the bank; and
Philippines"; and 24.2. The equity investment in any one
(g) Other classifications of banks as determined enterprise, whether allied or non-allied, shall
by the Monetary Board of the Bangko Sentral not exceed
ng Pilipinas. (6-Aa) twenty-five percent (25%) of the net worth of
the bank.
SEC 71. Other Banking Laws. The As used in this Act, "net worth" shall mean the
organization, ownership and capital total of the unimpaired paid-in capital including
requirements, paid-in surplus, retained earnings and undivided
powers, supervision and general conduct of profit, net of valuation reserves and other
business of thrift banks, rural banks and adjustments as
cooperative banks may be required by the Bangko Sentral.
shall be governed by the provisions of the Thrift The acquisition of such equity or equities is
Banks Act, the Rural Banks Act, and the subject to the prior approval of the Monetary
Cooperative Board
Code, respectively. which shall promulgate appropriate guidelines
The organization, ownership and capital to govern such investments. (21-Ba)
requirements, powers, supervision and general
conduct SEC 30. Equity Investments of a
of business of Islamic banks shall be governed Commercial Bank. A commercial bank may,
by special laws. subject
The provisions of this Act, however, insofar as to the conditions stated in the succeeding
they are not in conflict with the provisions of paragraphs, invest only in the equities of allied
the enterprises as
Thrift Banks Act, the Rural Banks Act, and the may be determined by the Monetary Board.
Cooperative Code shall likewise apply to thrift Allied enterprises may either be financial or
banks, rural non-financial.
banks, and cooperative banks, respectively. Except as the Monetary Board may otherwise
However, for purposes of prescribing the prescribe:
minimum ratio 30.1. The total investment in equities of allied
which the net worth of a thrift bank must bear enterprises shall not exceed thirty-five percent
to its total risk assets, the provisions of SEC 33 (35%) of the net worth of the bank; and
of this 30.2. The equity investment in any one
Act shall govern. (n) enterprise shall not exceed twenty-five percent
(25%) of the
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net worth of the bank. 4.4. Regular investigation which shall not be
The acquisition of such equity or equities is oftener than once a year from the last date of
subject to the prior approval of the Monetary examination to determine whether an
Board institution is conducting its business on a safe
which shall promulgate appropriate guidelines or
to govern such investments. (21A-a; 21-Ca) sound basis: Provided, That the
deficiencies/irregularities found by or
discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
Distinction between universal banks or
commercial banks and other banks The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
SEC 33. Acceptance of Demand Deposits. powers over quasi-banks, trust entities and
A bank other than a universal or other financial institutions which under special
commercial bank cannot accept or create laws are
demand deposits except upon prior approval of, subject to Bangko Sentral supervision. (2-Ca)
and subject to
such conditions and rules as may be prescribed For the purposes of this Act, "quasi-banks" shall
by the Monetary Board. (72-Aa) refer to entities engaged in the borrowing of
funds through the issuance, endorsement or
Distinction between allied and non-allied assignment with recourse or acceptance of
enterprises deposit
substitutes as defined in SEC 95 of Republic Act
No. 7653 (hereafter the "New Central Bank
SEC 23. Powers of a Universal Bank. A
Act") for
universal bank shall have the authority to
purposes of relending or purchasing of
exercise, in addition to the powers authorized
receivables and other obligations. (2-Da)
for a commercial bank in SEC 29, the powers of
an
R.A.7653
investment house as provided in existing laws
SEC 25. Supervision and Examination.
and the power to invest in non-allied
The Bangko Sentral shall have supervision
enterprises as
over, and conduct periodic or special
provided in this Act. (21-B)
examinations of, banking institutions and quasi-
banks, including
their subsidiaries and affiliates engaged in allied
Institutions subject to BSP supervisory and activities.
regulatory powers For purposes of this SEC, a subsidiary means a
corporation more than fifty percent (50%) of
SEC 4. Supervisory Powers. The the voting stock of which is owned by a bank or
operations and activities of banks shall be quasi-bank and an affiliate means a corporation
subject to the
supervision of the Bangko Sentral. "Supervision" voting stock of which, to the extent of fifty
shall include the following: percent (50%) or less, is owned by a bank or
4.1. The issuance of rules of conduct or the quasi-bank or
establishment of standards of operation for which is related or linked to such institution or
uniform intermediary through common stockholders or
application to all institutions or functions such other
covered, taking into consideration the factors as may be determined by the Monetary
distinctive Board.
character of the operations of institutions and The department heads and the examiners of
the substantive similarities of specific functions the supervising and/or examining departments
to which such rules, modes or standards are to are
be applied; hereby authorized to administer oaths to any
4.2. The conduct of examination to determine director, officer, or employee of any institution
compliance with laws and regulations if the under their
circumstances so warrant as determined by the respective supervision or subject to their
Monetary Board; examination and to compel the presentation of
4.3. Overseeing to ascertain that laws and all books,
regulations are complied with;
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documents, papers or records necessary in their Sentral, examine, inspect or investigate the
judgment to ascertain the facts relative to the books and records of such person or entity.
true Upon issuance of
condition of any institution as well as the books this authority, such person or entity may
and records of persons and entities relative to commence to engage in banking operations or
or in quasi-banking
connection with the operations, activities or functions and shall continue to do so unless
transactions of the institution under such authority is sooner surrendered, revoked,
examination, subject to suspended or
the provision of existing laws protecting or annulled by the Bangko Sentral in accordance
safeguarding the secrecy or confidentiality of with this Act or other special laws.
bank deposits The department head and the examiners of the
as well as investments of private persons, appropriate supervising and examining
natural or juridical, in debt instruments issued department are hereby authorized to administer
by the oaths to any such person, employee, officer, or
Government. director
No restraining order or injunction shall be of any such entity and to compel the
issued by the court enjoining the Bangko presentation or production of such books,
Sentral from documents, papers or
examining any institution subject to supervision records that are reasonably necessary to
or examination by the Bangko Sentral, unless ascertain the facts relative to the true functions
there is and operations
convincing proof that the action of the Bangko of such person or entity. Failure or refusal to
Sentral is plainly arbitrary and made in bad comply with the required presentation or
faith and the production of such
petitioner or plaintiff files with the clerk or judge books, documents, papers or records within a
of the court in which the action is pending a reasonable time shall subject the persons
bond responsible
executed in favor of the Bangko Sentral, in an therefore to the penal sanctions provided under
amount to be fixed by the court. The provisions the New Central Bank Act.
of Rule Persons or entities found to be performing
58 of the New Rules of Court insofar as they are banking or quasi-banking functions without
applicable and not inconsistent with the authority
provisions of from the Bangko Sentral shall be subject to
this SEC shall govern the issuance and appropriate sanctions under the New Central
dissolution of the restraining order or injunction Bank Act and
contemplated other applicable laws. (4a)
in this SEC.

Authority to engage in banking institutions Stock corporation

SEC 6. Authority to Engage in Banking and SEC 8. Organization. The Monetary Board
Quasi-Banking Functions. No person or may authorize the organization of a bank or
entity shall engage in banking operations or quasi-bank subject to the following conditions:
quasi-banking functions without authority from 8.1. That the entity is a stock corporation (7);
the Bangko 8.2. That its funds are obtained from the public,
Sentral: Provided, however, That an entity which shall mean twenty (20) or more persons
authorized by the Bangko Sentral to perform (2-Da); and
universal or 8.3. That the minimum capital requirements
commercial banking functions shall likewise prescribed by the Monetary Board for each
have the authority to engage in quasi-banking category
functions. of banks are satisfied. (n)
The determination of whether a person or entity No new commercial bank shall be established
is performing banking or quasi-banking within three (3) years from the effectivity of this
functions Act. In the
without Bangko Sentral authority shall be exercise of the authority granted herein, the
decided by the Monetary Board. To resolve such Monetary Board shall take into consideration
issue, the their capability
Monetary Board may, through the appropriate in terms of their financial resources and
supervising and examining department of the technical expertise and integrity. The bank
Bangko licensing process shall
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incorporate an assessment of the bank's enterprises as may be determined by the


ownership structure, directors and senior Monetary Board. Allied enterprises may either
management, its be financial or
operating plan and internal controls as well as non-financial.
its projected financial condition and capital
base. Except as the Monetary Board may otherwise
prescribe:
Not a close corporation 24.1. The total investment in equities of allied
Par value stock and non-allied enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
SEC 9. Issuance of Stocks. The Monetary 24.2. The equity investment in any one
Board may prescribe rules and regulations enterprise, whether allied or non-allied, shall
on the types of stock a bank may issue, not exceed
including the terms thereof and rights twenty-five percent (25%) of the net worth of
appurtenant thereto to the bank.
determine compliance with laws and regulations As used in this Act, "net worth" shall mean the
governing capital and equity structure of banks: total of the unimpaired paid-in capital including
Provided, That banks shall issue par value paid-in surplus, retained earnings and undivided
stocks only. profit, net of valuation reserves and other
adjustments as
may be required by the Bangko Sentral.
Ownership of shares The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board
SEC 11. Foreign Stockholdings. Foreign
which shall promulgate appropriate guidelines
individuals and non-bank corporations may
to govern such investments. (21-Ba)
own or control up to forty percent (40%) of the
voting stock of a domestic bank. This rule shall
SEC 25. Equity Investments of a Universal
apply to
Bank in Financial Allied Enterprises. A
Filipinos and domestic non-bank corporations.
universal bank can own up to one hundred
(12a; 12-Aa)
percent (100%) of the equity in a thrift bank, a
The percentage of foreign-owned voting stocks
rural bank or a
in a bank shall be determined by the citizenship
financial allied enterprise.
of
the individual stockholders in that bank. The
A publicly-listed universal or commercial bank
citizenship of the corporation which is a
may own up to one hundred percent (100%) of
stockholder in a
the
bank shall follow the citizenship of the
voting stock of only one other universal or
controlling stockholders of the corporation,
commercial bank. (21-B; 21-Ca)
irrespective of the place
of incorporation. (n)
SEC 26. Equity Investments of a Universal
Bank in Non-Financial Allied Enterprises.
A universal bank may own up to one hundred
MB Certificate of authority percent (100%) of the equity in a non-financial
Power of a universal bank allied
enterprise. (21-Ba)
SEC 23. Powers of a Universal Bank. A
universal bank shall have the authority to SEC 27. Equity Investments of a Universal
exercise, in addition to the powers authorized Bank in Non-Allied Enterprises. The
for a commercial bank in SEC 29, the powers of equity investment of a universal bank, or of its
an wholly or majority-owned subsidiaries, in a
investment house as provided in existing laws single nonallied
and the power to invest in non-allied enterprise shall not exceed thirty-five percent
enterprises as (35%) of the total equity in that enterprise nor
provided in this Act. (21-B) shall it
exceed thirty-five percent (35%) of the voting
SEC 24. Equity Investments of a Universal stock in that enterprise. (21-B)
Bank. A universal bank may, subject to
the conditions stated in the succeeding SEC 28. Equity Investments in Quasi-
paragraph, invest in the equities of allied and Banks. To promote competitive conditions in
non-allied
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financial markets, the Monetary Board may


further limit to forty percent (40%) equity The Monetary Board may regulate the
investments of operations authorized by this SEC in order to
universal banks in quasi-banks. This rule shall ensure
also apply in the case of commercial banks. (12- that such operations do not endanger the
E) interests of the depositors and other creditors
of the bank.
SEC 29. Powers of a Commercial Bank. A
commercial bank shall have, in addition to In case a bank or quasi-bank notifies the
the general powers incident to corporations, all Bangko Sentral or publicly announces a bank
such powers as may be necessary to carry on holiday, or
the in any manner suspends the payment of its
business of commercial banking, such as deposit liabilities continuously for more than
accepting drafts and issuing letters of credit; thirty (30) days,
discounting and the Monetary Board may summarily and without
negotiating promissory notes, drafts, bills of need for prior hearing close such banking
exchange, and other evidences of debt; institution and
accepting or creating place it under receivership of the Philippine
demand deposits; receiving other types of Deposit Insurance Corporation. (72a)
deposits and deposit substitutes; buying and
selling foreign
exchange and gold or silver bullion; acquiring Powers of a commercial bank
marketable bonds and other debt securities;
and extending SEC 29. Powers of a Commercial Bank. A
credit, subject to such rules as the Monetary commercial bank shall have, in addition to
Board may promulgate. These rules may the general powers incident to corporations, all
include the such powers as may be necessary to carry on
determination of bonds and other debt the
securities eligible for investment, the maturities business of commercial banking, such as
and aggregate accepting drafts and issuing letters of credit;
amount of such investment. (21a) discounting and
negotiating promissory notes, drafts, bills of
SEC 53. Other Banking Services. In exchange, and other evidences of debt;
addition to the operations specifically accepting or creating
authorized in this Act, a bank may perform the demand deposits; receiving other types of
following services: deposits and deposit substitutes; buying and
53.1. Receive in custody funds, documents and selling foreign
valuable objects; exchange and gold or silver bullion; acquiring
53.2. Act as financial agent and buy and sell, by marketable bonds and other debt securities;
order of and for the account of their customers, and extending
shares, evidences of indebtedness and all types credit, subject to such rules as the Monetary
of securities; Board may promulgate. These rules may
53.3. Make collections and payments for the include the
account of others and perform such other determination of bonds and other debt
services for securities eligible for investment, the maturities
their customers as are not incompatible with and aggregate
banking business; amount of such investment. (21a)
53.4. Upon prior approval of the Monetary
Board, act as managing agent, adviser, SEC 30. Equity Investments of a
consultant or Commercial Bank. A commercial bank may,
administrator of investment subject
management/advisory/consultancy accounts; to the conditions stated in the succeeding
and paragraphs, invest only in the equities of allied
53.5. Rent out safety deposit boxes. enterprises as
may be determined by the Monetary Board.
The bank shall perform the services permitted Allied enterprises may either be financial or
under SubSECs 53.1, 53.2, 53.3 and 53.4 as non-financial.
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects Except as the Monetary Board may otherwise
which it prescribe:
receives duly separate from the bank's own 30.1. The total investment in equities of allied
assets and liabilities. enterprises shall not exceed thirty-five percent
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(35%) of the net worth of the bank; and The Monetary Board may regulate the
30.2. The equity investment in any one operations authorized by this SEC in order to
enterprise shall not exceed twenty-five percent ensure
(25%) of the that such operations do not endanger the
net worth of the bank. interests of the depositors and other creditors
The acquisition of such equity or equities is of the bank.
subject to the prior approval of the Monetary
Board In case a bank or quasi-bank notifies the
which shall promulgate appropriate guidelines Bangko Sentral or publicly announces a bank
to govern such investments. (21A-a; 21-Ca) holiday, or
in any manner suspends the payment of its
SEC 31. Equity Investments of a deposit liabilities continuously for more than
Commercial Bank in Financial Allied thirty (30) days,
Enterprises. the Monetary Board may summarily and without
A commercial bank may own up to one hundred need for prior hearing close such banking
percent (100%) of the equity of a thrift bank or institution and
a rural place it under receivership of the Philippine
bank. Deposit Insurance Corporation. (72a)
Where the equity investment of a commercial
bank is in other financial allied enterprises,
including another commercial bank, such Areas of supervision and regulation of banks
investment shall remain a minority holding in Examination and investigation of banks
that enterprise.
(21-Aa; 21-Ca) SEC 4. Supervisory Powers. The
operations and activities of banks shall be
SEC 32. Equity Investments of a subject to
Commercial Bank in Non-Financial Allied supervision of the Bangko Sentral. "Supervision"
Enterprises. A commercial bank may own shall include the following:
up to one hundred percent (100%) of the equity 4.1. The issuance of rules of conduct or the
in a nonfinancial allied enterprise. (21-Aa) establishment of standards of operation for
uniform
SEC 53. Other Banking Services. In application to all institutions or functions
addition to the operations specifically covered, taking into consideration the
authorized distinctive
in this Act, a bank may perform the following character of the operations of institutions and
services: the substantive similarities of specific functions
53.1. Receive in custody funds, documents and to which such rules, modes or standards are to
valuable objects; be applied;
53.2. Act as financial agent and buy and sell, by 4.2. The conduct of examination to determine
order of and for the account of their customers, compliance with laws and regulations if the
shares, evidences of indebtedness and all types circumstances so warrant as determined by the
of securities; Monetary Board;
53.3. Make collections and payments for the 4.3. Overseeing to ascertain that laws and
account of others and perform such other regulations are complied with;
services for 4.4. Regular investigation which shall not be
their customers as are not incompatible with oftener than once a year from the last date of
banking business; examination to determine whether an
53.4. Upon prior approval of the Monetary institution is conducting its business on a safe
Board, act as managing agent, adviser, or
consultant or sound basis: Provided, That the
administrator of investment deficiencies/irregularities found by or
management/advisory/consultancy accounts; discovered by an audit
and shall be immediately addressed;
53.5. Rent out safety deposit boxes. 4.5. Inquiring into the solvency and liquidity of
The bank shall perform the services permitted the institution (2-D); or
under SubSECs 53.1, 53.2, 53.3 and 53.4 as 4.6. Enforcing prompt corrective action. (n)
depositary or as an agent. Accordingly, it shall The Bangko Sentral shall also have supervision
keep the funds, securities and other effects over the operations of and exercise regulatory
which it powers over quasi-banks, trust entities and
receives duly separate from the bank's own other financial institutions which under special
assets and liabilities. laws are
subject to Bangko Sentral supervision. (2-Ca)
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For the purposes of this Act, "quasi-banks" shall


refer to entities engaged in the borrowing of Acquisition by banks of own shares
funds through the issuance, endorsement or
assignment with recourse or acceptance of SEC 10. Treasury Stocks. No bank shall
deposit purchase or acquire shares of its own capital
substitutes as defined in SEC 95 of Republic Act stock or accept its own shares as a security for
No. 7653 (hereafter the "New Central Bank a loan, except when authorized by the Monetary
Act") for Board:
purposes of relending or purchasing of Provided, That in every case the stock so
receivables and other obligations. (2-Da) purchased or acquired shall, within six (6)
months from the time
R.A. 7653 SEC 28. Examination and Fees. of its purchase or acquisition, be sold or
The supervising and examining department disposed of at a public or private sale. (24a)
head,
personally or by deputy, shall examine the Stockholdings of family groups and related
books of every banking institution once in every interests
twelve (12)
months, and at such other times as the SEC 12. Stockholdings of Family Groups or
Monetary Board by an affirmative vote of five Related Interests. Stockholdings of
(5) members, may individuals related to each other within the
deem expedient and to make a report on the fourth degree of consanguinity or affinity,
same to the Monetary Board: Provided, That legitimate or
there shall be common-law, shall be considered family groups
an interval of at least twelve (12) months or related interests and must be fully disclosed
between annual examinations. in all
transactions by such an individual with the
The bank concerned shall afford to the head of bank. (12-Da)
the appropriate supervising and examining
departments and to his authorized deputies full SEC 13. Corporate Stockholdings. Two or
opportunity to examine its books, cash and more corporations owned or controlled by
available the same family group or same group of
assets and general condition at any time during persons shall be considered related interests
banking hours when requested to do so by the and must be fully
Bangko disclosed in all transactions by such
Sentral: Provided, however, That none of the corporations or related groups of persons with
reports and other papers relative to such the bank. (12-Ba)
examinations
shall be open to inspection by the public except Independent directors
insofar as such publicity is incidental to the
proceedings
SEC 15. Board of Directors. The provisions
hereinafter authorized or is necessary for the
of the Corporation Code to the contrary
prosecution of violations in connection with the
notwithstanding, there shall be at least five (5),
business
and a maximum of fifteen (15) members of the
of such institutions.
board of
directors of bank, two (2) of whom shall be
Banking and quasi-banking institutions which
independent directors. An "independent
are subject to examination by the Bangko
director" shall mean a
Sentral
person other than an officer or employee of the
shall pay to the Bangko Sentral, within the first
bank, its subsidiaries or affiliates or related
thirty (30) days of each year, an annual fee in
interests. (n)
an amount
Non-Filipino citizens may become members of
equal to a percentage as may be prescribed by
the board of directors of a bank to the extent of
the Monetary Board of its average total assets
the
during
foreign participation in the equity of said bank.
the preceding year as shown on its end-of-
(Sec. 7, RA 7721)
month balance sheets, after deducting cash on
The meetings of the board of directors may be
hand and
conducted through modern technologies such
amounts due from banks, including the Bangko
as,
Sentral and banks abroad.
but not limited to, teleconferencing and video-
conferencing. (n)
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Qualifications of directors and officers: the fit 18.3. When a bank is found by the Monetary
and proper rule Board to be in an unsatisfactory financial
condition.
SEC 16. Fit and Proper Rule. To maintain (n)
the quality of bank management and afford
better protection to depositors and the public in Ratio of net worth to total risk assets
general, the Monetary Board shall prescribe,
pass upon SEC 34. Risk-Based Capital. The Monetary
and review the qualifications and Board shall prescribe the minimum ratio
disqualifications of individuals elected or which the net worth of a bank must bear to its
appointed bank directors or total risk assets which may include contingent
officers and disqualify those found unfit. accounts.
For purposes of this SEC, the Monetary Board
After due notice to the board of directors of the may require that such ratio be determined on
bank, the Monetary Board may disqualify, the basis of the net worth and risk assets of a
suspend or remove any bank director or officer bank and its subsidiaries, financial or otherwise,
who commits or omits an act which render him as well as
unfit for the prescribe the composition and the manner of
position. determining the net worth and total risk assets
of banks and
In determining whether an individual is fit and their subsidiaries: Provided, That in the exercise
proper to hold the position of a director or of this authority, the Monetary Board shall, to
officer of the extent
a bank, regard shall be given to his integrity, feasible, conform to internationally accepted
experience, education, training, and standards, including those of the Bank for
competence. (9-Aa) International
Settlements (BIS), relating to risk-based capital
Prohibition on public officials requirements: Provided, further, That it may
alter or
SEC 19. Prohibition on Public Officials. suspend compliance with such ratio whenever
Except as otherwise provided in the Rural necessary for a maximum period of one (1)
Banks Act, no appointive or elective public year: Provided,
official, whether full-time or part-time shall at finally, That such ratio shall be applied
the same time uniformly to banks of the same category.
serve as officer of any private bank, save in In case a bank does not comply with the
cases where such service is incident to financial prescribed minimum ratio, the Monetary Board
assistance may limit
provided by the government or a government- or prohibit the distribution of net profits by such
owned or controlled corporation to the bank or bank and may require that part or all of the net
unless profits be
otherwise provided under existing laws. (13) used to increase the capital accounts of the
bank until the minimum requirement has been
Compensation and other benefits of directors met. The
and officers Monetary Board may, furthermore, restrict or
prohibit the acquisition of major assets and the
SEC 18. Compensation and Other Benefits making of
of Directors and Officers. To protect the new investments by the bank, with the
funds of depositors and creditors, the Monetary exception of purchases of readily marketable
Board may regulate the payment by the bank to evidences of
its indebtedness of the Republic of the Philippines
directors and officers of compensation, and of the Bangko Sentral and any other
allowance, fees, bonuses, stock options, profit evidences of
sharing and fringe indebtedness or obligations the servicing and
benefits only in exceptional cases and when the repayment of which are fully guaranteed by the
circumstances warrant, such as but not limited Republic of
to the the Philippines, until the minimum required
following: capital ratio has been restored.
18.1. When a bank is under comptrollership or
conservatorship; or In case of a bank merger or consolidation, or
18.2. When a bank is found by the Monetary when a bank is under rehabilitation under a
Board to be conducting business in an unsafe or program
unsound manner; or
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approved by the Bangko Sentral, the Monetary subsidiaries in which such corporation owns or
Board may temporarily relieve the surviving controls a majority interest; and (d) in the
bank, case of a partnership, association or other
consolidated bank, or constituent bank or entity, the liabilities of the members thereof to
corporations under rehabilitation from full such bank.
compliance with the 35.4. Even if a parent corporation, partnership,
required capital ratio under such conditions as it association, entity or an individual who owns or
may prescribe. controls a majority interest in such entities has
no liability to the bank, the Monetary Board
Before the effectivity of the rules which the may prescribe the combination of the liabilities
Monetary Board is authorized to prescribe under of subsidiary corporations or members of the
this partnership, association, entity or such
provision, SEC 22 of the General Banking Act, as individual under certain circumstances,
amended, SEC 9 of the Thrift Banks Act, and all including but
pertinent rules issued pursuant thereto, shall not limited to any of the following situations: (a)
continue to be in force. (22a) the parent corporation, partnership,
association, entity or individual guarantees the
BASLE ACCORD repayment of the liabilities; (b) the liabilities
Limits on loans, the SBL rules were incurred for the accommodation of the
parent corporation or another subsidiary or of
SEC 35. Limit on Loans, Credit the partnership or association or entity or such
Accommodations and Guarantees. individual; or (c) the subsidiaries though
35.1. Except as the Monetary Board may separate entities operate merely as
otherwise prescribe for reasons of national departments or divisions of a single entity.
interest, the 35.5. For purposes of this SEC, loans, other
total amount of loans, credit accommodations credit accommodations and guarantees shall
and guarantees as may be defined by the exclude:
Monetary Board that may be extended by a (a) loans and other credit accommodations
bank to any person, partnership, association, secured by obligations of the Bangko Sentral or
corporation or other entity shall at no time of the Philippine Government; (b) loans and
exceed twenty percent (20%) of the net worth other credit accommodations fully guaranteed
of by the
such bank. The basis for determining government as to the payment of principal and
compliance with single-borrower limit is the interest; (c) loans and other credit
total credit accommodations
commitment of the bank to the borrower. covered by assignment of deposits maintained
35.2. Unless the Monetary Board prescribes in the lending bank and held in the Philippines;
otherwise, the total amount of loans, credit (d)
accommodations and guarantees prescribed in loans, credit accommodations and acceptances
the preceding paragraph may be increased under letters of credit to the extent covered by
by an additional ten percent (10%) of the net margin deposits; and (e) other loans or credit
worth of such bank provided the additional accommodations which the Monetary Board
liabilities of any borrower are adequately may from
secured by trust receipts, shipping documents, time to time, specify as non-risk items.
warehouse receipts or other similar documents 35.6. Loans and other credit accommodations,
transferring or securing title covering readily deposits maintained with, and usual guarantees
marketable, non-perishable goods which must by
be fully covered by insurance. a bank to any other bank or non-bank entity,
35.3. The above prescribed ceilings shall whether locally or abroad, shall be subject to
include: (a) the direct liability of the maker or the limits as herein prescribed.
acceptor of 35.7. Certain types of contingent accounts of
paper discounted with or sold to such bank and borrowers may be included among those
the liability of a general indorser, drawer or subject to
guarantor who obtains a loan or other credit these prescribed limits as may be determined
accommodation from or discounts paper with or by the Monetary Board. (23a)
sells papers to such bank; (b) in the case of an
individual who owns or controls a majority Restrictions on bank exposure; the DOSRI
interest in a corporation, partnership, rules
association or any other entity, the liabilities of
said SEC 36. Restriction on Bank Exposure to
entities to such bank; (c) in the case of a Directors, Officers, Stockholders and Their
corporation, all liabilities to such bank of all
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Related Interests. No director or officer of be excluded from such limit: Provided, further,
any bank shall, directly or indirectly, for himself That loans, credit accommodations and
or as the advances to
representative or agent of others, borrow from officers in the form of fringe benefits granted in
such bank nor shall he become a guarantor, accordance with rules as may be prescribed by
indorser or the
surety for loans from such bank to others, or in Monetary Board shall not be subject to the
any manner be an obligor or incur any individual limit.
contractual liability The Monetary Board shall define the term
to the bank except with the written approval of "related interests."
the majority of all the directors of the bank, The limit on loans, credit accommodations and
excluding the guarantees prescribed herein shall not apply to
director concerned: Provided, That such written loans, credit accommodations and guarantees
approval shall not be required for loans, other extended by a cooperative bank to its
credit cooperative
accommodations and advances granted to shareholders. (83a)
officers under a fringe benefit plan approved by
the Bangko Microfinancing
Sentral. The required approval shall be entered
upon the records of the bank and a copy of such SEC 40. Requirement for Grant of Loans or
entry Other Credit Accommodations. Before
shall be transmitted forthwith to the granting a loan or other credit accommodation,
appropriate supervising and examining a bank must ascertain that the debtor is
department of the Bangko capable of
Sentral. fulfilling his commitments to the bank.
Dealings of a bank with any of its directors, Toward this end, a bank may demand from its
officers or stockholders and their related credit applicants a statement of their assets
interests and
shall be upon terms not less favorable to the liabilities and of their income and expenditures
bank than those offered to others. and such information as may be prescribed by
After due notice to the board of directors of the law or by
bank, the office of any bank director or officer rules and regulations of Monetary Board to
who enable the bank to properly evaluate the credit
violates the provisions of this SEC may be application
declared vacant and the director or officer shall which includes the corresponding financial
be subject statements submitted for taxation purposes to
to the penal provisions of the New Central Bank the Bureau of
Act. Internal Revenue. Should such statements
The Monetary Board may regulate the amount prove to be false or incorrect in any material
of loans, credit accommodations and detail, the bank
guarantees may terminate any loan or other credit
that may be extended, directly or indirectly, by accommodation granted on the basis of said
a bank to its directors, officers, stockholders statements and shall
and their have the right to demand immediate repayment
related interests, as well as investments of such or liquidation of the obligation.
bank in enterprises owned or controlled by said In formulating rules and regulations under this
directors, SEC, the Monetary Board shall recognize the
officers, stockholders and their related peculiar characteristics of microfinancing, such
interests. However, the outstanding loans, as cash flow-based lending to the basic sectors
credit accommodations that are
and guarantees which a bank may extend to not covered by traditional collateral. (76a)
each of its stockholders, directors, or officers
and their SEC 43. Authority to Prescribe Terms and
related interests, shall be limited to an amount Conditions of Loans and Other Credit
equivalent to their respective unencumbered Accommodations. The Monetary Board
deposits and may, similarly, in accordance with the authority
book value of their paid-in capital contribution granted to it
in the bank: Provided, however, That loans, in SEC 106 of the New Central Bank Act, and
credit taking into account the requirements of the
accommodations and guarantees secured by economy for
assets considered as non-risk by the Monetary
Board shall
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the effective utilization of long-term funds, upon between the bank and its borrower. (80a)
prescribe the maturities, as well as related
terms and
conditions for various types of bank loans and
other credit accommodations. Any change by
the Board in Real Estate investments and acquisitions
the maximum maturities shall apply only to
loans and other credit accommodations made SEC 51. Ceiling on Investments in Certain
after the date of Assets. Any bank may acquire real estate
such action. as shall be necessary for its own use in the
The Monetary Board shall regulate the interest conduct of its business: Provided, however, That
imposed on microfinance borrowers by lending the total
investors and similar lenders, such as, but not investment in such real estate and
limited to, the unconscionable rates of interest improvements thereof, including bank
collected on equipment, shall not exceed fifty
salary loans and similar credit accommodations. percent (50%) of combined capital accounts:
(78a) Provided, further, That the equity investment of
a bank in
SEC 44. Amortization on Loans and Other another corporation engaged primarily in real
Credit Accommodations. The estate shall be considered as part of the bank's
amortization schedule of bank loans and other total
credit accommodations shall be adapted to the investment in real estate, unless otherwise
nature of provided by the Monetary Board. (25a)
the operations to be financed.
In case of loans and other credit SEC 52. Acquisition of Real Estate by Way
accommodations with maturities of more than of Satisfaction of Claims.
five (5) years, Notwithstanding the limitations of the preceding
provisions must be made for periodic SEC, a bank may acquire, hold or convey real
amortization payments, but such payments property under the following circumstances:
must be made at least 52.1. Such as shall be mortgaged to it in good
annually: Provided, however, That when the faith by way of security for debts;
borrowed funds are to be used for purposes 52.2. Such as shall be conveyed to it in
which do not satisfaction of debts previously contracted in
initially produce revenues adequate for regular the course of
amortization payments therefrom, the bank its dealings; or
may permit the 52.3. Such as it shall purchase at sales under
initial amortization payment to be deferred until judgments, decrees, mortgages, or trust deeds
such time as said revenues are sufficient for held
such by it and such as it shall purchase to secure
purpose, but in no case shall the initial debts due it.
amortization date be later than five (5) years Any real property acquired or held under the
from the date on circumstances enumerated in the above
which the loan or other credit accommodation is paragraph
granted. (79a) shall be disposed of by the bank within a period
In case of loans and other credit of five (5) years or as may be prescribed by the
accommodations to microfinance sectors, the Monetary Board: Provided, however, That the
schedule of loan bank may, after said period, continue to hold
amortization shall take into consideration the the property
projected cash flow of the borrower and adopt for its own use, subject to the limitations of the
this into the preceding SEC. (25a)
terms and conditions formulated by banks. (n)
Outsourcing of bank functions
Prepayment of loans
SEC 55. Prohibited Transactions.
SEC 45. Prepayment of Loans and Other 55.1. No director, officer, employee, or agent of
Credit Accommodations. A borrower may any bank shall
at any time prior to the agreed maturity date (e) Outsource inherent banking functions.
prepay, in whole or in part, the unpaid balance
of any bank
loan and other credit accommodation, subject Employment of casual and probationary
to such reasonable terms and conditions as personnel
may be agreed
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SEC 55.4. Consistent with the provisions of of, any of the departments, directors, officers,
Republic Act No. 1405, otherwise known as the stockholders, or employees of the trust entity,
Banks relatives
Secrecy Law, no bank shall employ casual or within the first degree of consanguinity or
nonregular personnel or too lengthy affinity, or the related interests, of such
probationary personnel in the conduct of its directors, officers and
business involving bank deposits. stockholders, unless the transaction is
specifically authorized by the trustor and the
Declaration of dividends relationship of the
trustee and the other party involved in the
SEC 57. Prohibition on Dividend transaction is fully disclosed to the trustor or
Declaration. No bank or quasi-bank shall beneficiary of the
declare trust prior to the transaction.
dividends greater than its accumulated net The Monetary Board shall promulgate such
profits then on hand, deducting therefrom its rules and regulations as may be necessary to
losses and bad prevent
debts. Neither shall the bank nor quasi-bank circumvention of this prohibition or the evasion
declare dividends, if at the time of declaration: of the responsibility herein imposed on a trust
57.1 Its clearing account with the Bangko entity. (56)
Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor Deposit required as security for faithful
for government deposits for five (5) or more performance of trust duties
consecutive days; or
57.3 It does not comply with the liquidity SEC 84. Deposit for the Faithful
standards/ratios prescribed by the Bangko Performance of Trust Duties. Before
Sentral for transacting
purposes of determining funds available for trust business, every trust entity shall deposit
dividend declaration; or with the Bangko Sentral as security for the
57.4 It has committed a major violation as may faithful
be determined by the Bangko Sentral. (84a) performance of its trust duties, cash or
securities approved by the Monetary Board in
Authority to engage in trust business an amount equal to
Trust Receipt not less than Five hundred thousand pesos
(P500,000.00) or such higher amount as may be
SEC 79. Authority to Engage in Trust fixed by the
Business. Only a stock corporation or a Monetary Board: Provided, however, That the
person duly authorized by the Monetary Board Monetary Board shall require every trust entity
to engage in trust business shall act as a to increase
trustee or the amount of its cash or securities on deposit
administer any trust or hold property in trust or with the Bangko Sentral whenever in its
on deposit for the use, benefit, or behoof of judgment such
others. For increase is necessary by reason of the trust
purposes of this Act, such a corporation shall be business of such entity: Provided, further, That
referred to as a trust entity. (56a; 57a) the paid-in
capital and surplus of such entity must be at
Diligence required least equal to the amount required to be
deposited with the
Bangko Sentral in accordance with the
SEC 80. Conduct of Trust Business. A
provisions of this paragraph. Should the capital
trust entity shall administer the funds or
and surplus fall
property under its custody with the diligence
below said amount, the Monetary Board shall
that a prudent man would exercise in the
have the same authority as that granted to it
conduct of an
under the
enterprise of a like character and with similar
provisions of the fifth paragraph of SEC 34 of
aims.
this Act.
No trust entity shall, for the account of the
A trust entity so long as it shall continue to be
trustor or the beneficiary of the trust, purchase
solvent and comply with laws or regulations
or
shall
acquire property from, or sell, transfer, assign
have the right to collect the interest earned on
or lend money or property to, or purchase debt
such securities deposited with the Bangko
instruments
Sentral and,
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from time to time, with the approval of the Bangko Sentral within the purview of this Act
Bangko Sentral, to exchange the securities for who, being required in writing by the Monetary
others. If the Board or by
trust entity fails to comply with any law or the head of the supervising and examining
regulation, the Bangko Sentral shall retain such department willfully refuses to file the required
interest on the report or
securities deposited with it for the benefit of permit any lawful examination into the affairs of
rightful claimants. All claims arising out of the such institution shall be punished by a fine of
trust business not less
of a trust entity shall have priority over all other than Fifty thousand pesos (P50,000) nor more
claims as regards the cash or securities than One hundred thousand pesos (P100,000)
deposited as or by
above provided. The Monetary Board may not imprisonment of not less than one (1) year nor
permit the cash or securities deposited in more than five (5) years, or both, in the
accordance with discretion of the
the provisions of this SEC to be reduced below court.
the prescribed minimum amount until the
depositing R.A. 7653
entity shall discontinue its trust business and SEC 35. False Statement. The willful
shall satisfy the Monetary Board that it has making of a false or misleading statement on a
complied with all material fact to the Monetary Board or to the
its obligations in connection with such business. examiners of the Bangko Sentral shall be
(65a) punished by a
fine of not less than One hundred thousand
Separation of trust business from general pesos (P100,000) nor more than Two hundred
business thousand
pesos (P200,000), or by imprisonment of not
SEC 87. Separation of Trust Business from more than (5) years, or both, at the discretion
General Business. The trust business of the court.
and all funds, properties or securities received
by any trust entity as executor, administrator, R.A. 7653
guardian, SEC 36. Proceedings Upon Violation of
trustee, receiver, or depositary shall be kept This Act and Other Banking Laws, Rules,
separate and distinct from the general business Regulations, Orders or Instructions.
including all Whenever a bank or quasi-bank, or whenever
other funds, properties, and assets of such trust any person or
entity. The accounts of all such funds, entity willfully violates this Act or other
properties, or pertinent banking laws being enforced or
securities shall likewise be kept separate and implemented by the
distinct from the accounts of the general Bangko Sentral or any order, instruction, rule or
business of the regulation issued by the Monetary Board, the
trust entity. (61) person or
persons responsible for such violation shall
Exemption of trust assets from claims unless otherwise provided in this Act be
punished by a fine
of not less than Fifty thousand pesos (P50,000)
SEC 92. Exemption of Trust Assets from
nor more than Two hundred thousand pesos
Claims. No assets held by a trust entity in
(P200,000) or by imprisonment of not less than
its capacity as trustee shall be subject to any
two (2) years nor more than ten (10) years, or
claims other than those of the parties interested
both, at
in the
the discretion of the court.
specific trusts. (65)
Whenever a bank or quasi-bank persists in
carrying on its business in an unlawful or unsafe
Penalties for violations manner, the Board may, without prejudice to
Fine, imprisonment, etc. the penalties provided in the preceding
paragraph of this
R.A. 7653 SEC and the administrative sanctions provided
SEC 34. Refusal to Make Reports or Permit in SEC 37 of this Act, take action under SEC 30
Examination. Any officer, owner, agent, of this Act.
manager, director or officer-in-charge of any
institution subject to the supervision or R.A. 7653
examination by the
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SEC 37. Administrative Sanctions on Banks date of suspension, said director or officer shall
and Quasi-banks. Without prejudice to be reinstated in his position: Provided, further,
the criminal sanctions against the culpable That
persons provided in SECs 34, 35, and 36 of this when the delay in the disposition of the case is
Act, the due to the fault, negligence or petition of the
Monetary Board may, at its discretion, impose director or
upon any bank or quasi-bank, their directors officer, the period of delay shall not be counted
and/or in computing the period of suspension herein
officers, for any willful violation of its charter or provided.
by-laws, willful delay in the submission of The above administrative sanctions need not be
reports or applied in the order of their severity.
publications thereof as required by law, rules Whether or not there is an administrative
and regulations; any refusal to permit proceeding, if the institution and/or the
examination into the directors and/or
affairs of the institution; any willful making of a officers concerned continue with or otherwise
false or misleading statement to the Board or persist in the commission of the indicated
the practice or
appropriate supervising and examining violation, the Monetary Board may issue an
department or its examiners; any willful failure order requiring the institution and/or the
or refusal to directors and/or
comply with, or violation of, any banking law or officers concerned to cease and desist from the
any order, instruction or regulation issued by indicated practice or violation, and may further
the order
Monetary Board, or any order, instruction or that immediate action be taken to correct the
ruling by the Governor; or any commission of conditions resulting from such practice or
irregularities, violation. The
and/or conducting business in an unsafe or cease and desist order shall be immediately
unsound manner as may be determined by the effective upon service on the respondents.
Monetary The respondents shall be afforded an
Board, the following administrative sanctions, opportunity to defend their action in a hearing
whenever applicable: before the
(a) fines in amounts as may be determined by Monetary Board or any committee chaired by
the Monetary Board to be appropriate, but in no any Monetary Board member created for the
case to exceed Thirty thousand pesos (P30,000) purpose,
a day for each violation, taking into upon request made by the respondents within
consideration the attendant circumstances, five (5) days from their receipt of the order. If
such as the nature and gravity of the violation no such
or hearing is requested within said period, the
irregularity and the size of the bank or quasi- order shall be final. If a hearing is conducted, all
bank; issues
(b) suspension of rediscounting privileges or shall be determined on the basis of records,
access to Bangko Sentral credit facilities; after which the Monetary Board may either
(c) suspension of lending or foreign exchange reconsider or
operations or authority to accept new deposits make final its order.
or The Governor is hereby authorized, at his
make new investments; discretion, to impose upon banking institutions,
(d) suspension of interbank clearing privileges; for
and/or any failure to comply with the requirements of
(e) revocation of quasi-banking license. law, Monetary Board regulations and policies,
Resignation or termination from office shall not and/or
exempt such director or officer from instructions issued by the Monetary Board or by
administrative or criminal sanctions. the Governor, fines not in excess of Ten
The Monetary Board may, whenever warranted thousand
by circumstances, preventively suspend any pesos (P10,000) a day for each violation, the
director or officer of a bank or quasi-bank imposition of which shall be final and executory
pending an investigation: Provided, That should until
the case be reversed, modified or lifted by the Monetary
not finally decided by the Bangko Sentral within Board on appeal.
a period of one hundred twenty (120) days after
the
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9. internal audit, subject to the following


Suspension or removal of director or officer conditions:
a) the board of directors and senior
SEC 66. Penalty for Violation of this Act. management of the regulated entity remain
Unless otherwise herein provided, the responsible for maintaining an effective system
violation of any of the provisions of this Act of internal control and for providing active
shall be subject to SECs 34, 35, 36 and 37 of oversight of the outsourced internal audit
the New activities/functions;
Central Bank Act. If the offender is a director or b) the external service provider shall be an
officer of a bank, quasi-bank or trust entity, the independent external auditor included in the list
Monetary of BSP selected external auditors or a parent
Board may also suspend or remove such company which owns or controls more than
director or officer. If the violation is committed fifty percent (50%) of the subscribed capital
by a corporation, stock of the outsourcing entity: provided, that
such corporation may be dissolved by quo item b. of the general requirements under
warranto proceedings instituted by the Solicitor SEC 2 of Circular no.410, series of 2003 shall
General. (87) apply to the parent company while items b.,
d., e., and f. shall apply to the
Dissolution of bank independent external auditor.
c) the contract/service agreement with the
SEC 66. Penalty for Violation of this Act. external service provider shall not be entered
Unless otherwise herein provided, the into for a period longer than five (5) years;
violation of any of the provisions of this Act d) There shall be a contingency plan to
shall be subject to SECs 34, 35, 36 and 37 of mitigate any significant disruption, discontinuity
the New or gap in audit coverage, particularly for high-
Central Bank Act. If the offender is a director or risk areas;
officer of a bank, quasi-bank or trust entity, the e) The written engagement contract or service
Monetary agreement with the external service provider
Board may also suspend or remove such shall, as a minimum:
director or officer. If the violation is committed i. Define the rights, expectations and
by a corporation, responsibilities of both parties;
such corporation may be dissolved by quo ii. Set the scope and frequency of, and the
warranto proceedings instituted by the Solicitor fees to be paid for, the work to be performed by
General. (87) the external service provider;
iii. State that the outsourced internal audit
ADDITIONAL MATERIALS services are subject to regulatory review and
BSP CIRCULARS that BSP examiners shall be granted full and
timely access to internal audit reports and
BSP CIRCULAR NOS. 488, 493, 543, 548, related working papers;
642 iv. State that the external service provider will
Re: FUNCTIONS THAT BANKS COULD not perform management functions, make
OUTSOURCE management decisions, or act or appear to act
in a capacity equivalent to that of a member of
SEC 1. Subsec. X169.3 Outsourcing of other management or an employee of the institution,
banking functions of the MORB is hereby and will comply with professional and
amended to read, as follows: regulatory independence guidelines;
Subject to prior approval of the Monetary v. Specify that the external service provider
Board, banks may outsource the following must maintain the audit reports and related
functions, services or activities: working papers/files for at least five (5) years;
vi. State that internal audit reports are the
1. data imaging, storage, retrieval and
property of the institution, that the institution
other related systems;
will be provided with copies of related working
2. clearing and processing of checks not
papers/files it deems necessary, and any
included in the Philippine Clearing House
information pertaining to the institution must be
System;
kept confidential; and
3. printing of bank deposit statements;
vii. Establish a protocol for changing the terms
4. credit card services;
of the service contract and stipulations for
5. credit investigation and collection;
default and termination of the contract;
6. processing of export, import and other
trading transactions; 10. marketing loans, deposits and other
7. property appraisal; bank products and services, provided it
8. property management services; does not involve the actual opening of
deposit accounts;
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11. general bookkeeping and accounting 8. sorting and bagging of notes and coins;
services, provided that these activities 9. maintenance of computer hardware, e.g.,
do not include servicing bank deposits or disk drives, printers, monitors, UPS, network
other inherent banking functions; cabling systems;
12. offsite records storage services; 10. payroll of bank employees;
13. front/back office functions, i.e., trade 11. telephone operator/receptionist services;
support services and downstream 12. sale/disposal of acquired assets (ROPOA);
processing activities, by parent to a 13. Human-resource related services (such as
subsidiary or vice-versa, subject to the personnel training and development,
following conditions: background investigation and salary
a) The bank intending to outsource the benchmarking service) (as amended by BSP
aforementioned functions shall certify that the CIR#642);
front office functions to be done by its 14. building, ground and other facilities
parent/subsidiary (service provider) shall be maintenance; and
limited to trade support services; 15. legal services from local legal counsel
b) The bank shall remain a parent/subsidiary (amended by BSP CIR#493);
of its subsidiary/ parent (service provider) and 16. compliance risk assessment and testing;
such service provider shall service only entities (amended by BSP CIR#493)
belonging to its business group; 17. tax compliance services, provided that the
c) The bank shall certify that no inherent service provider is not also the external auditor
banking functions involving deposit transactions of the bank; (as amended by BSP CIR#548)
shall be outsourced to its parent/subsidiary 18. such other activities as may be determined
(service provider); by the Monetary Board."
d) The bank shall submit a Service Level
Agreement duly signed by the concerned SEC 2. The provisions on outsourcing of SEC
parties and any amendments thereto, detailing X169 and Subsecs. X169.1 to X169.5 of the
the functions to be outsourced, the respective Manual of Regulations for Banks (MORB) in so
responsibilities of the bank and its parent/ far as they are applicable to quasi-banks and
subsidiary (service provider), and a other non-bank financial institutions are hereby
confidentiality clause; and incorporated in the Manual of Regulations for
e) Any breach in any of the above conditions Non-Bank Financial Institutions (MORNBFI).
shall subject the outsourcing of the This Circular shall take effect fifteen (15) days
aforementioned banking functions to all the following its publication either in the Official
requirements of this SEC; and Gazette or in a newspaper of general
14. back-up and data recovery operations; (as circulation.
amended by BSP CIR# 493) and
15. Call center operations for credit card and
bank services provided that such bank services BSP CIRCULAR NO. 341
do not involve inherent banking functions; (as Series of 2002
amended by BSP CIR#543) and16. RE: UNSAFE AND UNSOUND BANKING
16. Such other activities as may be determined PRACTICES
by the Monetary Board."
The bank concerned must submit the same Pursuant to Monetary Board Resolution No.
documentary requirements listed in Subsec. 1055 dated 25 July 2002, the following
X169.2b hereof, except where they exclusively guidelines shall be observed in implementing
pertain to information technology operations. SEC 56 of the General Banking Law of 2000 or
Without need of prior Monetary Board approval, Republic Act No. 8791:
banks may outsource the following functions,
services or activities: SEC 1. Whether a particular activity may be
1. printing of bank loan statements and other considered as conducting business in an unsafe
non-deposit records, bank forms and or unsound manner, all relevant facts must be
promotional materials; considered. An analysis of the impact thereof
2. transfer agent services for debt and equity on the banks/quasi-banks/trust entities'
securities; operations and financial conditions must be
3. messenger, courier and postal services; undertaken, including evaluation of capital
4. security guard services; position, asset condition, management,
5. vehicle service contracts; earnings posture and liquidity position.
6. janitorial services;
7. public relations services, procurement In determining whether a particular act or
services, and temporary staffing, provided that omission, which is not otherwise prohibited by
these activities do not include servicing bank any law, rule or regulation affecting banks,
deposits or other inherent banking functions; quasi-banks or trust entities, may be deemed as
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conducting business in an unsafe or unsound e. Suspension of lending or foreign exchange


manner, the Monetary Board, upon report of the operations or authority to accept new deposits
head of the supervising or examining or make new investments;
department based on findings in an f. Suspension of responsible directors and/or
examination or a complaint, shall consider any officers;
of the following circumstances: g. Revocation of quasi-banking cense; and/or
a. The act or omission has resulted or may h. Receivership and liquidation under SEC 30 of
result in material loss or damage, or abnormal RA 7653.
risk or danger to the safety, stability, liquidity or
solvency of the' institution; All other provisions of SECs 30 and 37 of R.A.
b. The act or omission has resulted or may 7653 whenever appropriate shall also be
result in material loss or damage or abnormal applicable on the conduct of business in an
risk to the institution's depositors, creditors, unsafe or unsound manner.
investors, stockholders or to the Bangko Sentral
or to the pubiic in general; The imposition of the above sanctions is without
c The act or omission has caused any undue prejudice to the filing of appropriate criminal
injury, or has given unwarranted benefits, charges against culpable persons as provided in
advantage or preference to the bank or any SECs 34, 35 and 36 of R.A. 7653.
party in the discharge by the director or officer
of his duties and responsibilities through This Circular shall take effect immediately.
manifest partiality, evident bad faith or gross
inexcusable negligence; or Annex A
d. The act or omission involves entering into
any contract or transaction manifestly and List of Activities Which May Be Considered
grossly disadvantageous to the bank, quasi- Unsafe and Unsound Banking Practices
bank or trust entity, whether or not the director
or officer profited or will profit thereby. The activities enumerated herein are
considered only as guidelines and are not
Attached for guidance is a list of activities which irrebutably presumed to be unsafe or unsound.
may be considered unsafe and unsound. (Annex Conversely, not all practices which might under
A) The Monetary Board may consider any other the circumstances be termed unsafe or
acts/omissions as unsafe and unsound unsound are mentioned here. The Monetary
practices. Board may NOW AND THEN consider any other
acts/omissions as unsafe or unsound practices.
SEC 2. The Monetary Board may, at its (opening par. As amended by BSP CIR#640)
discretion and based on the seriousness and
materiality of the acts or omissions, impose any a. Operating with management whose policies
or all of the following sanctions provided under and practices are detrimental to the bank, quasi
SEC 37 of Republic Act No. 7653 and SEC 56 of bank or trust entity and jeopardize the safety of
Republic Act No. 8791, whenever a bank, quasi- its deposits/deposit substitutes/trust accounts.
bank or trust entity conducts business in an b. Operating with total adjusted capital and
unsafe and unsound manner: reserves that are inadequate in relation to the
a. Issue an order requiring the institution to kind and quality of the assets of the bank,
cease and desist from conducting business in quasi-bank or trust entity.
an unsafe and unsound manner and may c. Operating in a way that produces a
further order that immediate action be taken to deficit in net operating income WITHOUT
correct the conditions resulting from such ADEQUATE MEASURES TO ENSURE A SURPLUS
unsafe or unsound practice; IN NET OPERATING INCOME IN THE FUTURE. (as
b. Fines in amounts as may be determined by amended by BSP CIR#640)
the Monetary Board to be appropriate, but in no d. Operating with a serious lack of liquidity,
case to exceed Thirty Thousand pesos especially in view of the asset and
(P30,000.00) a day on a per transaction basis deposit/deposit substitute/liability structure of
taking into consideration the attendant the bank, quasi-bank or trust entity.
circumstances, such the gravity of the act or e. Engaging in speculative and hazardous
omission and the size of the bank, quasi-bank or investment policies.
trust entity, to be imposed on the bank, quasi- f. Paying excessive cash dividends in relation to
banks or trust entities, their directors and/or the capital position, earnings capacity and asset
responsible officers; quality of the bank, quasi-bank or trust entity.
c. Suspension of interbank clearing g. Excessive reliance on large, high-COST or
privileges/immediate exclusion from clearing; volatile deposits/ borrowings TO FUND
d. Suspension of rediscounting privileges or AGGRESSIVE GROWTH THAT MAY BE
access to Bangko Sentral credit facilities; UNSUSTAINABLE.
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FOR THIS PURPOSE, A BANK IS CONSIDERED bank, quasi-bank or trust entity, especially if a
OFFERING HIGH-COST DEPOSITS/ BORROWINGS significant portion of these loans are adversely
IF THE EFFECTIVE INTEREST RATE PAID ON SAID classified;
DEPOSITS/ BORROWINGS AND/OR NON-CASH 6) excessive concentrations of credit, especially
INCENTIVES IS 50% OVER THE PREVAILING if a substantial portion of this credit is adversely
COMPARABLE MARKET MEDIAN RATE FOR classified;
SIMILAR BANK CATEGORIES, MATURITIES AND 7) indiscriminate participation in weak and
CURRENCY DENOMINATION AND ACCOMPANIED undocumented loans originated by other
BY OTHER CIRCUMSTANCE/S SUCH AS: institutions;
1. UNDUE RELIANCE ON SOLICITATION AND 8) failing to adopt written loan policies;
ACCEPTANCE OF BROKERED DEPOSITS; 9) an excessive volume of past due or non-
2. BANK INCURS LARGE SUM OF DEPOSIT performing loans;
GENERATION EXPENSES IN THE FORM OF 10) failure to diversify the loan portfolio/asset
COMMISSIONS, REFERRAL AND SOLICITATION mix of the institution
FEES AND RELATED EXPENSES AND/OR 11) failure to make provision for an adequate
PAYMENT OF ADVANCE INTEREST ON DEPOSITS; reserve for possible loan losses
3. DEFERRAL OF THE ABOVE DEPOSIT n. Permitting officers to engage in lending
GENERATION EXPENSES INCURRED TO DELAY practices beyond the scope of their position,
RECORDING OF EXPENSES AND/OR o. Operating the bank, quasi-bank or trust
INACCURATE AMORTIZATION OF ADVANCE entity with inadequate internal controls,
INTEREST PAID ON DEPOSITS; p. Failure to keep accurate and updated books
4. DEPOSIT PACKAGES OFFERED INCLUDE and records.
NON-CASH INCENTIVES DISPROPORTIONATE TO q. Operating the institution with excessive
THE AMOUNT OF DEPOSITS SOUGHT WHICH volume of out-of-territory loans,
GIVE UNDUE OR UNWARRANTED ADVANTAGE r. Excessive volume of non-earning assets.
OR PREFERENCE FOR THE BANK; AND s. Failure to heed warnings and admonitions of
5. BANK MARKETS, SOLICITS AND ACCEPTS the supervisory authorities of the institution.
DEPOSITS OUTSIDE THE BANK PREMISES t. Continued and flagrant violation of any laws,
INCLUDING BRANCHES, UNLESS OTHERWISE rules, regulations or written agreements
AUTHORIZED BY THE BSP UNDER SECS X213 between the institution and the Bangko Sentral
(SERVICING DEPOSITS OUTSIDE BANK ng Pilipinas.
PREMISES) OR X621 (ELECTRONIC BANKING u. Any action likely to cause insolvency or
SERVICES) OF THE MANUAL OF REGULATIONS substantial dissipation of assetsor earnings of
FOR BANKS. (As amended by BSP CIR#640) the institution or likely to seriously weaken its
condition or otherwise seriously prejudice the
h. Excessive reliance on letters of credit either interest of its depositors/investors/clients.
issued by the bank or accepted as collateral to
loans advanced.
i. Excessive amounts of loan participations sold, BSP CIRCULAR NO. 650Series of 2009
j. Paying interest on participations without RE: AUTHORITY OF THRIFT BANKS TO ISSUE
advising participating institution that ths course FOREIGN LETTERS OF CREDIT
of interest was not from the borrower, Subject : Authority of Thrift Banks to Issue
k. Selling participations without disclosing to the Foreign Letters of Credit (LCs) and
purchasers of those participations materia!, Pay/Accept/Negotiate Import/Export Drafts/Bills
non-public information known to the bank of Exchange
i. Failure to limit, control and document Pursuant to Monetary Board Resolution No. 283
contingent liabilities, dated 19 February 2009, the Manual of
m. Engaging in hazardous lending and lax Regulations for Banks (MORB) is hereby
collection policies and practices, as evidenced amended, as follows:
by: SEC 1. Subsec. 2101.7 on authority of thrift
1 ) An excessive volume of loans subject to banks to issue foreign letters of credit (LCs) and
adverse classification; pay/accept/negotiate import/export drafts/bills
2) An excessive volume of loans without of exchange is hereby added and shall read, as
adequate documentation, follows:
including credit information; Subsec. X2101.7 Authority of thrift
3) Excessive net loan losses; banks to issue foreign letters of credit (LCs) and
4) An excessive volume of loans in relation to pay/accept/negotiate import/export drafts/bills
the total assets and deposits/deposit of exchange. With prior Monetary Board
substitutes/trust liabilities of the bank, quasi- approval, thrift banks may be authorized to
bank or trust entity; issue foreign letters of credit (LCs) and
5) An excessive volume of weak and self- pay/accept/negotiate import/export drafts/bills
serving loans to persons connected with the of exchange, subject to compliance with the
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following conditions (at the time of application o) Compliant with the single borrowers loan
unless otherwise indicated): limit (SBL);
a) Minimum capital requirement of P= 1.0 p) Compliant with the limit on real estate and
billion; improvements, including bank equipment;
b) Ten percent (10%) risk-based capital q) No uncorrected findings of unsafe and
adequacy ratio (CAR); unsound banking practices;
c) CAMELS composite rating not lower than 3, r) Generally compliant with banking laws, rules
with Management component score not lower and regulations, orders or instructions of the
than 3 in the latest examination of the bank; Monetary Board and/or BSP Management; and
d) Risk management system appropriate to its s) No past due obligations with the BSP or with
operations, characterized by clear delineation of any financial institution.
responsibility for risk management, adequate SEC 2. Subsec. 2101.8 on application for
risk measurement system, appropriately authority to issue foreign letters of credit and
structured risk limits, effective internal control pay/accept/negotiate import/export drafts/bills
system and complete, timely and efficient risk of exchange is hereby added, and shall read as
reporting system; follows:
e) Articles of incorporation which shall include Subsec. 2101.8 Application for
among its powers or purposes, the issuance of authority to issue foreign letters of credit (LCs)
foreign LCs and and pay/accept/negotiate import/export
payment/acceptance/negotiation of drafts/bills of exchange. An application for
import/export drafts/bills of exchange (which authority to issue foreign LCs and
may be submitted any time prior to engaging in pay/accept/negotiate import/export drafts/bills
said activities); of exchange shall be signed by the president of
f) Correspondent banking relationship or the bank or officer of equivalent rank and shall
arrangement with reputable foreign banks be accompanied by a certified true copy of the
(which should be in place prior to engaging in resolution of the banks board of directors
said activities); authorizing the application.
g) Appointment of the officer with actual
experience of at least two (2) years as in-charge This Circular shall take effect fifteen (15) days
or at least as assistant in-charge of import and following its publication either in the Official
export financing operations in a universal/ Gazette or in a newspaper of general
commercial bank who will be in-charge of the circulation.
said operations (prior to engaging in said
activities);
h) Appointment of bank personnel with actual CASES
experience and/or training of at least six (6)
months in import and export financing PHILIPPINE BANKING CORPORATION vs. CA
operations in a universal/commercial bank who G.R. No. 127469
will handle the said operations (prior to 15 January 2004
engaging in said activities);
i) No net weekly regular and liquidity reserve Facts:
deficiencies during the twelve (12) week period On 30 August 1989, Leonilo Marcos (Marcos)
immediately preceding the date of application; filed with the trial court a Complaint for Sum of
j) No deficiency in asset and liquid asset cover Money with Damages[3] against petitioner
for FCDU liabilities for three (3) months Philippine Banking Corporation (BANK).
immediately preceding the date of application; Marcos alleged that sometime in 1982, the
k) No deficiency in liquidity floor requirement BANK through Florencio B. Pagsaligan
for government funds held during the twelve (Pagsaligan), one of the officials of the BANK
(12) week period immediately preceding the and a close friend of Marcos, persuaded him to
date of application; deposit money with the BANK. Marcos yielded
l) No float items outstanding for more than sixty to Pagsaligans persuasion and claimed he
(60) calendar days in the Due From/To Head made a time deposit with the BANK on two
Office/Branches/Offices and Due from BSP occasions. The first was on 11 March 1982 for
accounts exceeding 1% of the total resources P664,897.67. On 12 March 1982, Marcos
as of end of month preceding the date of claimed he again made a time deposit with the
application; BANK for P764,897.67. The BANK did not issue
m) No unbooked valuation reserves; an official receipt for the second deposit but it
n) Compliant with ceilings on loans, other credit acknowledged a deposit of this amount through
accommodations and guarantees to directors, a letter-certification Pagsaligan issued. The time
officers, stockholders, and their related deposits earned interest at 17% per annum and
interests (DOSRI) for the quarter immediately had a maturity period of 90 days.
preceding the date of application;
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Marcos alleged that Pagsaligan kept the various at 25% per annum supposedly covered by
time deposit certificates on the assurance that Promissory Note No. 20-979-83 dated 24
the BANK would take care of the certificates, October 1983. Marcos bewailed the BANKs
interests and renewals. Marcos claimed that belated claim that his time deposits were
from the time of the deposit, he had not applied to this void promissory note on 12
received the principal amount or its interest. March 1985.
Sometime in March 1983, Marcos wanted to In sum, Marcos claimed that:
withdraw from the BANK his time deposits and His time deposit with the BANK in the total
the accumulated interests to buy materials for sum of P1,428,795.34[5] has earned
his construction business. However, the BANK accumulated interest since March 1982 up to
through Pagsaligan convinced Marcos to keep the present in the total amount of
his time deposits intact and instead to open P1,727,305.45 at the rate of 17% per annum so
several domestic letters of credit. The BANK his total money with defendant (the BANK) is
required Marcos to give a marginal deposit of P3,156,100.79 less the amount of P595,875
30% of the total amount of the letters of credit. representing the 70% balance of the marginal
The time deposits of Marcos would secure 70% deposit and/or balance of the trust
of the letters of credit. Since Marcos trusted agreements; and
the BANK and Pagsaligan, he signed blank His indebtedness was only P851,250 less the
printed forms of the application for the 30% paid as marginal deposit or a balance of
domestic letters of credit, trust receipt P595,875, which the BANK should have
agreements and promissory notes. automatically deducted from his time deposits
Marcos executed three Trust Receipt and accumulated interest, leaving the BANKs
Agreements totalling P851,250, broken down as indebtedness to him at P2,560,025.79.
follows: (1) Trust Receipt No. CD 83.7 dated 8 Marcos prayed the trial court to declare
March 1983 for P300,000; (2) Trust Receipt No. Promissory Note No. 20-979-83 void and to
CD 83.9 dated 15 March 1983 for P300,000; and order the BANK to pay the amount of his time
(3) Trust Receipt No. CD 83.10 dated 15 March deposits with interest. He also sought the
1983 for P251,250. Marcos deposited the award of moral and exemplary damages as well
required 30% marginal deposit for the trust as attorneys fees for P200,000 plus 25% of the
receipt agreements. Marcos claimed that his amount due.
obligation to the BANK was therefore only On 9 October 1989, the BANK filed its Answer
P595,875 representing 70% of the letters of with Counterclaim. The BANK denied the
credit. allegations in the complaint. The BANK
Marcos believed that he and the BANK became believed that the suit was Marcos desperate
creditors and debtors of each other. Marcos attempt to avoid liability under several trust
expected the BANK to offset automatically a receipt agreements that were the subject of a
portion of his time deposits and the criminal complaint.
accumulated interest with the amount covered The BANK alleged that as of 12 March 1982, the
by the three trust receipts totalling P851,250 total amount of the various time deposits of
less the 30% marginal deposit that he had paid. Marcos was only P764,897.67 and not
Marcos argued that if only the BANK applied his P1,428,795.35 as alleged in the complaint. The
time deposits and the accumulated interest to P764,897.67 included the P664,897.67 that
his remaining obligation, which is 70% of the Marcos deposited on 11 March 1982.
total amount of the letters of credit, he would
have paid completely his debt. Marcos further The BANK pointed out that Marcos delivered to
pointed out that since he did not apply for a the BANK the time deposit certificates by virtue
renewal of the trust receipt agreements, the of the Deed of Assignment dated 2 June 1989.
BANK had no right to renew the same. Marcos executed the Deed of Assignment to
Marcos accused the BANK of unjustly secure his various loan obligations. The BANK
demanding payment for the total amount of the claimed that these loans are covered by
trust receipt agreements without deducting the Promissory Note No. 20-756-82 dated 2 June
30% marginal deposit that he had already 1982 for P420,000 and Promissory Note No. 20-
made. He decried the BANKs unlawful 979-83 dated 24 October 1983 for P500,000.
charging of accumulated interest because he The BANK stressed that these obligations are
claimed there was no agreement as to the separate and distinct from the trust receipt
payment of interest. The interest arose from agreements.
numerous alleged extensions and penalties. When Marcos defaulted in the payment of
Marcos reiterated that there was no agreement Promissory Note No. 20-979-83, the BANK
to this effect because his time deposits served debited his time deposits and applied the same
as the collateral for his remaining obligation. to the obligation that is now considered fully
Marcos also denied that he obtained another paid. The BANK insisted that the Deed of
loan from the BANK for P500,000 with interest Assignment authorized it to apply the time
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deposits in payment of Promissory Note No. 20- BANKs dismal failure to fulfill its fiduciary duty
979-83. to Marcos.
In March 1982, the wife of Marcos, Consolacion SEC 2 of Republic Act No. 8791 (General
Marcos, sought the advice of Pagsaligan. Banking Law of 2000) expressly imposes this
Consolacion informed Pagsaligan that she and fiduciary duty on banks when it declares that
her husband needed to finance the purchase of the State recognizes the fiduciary nature of
construction materials for their business, L.A. banking that requires high standards of
Marcos Construction Company. Pagsaligan integrity and performance. This statutory
suggested the opening of the letters of credit declaration merely echoes the earlier
and the execution of trust receipts, whereby the pronouncement of the Supreme Court in Simex
BANK would agree to purchase the goods International (Manila) Inc. v. Court of Appeals
needed by the client through the letters of requiring banks to treat the accounts of its
credit. The BANK would then entrust the goods depositors with meticulous care, always having
to the client, as entrustee, who would in mind the fiduciary nature of their
undertake to deliver the proceeds of the sale or relationship. The Court reiterated this fiduciary
the goods themselves to the entrustor within a duty of banks in subsequent cases.
specified time. Although RA No. 8791 took effect only in the
The BANK claimed that Marcos freely entered year 2000, at the time that the BANK
into the trust receipt agreements. When Marcos transacted with Marcos, jurisprudence had
failed to account for the goods delivered or for already imposed on banks the same high
the proceeds of the sale, the BANK filed a standard of diligence required under RA No.
complaint for violation of Presidential Decree 8791. This fiduciary relationship means that the
No. 115 or the Trust Receipts Law. Instead of banks obligation to observe high standards of
initiating negotiations for the settlement of the integrity and performance is deemed written
account, Marcos filed this suit. into every deposit agreement between a bank
The BANK denied falsifying Promissory Note No. and its depositor.
20-979-83. The BANK claimed that the The fiduciary nature of banking requires banks
promissory note is supported by documentary to assume a degree of diligence higher than
evidence such as Marcos application for this that of a good father of a family. Thus, the
loan and the microfilm of the cashiers check BANKs fiduciary duty imposes upon it a higher
issued for the loan. The BANK insisted that level of accountability than that expected of
Marcos could not deny the agreement for the Marcos, a businessman, who negligently signed
payment of interest and penalties under the blank forms and entrusted his certificates of
trust receipt agreements. The BANK prayed for time deposits to Pagsaligan without retaining
the dismissal of the complaint, payment of copies of the certificates.
damages, attorneys fees and cost of suit. The business of banking is imbued with public
The trial court rendered its decision in favor of interest. The stability of banks largely depends
Marcos. Aggrieved, the BANK appealed to the on the confidence of the people in the honesty
Court of Appeals. and efficiency of banks. In Simex International
On 10 December 1996, the Court of Appeals (Manila) Inc. v. Court of Appeals[36] we pointed
modified the decision of the trial court by out the depositors reasonable expectations
reducing the amount of actual damages and from a bank and the banks corresponding duty
deleting the attorneys fees awarded to Marcos. to its depositor, as follows:
In every case, the depositor expects the bank to
Issue: WON the bank is liable for offsetting his treat his account with the utmost fidelity,
time deposits whether such account consists only of a few
Held: Yes hundred pesos or of millions. The bank must
Ratio: record every single transaction accurately,
The BANK is liable to Marcos for offsetting his down to the last centavo, and as promptly as
time deposits with a fictitious promissory note. possible. This has to be done if the account is to
The existence of Promissory Note No. 20-979-83 reflect at any given time the amount of money
could have been easily proven had the BANK the depositor can dispose of as he sees fit,
presented the original copies of the promissory confident that the bank will deliver it as and to
note and its supporting evidence. In lieu of the whomever he directs.
original copies, the BANK presented the As the BANKs depositor, Marcos had the right
machine copies of the duplicate of the to expect that the BANK was accurately
documents. These substitute documents have recording his transactions with it. Upon the
no evidentiary value. The BANKs failure to maturity of his time deposits, Marcos also had
explain the absence of the original documents the right to withdraw the amount due him after
and to maintain a record of the offsetting of this the BANK had correctly debited his outstanding
loan with the time deposits bring to fore the obligations from his time deposits.
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By the very nature of its business, the BANK VIII. PHILIPPINE DEPOSIT
should have had in its possession the original INSURANCE CORPORATION ACT
copies of the disputed promissory note and the
records and ledgers evidencing the offsetting of
the loan with the time deposits of Marcos. The Basic Policy (Sec.1)
BANK inexplicably failed to produce the original To promote and safeguard the interests of the
copies of these documents. Clearly, the BANK depositing public by way of providing
failed to treat the account of Marcos with permanent and continuing insurance coverage
meticulous care. on all insured deposits.
The BANK claims that it is a reputable banking
institution and that it has no reason to forge Main Functions
Promissory Note No. 20-979-83. The trial court 1. Insurance of Banks (Sec.5)
and appellate court did not rule that it was the To insure the deposit liabilities of any bank or
bank that forged the promissory note. It was banking institution engaged in the business of
Pagsaligan, the BANKs branch manager and a receiving deposits or which thereafter may
close friend of Marcos, whom the trial court engage in the business of receiving deposits.
categorically blamed for the fictitious loan 2. Examination of Banks (Sec. 8 and 9)
agreements. The trial court held that To conduct examination of banks with prior
Pagsaligan made up the loan agreement to approval of the Monetary Board. No
cover up his inability to account for the time examination can be conducted within twelve
deposits of Marcos. months from the last examination date.
Whether it was the BANKs negligence and The Board of Directors shall appoint examiners
inefficiency or Pagsaligans misdeed that who shall have power, on behalf of the PDIC to
deprived Marcos of the amount due him will not examine any insured bank. Such examiner shall
excuse the BANK from its obligation to return to have the power to make a thorough
Marcos the correct amount of his time deposits examination of all the affairs of the bank and in
with interest. The duty to observe high doing so, he shall have the power to administer
standards of integrity and performance oaths, to examine and take and preserve the
imposes on the BANK that obligation. The BANK testimony of any of the officers and agents
cannot also unjustly enrich itself by keeping thereof, and, to compel the presentation of
Marcos money. books, documents, papers, or records necessary
Assuming Pagsaligan was behind the spurious in his judgment to ascertain the facts relative to
promissory note, the BANK would still be the condition of the bank; and shall make a full
accountable to Marcos. We have held that a and detailed report of the condition of the bank
bank is liable for the wrongful acts of its officers to the PDIC.
done in the interest of the bank or in their The Board of Directors shall appoint claim
dealings as bank representatives but not for agents who shall have the power to investigate
acts outside the scope of their authority. Thus, and examine all claims for insured deposits and
we held: transferred deposits. Each claim agent shall
A bank holding out its officers and agents as have the power to administer oaths and to
worthy of confidence will not be permitted to examine under oath and take and preserve
profit by the frauds they may thus be enabled testimony of any person relating to such claim
to perpetrate in the apparent scope of their 3. Rehabilitation of Banks (Sec.17)
employment; nor will it be permitted to shirk its Money of the PDIC not otherwise employed shall
responsibility for such frauds, even though no be invested in obligations of the Republic of the
benefit may accrue to the bank therefrom (10 Philippines or in obligations guaranteed as to
Am Jur 2d, p. 114). Accordingly, a banking principal and interest by the Republic of the
corporation is liable to innocent third persons Philippines.
where the representation is made in the course The banking or checking accounts of the PDIC
of its business by an agent acting within the shall be kept with the Bangko Sentral ng
general scope of his authority even though, in Pilipinas, with the Philippine National Bank, or
the particular case, the agent is secretly with any other bank designated as depository or
abusing his authority and attempting to fiscal agent of the Philippine government.
perpetrate a fraud upon his principal or some 4. Receivership of Closed Banks (Sec.10)
other person, for his own ultimate benefit. The PDIC as receiver shall control, manage and
Note: The promissory note was considered as administer the affairs of the closed bank.
forged as the bank did not show the original. Effective immediately upon takeover as
Applying the Best Evidence Rule, the original receiver of such bank, the powers, functions
should have been shown not the machine print- and duties, as well as all allowances,
out, which was what was given by the Bank. remunerations and perquisites of the directors,
officers, and stockholders of such bank are
suspended, and the relevant provisions of the
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Articles of InPDIC and By-laws of the closed paragraph, the Monetary Board shall notify in
bank are likewise deemed suspended. writing the board of directors of its findings and
The assets of the closed bank under direct the receiver to proceed with the
receivership shall be deemed in custodia legis liquidation of the institution. The receiver shall:
in the hands of the receiver. From the time the (1) file ex parte with the proper regional trial
closed bank is placed under such receivership, court, and without requirement of prior notice
its assets shall not be subject to attachment, or any other action, a petition for assistance in
garnishment, execution, levy or any other court the liquidation of the institution pursuant to a
processes. liquidation plan adopted by the Philippine
5. Liquidation of Closed Banks (Sec.30, Deposit Insurance PDIC for general application
R.A.7653) to all closed banks. In case of quasi-banks, the
Whenever, upon report of the head of the liquidation plan shall be adopted by the
supervising or examining department, the Monetary Board. Upon acquiring jurisdiction, the
Monetary Board finds that a bank or quasi-bank: court shall, upon motion by the receiver after
(a) is unable to pay its liabilities as they become due notice, adjudicate disputed claims against
due in the ordinary course of business: the institution, assist the enforcement of
Provided, That this shall not include inability to individual liabilities of the stockholders,
pay caused by extraordinary demands induced directors and officers, and decide on other
by financial panic in the banking community; issues as may be material to implement the
(b) has insufficient realizable assets, as liquidation plan adopted. The receiver shall pay
determined by the Bangko Sentral, to meet its the cost of the proceedings from the assets of
liabilities; or the institution.
(c) cannot continue in business without (2) convert the assets of the institutions to
involving probable losses to its depositors or money, dispose of the same to creditors and
creditors; or other parties, for the purpose of paying the
(d) has willfully violated a cease and desist debts of such institution in accordance with the
order under SEC 37 that has become final, rules on concurrence and preference of credit
involving acts or transactions which amount to under the Civil Code of the Philippines and he
fraud or a dissipation of the assets of the may, in the name of the institution, and with
institution; in which cases, the Monetary Board the assistance of counsel as he may retain,
may summarily and without need for prior institute such actions as may be necessary to
hearing forbid the institution from doing collect and recover accounts and assets of, or
business in the Philippines and designate the defend any action against, the institution. The
Philippine Deposit Insurance PDIC as receiver of assets of an institution under receivership or
the banking institution. liquidation shall be deemed in custodia legis in
For a quasi-bank, any person of recognized the hands of the receiver and shall, from the
competence in banking or finance may be moment the institution was placed under such
designed as receiver. receivership or liquidation, be exempt from any
The receiver shall immediately gather and take order of garnishment, levy, attachment, or
charge of all the assets and liabilities of the execution.
institution, administer the same for the benefit The actions of the Monetary Board taken under
of its creditors, and exercise the general powers this SEC or under SEC 29 of this Act shall be
of a receiver under the Revised Rules of Court final and executory, and may not be restrained
but shall not, with the exception of or set aside by the court except on petition for
administrative expenditures, pay or commit any certiorari on the ground that the action taken
act that will involve the transfer or disposition of was in excess of jurisdiction or with such grave
any asset of the institution: Provided, That the abuse of discretion as to amount to lack or
receiver may deposit or place the funds of the excess of jurisdiction. The petition for certiorari
institution in non-speculative investments. The may only be filed by the stockholders of record
receiver shall determine as soon as possible, representing the majority of the capital stock
but not later than ninety (90) days from take within ten (10) days from receipt by the board
over, whether the institution may be of directors of the institution of the order
rehabilitated or otherwise placed in such a directing receivership, liquidation or
condition so that it may be permitted to resume conservatorship.
business with safety to its depositors and
creditors and the general public: Provided, That Insured Deposits (Sec.4(g))
any determination for the resumption of The amount due to any bona fide depositor for
business of the institution shall be subject to legitimate deposits in an insured bank net of
prior approval of the Monetary Board. any obligation of the depositor to the insured
If the receiver determines that the institution bank as of date of closure, but not to exceed
cannot be rehabilitated or permitted to resume P500,000.00.
business in accordance with the next preceding
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Liability to Depositors In determining such amount due to any


1. Deposit Liabilities Required to be Insured depositor, there shall be added together all
(Sec.5) deposits in the bank maintained in the same
The deposit liabilities of any bank or banking right and capacity for his benefit either in his
institution, which is engaged in the business of own name or in the name of others.
receiving deposits or which thereafter may Joint Accounts
engage in the business of receiving deposits, A joint account regardless of whether the
shall be insured with the PDIC. conjunction "and," "or," "and/or" is used, shall
2. Commencement of Liability (Sec.14) be insured separately from any individually-
Whenever an insured bank shall have been owned deposit account.
closed by the Monetary Board, payment of the If the account is held jointly by two or more
insured deposits on such closed bank shall be natural persons, or by two or more juridical
made by the PDIC as soon as possible either (1) persons or entities, the maximum insured
by cash or (2) by making available to each deposit shall be divided into as many equal
depositor a transferred deposit in another shares as there are individuals, juridical persons
insured bank in an amount equal to insured or entities, unless a different sharing is
deposit of such depositor. stipulated in the document of deposit.
The PDIC, in its discretion, may require proof of If the account is held by a juridical person or
claims to be filed before paying the insured entity jointly with one or more natural persons,
deposits, and that in any case where the PDIC is the maximum insured deposit shall be
not satisfied as to the viability of a claim for an presumed to belong entirely to such juridical
insured deposit, it may require final person or entity.
determination of a court of competent The aggregate of the interests of each co-owner
jurisdiction before paying such claim. over several joint accounts, whether owned by
Failure to settle the claim, within six (6) months the same or different combinations of
from the date of filing of claim for insured individuals, juridical persons or entities, shall
deposit, where such failure was due to grave likewise be subject to the maximum insured
abuse of discretion, gross negligence, bad faith, deposit of P250,000.00.
or malice, shall, upon conviction, subject the Mode of Payments (Sec.14)
directors, officers or employees of the PDIC Payment shall be made by cash or transferred
responsible for the delay, to imprisonment from deposit.
six (6) months to one (1) year. The period shall Transferred Deposit. Deposit in another insured
not apply if the validity of the claim requires the bank in an amount equal to insured deposit of
resolution of issues of facts and or law by such depositor.
another office, body or agency including the Effect of Payment (Secc. 15, 16(b))
case mentioned in the first proviso or by the Payment (a) of an insured deposit to any person
PDIC together with such other office, body or by the PDIC and (b) payment of a transferred
agency. deposit to any person by the new bank or by an
3. Deposit Accounts Not Entitled to insured bank in which a transferred deposit has
Payment (Sec.4(f)) been made available shall discharge the PDIC.
Any obligation of a bank which is payable at the
office of the bank located outside of the Payment as Preferred Credit (Art.2244, Civil
Philippines shall not be a deposit or included as Code)
part of the total deposits or of insured deposit.
Subject to the approval of the Board of Failure to Settle Claim of an Insured Depositor
Directors, any insured bank which is (Sec. 14)
incorporated under the laws of the Philippines The PDIC, in its discretion, may require proof of
which maintains a branch outside the claims to be filed before paying the insured
Philippines may elect to include for insurance its deposits, and that in any case where the PDIC is
deposit obligations payable only at such branch. not satisfied as to the viability of a claim for an
4. Liability for Contents of Safety Box insured deposit, it may require final
Not liable the Bank has no way of knowing determination of a court of competent
what a depositor places in his security deposit jurisdiction before paying such claim.
box (Catindig). Failure to settle the claim, within six (6) months
5. Determination of Insured Deposits from the date of filing of claim for insured
(Sec.16) deposit, where such failure was due to grave
The PDIC shall commence the determination of abuse of discretion, gross negligence, bad faith,
insured deposits due the depositors of a closed or malice, shall, upon conviction, subject the
bank upon its actual takeover of the closed directors, officers or employees of the PDIC
bank. responsible for the delay, to imprisonment from
6. Calculation of Liability (Sec. 4(g)) six (6) months to one (1) year.
Per Depositor, Per Capacity
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The period shall not apply if the validity of the


claim requires the resolution of issues of facts Prohibition against Issuance of TROs (Sec.22)
and or law by another office, body or agency No court, except the Court of Appeals, shall
including the case mentioned in the first proviso issue any temporary restraining order,
or by the Corporation together with such other preliminary injunction or preliminary mandatory
office, body or agency. injunction against the PDIC for any action under
the PDIC Act.
Failure of Depositor to Claim Insured Deposit This prohibition shall apply in all cases, disputes
(Sec.16(e)) or controversies instituted by a private party,
If the depositor in the closed bank shall fail to the insured bank, or any shareholder of the
claim his insured deposits with the Corporation insured bank.
within two (2) years from actual takeover of the The Supreme Court may issue a restraining
closed bank by the receiver, or does not enforce order or injunction when the matter is of
his claim filed with the corporation within two extreme urgency involving a constitutional
(2) years after the two-year period to file a issue, such that unless a temporary restraining
claim as mentioned hereinabove, all rights of order is issued, grave injustice and irreparable
the depositor against the Corporation with injury will arise. The party applying for the
respect to the insured deposit shall be barred; issuance of a restraining order or injunction
however, all rights of the depositor against the shall file a bond in an amount to be fixed by the
closed bank and its shareholders or the Supreme Court, which bond shall accrue in
receivership estate to which the Corporation favor of the Corporation if the court should
may have become subrogated, shall thereupon finally decide that the applicant was not entitled
revert to the depositor. Thereafter, the to the relief sought.
Corporation shall be discharged from any Any restraining order or injunction issued in
liability on the insured deposit. violation of this is void and of no force and
effect and any judge who has issued the same
Other Powers of the PDIC shall suffer the penalty of suspension of at least
1. To adopt and use a corporate seal; sixty (60) days without pay.
2. To have succession until dissolved by
an Act of Congress;
3. To make contracts IX. LAW ON SECRECY OF BANK
4. To sue and be sued, complain and
defend, in any court of law in the
DEPOSITS
Philippines
5. To appoint its Board of Directors, Purpose
officers and employees To encourage people to deposit their money in
6. To prescribe its by-laws banks and thereby discourage private hoarding
7. To exercise all powers granted so that the banks may lend out the money and
8. To prescribe rules and regulations assist in the economic development of the
9. To establish its own provident fund country.
10. To compromise, condone, release
any claim or settled liability Prohibited Acts
11. To underwrite or advance litigation 1. The examination and inquiry or looking
costs or expenses into all deposits of whatever nature with
banks in the Philippines (including
Prohibition against the Splitting of Deposits investments in bonds issued by the
(Sec.21(f)(5)) Government) by any person,
Splitting of deposits occurs whenever a deposit government, bureau or office.
account with an outstanding balance of more 2. The disclosure by any official or
than the statutory maximum amount of insured employee of any bank to any
deposit maintained under the name of natural unauthorized person of any information
or juridical persons is broken down and concerning said deposits.
transferred into two or more accounts in the
name/s of natural or juridical persons or entities Exceptions
who have no beneficial ownership on 1. Upon written permission of the depositor
transferred deposits in their names within thirty 2. In cases of impeachment
(30) days immediately preceding or during a 3. Upon order of a competent court in
bank-declared bank holiday, or immediately cases of bribery or dereliction of duty of
preceding a closure order issued by the a public official
Monetary Board of the Bangko Sentral ng 4. In cases where the money deposited or
Pilipinas for the purpose of availing of the invested is the subject matter of the
maximum deposit insurance coverage. litigation
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5. Upon court order in cases of unexplained FACTS An action was filed by a group of laborers,
wealth (RA3019) who obtained a favorable judgment for the
6. Upon order of the Commissioner of payment of backwages against Marinduque
Internal Revenue in respect of bank Mining Corporation (MMC). The NLRC issued a
deposits of a decedent for the purpose of writ of execution. The Sheriff of Negros
determining gross estate Occidental then prepared a Notice of
7. Upon order of the Commissioner of Garnishment addressed to six banks directing
Internal Revenue in respect of bank the banks concerned to immediately issue a
deposits of a taxpayer who has filed an check in the name of the Deputy Provincial
application for compromise of his tax Sheriff of Negros Occidental in an amount
liability by reason of financial incapacity equivalent to the amount of the garnishment
8. Upon court order in cases filed by the and that proper receipt would be issued
Ombudsman therefor. PCIB Bank Manager Jose Henares
a. In case of unclaimed balances issued a debit memo for the full balance of
b. Without court order if the Anti- MMCs account and allowed its encashment.
Money Laundering Council
determines that a particular ISSUE Whether or not PCIB violated Republic Act
deposit or investment is related No. 1405 when it allowed the sheriff to garnish
to any one of the following the deposit of MMC pursuant to a writ of
unlawful activities: execution issued by the NLRC.
i. Kidnapping for ransom
ii. Violations of the HELD No. Garnishment is considered as a specie
Comprehensive of attachment for reaching credits belonging to
Dangerous Drugs Act the judgment debtor and owing to him from a
iii. Hijacking, destructive stranger to the litigation. Under the above-cited
arson, murder rule, the garnishee is obliged to deliver the
c. Upon court order if the Anti- credits to the proper officer issuing the writ. The
Money Laundering Council law exempts from liability the person having in
determines that a particular his possession or under his control any credits
deposit or investment is related or other personal property belonging to the
to a money laundering offense defendant if such property be delivered or
d. Inquiry into or examination when transferred to the clerk, sheriff, or other officer
made by the Bangko Sentral of the court in which the action is pending.
Since there is no evidence that PCIB divulged
Garnishment of Deposit the information that the MMC had an account
with it, and it is undisputed that the said
China Banking Corporation v. Ortega account was properly the object of the notice of
garnishment and writ of execution carried out
FACTS Judgment by default was rendered against by the deputy sheriff, a duly authorized officer
Bautista Logging Co., Inc., B&B Forest of the court, PCIB is not liable.
Development Corporation and Marino Bautista
in an action for the collection of a sum of Concealment of Illegally Acquired Property
money. To satisfy the judgment, Tan Kim Liong Banco Filipino v. Purisima
sought the garnishment of a bank deposit of FACTS A complaint was filed by the Bureau of
B&B Forest with China Banking Corporation. Internal Revenue against Manuel Caturla. In the
ISSUE Whether or not a banking institution may course of the preliminary investigation thereof,
validly refuse to comply with a court process the Tanodbayan issued a subpoena duces
garnishing the bank deposit of a judgment tecum to the Banco Filipino Savings & Mortgage
debtor, by invoking the provisions of Republic Bank, commanding its representative to to
Act No. 1405. furnish the Tanodbayan with duly certified
copies of the records in all its branches of the
HELD No. It was not the intention of the loans, savings and time deposits and other
legislature to place bank deposits beyond the banking transactions appearing in the names of
reach of execution to satisfy a final judgment. Caturla, his wife and their children.
There is no real inquiry in an order for
garnishment and if the existence of the deposit ISSUE Whether or not such an inquiry is allowed
were disclosed, the disclosure was purely as regards public officials under investigation
incidental to the execution process. for a violation of the Anti-Graft & Corrupt
Practices Act
PCIB v. CA
HELD Yes. while Republic Act No. 1405 provides
that bank deposits are absolutely confidential
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and therefore may not be examined, inquired or other than the one responsible for the illegal
looked into, except in those cases enumerated acquisition.
therein, the Anti-Graft Law directs in mandatory
terms that bank deposits shall be taken into Case Pending in Court Required Before
consideration in the enforcement of this SEC, Ombudsman Can Examine Bank Accounts
notwithstanding any provision of law to the
contrary. The only conclusion possible is that Marquez v. Desierto
the Anti-Graft Law is intended to amend
Republic Act No. 1405 by providing an FACTS The Ombudsman attempted to inspect
additional exception to the rule against the certain deposit accounts maintained at the Julia
disclosure of bank desposits. Vargas Branch of Union Bank involved in a case
Cases of unexplained wealth are similar to pending with the Ombudsman.
cases of bribery or dereliction of duty and no
reason is seen why these two classes of cases ISSUE Whether or not the power of the
cannot be excepted from the rule making bank Ombudsman to examine and have access to
deposits confidential. The policy as to one bak accounts and records holds notwithstanding
cannot be different from the policy as to the the provisions of Republic Act No. 1405.
other. This policy expresses the notion that a
public office is a public trust and any person HELD No. Before an in camera inspection may be
who enters upon its discharge does so with the allowed, there must first be a pending case
full knowledge that his life, so far as relevant to before a court of competent jurisdiction. The
his duty, is open to public scrutiny. account must be clearly identified, the
The inquiry into illegally acquired property inspection limited to the subject matter of the
extends to cases where such property is pending case, and the bank personnel as well
concealed by being held by or recorded in the as the account holder must be notified to be
name of other persons. This proposition is made present during the inspection.
clear by R.A. No. 3019 which quite categorically
states that the term, legitimately acquired
Foreign Currency Deposit Act
property of a public officer or employee shall
not include property unlawfully acquired by the
respondent, but its ownership is concealed by Salvacion v. Central Bank
its being recorded in the name of, or held by, FACTS Karen Salvacion was detained and raped
respondent's spouse, ascendants, descendants, by Greg Bartelli, an American citizen. Bartelli
relatives or any other persons. was arrested but was able to escape from jail.
The civil case for damages continued, and
judgment was rendered against Bartelli.
Mellon Bank v. Magsino ISSUE Whether or not Bartellis deposits with
China Banking Corporation can be garnished.
FACTS Dolores Ventosa requested the transfer of HELD Yes. Republic Act No. 6426 does not
$1,000 from the First National Bank of protect and would not apply to the foreign
Moundsville, West Virginia, U.S.A. to Victoria currency deposit of a transient alien depositor
Javier in Manila through the Prudential Bank. under the peculiar circumstances of this case.
First National Bank requested Mellon Bank, to
effect the transfer. Unfortunately the wire sent
by Mellon Bank to Manufacturers Hanover Bank,
Anti-Money Laundering Act
a correspondent of Prudential Bank, indicated
the amount transferred as US$1,000,000.00
Common Stages of Money Laundering
instead of US$1,000.00. Javiers husband used
Placement, layering, integration
the money to purchase real property from
Honorio Poblador, Jr.
Covered Institutions
ISSUE Whether or not the accounts of third 1. Banks, non-banks, quasi-banks, trust
parties can be looked into. entities, and all other institutions and
their subsidiaries and affiliates
HELD Yes. Republic Act No. 1405 allows the supervised or regulated by the Bangko
disclosure of bank deposits in cases where the Sentral ng Pilipinas (BSP)
money deposited is the subject matter of the 2. Insurance companies and all other
litigation. Inasmuch as the case is aimed at institutions supervised or regulated by
recovering the amount converted by the Javiers the Insurance Commission
for their own benefit, necessarily, an inquiry 3. (i) Securities dealers, brokers, salesmen,
into the whereabouts of the illegally acquired investment houses and other similar
amount extends to whatever is concealed by entities managing securities or rendering
being held or recorded in the name of persons services as investment agent, advisor, or
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consultant, (ii) mutual funds, close and 6. Jueteng and Masiao


investment companies, common trust 7. Piracy on the high seas
funds, pre-need companies and other 8. Qualified theft
similar entities, (iii) foreign exchange 9. Swindling
corporations, money changers, money 10. Smuggling
payment, remittance, and transfer
11. Violations of the Electronic Commerce
companies and other similar entities,
Act
and (iv) other entities administering or
12. Hijacking, destructive arson and murder
otherwise dealing in currency,
commodities or financial derivatives 13. Fraudulent Practices under the Securities
based thereon, valuable objects, cash Regulation Code
substitutes and other similar monetary 14. Felonies or offenses of a similar nature
instruments or property supervised or that are punishable under the penal laws
regulated by Securities and Exchange of other countries
Commission Money Laundering Offenses
Money laundering is a crime whereby the
Covered Transactions proceeds of an unlawful activity as herein
'Covered transaction' is a transaction in cash or defined are transacted, thereby making them
other equivalent monetary instrument involving appear to have originated from legitimate
a total amount in excess of P500,000.00 within sources. It is committed by the following:
one banking day. 1. Any person knowing that any monetary
instrument or property represents,
Suspicious Transactions involves, or relates to, the proceeds of
Transactions with covered institutions, any unlawful activity, transacts or
regardless of the amounts involved, where any attempts to transacts said monetary
of the following circumstances exist: instrument or property.
1. There is no underlying legal or trade 2. Any person knowing that any monetary
obligation, purpose or economic instrument or property involves the
justification proceeds of any unlawful activity,
performs or fails to perform any act as a
2. The client is not properly identified
result of which he falicitates the offense
3. The amount involved is not
of money laundering referred to in
commensurate with the business or
paragraph (a) above.
financial capacity of the client
3. Any person knowing that any monetary
4. Taking into account all known instrument or property is required under
circumstances, it may be perceived that this Act to be disclosed and filed with the
the client's transaction is structured in Anti-Money Laundering Council (AMLC),
order to avoid being the subject of fails to do so.
reporting requirements under the Act
5. Any circumstances relating to the Anti-Money Laundering Council
transaction which is observed to deviate The Anti-Money Laundering Council is hereby
from the profile of the client and/or the created and shall be composed of the Governor
client's past transactions with the of the Bangko Sentral ng Pilipinas as chairman,
covered institution the Commissioner of the Insurance Commission
6. The transactions is in a way related to an and the Chairman of the Securities and
unlawful activity or offense under this Exchange Commission as member. The AMLC
Act that is about to be, is being or has shall shall act unanimously in the discharge of
been committed its functions as defined hereunder:
7. Any transactions that is similar or 1. To require and receive covered or
analogous to any of the foregoing suspicious transaction reports from
covered institutions
Unlawful Activities or Predicate Crimes 2. To issue orders addressed to the
'Unlawful activity' refers to any act or omission appropriate Supervising Authority or the
or series or combination thereof involving or covered institutions to determine the
having direct relation to following: true identity of the owner of any
1. Kidnapping for ransom monetary instrument or preperty subject
2. Violations of the Comprehensive Drugs of a covered transaction or suspicious
Act of 2002 transaction report or request for
3. Violations of the Anti-Graft and Corrupt assistance from a foreign State, or
Practices Act believed by the Council, on the basis fo
4. Plunder under Republic Act No. 7080 substantial evidence, to be, in whole or
5. Robbery and extortion in part, wherever located, representing,
involving, or related to directly or
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indirectly, in any manner or by any The AMLC may inquire into or examine any
means, the proceeds of an unlawful particular deposit or investment with any
activitity banking institution or non-bank financial
3. To institute civil forfeiture proceedings institution upon order of any competent court in
and all other remedial proceedings cases of violation of the Anti-Money Laundering
through the Office of th Solicitor General Act, when it has been established that there is
4. To cause the filing of complaints with the probable cause that the deposits or investments
Department of Justice or the are related to an unlawful activity or a money
Ombudsman for the prosecution of laundering except that no court order shall be
money laundering offenses required in cases involving kidnapping for
5. To investigate suspicious transactions ransom, violations of the Comprehensive
and covered transactions deemed Dangerous Drugs act, hijacking, destructive
suspicious after an investigation by arson, and murder.
AMLC, money laundering activities and
other violations of this Act Penal Provisions
6. To apply before the Court of Appeals, ex 1. Malicious Reporting. Any person who,
parte, for the freezing of any monetary with malice, or in bad faith, reports or
instrument or property alleged to be the files a completely unwarranted or false
proceeds of any unlawful activity information relative to money laundering
7. To implement such measures as may be transaction against any person shall be
necessary and justified under this Act to subject to a penalty to six (6) months to
counteract money laundering four (4) years imprisonment and a fine of
8. To receive and take action in respect of, not less than P100,000.00 but not more
any request from foreign states for than P500,000.00, at the discretion of
assistance in their own anti-money the court: Provided, That the offender is
laundering operations not entitled to avail the benefits of the
Probation Law.
9. To develop educational programs on the
pernicious effects of money laundering, 2. Breach of Confidentiality. The
the methods and techniques used in the punishment of imprisonment ranging
money laundering, the viable means of from three (3) to eight (8) years and a
preventing money laundering and the fine of not less than P500,000.00 but not
effective ways of prosecuting and more than P1,000,000.00 shall be
punishing offenders imposed. In the case of a breach of
confidentiality that is published or
10. To impose administrative sanctions for
reported by media, the responsible
the violation of laws, rules, regulations,
reporter, writer, president, publisher,
and orders and resolutions issued
manager and editor-in-chief shall be
pursuant thereto
liable.
Prohibitions Against Political Harrassment
Basic Activities Required of Covered Institutions
Act shall not be used for political prosecution or
to Prevent Money Laundering
harassment or as an instrument to hamper
Covered institutions shall report to the AMLC all
competition in trade and commerce.No case for
covered transactions and suspicious
money laundering may be filed against and no
transactions within five(5) working days from
assets shall be frozen, attached or forfeited to
occurrences thereof, unless the Supervising
the prejudice of a candidate for an electoral
Authority prescribes a longer period not
office during an election period.
exceeding ten working days. Should a
transaction be determined to be both a covered
transaction and a suspicious transaction, the
Human Security Act
covered institution shall be required to report
the same as a suspicious transaction.
Judicial Authorization to Examine Bank
Deposits, Accounts and Records
Freezing of Monetary Instrument or Property
The provisions of Republic Act No. 1405 as
The Court of Appeals, upon application ex parte
amended, to the contrary notwithstanding, the
by the AMLC and after determination that
justices of the Court of Appeals designated as a
probable cause exists that any monetary
special court to handle anti-terrorism cases
instrument or property is in any way related to
after satisfying themselves of the existence of
an unlawful activity, may issue a freeze order
probable cause in a hearing called for that
which shall be effective immediately. The freeze
purpose that: (1) a person charged with or
order shall be for a period of twenty days unless
suspected of the crime of terrorism or,
extended by the court.
conspiracy to commit terrorism, (2) of a
judicially declared and outlawed terrorist
Authority to Inquire Into Bank Deposits
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organization, association, or group of persons; for the length of time specified in the written
and (3) of a member of such judicially declared order of the authorizing division of the Court of
and outlawed organization, association, or Appeals, which shall not exceed a period of
group of persons, may authorize in writing any thirty (30) days from the date of receipt of the
police or law enforcement officer and the written order of the authorizing division of the
members of his/her team duly authorized in Court of Appeals by the applicant police or law
writing by the anti-terrorism council to: (a) enforcement official.
examine, or cause the examination of, the The authorizing division of the Court of Appeals
deposits, placements, trust accounts, assets may extend or renew the said authorization for
and records in a bank or financial institution; another period, which shall not exceed thirty
and (b) gather or cause the gathering of any (30) days renewable to another thirty (30) days
relevant information about such deposits, from the expiration of the original period:
placements, trust accounts, assets, and records Provided, That the authorizing division of the
from a bank or financial institution. The bank or Court of Appeals is satisfied that such extension
financial institution concerned, shall not refuse or renewal is in the public interest: and,
to allow such examination or to provide the Provided, further, That the application for
desired information, when so, ordered by and extension or renewal, which must be filed by
served with the written order of the Court of the original applicant, has been duly authorized
Appeals. in writing by the Anti-Terrorism Council.
In case of death of the original applicant or in
Application to Examine Bank Deposits, Accounts case he is physically disabled to file the
and Records application for extension or renewal, the one
The written order of the Court of Appeals next in rank to the original applicant among the
authorizing the examination of bank deposits, members of the ream named in the original
placements, trust accounts, assets, and written order of the authorizing division of the
records: (1) of a person charged with or Court of Appeals shall file the application for
suspected of the crime of terrorism or extension or renewal: Provided, That, without
conspiracy to commit terrorism; (2) of any prejudice to the liability of the police or law
judicially declared and outlawed terrorist enforcement personnel under SEC 19 hereof,
organization, association, or group of persons, the applicant police or law enforcement official
or (3) of any member of such organization, shall have thirty (30) days after the termination
association, or group of persons in a bank or of the period granted by the Court of Appeals as
financial institution, and the gathering of any provided in the preceding paragraphs within
relevant information about the same from said which to file the appropriate case before the
bank or financial institution, shall only be Public Prosecutor's Office for any violation of
granted by the authorizing division of the Court this Act.
of Appeals upon an ex parte application to that If no case is filed within the thirty (30)-day
effect of a police or of a law enforcement official period, the applicant police or law enforcement
who has been duly authorized in writing to file official shall immediately notify in writing the
such ex parte application by the Anti-Terrorism person subject of the bank examination and
Council created in SEC 53 of this Act to file such freezing of bank deposits, placements, trust
ex parte application, and upon examination accounts, assets and records. The penalty of
under oath or affirmation of the applicant and, ten (10) years and one day to twelve (12) years
the witnesses he may produce to establish the of imprisonment shall be imposed upon the
facts that will justify the need and urgency of applicant police or law enforcement official who
examining and freezing the bank deposits, fails to notify in writing the person subject of
placements, trust accounts, assets, and the bank examination and freezing of bank
records: (1) of the person charged with or deposits, placements, trust accounts, assets
suspected of the crime of terrorism or and records.
conspiracy to commit terrorism; (2) of a
judicially declared and outlawed terrorist
organization, association or group of persons; or X. TRUTH IN LENDING ACT
(3) of any member of such organization,
association, or group of persons.
RA 3765 (1963)

Effective Period of Court Authorization 10.1 Topics


The authorization issued or granted by the Purpose
authorizing division of the Court of Appeals to
examine or cause the examination of and to SEC 2. Declaration of Policy. It is hereby
freeze bank deposits, placements, trust declared to be the policy of the State to protect
accounts, assets, and records, or to gather its citizens from a lack of awareness of the true
information about the same, shall be effective cost of credit to the user by assuring a full
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disclosure of such cost with a view of Sec. 3, CB Circular No. 158 implementing RA
preventing the uninformed use of credit to the 3765
detriment of the national economy. a) Any loans, mortgages, deeds of trust,
advances and discounts;
Obligation of creditors b) Any conditional sales contracts, any
contract to sell, or sale or contract of
SEC 3. As used in this Act, the term sale of property or services, either for
(4) "Creditor" means any person engaged in the present or future delivery, under which
business of extending credit (including any part or all of the price is payable
person who as a regular business practice make subsequent to the making of such sale
loans or sells or rents property or services on a or contract;
time, credit, or installment basis, either as c) Any rental-purchase contract;
principal or as agent) who requires as an d) Any contract for the hire, bailment or
incident to the extension of credit, the payment leasing of property;
of a finance charge. e) Any option, demand, lien, pledge or
SEC 4. Any creditor shall furnish to each person other claim against or for delivery of,
to whom credit is extended, prior to the property or money;
consummation of the transaction, a clear f) Any purchase, or other acquisition of, or
statement in writing setting forth, to the extent any credit upon the security of, any
applicable and in accordance with rules and obligation or claim arising out of any of
regulations prescribed by the Board, the the foregoing; and
following information: g) Any transaction or series of transactions
(1) the cash price or delivered price of the having a similar purpose or effect.
property or service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in; Excluded transactions
(3) the difference between the amounts set Sec. 3, CB Circular 158
forth under clauses (1) and (2);
(4) the charges, individually itemized, which are a) Those that do not involve the payment
paid or to be paid by such person in connection of any finance charge by the debtor; and
with the transaction but which are not incident b) Those in which the debtor is the one
to the extension of credit; specifying a definite and fixed set of
(5) the total amount to be financed; credit terms such as bank deposits,
(6) the finance charge expressed in terms of insurance contracts, sale of bonds, etc.
pesos and centavos; and
(7) the percentage that the finance bears to the Finance and non-finance charges
total amount to be financed expressed as a Finance charges
simple annual rate on the outstanding unpaid
balance of the obligation. SEC 3. As used in this Act, the term
(3) "Finance charge" includes interest, fees,
service charges, discounts, and such other
Covered and excluded transactions charges incident to the extension of credit as
Covered transactions the Board may be regulation prescribe.
Sec. 2 (h), CB Circular 158
SEC 3. As used in this Act, the term Finance charges are the amounts to be paid by
(2) "Credit" means any loan, mortgage, deed of the debtor incident to the extension of credit
trust, advance, or discount; any conditional such as interests, discounts, collection fees,
sales contract; any contract to sell, or sale or credit investigation fees and attorneys fees.
contract of sale of property or services, either
for present or future delivery, under which part Non-finance charges
or all of the price is payable subsequent to the Sec. 2(f), CB Circular 158
making of such sale or contract; any rental-
purchase contract; any contract or arrangement Non-finance charges are the amounts advanced
for the hire, bailment, or leasing of property; by a creditor for items normally associated with
any option, demand, lien, pledge, or other claim the ownership of property or the availment of
against, or for the delivery of, property or the services purchased which are not incident
money; any purchase, or other acquisition of, or to the extension of credit. For example, when a
any credit upon the security of, any obligation debtor purchases a car on credit, the creditor
of claim arising out of any of the foregoing; and may advance the insurance premium as well as
any transaction or series of transactions having the registration fee for the account of the
a similar purpose or effect. debtor.
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Consequences of non-compliance with remaining unpaid or unrenewed when they fell


obligation due, there is no stipulation therein that would
justify any increase in that charges. The effect,
SEC 6. (a) Any creditor who in connection with therefore, when the borrower is not clearly
any credit transaction fails to disclose to any informed of the Disclosure Statements -- prior
person any information in violation of this Act or to the consummation of the availment or
any regulation issued thereunder shall be liable drawdown -- is that the lender will have no right
to such person in the amount of P100 or in an to collect upon such charge or increases
amount equal to twice the finance charged thereof, even if stipulated in the Notes. The
required by such creditor in connection with time is now ripe to give teeth to the often
such transaction, whichever is the greater, ignored forty-one-year old Truth in Lending
except that such liability shall not exceed Act and thus transform it from a snivelling
P2,000 on any credit transaction. Action to paper tiger to a growling financial watchdog of
recover such penalty may be brought by such hapless borrowers.
person within one year from the date of the
occurrence of the violation, in any court of Failure to disclose required information in
competent jurisdiction. In any action under this disclosure statement cured by disclosure
subSEC in which any person is entitled to a thereof in loan transaction documents
recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as DBP v. Arcilla
determined by the court. Issue: WON DBP complied with the disclosure
(b) Except as specified in subSEC (a) of this requirement of RA 3765 and CB Circular 158?
SEC, nothing contained in this Act or any Held: Yes. Under Circular No. 158 of the Central
regulation contained in this Act or any Bank, the information required by R.A. No. 3765
regulation thereunder shall affect the validity or shall be included in the contract covering the
enforceability of any contract or transactions. credit transaction or any other document to be
(c) Any person who willfully violates any acknowledged and signed by the debtor. If the
provision of this Act or any regulation issued borrower is not duly informed of the data
thereunder shall be fined by not less than P1,00 required by the law prior to the consummation
or more than P5,000 or imprisonment for not of the availment or drawdown, the lender will
less than 6 months, nor more than one year or have no right to collect such charge or
both. increases thereof, even if stipulated in the
(d) No punishment or penalty provided by this promissory note. However, such failure shall not
Act shall apply to the Philippine Government or affect the validity or enforceability of any
any agency or any political subdivision thereof. contract or transaction. In the present case,
(e) A final judgment hereafter rendered in any DBP failed to disclose the requisite information
criminal proceeding under this Act to the effect in the disclosure statement form authorized by
that a defendant has willfully violated this Act the Central Bank, but did so in the loan
shall be prima facie evidence against such transaction documents between it and Arcilla.
defendant in an action or proceeding brought Contrary to appellee's claim that he was not
by any other party against such defendant sufficiently informed of the details of the loan,
under this Act as to all matters respecting which the records disclose that the required
said judgment would be an estoppel as between informations were readily available in the three
the parties thereto. (3) promissory notes he executed. Thus, DBP
substantially complied with RA 3765 and CB
Circular 158.
10.2 Cases
Excessive interests, penalties and other charges 10.3 Additional Materials
not revealed in disclosure statements issued by a) Implementing Rules: CB Circular No.
banks, even if stipulated in the promissory 158-63
notes, cannot be given effect under the Truth in b) Additional Implementing Rules: CB
Lending Act Circular No. 431-74

New Sampaguita Builders Construction, Inc., et 10.4 Related Statute


al. v. PNB
No penalty charges or increases thereof Access Devices Regulation Act of 1998 (RA
appear either in the Disclosure Statements or in 8484)
any of the clauses in the second and the third a) Disclosure required upon credit card
Credit Agreements earlier discussed. While a application or solicitation
standard penalty charge of 6 percent per
annum has been imposed on the amounts
stated in all three Promissory Notes still
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SEC 4. Credit Card Application and 1) A statement, in a conspicuous


Solicitation. Any application to open a credit and prominent location on the
card account for any person under an open-end application or solicitation,
credit plan or a solicitation to open such an that:
account, either by mail, telephone or other i. the information is
means, shall disclose in writing or orally, as the accurate as of the date
case may be, the following information: the application or
(a) Annual Percentage Rate solicitation was printed;
1) Each annual percentage rate ii. the information contained
of interest on the amount of in the application or
credit obtained by the credit solicitation is subject to
card holder under such credit change after such date;
plan. Where an extension of iii. the applicant should
credit is subject to a variable contact the creditor for
rate, the fact that the rate is information on any change
variable, and the annual in the information
percentage rate in effect at contained in the
the time of the mailing. application or solicitation
2) Where more than one rate since it was printed;
applies, the range of balances 2) The date the application or
to which each rate applies. solicitation was printed; and
(b) Annual and other Fees 3) In a conspicuous and
1) Any annual fee, other periodic prominent location on the
fee, or membership fee application or solicitation, a
imposed for the issuance or toll free telephone number or
availability of a credit card, mailing address which the
including any account applicant may contact to
maintenance fee or any other obtain any change in the
charge imposed based on information provided in the
activity or inactivity for the application or solicitation
account during the billing since it was printed.
cycle.
2) Any minimum finance charge
imposed for each period b) Detailed explanation and clear illustration of
during which any extension of computation of charges and fees
credit which is subject to a
finance charge is outstanding. SEC 5. Computations. In addition to the
3) Any transaction charge foregoing, a credit card issuer must, to the
imposed in connection with extent practicable, provide a detailed
use of the card to purchase explanation and a clear illustration of the
goods or services. manner by which all charges and fees are
4) Any fee, penalty or surcharge computed.
imposed for the delay in
payment of an account. c) Exceptions to the disclosure requirement
(c) Balance Calculation Method the name or a
detailed explanation of the balance calculation SEC 6. Exceptions. The disclosures required
method used in determining the balance upon under SEC 4 of this Act may be omitted in any
which the finance charge is computed. telephone solicitation or application if the credit
(d) Cash Advance Fee any fee imposed for an card issuer:
extension of credit in the form of cash. (a) does not impose any fee in connection with
(e) Over-the-Limit-Fee any fee imposed in paragraph (b)(1), SEC 4 of this Act;
connection with an extension of credit in excess (b) does not impose any fee in connection with
of the amount of credit authorized to be telephone solicitation unless the consumer
extended with respect to such amount: signifies acceptance by using the card;
Provided, however, That in case the application (c) discloses clearly the information described in
or solicitation to open a credit card account for SEC 4 of this Act in writing within thirty (30)
any person under an open-end consumer credit days after the consumer requests the card, but
plan be made through catalogs, magazines, or in no event later than the date of delivery of the
other publications, the following additional card; and
information shall be disclosed: (d) discloses clearly that the consumer is not
obligated to accept the card or account and the
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consumer will not be obligated to pay any fees reflects accepted commercial usage and
or charges disclosed unless the consumer elects practice on the subject of letters of credit and
to accept the card or account by using the card. the application of which in the Philippines has
been acknowledged by the Supreme Court
d) Disclosure required prior to renewal based on Article 2 of the Code of Commerce
which provides that in the absence of any
SEC 7. Disclosure Prior to Renewal. applicable provision in the Code of Commerce,
Except in telephone solicitations a card issuer commercial transactions shall be governed by
that imposes any fee described in SEC 4 shall usages generally observed. (See BPI v. De Reny
transmit to a consumer's credit card account a Fabric Industries; Feati Bank v. CA; and Bank of
clear and conspicuous disclosure of: America, NT & SA v. CA)
(a) the date by which, the month by which, or
the billing period at the close of which, the Concept and nature
account will expire if not renewed;
(b) the information described in SEC 4 which ARTICLE 567. Letters of credit are those issued
shall be transmitted to a consumer at least by one merchant to another or for the purpose
thirty (30) days prior to the scheduled renewal of attending to a commercial transaction.
date of the consumer's credit card account;
(c) the information described in SEC 4 (a) (1) Essential conditions
which shall be transmitted to a consumer's
credit card account; and ARTICLE 568. The essential conditions of
(d) the method by which the consumer may letters of credit shall be:
terminate continued credit availability under 1. To be issued in favor of a definite person
the account: Provided, That the disclosures and not to order.
required by this SEC must be made prior to 2. To be limited to a fixed and specified
posting a fee described in SEC 4 (b) (1) to the amount, or to one or more undetermined
account, or with the periodic billing statement amounts, but within a maximum the limits of
first disclosing that the fee has been posted to which has to be stated exactly.
the account subject to the condition that the Those which do not have any of these last
consumer is given thirty (30) day period to circumstances shall be considered as mere
avoid payment of the fee or to have the fee letters of recommendation.
recredited to the account in any case where the
consumer does not wish to continue the Period of validity
availability of the credit.
ARTICLE 572. If the bearer of a letter of credit
e) Penalty for failure to disclose does not make use thereof within the period
agreed upon with the drawer, or, in default of a
SEC 8. Failure to Disclose. Credit card period fixed, within six months, counted from its
companies which shall fail to disclose the date in any point in the Philippines, and within
information required under SECs 4, 5 and 7 of twelve months anywhere outside thereof, it
this Act, after due notice and hearing, shall be shall be void in fact and in law.
subject to suspension or cancellation of their
authority to issue credit cards by the Bangko Basic parties and governing contracts
Sentral ng Pilipinas, Securities and Exchange Basic parties of a letter of credit
Commission and such other government a) The buyer, who procures the letter of
agencies. credit and obliges himself to reimburse
the issuing bank upon receipt of the
documents of title;
b) The bank issuing the letter of credit,
XI. LETTERS OF CREDIT which undertakes to pay the seller upon
receipt of the draft and proper
ART 567-572 CODE OF COMMERCE documents of titles and to surrender the
documents to the buyer upon
11.1 Topics reimbursement; and
c) The seller, who in compliance with the
Governing Law
contract of sale ships the goods to the
1. Articles 567-572 of the Code of
buyer and delivers the documents of title
Commerce, which provides a skeletal
and draft to the issuing bank to recover
introduction to the subject of letters of credit
payment. (See Bank of America v. NT &
2. The Uniform Customs and Practice for SA)
Documentary Credits issued by the
International Chamber of Commerce, which
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Governing contracts a) Draft sometimes called a bill of


a) Issuing bank and exchange, it is an order written by an
applicant/buyer/importer Their exporter/seller instructing an
relationship is governed by the terms of importer/buyer or its agent to pay a
the application and agreement for the specified amount of money at a specified
issuance of the letter of credit by the time.
bank b) Bill of lading document issued to the
b) Issuing bank and exporter by a common carrier
beneficiary/seller/exporter Their transporting the merchandise. It serves
relationship is governed by the terms of three purposes: as a receipt, a contract
the letter of credit issued by the bank and a document of title.
c) Applicant and beneficiary Their c) Commercial invoice a document
relationship is governed by the sales signed and issued by the seller and
contract. (See Reliance Commodities v. contains a precise description of the
Deawoo Industrial) merchandise and the terms of the sale
such as unit prices, amount due from the
Opening bank buyers bank which issues the buyer and shipping conditions related to
letter of credit charges.
Notifying bank corresponding bank of the d) Consular invoice a document issued by
opening bank through which it advises the the consulate of the importing country to
beneficiary of the existence of the letter of provide customs information and
credit statistics for that country and to help
Negotiating bank any bank in the city of the prevent false declarations of value.
beneficiary e) Certificate of analysis a document that
Paying bank - buys or discounts the drafts if may be required to ascertain that certain
such draft is drawn on the opening bank or on specifications of weight, purity,
another designated bank not in the city of the sanitation, etc. have been met.
beneficiary f) Packing list an enumeration of the
Confirming bank upon the request of the contents of containers so that they can
beneficiary confirms the letter of credit issued be identified, either for customs
by the opening bank purposes or for importer identification of
the contents of separate containers.
Independence principle g) Export declaration a document
The independence principle in a letter of credit prepared by the exporter to assist the
transactions means that a bank, in determining government to prepare export statistics.
compliance with the terms of a letter of credit is
required to examine only the shipping 11.2 Cases
documents presented by the seller and is Nature of letters of credit
precluded from determining whether the main
contract is actually accomplished or not. This Prudential Bank v. IAC
arrangement assures the seller of prompt
payment, independent of any breach of the A letter of credit is defined as an engagement
main sales contract. (See Bank of America NT & by a bank or other person made at the request
SA). of a customer that the issuer will honor drafts or
other demands for payment upon compliance
Rule of strict compliance with the conditions specified in the credit.
The rule of strict compliance in a letter of credit Through a letter of credit, the bank merely
transaction means that the documents substitutes its own promise to pay for the
tendered by the seller or beneficiary must promise to pay of one of its customers who in
strictly conform to the terms of the letter of return promises to pay the bank the amount of
credit, i.e., they must include all documents funds mentioned in the letter of credit plus
required by the letter of credit. Thus, a credit or commitment fees mutually agreed
correspondent bank which departs from what upon.
has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its Bank of America v. CA
own risk and may not thereafter be able to
recover from the buyer or the issuing bank, as A letter of credit is a financial device developed
the case may be; the money thus paid to the by merchants as a convenient and relatively
beneficiary. (See Feati Bank) safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interest of a
Documents associated with letters of seller, who refuses to part with his goods before
credit transactions he is paid, and a buyer, who wants to have
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control of the goods before paying. To break the 5. Negotiating bank any bank in the city
impasse, the buyer may be required to contract of the beneficiary
a bank to issue a letter of credit in favor of the 6. Paying bank buys or discounts the
seller so that, by virtue of the letter of the letter drafts if such draft is drawn on the opening
of credit, the issuing bank can authorize the bank or on another designated bank not in the
seller to draw drafts and engage to pay them city of the beneficiary
upon their presentment simultaneously with the 7. Confirming bank upon the request of
tender of documents required by the letter of the beneficiary confirms the letter of credit
credit. The buyer and the seller agree on what issued by the opening bank
documents are to be presented for payment,
but ordinarily they are documents of title Standby letters of credit
evidencing or attesting to the shipment of the
goods to the buyer. Under this arrangement, Transfield Philippines, Inc. v. Luzon Hydro
the seller gets paid only if he delivers the Corporation
documents of title over the goods, while the Facts: Transfield Philippines and LHC entered
buyer acquires the said documents of title over into a turnkey contract whereby the former
the goods only after reimbursing the bank. undertook to construct a hydro-electric power
station by June 1, 2000. To secure performance
Process of the obligation on or before the target
1. Once the credit is established, the seller completion date, Transfield opened in favor of
ships the goods to the buyer and in the process LHC 2 standby letters of credit. Transfeild failed
secures the shipping documents or DOT to complete the project by the target date.
2. To get paid, the seller executes a draft Transfield filed a Complaint for Injunction to
and presents it together with the required restrain LHC from calling on the securities.
documents to the issuing bank Issue: WON the banks should dispose of the
3. The issuing bank redeems the draft and securities upon application by LHC? Yes.
pays cash to the seller if it finds the documents Held:
submitted by the seller conform with what the Concept of Standby letters of credit The use of
letter of credit requires credits in commercial transactions serves to
4. The bank obtains possession of the reduce the risk of non-payment of the purchase
documents upon paying the seller price under the contract of sale of goods.
5. Transaction is completed when the Standby credits however are used in non-sale
buyer reimburses the issuing bank and acquires settings where they serve to reduce the risk of
the documents entitling him to the goods. non-performance.
Commercial credit v. standby credit
Lee v. CA 1. Commercial credit involve of payment of
money under a contract of sale.
Modern letters of credit are usually not made 2. Commercial credits become payable
between natural persons. They involve bank-to- upon the presentation by the seller of
bank transactions. Historically, letters of credit documents that show he has taken
was developed to facilitate the sale of goods affirmative steps to comply with the
between distant and unfamiliar buyers and sales agreement. Standby credits is
sellers. It was an arrangement under which a payable upon certification of a partys
bank, whose credit was acceptable to the seller, nonperformance of the agreement.
would at the instance of the buyer agree to pay 3. Beneficiary of commercial credit must
drafts drawn on it by the seller, provided that present documents that he has
certain documents are presented such as bills performed his contract. While
of lading accompanied the corresponding beneficiary of standby credit must certify
drafts. that his obligor has not performed the
contract.

Independence principle
Parties to a commercial letter of credit
1. Buyer or importer BPI v. De Reny Fabric Industries
2. Seller or the beneficiary Facts: De Reny Fabric obtained letters of credit
3. Opening bank buyers bank which from BPI covering the purchase by the
issues the letter of credit corporation of dyestuffs from its American
4. Notifying bank corresponding bank of supplier. Upon presentment of the bills of lading
the opening bank through which it advises the and drafts covering the goods to the
beneficiary of the existence of the letter of corresponding bank of BPI in the US the supplier
credit
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was paid. De Reny refused to pay BPI on the means that the document is of vital importance
ground that the goods delivered were defective. to the buyer.
Issue: WON the foreign corresponding banks of
BPI had the duty to take the necessary
precaution to insure that the goods shipped
conformed with the item appearing of the
XII. TRUST RECEIPTS LAW
letters of credit? PD 115 (1973)
Held: No.
Under the terms of their commercial letter of 12.1 Topics
credit agreements with the bank, De Reny
agreed that the Bank shall not be responsible or Origin
liable for any defect or loss of the goods. But The Trust Receipts Law has no legislative
even without such stipulation, the burden of history to speak of as it was a presidential
loss still cannot be shifted to the Bank on issuance. It was closely patterned after the
account of the seller breach of its obligation. Uniform Trust Receipts Act promulgated in 1993
Under Uniform Customs and Practice for by the US National Conference of
Commercial Documentary Credits, banks in Commissioners on Uniform State Laws and
providing financing in international business adopted by roughly two-thirds of the states. The
transactions, do not deal with the property to UTRA was replaced in 1952 by the Uniform
be exported or shipped to the importer but only Commercial Code. The UTRA, just like the Trust
deal with the documents. Custom in Receipts Law, contemplated a tripartite
international banking and financing circles arrangement under which a buyer, called an
negate any duty on the part of a bank to verify entrustee, purchased goods from a seller, with
whether what has been described in letters of the financing being provided by a lender called
credit or drafts or shipping documents actually the entruster.
tallies with what was loaded abroad ship.
Nature and tripartite character of trust
Rule of strict compliance receipts transaction

Feati Bank v. CA SEC 4. What constitutes a trust receipt


Facts: The letter of credit provided that the transaction. A trust receipt transaction, within
draft should be presented to the issuing bank the meaning of this Decree, is any transaction
with the following documents: commercial by and between a person referred to in this
invoice, tally sheets, bills of lading and a Decree as the entruster, and another person
certification from Han-Axel Christiansen referred to in this Decree as entrustee, whereby
(consignor). The latter refused to issue the the entruster, who owns or holds absolute title
certification. Feati Bank, a corresponding bank or security interests over certain specified
of the issuing bank in the Philippines, refused to goods, documents or instruments, releases the
honor the drafts without the certification. same to the possession of the entrustee upon
Issue: WON a correspondent bank can be held the latter's execution and delivery to the
liable under the letter of credit despite non- entruster of a signed document called a "trust
compliance by the beneficiary with the terms receipt" wherein the entrustee binds himself to
thereof. hold the designated goods, documents or
Held: It is as settled rule in commercial instruments in trust for the entruster and to sell
transactions involving letters of credit that the or otherwise dispose of the goods, documents
documents tendered must strictly conform to or instruments with the obligation to turn over
the terms of the letter of credit. The tender of to the entruster the proceeds thereof to the
documents by the beneficiary must include all extent of the amount owing to the entruster or
documents required by the letter. A as appears in the trust receipt or the goods,
correspondent bank which departs from what documents or instruments themselves if they
has been stipulated under the letter of credit, are unsold or not otherwise disposed of, in
as when it accepts a faulty tender, acts on its accordance with the terms and conditions
own risks and it may not thereafter be able to specified in the trust receipt, or for other
recover from the buyer or the issuing bank the purposes substantially equivalent to any of the
money thus paid to the beneficiary. Thus the following:
rule of strict compliance. 1. In the case of goods or documents, (a) to sell
Since a bank deals only with documents, it is the goods or procure their sale; or (b) to
not in a position to determine whether or not manufacture or process the goods with the
the documents required by the letter of credit purpose of ultimate sale: Provided, That, in the
are material or superfluous. There mere fact case of goods delivered under trust receipt for
that the document was specified therein readily the purpose of manufacturing or processing
before its ultimate sale, the entruster shall
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retain its title over the goods whether in its released under a trust receipt to the entrustee
original or processed form until the entrustee to the extent of the amount owing to the
has complied fully with his obligation under the entruster or as appears in the trust receipt, or
trust receipt; or (c) to load, unload, ship or to the return of the goods, documents or
tranship or otherwise deal with them in a instruments in case of non-sale, and to the
manner preliminary or necessary to their sale; enforcement of all other rights conferred on him
or in the trust receipt provided such are not
2. In the case of instruments, contrary to the provisions of this Decree.
a) to sell or procure their sale or exchange; or The entruster may cancel the trust and take
b) to deliver them to a principal; or possession of the goods, documents or
c) to effect the consummation of some instruments subject of the trust or of the
transactions involving delivery to a depository proceeds realized therefrom at any time upon
or register; or default or failure of the entrustee to comply
d) to effect their presentation, collection or with any of the terms and conditions of the trust
renewal receipt or any other agreement between the
The sale of goods, documents or instruments by entruster and the entrustee, and the entruster
a person in the business of selling goods, in possession of the goods, documents or
documents or instruments for profit who, at the instruments may, on or after default, give
outset of the transaction, has, as against the notice to the entrustee of the intention to sell,
buyer, general property rights in such goods, and may, not less than five days after serving
documents or instruments, or who sells the or sending of such notice, sell the goods,
same to the buyer on credit, retaining title or documents or instruments at public or private
other interest as security for the payment of the sale, and the entruster may, at a public sale,
purchase price, does not constitute a trust become a purchaser. The proceeds of any such
receipt transaction and is outside the purview sale, whether public or private, shall be applied
and coverage of this Decree. (a) to the payment of the expenses thereof; (b)
to the payment of the expenses of re-taking,
Distinguish from pledge, conditional sale, keeping and storing the goods, documents or
chattel mortgage and consignment instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The
Pledge entrustee shall receive any surplus but shall be
In a pledge, the person doing the financing has liable to the entruster for any deficiency. Notice
possession of the property; in a trust receipt, of sale shall be deemed sufficiently given if in
the property is in the possession of the person writing, and either personally served on the
financed. entrustee or sent by post-paid ordinary mail to
the entrustee's last known business address.
Conditional Sale
In a conditional sale, there is a sale of the Obligations of entrustee
property from the seller to the buyer; in a trust
receipt, there is no sale of the property from the SEC 9. Obligations of the entrustee. The
entruster to the entrustee. entrustee shall (1) hold the goods, documents
or instruments in trust for the entruster and
shall dispose of them strictly in accordance with
Chattel Mortgage the terms and conditions of the trust receipt; (2)
A chattel mortgage involves the creation of a receive the proceeds in trust for the entruster
lien on the property; a trust receipt does not and turn over the same to the entruster to the
involve the creation of a lien. extent of the amount owing to the entruster or
as appears on the trust receipt; (3) insure the
Consignment goods for their total value against loss from fire,
In a consignment, the consignor retains title to theft, pilferage or other casualties; (4) keep said
the property to secure the indebtedness due goods or proceeds thereof whether in money or
from the consignee; in a trust receipt, the seller whatever form, separate and capable of
does not retain title to the property but identification as property of the entruster; (5)
transfers such title to the entruster. return the goods, documents or instruments in
the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to
Rights of entruster the provisions of this Decree.

SEC 7. Rights of the entruster. The entruster Non-liability of entruster for sale of goods
shall be entitled to the proceeds from the sale made by entrustee
of the goods, documents or instruments
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SEC 8. Entruster not responsible on sale by their obligation to IBAA has been extinguished
entrustee. The entruster holding a security inasmuch as they have relinquished possession
interest shall not, merely by virtue of such thereof to IBAA, as owner of the goods.
interest or having given the entrustee liberty of
sale or other disposition of the goods, Issue: WON the obligation of the Vintolas under
documents or instruments under the terms of the trust receipt agreement was extinguished?
the trust receipt transaction be responsible as No
principal or as vendor under any sale or
contract to sell made by the entrustee. Held: IBAA did not become the real owner of the
goods. It was merely the holder of a security of
Risk of loss of goods borne by entrustee title for the advances it had made to the
Vintolas. The goods remain the property of the
SEC 10. Liability of entrustee for loss. The risk Vintolas and they hold it at their own risk. The
of loss shall be borne by the entrustee. Loss of trust receipt agreement did not convert IBAA in
goods, documents or instruments which are the to an investor, the latter remained a lender and
subject of a trust receipt, pending their creditor. Since the IBAA is not the factual owner
disposition, irrespective of whether or not it was of the goods, the Vintolas cannot claim that
due to the fault or negligence of the entrustee, because they have surrendered the goods to
shall not extinguish his obligation to the IBAA they are absolutely relieved of their
entruster for the value thereof. obligation to pay their loan because of their
inability to dispose of the goods.
Acquisition by purchaser of goods free
from entrusters security interest Trust receipts law deemed to cover capital
goods
SEC 11. Rights of purchaser for value and in
good faith. Any purchaser of goods from an Allied Banking v. Ordones
entrustee with right to sell, or of documents or
instruments through their customary form of Facts: PBM was given letter of credit by Allied
transfer, who buys the goods, documents, or Banking to cover the purchase of Dolomites and
instruments for value and in good faith from the Nozzle Bricks (insulating materials which do not
entrustee, acquires said goods, documents or form part of the steel products). The drafts
instruments free from the entruster's security drawn against the letter of credit was honored
interest. and paid by Allied Banking. A trust receipt
agreement was entered into between PBM and
Security interest of entruster valid against Allied Banking. PBM failed to turn over the
all creditors of entrustee proceeds of the sale of the goods or to return
the goods themselves. Allied Banking filed a
SEC 12. Validity of entruster's security interest criminal case against PBM for violation of PD
as against creditors. The entruster's security 115. The DOJ held that PD 115 covers only
interest in goods, documents, or instruments goods or components of goods which are
pursuant to the written terms of a trust receipt ultimately destined for sale.
shall be valid as against all creditors of the
entrustee for the duration of the trust receipt Issue: WON PD 115 also covers goods that do
agreement. not form part of the finished product which are
ultimately sold but are instead used up in the
operation of the equipment and machineries of
12.2 Cases
the entrustee-manufacturer? Yes
Liability of entrustee not extinguished by return
Held: The Court takes judicial notice of
of goods to entruster
customary banking and business practices
where trust receipts are used for importation of
Vintola v. IBAA heavy equipment, machineries and supplies
used in manufacturing operations. A
Facts: Vintolas were granted a letter of credit by construction should be avoided when it affords
IBAA to cover its purchase of seashells. an opportunity to defeat compliance with the
Thereafter, the Vintolas received the seashells terms of a statute. The penal provision of PD
from the seller. Vintolas then executed a trust 115 encompasses any act violative of an
receipt agreement with IBAA. The Vintolas obligation covered by the trust receipt; it is not
defaulted on their obligation as they were limited to transactions in goods which are to be
unable to sell the seashells. After IBAA sold, reshipped, stored or processed as a
demanded payment from them, they returned component of a product ultimately sold. To
the seashells to IBAA. The Vintolas claim that
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uphold the DOJs ruling would contravene not Held: The Trusts Receipts Law punishes
only the letter but the spirit of PD 115. dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of
Bipartite transaction deemed covered by trust another regardless of whether the latter is the
receipts law owner or not. The law does not seek to enforce
payment of the loan. Thus, there can be no
Robles v. CA violation of a right against imprisonment for
non-payment of a debt. PD 115 like BP 22
Facts: Ng entrusted to Robles office equipment punished the act not as an offense against
which were all covered by delivery trust property, but as an offense against public
receipts. For all these items, Robles agreed to order. It is in the context of upholding public
sell them and remit the proceeds of the sales to interest that the law now specifically designates
Ng or to return the items if unsold. When Robles a breach of a trust receipt agreement to be an
failed to comply with his obligation, Ng filed a act that shall make one liable for estafa.
case for estafa against him. Robles claims that
the trust receipts were merely intended to Transaction a simple loan, not a trust receipt
evidence the fact that the articles listed therein transaction
were delivered to and received by him. He
claims that these transactions were in fact sales Colinares v. CA
on a trial basis for a period of 2 days. Thus,
when he failed to return the pieces of Facts: Colinares obtained materials from CM
equipment within the 2 day period he was Builders to renovate the Carmelite Sisters
deemed to have purchased the same and his Convent. The next day, Colinares applied for a
liability should therefore only be civil i.e. to pay letter of credit from PBC in favor of the CM
the purchase price. Builders. PBC approved the letter of credit to
cover the full invoice value of the goods.
Held: The provisions of the trust receipts clearly Colinares signed a pro-forma trust receipt as
show that (1) Ng retained ownership of the security. Colinares was charged for violation of
office equipment covered by the receipts; (2) PD 115.
that possession of the goods were conveyed to
Robles subject to the fiduciary obligation either Issue: WON the transaction was an ordinary
to return them within a specified period of time loan and not a trust receipt agreement under
or to pay or account for the price of proceeds the Trust Receipts Law?
thereof. Surrounding circumstances also
showed that the transactions were not ordinary Held: The transaction intended by the parties
sales on trial basis. There were 6 transactions was a simple loan not a trust receipt
and each transaction involved the delivery of agreement. Colinares received the merchandise
several equipment indicating that Robles was from CM Builders on October 30. On that day,
not an ordinary buyer who would himself use ownership over the merchandise was already
the articles bought but rather a commission transferred to Colinares who was to use the
merchant. materials for his construction project. It was
only a day later that Colinares went to the bank
Violation of trust receipts law offense against to apply for a loan to pay for the merchandise.
public order, not against property This situation belies what normally obtains in a
pure trust receipt transaction where goods are
People v. Nitafan owned by the bank and only released to the
importer in trust subsequent to the grant of the
Facts: Allied Banking Corporation charged Ang loan. The bank acquires a security interest in
with estafa under PD 115. Judge Nitafan the goods as holder of a security title for the
dismissed the cased on the ground that the advances it had made to the entrustee. The
penal clause of PD 115 is inoperative because it ownership of the merchandise continues to be
does actually punish an offense mala prohibita. vested in the person who had advanced
Nitafan also asserts that PD 115 is payment until he has been paid in full, or if the
unconstitutional as it violates the constitutional merchandise has already been sold, the
prohibition against imprisonment for non- proceeds of the sale should be turned over to
payment of a debt. him by the importer or by his representative or
Issue: WON an entrustee in a trust receipt successor in interest. To secure that the bank
agreement who fails to deliver the proceeds of will be paid it takes full title to the goods at the
the sale or to return the goods if not sold to the very beginning and continues to hold that title
entruster bank is liable for the crime of estafa? as his indispensible security until the goods are
Yes sold and the vendee is called upon to pay for
them. Hence the importer has never owned the
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goods and is not able to deliver possession. In a Held: The articles were owned by Prudential
certain manner, trust receipts partake the Bank and they were only held by Litex in trust.
nature of a conditional sale where the importer While it was allowed to sell the items, Litex had
becomes the absolute owner of the no authority to dispose of them or any part
merchandise as soon as he has paid its price. thereof or their proceeds through conditional
sale, pledge or any other means. Article 2085
Acquittal in criminal case for estafa under Sec. (2) of the Civil Code requires that, in a contract
13 of PD 115 does not extinguish civil liability of pledge or mortgage, it is essential that the
arising from breach of trust receipts contract pledgor or mortgagor should be the absolute
owner of the thing pledged or mortgaged.
Tupaz IV v. CA Article 2085 (3) further mandates that the
person constituting the pledge or mortgage
Facts: BPI charged Tupaz with estafa under Sec. must have the free disposal of his property, and
13 PD 115. The trial court rendered judgment in the absence thereof, that he be legally
acquitting Tupaz of estafa on reasonable doubt. authorized for the purpose. Litex had neither
However, the trial court found Tupaz solidarily absolute ownership, free disposal nor the
liable for the balance of the principle debt under authority to freely dispose of the articles. Litex
the trust receipts. could not have subjected them to a chattel
Issue: WON Tupazs acquittal of estafa under mortgage. Their inclusion in the mortgage was
Sec. 13 PD 115 extinguished their civil liability? void and had no legal effect. There being no
valid mortgage, there could also be no valid
Held: The rule is that where the civil action is foreclosure or valid auction sale.
impliedly instituted with criminal action, the
civil liability is not extinguished by acquittal:
1. where the acquittal is based on
reasonable doubt as only
preponderance of evidence is required
in civil cases;
2. where the court expressly declares that
the liability of the accused is not
criminal but civil in nature and
3. where the civil liability does not arise
from or is not based upon the criminal
act of which the accused was acquitted.
XIII. MERCHANTS AND
Although the trial court aquitted Tupaz his COMMERCIAL TRANSACTIONS
acquittal did not extinguish his civil liability. His CODE OF COMMERCE (1888)
liability arose not from the criminal act of which
he was acquitted but from the trust receipt Who are merchants?
contract (ex contractu) which he signed in his
personal capacity. ARTICLE 1. For purposes of this Code,
merchants are:
Entrustee has no authority to mortgage goods 1. Those who, having legal capacity to
covered by trust receipts engage in commerce, habitually devote
themselves to it;
DBP v. Prudential Bank 2. The commercial or industrial companies
which may be created in accordance with [this
Facts: Litex opened a letter of credit from Code] existing legislation.
Prudential Bank to cover the importation of
ARTICLE 2. Acts of commerce, whether
spindles etc. Prudential Bank released the
those who execute them be merchants or not,
spindles to Litex under a trust receipt
and whether specified in this Code or not,
agreement. Subsequently, Litex obtained a loan
should be governed by the provisions contained
from DBP which was secured by real estate and
in it, in their absence, by the usages of
chattel mortgages over its plant and
commerce generally observed in each place;
machineries including the goods covered by the
and in the absence of both rules, by those of
trust receipts. When Litex failed to pay its loan,
the civil law.
DBP foreclose the mortgages. Prudential filed a
Those acts contained in this Code and all
case for damages against DBP.
others of analogous character shall be deemed
Issue: WON Litex as entrustee could mortgage
acts of commerce.
the goods covered by the trust receipts?
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ARTICLE 3. The legal presumption of 2. Those declared bankrupt, while they have
habitually engaging in commerce shall exist not obtained their discharge [or have not been
from the moment the person who intends to authorized, by virtue of an agreement accepted
engage therein announces through circulars, at a general meeting of creditors and approved
newspapers, handbills, posters exhibited to the by judicial authority, to continue at the head of
public, or in any other manner whatsoever, an the establishment, the authority being
establishment which has for its object some understood in such case as limited to that
commercial operation. expressed in the agreement.]
3. Those who on account of special laws or
ARTICLE 4. Persons who possess the following provisions can not trade.
qualifications shall have legal capacity to
habitually engage in commerce: ARTICLE 14. The following cannot engage in
1. Having completed the age of twenty-one the mercantile profession, in person or through
years. another, nor hold office or have any direct
2. Not being subject to the authority of the administrative or financial intervention in
father or of the mother nor to marital authority. commercial or industrial associations, within the
3. Having the free disposition of their limits of the districts, provinces or towns in
property. which they discharge their duties:
1. Justices, judges and officials of the fiscals
ARTICLE 5. Those under twenty-one years of office in active service.
age and those incapacitated may continue, This provision shall not be applicable to the
through their guardians, the business engaged municipal mayors, judges and prosecuting
in by their parents or their predecessors. If the attorneys, nor to those who may temporarily
guardians do not have legal capacity to trade or discharge judicial or prosecution duties.
are under some disqualifications, they shall be 2. Administrative, economic or military
obliged to appoint one or more factors having heads of districts, provinces, or posts.
the legal qualifications who shall substitute 3. Those employed in the collection and
them in conduct of the business. administration of funds of the State, appointed
by the Government.
ARTICLE 6. (Repealed) 1 Those who administer and collect under
ARTICLE 7. (Repealed) 2 contract and their representative are excepted.
4. Stock and commercial brokers of
ARTICLE 8. The husband may freely revoke the whatever class they may be.
authorization impliedly or expressly granted to 5. Those who, under special laws and
his wife to trade, stating the revocation in a provisions, cannot trade in specified territory.
public instrument which shall also be recorded
in the commercial registry, published in the ARTICLE 15. Foreigners and companies
official periodical of the town, if there be one, or created abroad may engage in commerce in the
otherwise in that of the town, if there be one, or Philippines, subject to the laws of their country
otherwise in that of the province, and with respect to their capacity to contract, and to
announced to her correspondents by means of the provisions of this Code as regard the
circulars. The publication may also be made, if creation of their establishments in Philippine
the husband so demands, by proclamations and territory, their mercantile operations, and the
common criers. jurisdiction of the courts of the nation.
This revocation may, in no case, The provisions of the article shall be
prejudice rights acquired before its publication understood to be without prejudice to what, in
in the official periodical. particular cases, may be established by treaties
or agreements with other powers.
ARTICLE 9. (Repealed) 3
ARTICLE 10. (Repealed) 4 Title II - Commercial Registries
ARTICLE 11. (Repealed) 5 ARTICLE 16. In all the capitals of provinces
ARTICLE 12. (Repealed) 6 shall be opened a mercantile registry composed
of two independent books in which shall be
Who may NOT engage in commerce?
inscribed:
1. Individual merchants.
ARTICLE 13. The following may not engage
2. Associations.
in commerce nor hold office or have any direct
In the coastal provinces and in the interior ones
administrative or financial intervention in
where it is considered convenient because of
commercial or industrial companies:
the presence of navigation, the registry shall
1. Those sentenced to the penalty of civil
include a third book for the registration of
interdiction, while they have not served their
vessels.
sentence or have not been amnestied or
pardoned.
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ARTICLE 17. Registration in the mercantile premium, should they have one or the other,
registry shall be optional for individual the total amount of the issue, and the property,
merchants and compulsory for associations works, rights or mortgages, should there be
which are created in accordance with this Code any, by which their payment is secured. The
or with special laws, and for vessels. issues which may be made by individuals shall
also be recorded in accordance with the
ARTICLE 18. The unregistered merchant provisions of the preceding paragraph.
cannot request the inscription of any document 11. [The issues of bank notes, stating the
in the mercantile registry, nor take advantage date, class, series, quantity and value of each
of its legal effects. issue.]
12. [The titles of industrial property, patents,
ARTICLE 19. The register shall keep the books and trademarks, in the form and manner
necessary for registration, stamped, folioed and established by law.]
with a memorandum on the first page of the Foreign associations which desire to establish
number of pages which each book contains, themselves or create branches in the
signed by the justice of the peace. Philippines shall present and record in the
Where there are several justices of the peace, registry, besides their by-laws and the
any one of them may sign the memorandum. documents required of Filipinos, a certificate
issued by the Philippine consul that they are
ARTICLE 20. The registrar shall enter in constituted and authorized in accordance with
chronological order in the registry and general the laws of their respective countries.
index all the merchants and companies which
are registered, giving each sheet the correlative ARTICLE 22. [In the registry of vessels there
number which corresponds to it. shall be stated:
1. The name of the vessel, kind of
ARTICLE 21. On the record sheet of each equipment, system or power of the engines, if it
merchant or company shall be entered: is a steamer, stating whether they are nominal
1. The name, firm name, or title. cd or indicated horsepower; place of construction
2. The class of commerce or transactions in of the hull and engines; year thereof, material
which engaged. of the hull, stating whether it is of wood, iron,
3. The date on which the transactions shall steel, or mixed; principal dimensions of length,
commence or have commenced. breadth of beam, and depth of hold; the gross
4. The domicile, with a specification of the and net tonnage; distinctive signal which it
branches which may have been established, bears in the International Code of Signals;
without prejudice to the registration of the finally, the names and domiciles of the owners
branches in the registry of the province in which or part owners of the same.
they may be domiciled. 2. The changes in the ownership of vessels,
5. Instruments for the creation of in their name, or in any of the other conditions
commercial associations, whatever their object enumerated in the foregoing paragraph.
or denomination may be, as well as those for 3. The imposition, modification or
the modification, rescission or dissolution of cancellation of liens of any class whatsoever
such associations. which encumber vessels.]
6. [General powers of attorney, and the
revocation of the same, should there be any, ARTICLE 23. As a general rule, the registration
given to managers, factors, employees and any shall be made by virtue of notarial copies of the
other agents.] documents which the interested party may
7. [The authorization of the husband for his present.
wife to engage in commerce and the legal or The registration of notes, bonds, or order
judicial authority of the wife to administer her and bearer instruments which do not carry
property on account of the absence or mortgages of immovable property shall be
incapacity of the husband.] made upon presentation of the certified
8. [The revocation of the permission given minutes where in appears the resolution of the
to the wife to trade.] person or persons who made the issue, and the
9. [Dotal instruments], marriage settlement conditions, requisites and guaranties thereof.
and the title which prove the ownership of the When these guaranties consist of mortgage of
paraphernal property of the wives of immovables, the corresponding instrument shall
merchants. be presented for annotation in the mercantile
10. The issue of shares, certificates, and registry.
bonds of railroads and of all classes of
associations, be they associations for public ARTICLE 24. Unregistered articles of
works, credit companies, or others, stating the association shall produce effect among the
series and number of the certificates of each members who execute them, but they shall not
issue, their participation, interest, payment and
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prejudice third person who, however, may make ARTICLE 32. [The office of commercial
use thereof in so far as favorable. registrar shall be filled by the government after
a competitive examination.]
ARTICLE 25. All the resolutions or acts which
effect an increase or reduction in the capital of TITLE III - BOOKS AND BOOKKEEPING OF COMMERCE
commercial associations, whatever their
denomination may be, and those which modify ARTICLE 33. Merchants shall necessarily keep:
or alter the conditions of recorded instruments, 1. A book of inventories and balances.
shall also be recorded in the mercantile 2. A journal.
registry. The omission of this requisite shall 3. A ledger.
produce the effects mentioned in the preceding 4. A book or books for copies of letters and
article. telegrams.
5. Other books which may be required by
ARTICLE 26. Registered documents shall special laws.
produce legal effect to the prejudice of third
persons only from the date of their registration, Associations and companies shall also
and cannot be invalidated by prior or keep a book or books of minutes, in which shall
subsequent unregistered documents. be entered all resolutions referring to the
progress and operations of the entities,
ARTICLE 27. [Dotal] instruments [and those] approved at general meetings or at those of
referring to paraphernal property of the managing boards.
merchants wife, not registered in the
mercantile registry, shall have no right of ARTICLE 34. They may also keep other books
preference over other credits. which they may deem convenient, according to
Immovable property and real rights over the system of bookkeeping they may adopt.
them, acquired by the wife prior to the creation These books shall not be subject to the
of the concurrent credits, shall be excepted. provisions of Article 36; but they may legalize
those which they may consider proper.
ARTICLE 28. If a merchant should fail to make
in the registry the inscription of the [dotal or] ARTICLE 35. Merchants may keep their books
paraphernal property of his wife, the latter personally or through persons whom they
herself may request it or it may be done for her authorize for the purpose. If a merchant does
by her parents, by others or uncles by not keep his books personally, authorization
consanguinity, as well as by those who shall be presumed granted to him who keeps
discharge or may have discharged the duties of them unless there is proof to the contrary.
guardians or curators of the wife, [or who
constitute or may have constituted the dowry.] ARTICLE 36. Merchants shall present the
books referred to in Article 33, bound, ruled,
ARTICLE 29. [Unregistered powers of attorney and folioed, to the justice of the peace of the
shall give rise to actions between the principal municipality in which they have their
and the agent, but they cannot be used to the commercial establishments in order that he
prejudice of third persons, who, however, may may put on the first page of each one a signed
rely thereon in so far as they may be favorable.] memorandum of the number of pages which the
book contains. The seal of the justice of the
ARTICLE 30. The mercantile registry shall be peace legalizing it shall, furthermore, be
public. The registrar shall furnish those who stamped on all the pages of each book.
may request it any data referring to what may
appear on the registration sheet of each ARTICLE 37. The book of inventories and
merchant, association or vessel. Likewise, he balance shall begin with the inventory which
shall issue true copies of the whole or part of the merchant must prepare at the time he
said sheet to anyone who may ask for it in a starts his operations, and shall contain:
signed request. 1. An exact statement of the money,
securities, credits, notes receivable, movable
ARTICLE 31. [The commercial registrar shall and immovable property, merchandise and
have under his charge, where there is an goods of all kinds, appraised at their true value,
exchange, copies of the daily quotations of the and which constitute his assets.
properties negotiated and the exchanges fixed 2. An exact statement of the debts and all
therein. kinds of pending obligations, should there be
The copies shall serve as original any, and which form his liabilities.
instruments in all cases of investigation and 3. He shall determine, in proper cases, the
verfication of exchanges and quotations on exact difference between the assets and the
determined dates.] liabilities, which shall be the capital with which
he begins his operations.
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The merchant shall, furthermore,


prepare annually and enter in the same book ARTICLE 43. Besides complying with and
the general balance of his business, with the fulfilling the conditions and formalities
details mentioned in this article, and in prescribed in this title, merchants must keep
accordance with the entries in the journal, their books with clearness, in the order of dates,
without any reservations or omissions, under without blanks, interpolations, erasures or blots,
his signature and responsibility. and without showing signs of having been
altered by substituting or tearing out folios, or
ARTICLE 38. In the journal shall be entered as in any other manner whatsoever.
the first item the result of the inventory
mentioned in the preceding article, divided into ARTICLE 44. Merchants shall correct the
one or various consecutive accounts, according errors or omissions which they may make in
to the system of bookkeeping adopted. entering in their books, immediately upon
Thereafter, all his operations shall follow noticing them, explaining clearly in what they
day by day, each entry stating the credit and consisted, and writing the entry as it should
debit of the respective accounts. have been written.
When the operations are numerous, If some time should have elapsed since
whatever their importance may be, or when the error was committed or since the omission
they have taken place outside the domicile, was incurred, they shall make the proper entry
those referring to each account and which have of correction, adding on the margin of the
taken place in each day may be included in a erroneous entry a memorandum indicating the
single entry, but observing in their statement, if correction.
itemized, the same order in which they took
place. ARTICLE 45. No judge or court or authority
Likewise, the amounts which the may, on his own initiative, make an inquiry to
merchant uses for his household expenses shall ascertain if merchants keep their books in
be entered on the date on which they are accordance with the provisions of this Code, nor
withdrawn from the funds, and they shall be make a general investigation or examination of
carried into a special account to be opened for the bookkeeping in the offices or counting-
that purpose in the ledger. houses of merchants.

ARTICLE 39. The accounts referring to each ARTICLE 46. [Neither may the communication,
object or person in particular shall, furthermore, delivery or general examination of the books,
be opened with Debit and Credit in the ledger, correspondence and other documents of
and to each of these accounts shall be merchants, be decreed at the instance of a
transferred, in strict order of dates, the entries party, except in the cases of liquidation,
in the journal referring to them. universal succession or bankruptcy.]

ARTICLE 40. In the book of minutes which ARTICLE 47. [Outside of the cases mentioned
each association shall carry shall be entered in the preceding article, the exhibition of the
verbatim the resolutions agreed upon at its books and documents of merchants may be
meetings or at those of its managers, stating decreed at the instance of a party or at the
the date of each one, those present in them, initiative of the court, only when the person to
the votes cast, and other matters conducive to whom they belong has an interest or
an exact knowledge of what as agreed upon, responsibility in the case in which the exhibition
authenticated with the signatures of the is made.
managers, directors or administrators charged The examination shall be made in the
with the management of the association or counting-house of the merchant, in his presence
designated by the by-laws or regulations by or in that of the person whom he commissions,
which it is governed. and shall be limited to the points related to the
question at issue; these being the only ones
ARTICLE 41. All the letters which a merchant that may be verified.]
may write regarding his business and the
telegraphic dispatches which he may send shall ARTICLE 48. In order to measure the
be transferred, either by hand or by any probative force of the books of merchants, the
mechanical means, to the book for copies., fully following rules shall be observed:
and successively by order of dates, including 1. The books of merchants shall be evidence
the subscribing clause and the signatures. against themselves, no proof to the contrary
being admissible; but the adverse party cannot
ARTICLE 42. Merchants shall carefully keep, in accept the entries which may be favorable to
bundles and in proper order, the letters and him and reject those which may prejudice him,
telegraphic dispatches which they may receive but having accepted this means of proof, he
relative to their transactions. shall be bound by the result which it may show
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in its entirety, taking into equal consideration all causes of action in suits, whatever the form and
the entries relative to the question in litigation. language in which they may be executed, the
2. If there should be a conflict in the entries class to which they may belong, and the
of the books kept by two merchant, and those amount they may involve, provided their
of one should have been kept with all the existence is shown by any means established
formalities mentioned in this title, and those of by the civil law. However, the testimony of
the other should suffer from any defect or witness alone shall not be sufficient to prove
should lack the requisites prescribed by this the existence of a contract which involves an
Code, the entries of the books properly kept amount exceeding 1,500 pesetas unless
shall be admitted against those of the defective supported by some other evidence.
one. unless the contrary is shown by means of
other evidence admissible in law. ARTICLE 52. From the provisions of the
3. If one of the merchants should not present preceding article shall be excepted:
his books or should manifest that he does not 1. Contracts which, in accordance with this
have them, those of his adversary, kept with all Code or with special laws, must be reduced to
the legal formalities, shall be admitted against writing or require forms or formalities necessary
him, unless it is shown that the absence of such for their efficacy.
books is due to force majeure, and always 2. Contracts executed in a foreign country in
saving proof by other means admissible in suits which the law requires certain instruments,
against the entries exhibited. forms or formalities for their validity, although
4. If the books of the merchants should have Philippine law does not require them.
all the legal requisites and should be In either case, contracts which do not satisfy
contradictory, the court shall decide by the the circumstances respectively required shall
other proofs, weighing them according to the not give rise to obligations or causes of action.
general rules of law.
ARTICLE 53. Illicit agreements do not give rise
ARTICLE 49. Merchants and their heirs or to obligations or causes of action even should
successors shall keep the books, telegrams, they refer to commercial transaction.
and correspondence of their business in
general, during all the time that this may last ARTICLE 54. Contracts entered into by
and for five years after the liquidation of all correspondence shall be perfected from the
their business and commercial affairs. moment an answer is made accepting the offer
Documents which specially concern or the conditions by which the latter may be
specific acts or transactions may be rendered modified.
useless or destroyed upon the laps of the
prescriptive period of the actions which may ARTICLE 55. Contracts in which an agent or
arise therefrom, unless some questions broker intervenes shall be perfected when the
referring directly or indirectly to them should be contracting parties shall have accepted his
pending, in which case, they must be kept until offer.
the conclusion thereof.
ARTICLE 56. In a commercial contract in
which a penalty for indemnification against the
TITLE IV - GENERAL PROVISIONS RELATING TO
party failing to comply therewith is fixed, the
COMMERCIAL CONTRACTS
injured party may demand through legal means
ARTICLE 50. Commercial contracts, in the fulfillment of the contract or the penalty
everything relative to their requisites, stipulated; but the recourse to one of these
modifications, exceptions, interpretations and actions shall extinguish the other unless the
extinction and to the capacity of the contracting contrary is stipulated.
parties, shall be governed in all matters not
ARTICLE 57. Commercial contracts shall be
expressly provided for in this Code or in special
executed and complied with in good faith,
laws, by the general rules of the civil law.
according to the terms in which they were
[Telegraphic correspondence shall only be the
made and drawn up, without evading through
basis of an obligation between contracting
arbitrary interpretations the plain, proper and
parties who have previously admitted this
usual meaning of the spoken or written words,
medium in a written contract, and provided the
or limiting the effects which are naturally
telegrams fulfill the conventional conditions or
derived from the manner in which the
conventional signs which may have been
contracting parties may have expressed their
previously fixed and agreed to by the
will and contracted their obligations.
contracting parties.]
ARTICLE 58. If a discrepancy should appear
ARTICLE 51. Commercial contracts shall be
between the copies of a contract which the
valid and shall give rise to obligations and
contracting parties present, and, in its
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execution, an agent or broker should have ARTICLE 241. In the transactions treated of in
intervened, that which appears in the books of the foregoing articles, no commercial name
the latter shall prevail provided they are kept in common to all the participants can be adopted,
accordance with law. nor can any further direct credit be made use of
except that of the merchant who transacts and
ARTICLE 59. If doubts which cannot be manages the business in his own name and
decided in accordance with what is provided in under his individual liability.
Article 2 of this Code should arise, the question
shall be decided in favor of the debtor. ARTICLE 242. Persons transacting business
with the merchant carrying on the joint
ARTICLE 60. In all computations of days, business shall only have a right of action
months and years, it shall be understood that a against the latter and not against the other
day has twenty four hours, the months as persons interested, and the latter, on the other
designated in the Gregorian calendar, and the hand, shall have no right of action against the
year has three hundred sixty-five days. third person who made the transaction with the
Bills of exchange, promissory notes, and loans, manager unless said manager formally cedes
with respect to which that specially provided for his rights to them.
them by this Code shall govern, are excepted.
ARTICLE 243. The liquidation shall be effected
ARTICLE 61. Days of grace, courtesy or others by the manager, and after the transactions
which under any name whatsoever defer the have been concluded, he shall render a proper
fulfillment of commercial obligations, shall not account of its results.
be recognized, except those which the parties
may have previously fixed in the contract or
which are based on a definite provision of law. Commerce (definition) It is the exchange of
goods, productions, or property of any kind. It is
ARTICLE 62. Obligations which do not have a intercourse by way of trade and traffic between
period previously fixed by the parties or different peoples or states and the citizens or
by the provisions of this Code, shall be inhabitants thereof, including not only the
demandable ten days after having been purchase, sale, exchange of commodities, but
contracted if they give rise only to an ordinary also the instrumentalities and agencies by
action, and on the next day if they involve which it is promoted and the means and
immediate execution. appliances by which it is carried on, and
transportation of persons as well as goods.
ARTICLE 63. The effect of default in the
performance of commercial obligations shall
Law merchant is an old translation of the
commence:
Latin lex mercatoria: an old international law of
1. In contracts with a day for performance
merchants and mariners growing out of their
fixed by the will of the parties or by the law, on
customary practices. It was a law practiced and
the day following their maturity.
enforced by businessmen and shipowners in
2. In those which do not have such day fixed,
their own courts, without professional judges or
from the day on which the creditor makes a
lawyers.
judicial demand on the debtor or notifies him of
the protest for loss and damages made against
Who are merchants under the Commercial
him before a judge, notary or other public
Code? (Art. 1)
official authorized to admit the same.
1. those who having capacity engage in
commerce, habitually devote themselves
TITLE II - JOINT ACCOUNTS
thereto; and
2. commercial or industrial associations
ARTICLE 239. Merchants may interest
organized in accordance with the Code
themselves in the transaction of other
merchants, contributing thereto the amount of
NOTE: The legal presumption of habitually
capital they may agree upon, and participating
engaging in commerce shall exist from the time
in the favorable or unfavorable results thereof
the person who intends to engage therein gives
in the proportion they may
announcement by means of circulars,
determine.
newspapers, handbills, posters, etc. for the
ARTICLE 240. With regard to their formation, purpose of conducting any commercial
transaction.
joint accounts shall not be subjected to any
formality, and may be privately contracted
What are commercial transactions?
orally or in writing, and their existence may be
Commercial transactions refer to those acts
proved by any of the means accepted by law, in
covered by the Code of Commerce and all
accordance with the provisions of Article 51.
others of analogous character. They are
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governed by the provisions of the Code of the other defendants were the partners of Lo-
Commerce; in default of such provisions, by the Chim-Lim in the said lumber yard business.
commercial usages observed in each place; and
in the absence of both, by the rules of civil law. Held:
As far as the evidence shows it seems
Who cannot engage in commerce? that the business was conducted by Lo-Chim-
The following cannot engage in commerce: Lim in his own name, although he gave to the
1. persons sentenced to civil interdiction; appellants a share of the earnings of the
2. persons declared bankrupt business; but what that share was has not been
3. persons who, on account of laws or shown with certainty. The contracts made with
special provisions, may not engage in the plaintiff were made by Lo-Chim-Lim
commerce. individually in his own name, and there is no
For some of the rules to be observed in respect evidence that the partnership ever contracted
of commercial contracts, see Articles 50-57 in any other form. Under such circumstances we
above (important parts are already underlined). find nothing upon which to consider this
partnership other than as a partnership of
Joint Accounts / cuentas en participacion cuentas en participacion. It may be that, as a
is an arrangement among merchants who matter of fact, it is something different, but the
interest themselves in the transactions of other uncertain and scant evidence introduced by the
merchants, contributing thereto the part of the parties does not permit of any other designation
capital they may agree upon, and who of this partnership. We see nothing, according
participate in the favorable or unfavorable to the evidence, but a simple business
results thereof in the proportion they may conducted by Lo-Chim-Lim exclusively, in his
determine (Art. 239). (see Articles 240-243 own name, the names of other persons
above for rules governing joint accounts) interested in the profits and losses of the
business nowhere appearing.
Joint Accounts vs. Partnerships A partnership constituted in such a
Joint Accounts Partnership manner, the existence of which was only known
1. has no separate 1. has juridical to those who had an interest in the same, there
juridical personality; personality and may being no mutual agreements between the
can sue and be sued sue and be sued under partners, and without a corporate name
only in the name of the partnership name indicating to the public in some way that there
the ostensible partner were other people besides the one who
2. prohibited from 2. has a firm name ostensibly managed and conducted the
having a commercial business, is exactly the accidental partnership
name (thus, business of cuentas en participacion defined in article
is conducted in the 239 of the Code of Commerce.
name of the ostensible Those who contract with the person
partner) under whose name the business of such
3. business is 3. general partners partnership of cuentas en participacion is
managed by the have the right of conducted, shall have only a right of action
ostensible partner management against such person and not against the other
4. liquidation shall be 4. liquidation may, by persons interested, and the latter, on the other
made by the agreement, be hand, shall have no right of action against the
ostensible partner entrusted to a partner third person who contracted with the manager
or partners unless such manager formally transfers his right
to them. (Art 242 of the code Of Commerce.) It
Case: follows, therefore that the plaintiff has no right
to demand from the appellants the payment of
Bourns vs. Carman G.R. L-2800 the amount claimed in the complaint, as Lo-
Chim-Lim was the only one who contracted with
Facts: him. the action of the plaintiff lacks, therefore, a
The plaintiff in this action seeks to legal foundation and should be accordingly
recover the sum of $437.50, balance due on a dismissed.
contract for the sawing of lumber for the lumber
yard of Lo-Chim-Lim. Lo-Chim-Lim and his
codefendants alleged that at the time the
contract was made, they were the joint
proprietors and operators of the said lumber
yard engaged in the purchase and sale of
lumber under the name and style of Lo-Chim-
Lim. Apparently the plaintiff tries to show that
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Act. Also SEC 15 and 26, subSEC 5 of SEC 25,


XIV. THE INSOLVENCY LAW and subSEC 3 of SEC 1, and several minor
ACT 1956 (1909), AS AMENDED BY ACT portions of the other SECs of the California Act
are omitted. These relate to procedure in the
3544 (1929), ACT 3616 (1929), AND
main and are substantially governed by other
ACT 3692 (1932) provisions in the Commission Bill. The
concluding SECs of the Commission Bill and of
14.1 Purpose the California Act are different. The most
The purpose of the law is to provide for important difference is the inclusion in the
an orderly mechanism by which the assets of Commission Bill of SEC 34, which is wholly
the insolvent debtor could be converted into lacking in the California Act. This SEC deals with
money for distribution among his creditors and preferred claims and has its counterpart in SEC
thereby relieve the debtor from the weight of 48b of the United States Bankruptcy Act of
his debts and permit him to start anew free 1898. Another addition is chapter 7 of the
from such debts. Commission Bill entitled "Compositions." This
chapter corresponds closely to SEC 12 and 13 of
14.2 Sources the United States Bankruptcy Act of 1898. The
result is that the only provisions in Act No.
(Spanish Code of Commerce as to
1956, which tend to show that the Legislature
suspension of payments)
did not intend to adopt in this jurisdiction the
American theory of bankruptcy, are found in
Mitsui Bussan Kaisha vs. Hongkong & SEC 48. This SEC, by its nine subdivisions,
Shanghai Banking Corp. G.R. 11079 specifies what property in the hands of the
Held: insolvent may not be taken by the assignee.
(Actually, this is only narrates the history of These provisions are found neither in the United
Philippine Insolvency Law) States Bankruptcy Act of 1898 nor in the
In 1908 two bills (Assembly Bill No. 126 California Act of 1895. They are found, however,
and Commission Bill No. 87) were introduced in in Assembly Bill No. 126 and were inserted for
the Philippine Legislature and both were the purpose of avoiding a conflict between Act
rejected. The committee of the Commission, in No. 1956 and certain well defined provisions of
reporting upon the Assembly bill, stated in its the Civil Code.
report of June 12, 1908, that "The law seeks to Act No. 1956 deals with three principal
blend the American laws of insolvency and subjects, namely, suspension of payments,
bankruptcy with the Spanish law of bankruptcy. voluntary insolvency, and involuntary
Such a policy is sure to result in complications insolvency. That part of the Act referring to the
and to bring about a system so cumbersome first appears to have been taken from the
and unwieldly as to make it impracticable and Spanish Code of Commerce, as amended by
uneconomical." the law of June 10, 1897. Formerly there were in
Later a joint conference committee was England and America marked distinctions
appointed from the two houses and it prepared between bankruptcy laws and insolvency laws.
a bill which was designated Assembly Bill No. The two principal distinctions, which have been
576. This bill was passed without any material given by various authors, between these laws
changes and became Act No. 1956. By are: First, bankruptcy laws applied only to
comparing the Commission Bill No. 87 with Act traders and merchants, while insolvency laws
No. 1956, it will be seen that every SEC of the applied to all classes of persons; second, the
former is embodied in the latter. The only former discharged absolutely the debts of the
apparent exception is SEC 41 of the honest debtor, while the latter discharged only
Commission Bill, but the substantial provisions the person of the debtor from arrest and
of that SEC appear in subSEC 9 of SEC 48 of the imprisonment, but left the property
Act. Furthermore, there is little in the Act from subsequently acquired by the debtor liable to
SEC 14 which is not in the Commission Bill. the demands of his creditors. More recently in
SubSEC 3 of SEC 71 of the Act contains penal some jurisdictions no attempt has been made to
provisions which relate to the suspension of distinguish between them. A bankruptcy law
payments and which are not in the Commission may contain those regulations which are
Bill. SEC 48 of the Act has no counterpart in the generally found in insolvency laws, and an
Commission Bill. Again, a comparison of insolvency law may deal with those which are
Commission Bill No. 87 with the Insolvency Act common in bankruptcy laws. Whether these
of California, enacted in 1895, SEC by SEC and distinctions were recognized and
clause by clause, shows that the former is, in a maintained in the Spanish system is of no
great many respects, a copy of the latter. The importance. It is sufficient to say that the
Commission Bill omits one of the acts of Act, in so far as it relates to voluntary and
bankruptcy named in SEC 9 of the California involuntary insolvency, is essentially a
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bankruptcy law because it discharges the SEC 2. The debtor who, possessing sufficient
honest debtor. property to cover all his debts, be it an
individual person, be it a sociedad or
Insolvency Act of California of 1895, as to corporation, foresees the impossibility of
voluntary and involuntary insolvency meeting them when they respectively fall due,
may petition that he be declared in the state of
Sun Life Assurance vs. Ingersoll G.R. suspension of payments by the court, or the
16475 judge thereof in vacation, of the province or of
the city in which he has resided for six months
Held: next preceding the filing of his petition.
(again, historical background lang to ng He shall necessarily annex to his petition a
Insolvency Law) Now, it is a well-known fact in schedule and inventory in the form provided in
our legislative history that the Insolvency Law SECs fifteen, sixteen, and seventeen of this Act,
(Act No. 1956) is in great part a copy of the in addition to the statement of his assets and
Insolvency Act of California, enacted in 1895, liabilities and the proposed agreement he
though it contains a few provisions from the requests of his creditors.
American Bankruptcy Law of 1898 (see
observation of Justice Trent in Mitsui Bussan Differentiate from insolvency proceeding
Kaisha vs. Hongkong and Shanghai Banking Suspension of payments vs. Insolvency
Corporation, 36 Phil., 27, 37). Again, upon proceeding
comparing the California Insolvency Law of Suspension of Insolvency
1895 with the American Bankruptcy Act of Payments Proceeding
1867, it will be found that the former contains 1. object of suspension 1. object is to compel
much in common with the latter; and among of payments is the presentment of all
the provisions common to the Bankruptcy Act of deferment of the debts, due or not due,
1867, the California Insolvency Law of 1895, payment of debts until and secure a complete
and the Insolvency Law in force in these Islands such time as the discharge from such
(Act No. 1956), is precisely the provision which debtor, who possesses debts
appears as SEC 32 of our Act, defining the sufficient property to
property which passes as assets to the assignee cover all his debts, is
in insolvency. (Bankruptcy Act of 1867, sec. 14; able to convert such
California Insolvency Law of 1895, sec. 21; assets into cash or
Philippine Insolvency Law, sec. 32.) otherwise acquires the
Under each of said laws the assignee cash necessary to pay
acquires all the real and personal property, his debts
estate, and effects of the debtor, not exempt by 2. amount of debts is 2. the creditors
law from execution, with all deeds, books and not affected although receive less than what
papers relating thereto; and while this language their payment is they are entitled to; in
is broad, it nevertheless lacks the postponed some cases, where
comprehensiveness of SEC 70 (a) of the preferences are
American Bankruptcy Law of 1898 in the least proper, some creditors
two particulars; for under subSEC 3 of SEC 70 may not receive any
(a) of the last mentioned law, the trustee in amount at all
bankruptcy acquires the right to exercise any
powers which the insolvent might have Effect of filing of petition
exercised for his own benefit, and under subSEC On execution pending against
5 the trustee acquires any property of the debtor
insolvent which the latter could by any means On execution against property
have assigned to another. The Insolvency Law specially mortgaged
here in force, in common with the predecessor On action to collect sum of money
laws above-mentioned, contains nothing similar still to be filed against debtor
to these provisions. On other actions

14.3 Applicability to banks, quasi banks, SEC 6. If any execution be pending against the
and insurance companies debtor it shall not be consolidated with this
The Insolvency law is NOT applicable to banks, proceeding, but the course thereof shall be
quasi-banks, and insurance companies. suspended before sale of property is made
thereunder, provided the debtor makes a
SUSPENSION OF PAYMENTS request therefor to the court before which the
Nature proceeding for suspension of payments is
Who could file petition pending, unless the execution be against
property especially mortgaged which is hereby
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exempted from the provisions of this SEC. The SEC 5. Only creditors included in the schedule
suspension ordered by virtue of this SEC shall filed by the debtor shall be cited to appear and
lapse when three months shall have passed take part in the meeting mentioned in SEC
without the proposed agreement being three, and they shall be notified upon delivery
accepted by the creditors or as or transmission to them of a copy of the order
soon as it is denied. No creditor other than calling the meeting to appear at same with the
those mentioned in SEC nine shall sue or written evidences of their respective claims,
institute proceedings to collect his claim from without which they shall not be admitted.
the debtor from the moment that suspension of
payments is applied for and while the Required quorum for holding of meeting
proceedings are pending. Required vote for approval of debtors
proposal
Procedure
(a) filing of petition by the debtor SEC 8. The presence of the creditors
(b) issuance by the court of an order calling representing at least three-fifths of the
for a meeting of the creditors liabilities shall be necessary for holding a
(c) publication of the order and service meeting. The meeting shall be held on the day
thereof on the creditors and at the hour and place designated, the
judge, or commissioner deputized by him when
(d) meeting of creditors for approval or
he is absent from the province where the
disapproval of the debtors proposition
meeting is held, acting as president and the
(e) objection, if any and if justified, to the clerk as secretary thereof, subject to the
decision of the meeting of creditors following rules:
(a) The clerk shall prepare for insertion in
Issuance, publication and delivery of order the minutes of the meeting a statement of the
calling creditors to meeting (Secs. 3 and persons present and their claims; the judge, or,
5) in default thereof, the commissioner, shall
examine the written evidences of the claims
SEC 3. Upon receiving and filing the petition and the powers of attorney, if any. If the
with the schedule and documents mentioned in persons present who have complied with the
the next preceding SEC, the court, or the judge foregoing rules represent at least three-fifths of
thereof in vacation, shall make an order calling the liabilities, the judge or commissioner shall
a meeting of creditors to take place in not less declare the meeting open for business.
than two weeks nor more than eight weeks (b) The petition of the debtor, the
from the date of such order. Said order shall schedule of debts and of property, the
designate the day, hour, and place of meeting statement of assets and liabilities, and the
of said creditors as well as a newspaper of proposed agreement filed therewith shall be
general circulation published in the province or read forthwith by the clerk, and the discussion
city in which the petition is filed, if there be one, shall be opened.
and if there be none, in a newspaper which, in (c) The debtor may modify his proposition
the judgment of the judge, will best give notice or propositions in view of the result of the
to the creditors of the said debtor, and in the debate, or insist upon the ones already made,
newspaper so designated said order shall be and the judge or commissioner, without further
published as often as may be prescribed by the discussion, shall clearly and succinctly place
court or the judge thereof. these several propositions before the meeting
Said order shall further contain an for a vote thereupon.
absolute injunction forbidding the petitioning (d) The vote shall be taken by a call of
debtor from disposing in any manner of his names and shall be inserted in and the minutes;
property, except in so far as concerns the a majority vote shall rule.
ordinary operations of commerce or of industry (e) To form a majority it is necessary
in which the petitioner is engaged, and,
furthermore, from making any payments 1. That two-thirds of the creditors
outside of the necessary or legitimate expenses voting unite upon the same proposition.
of his business or industry, so long as the 2. That the claims represented by
proceedings relative to the suspension of said majority vote amount to at least three-
payments are pending, and said proceedings for fifths of the total liabilities of the debtor
the purposes of this Act shall be considered to mentioned in the petition.
have been instituted from the date of the filing (f) After the result of the voting has been
of the petition. announced, all protests made against the
majority vote shall be admitted and stated in
the record, and the meeting shall be closed.
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(g) The minutes of the meeting, meeting. The court may also issue all orders
containing a succinct statement of all which may be proper to enforce the agreement
proceedings had therein, shall be drawn up, and on motion of any of the parties litigant. The
there shall be inserted therein the proposition order directing the agreement to be made
or propositions voted upon, which, after having effective shall be binding upon all creditors
been read and approved, shall be signed by the included in the schedule of the debtor who may
judge or commissioner together with all persons have been properly summoned, but not upon
taking part in the voting; if any such persons creditors mentioned in SEC nine who failed to
shall be unable to write, any person present attend the meeting or refrained from voting
shall sign, at their request, and the clerk shall therein, and their rights shall not be affected by
certify to all of the above. the agreement unless they may have expressly
or impliedly consented thereto.
Persons not bound by agreement on
debtors proposal Consequences of debtors failure to
perform agreement
SEC 9. Persons having claims for personal
labor, maintenance, expenses of last illness and SEC 13. If the debtor fails wholly or in part to
funeral of the wife or children of the debtor, perform the agreement decided upon at the
incurred in the sixty days immediately meeting of the creditors, all the rights which the
preceding the filing of the petition, and persons creditors had against the debtor before the
having legal or contractual mortgages, may agreement shall revest in them. In such case
refrain from attending the meeting and from the debtor may be made subject to the
voting therein. Such persons shall not be bound bankruptcy and insolvency proceedings in the
by any agreement determined upon at such manner established by the following chapters of
meeting, but if they should join in the voting this Act.
they shall be bound in the same manner as are
the other creditors.
VOLUNTARY INSOLVENCY
Termination of proceedings
14.5 Nature
SEC 11. If the decision of the meeting be Who could file petition
negative as regards the proposed agreement or Schedule of debts and liabilities
if no decision is had in default of such number Inventory of property
or of such majorities, the proceeding shall be
terminated without recourse and the parties Differentiate from involuntary
concerned shall be at liberty to enforce the insolvency
rights which may correspond to them. If the Voluntary vs. Involuntary Insolvency
decision is favorable to the debtor it may be In voluntary insolvency, a debtor is
objected to within ten days following the date of deemed insolvent upon his filing of a petition
the meeting by any creditor who attended the for voluntary insolvency; while in involuntary
meeting and who dissented from and protested insolvency, the debtor is considered insolvent
against the vote of the majority. The opposition upon the issuance by the court of an order
or objection to the decision of the majority declaring him insolvent.
favorable to the debtor shall be proceeded with
as in any other incidental motion, the debtor Procedure
and the creditors who shall appear declaring a. filing of petition by the debtor
their purpose to sustain the decision of the
b. issuance by the court of an
meeting being the defendants. The court shall
order declaring, among other
hear and pass upon such objection as soon as
things, that the petitioner is
possible and in a summary manner, and in its
insolvent
order, which shall be final, it shall declare
whether or not the decision of the meeting is c. publication of order and
valid. In case that the decision of the meeting is service thereof on the
held to be null, the court shall declare the creditors
proceeding terminated and the parties d. meeting of creditors for
concerned at liberty to exercise the rights which election of assignee in
may correspond to them; and in case the insolvency
decision of the meeting is declared valid, or e. conveyance of debtors
when no opposition or objection to said decision property to assignee in
has been presented, the court shall order that insolvency
the agreement be carried out and the persons
concerned shall be bound by the decision of the
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f. liquidation of assets and SEC 17. The petition, schedule, and inventory
payment of debts must be verified by the affidavit of the
g. discharge of the debtor petitioner, annexed thereto, and shall be in
form substantially as follows: I, _______________,
h. objections to discharge, if any
do solemnly swear that the schedule and
i. appeal to the Supreme Court inventory now delivered by me contain a full,
in certain cases. correct, and true discovery of all my debts and
liabilities and of all goods, effects, estate, and
property of whatever kind or class to me in any
way belonging. The inventory also contains a
Filing of petition an act of insolvency full, true and correct statement of all debts
owing or due to me, or to any person or persons
in trust for me and of all securities and
SEC 14. An insolvent debtor, owing debts contracts whereby any money may hereafter
exceeding in amount the sum of one thousand become due or payable to me or by or through
pesos, may apply to be discharged from his which any benefit or advantage whatever may
debts and liabilities by petition to the Court of accrue to me or to my use, or to any other
First Instance of the province or city in which he person or persons in trust for me. The schedule
has resided for six months next preceding the contains a clear outline of the facts giving rise,
filing of such petition. In his petition he shall set or which might give rise, to a cause of action
forth his place of residence, the period of his against me, and the inventory contains an
residence therein immediately prior to filing outline of the facts giving rise, or which might
said petition, his inability to pay all his debts in give rise, to any cause of action in my favor. I
full, his willingness to surrender all his property, have no lands, money, stock, or estate,
estate, and effects not exempt from execution reversion, or expectancy, or property of any
for the benefit of his creditors, and an kind, except that set forth in said inventory. I
application to be adjudged an insolvent. He have in no instance created or acknowledged a
shall annex to his petition a schedule and debt for a greater sum than I honestly and truly
inventory in the form hereinafter provided. The owe. I have not, directly or indirectly,
filing of such petition shall be an act of concealed, fraudulently sold, or otherwise
insolvency. fraudulently disposed of, any part of my real or
SEC 15. Said schedule must contain a full and personal property, estate, effects, or rights of
true statement of all his debts and liabilities, action, and I have not in any way compounded
together with a list of all those to whom, to the with any of my creditors in order to secure such
best of his knowledge and belief, said debts or creditors, or to receive or to accept any profit or
liabilities are due, the place of residence of his advantage therefrom, or to defraud or deceive
creditors and the sum due each, the nature of in any manner any creditor to whom I am
the indebtedness or liability and whether indebted. So help me God.
founded on written security, obligation, contract SEC 18. Upon receiving and filing said petition,
or otherwise, the true cause and consideration schedule, and inventory, the court, or the judge
thereof, the time and place when and where thereof in vacation, shall make an order
such indebtedness or liability accrued, a declaring the petitioner insolvent, and directing
declaration of any existing pledge, lien, the sheriff of the province or city in which the
mortgage, judgment, or other security for the petition is filed to take possession of, and safely
payment of the debt or liability, and an outline keep, until the appointment of a receiver or
of the facts giving rise or which might give rise assignee, all the deeds, vouchers, books of
to a cause of action against such insolvent account, papers, notes, bonds, bills, and
debtor. securities of the debtor, and all his real and
SEC 16. Said inventory must contain, besides personal property, estate, and effects, except
the creditors, an accurate description of all the such as may be by law exempt from execution.
real and personal property, estate, and effects Said order shall further forbid the payment to
of the petitioner, including his homestead, if the debtor of any debts due to him and the
any, together with a statement of the value of delivery to the debtor, or to any person for him,
each item of said property, estate, and effects of any property belonging to him, and the
and its location, and a statement of the transfer of any property by him, and shall
incumbrances thereon. All property exempt by further appoint a time and place for a meeting
law from execution shall be set out in said of the creditors to choose an assignee of the
inventory with a statement of its valuation, estate. Said order shall designate a newspaper
location, and the incumbrances thereon, if any. of general circulation published in the province
The inventory shall contain an outline of the or city in which the petition is filed, if there be
facts giving rise, or which might give rise, to a one, and if there be none, in a newspaper
right of action in favor of the insolvent debtor. which, in the opinion of the judge, will best give
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notice to the creditors of the said insolvent, and The following shall be considered acts of
in the newspaper so designated said order shall insolvency, and the petition for insolvency
be published as often as may be prescribed by shall set forth one or more of such acts: (1)
the court or the judge thereof. The time That such person is about to depart or has
appointed for the election of an assignee shall departed from the Philippine Islands, with intent
not be less than two, nor more than eight, to defraud his creditors; (2) that being absent
weeks from the date of the order of from the Philippine Islands, with intent to
adjudication. Upon the granting of said order all defraud his creditors, he remains absent; (3)
civil proceedings pending against the said that he conceals himself to avoid the service of
insolvent shall be stayed. When a receiver is legal process for the purpose of hindering or
appointed, or an assignee chosen, as provided delaying or defrauding his creditors; (4) that he
in this Act, the sheriff shall thereupon deliver to conceals, or is removing, any of his property to
such receiver or assignee, as the case may be, avoid its being attached or taken on legal
all the property, assets, and belongings of the process; (5) that he has suffered his property to
insolvent which have come into his possession, remain under attachment or legal process for
and he shall be allowed and paid as three days for the purpose of hindering or
compensation for his services the same delaying or defrauding his creditors; (6) that he
expenses and fees as would by law be has confessed or offered to allow judgment in
collectible if the property had been levied upon favor of any creditor or claimant for the purpose
and safely kept under attachment. of hindering or delaying or defrauding any
SEC 19. A copy of said order shall immediately creditor or claimant; (7) that he has willfully
be published by the clerk of said court, in the suffered judgment to be taken against him by
newspaper designated therein, for the number default for the purpose of hindering or delaying
of times and as prescribed by the court or the or defrauding his creditors; (8) that he has
judge thereof, and a copy of said order shall be suffered or procured his property to be taken on
delivered personally or sent by the clerk legal process with intent to give a preference to
forthwith by registered mail, postage prepaid, one or more of his creditors and thereby hinder,
to all creditors named in the schedule. There delay, or defraud any one of his creditors; (9)
shall be deposited, in addition to twenty-four that he has made any assignment, gift, sale,
pesos, which shall be received by the clerk on conveyance, or transfer of his estate, property,
commencing such proceedings, a sum of money rights, or credits with intent to delay, defraud,
sufficient to defray the expense of the or hinder his creditors; (10) that he has, in
publication ordered by the court, necessary contemplation of insolvency, made any
postage, and ten centavos for each copy, to be payment, gift, grant, sale conveyance, or
delivered personally or mailed to the creditors, transfer of his estate, property, rights, or
which last-named sum is hereby constituted the credits; (11) that being a merchant or
legal fee of the clerk for the personal delivery or tradesman he has generally defaulted in the
mailing required by this SEC. payment of his current obligations for a period
of thirty days; (12) that for a period of thirty
days he has failed, after demand, to pay any
moneys deposited with him or received by him
INVOLUNTARY INSOLVENCY
in a fiduciary capacity; and (13) that an
execution having been issued against him on
Nature final judgment for money, he shall have been
Who could file petition found to be without sufficient property subject
Must be accompanied by bond to execution to satisfy the judgment. The
Acts of insolvency petitioners may, from time to time, by leave of
the court, amend and correct the petition, so
SEC 20. An adjudication of insolvency may be that the same shall conform to the facts, such
made on the petition of three or more amendment or amendments to relate back to
creditors, residents of the Philippine Islands, and be received as embraced in the original
whose credits or demands accrued in the petition. The said petition shall be accompanied
Philippine Islands, and the amount of which by a bond, approved by the court, with at least
credits or demands are in the aggregate not two sureties, in such penal sum as the court
less than one thousand pesos: Provided, That shall direct, conditioned that if the petition in
none of said creditors has become a creditor by insolvency be dismissed by the court, or
assignment, however made, within thirty days withdrawn by the petitioner, or if the debtor
prior to the filing of said petition. Such petition shall not be declared an insolvent, the
must be filed in the Court of First Instance of petitioners will pay to the debtor alleged in the
the province or city in which the debtor resides petition to be insolvent all costs, expenses, and
or has his principal place of business, and must damages occasioned by the proceedings in
be verified by at least three of the petitioners. insolvency, together with a reasonable counsel
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fee to be fixed by the court. The court may, vouchers, books of account, papers, notes, bills,
upon motion, direct the filing of an additional bonds and securities of the debtor, and all his
bond, with different sureties, when deemed real and personal property, estate and effects,
necessary except such as may be by law exempt from
execution. Said order shall further forbid the
Determination of solvency or insolvency of payment to the debtor of any debts due to him,
debtor and the delivery to the debtor, or to any person
for him, of any property belonging to him, and
SEC 23. At the time fixed for the hearing of
the transfer of any property by him, and shall
said order to show cause, or at another time to
further appoint a time and place for a meeting
which such hearing may be adjourned, the
of the creditors to choose an assignee of the
debtor must answer the petition, or may demur
estate. Said order shall designate a newspaper
for the same causes as are provided for
of general circulation published in the province
demurrer in other cases by the Code of Civil
or city in which the petition is filed, if there be
Procedure. If he demur and the demurrer be
one, and if there be none, in a newspaper
overruled, the debtor shall immediately answer
which, in the opinion of the judge, will best give
the petition. Such answer shall contain a
notice to the creditors of the said insolvent, and
specific denial of the material allegations of the
in the newspaper so designated said order shall
petition controverted by him, and shall be
be published as often as may be prescribed by
sworn to; and the issues raised thereon shall be
the court or the judge thereof. The time
promptly tried and disposed of. If, upon such
appointed for the election of an assignee shall
trial, the issues are found in favor of the
not be less than two nor more than eight weeks
respondent, the proceedings shall be dismissed,
from the date of the order of adjudication. Upon
and the respondent shall be allowed all costs,
the granting of said order, all civil proceedings
counsel fees, expenses, and damages sustained
pending against the said insolvent shall be
by reason of the proceedings therein. Counsel
stayed. When an assignee is chosen as
fees, costs, expenses, and damages shall be
provided in this Act, the sheriff or receiver, if
fixed and allowed by the court.
there be one, shall thereupon deliver to such
assignee all the property, estate, and
PROVISIONS COMMON TO VOLUNTARY belongings of the insolvent, which have come
AND INVOLUNTARY INSOLVENCIES into his possession, and he shall be allowed and
paid as compensation for his services the same
14.7 Procedure if debtor defaults or is expenses and fees as would by law be
found insolvent collectible if the property had been levied upon
Debtor to file schedule of debts and and safely kept under attachment.
liabilities and inventory of property
Sheriff to take possession of insolvents
SEC 24. If the respondent shall make default, property
or if, after trial, the issues are found in favor of
the petitioners, the court shall make an order SEC 26. In all cases where the debtor resides
adjudging that said respondent is and was, at out of the Philippine Islands; or has departed
the time of filing the petition, an insolvent from the Philippine Islands; or can not, after due
debtor and that the debtor was guilty of the diligence, be found within the Philippine Islands;
acts and things charged in the petition, or such or conceals himself to avoid service of the order
of them as the court may find to be true; and to show cause, or any other preliminary process
shall require said debtor, within such time as or orders in the matter; or is a foreign
the court may designate, not to exceed three corporation having no managing or business
days, to file in court the schedule and inventory agent, cashier, or secretary within the Philippine
provided for in SECs fifteen and sixteen of this Islands upon whom service or orders and
Act, duly verified as required of a petitioning process can be made, and it therefore becomes
debtor: Provided, That in the affidavit of the necessary to obtain service of process and
insolvent, touching his property and its order to show cause, as provided in SEC twenty-
disposition, he shall not be required to swear two of this Act, then the petitioning creditors,
that he has not made any fraudulent preference upon submitting the affidavits requisite to
or committed any other act in conflict with the procure an order of publication, and presenting
provisions of this Act; but he may do so if he a bond in double the amount of the aggregate
desires. Said order shall further direct the sum of their claims against the debtor, shall be
sheriff of the province or city where the entitled to an order of the court directing the
insolvency petition is filed, or the receiver, if sheriff of the province or city in which the
one has been theretofore appointed, to take matter is pending to take into his custody a
possession of and safely keep, until the sufficient amount of property of the debtor to
appointment of an assignee, all the deeds,
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satisfy the demands of the petitioning creditors the debtor duly recorded and not dissolved
and the costs of the proceedings. Upon under this Act shall be permitted to vote at the
receiving such order of the court to take into election of the assignee any part of his secured
custody property of the debtor, it shall be the claim unless he shall first have the value of
duty of the sheriff to take possession of the such security fixed as provided in SEC fifty-nine
property and effects of the debtor, not exempt of this Act, or shall surrender to the sheriff or
from execution, to an extent sufficient to cover receiver of the estate of the insolvent, if there
the amount provided for, and to prepare, within be a receiver, all such property, or assign such
three days from the time of taking such lien to such sheriff or receiver. The surrender or
possession, a complete inventory of all the assignment of such security or lien shall be for
property so taken, and to return it to the court the benefit of all creditors of the estate of the
as soon as completed. The time for taking the insolvent. The value of such security, if fixed by
inventory and making return thereof may be the court, shall be so fixed at least one day
extended for good cause shown to the court or before the day appointed for the election of an
a judge thereof. The sheriff shall also prepare a assignee, in which event the claimant may
schedule of the names and residences of the prove his demand as provided in this SEC for
creditors, and the amount due each, from the any unsecured balance, subject to the filing of
books of the debtor, or from such other papers exceptions as in all other claims.
or data of the debtor available as may come to
his possession, and shall file such schedule list Conveyance of insolvents property to
of creditors and inventory with the clerk of the assignee
court
SEC 32. As soon as an assignee is elected or
Meeting of creditors for election of appointed and qualified, the clerk of the court
assignee in insolvency shall, by an instrument under his hand and seal
Filing of claims by creditors prior to of the court, assign and convey to the assignee
election all the real and personal property, estate, and
effects of the debtor with all his deeds, books,
SEC 29. No creditor shall be entitled to vote for and papers relating thereto, and such
the election of an assignee unless he shall have assignment shall relate back to the
filed his claim in the office of the clerk of the commencement of the proceedings in
court in which the proceedings are pending at insolvency, and shall relate back to the acts
least two days prior to the time appointed for upon which the adjudication was founded, and
such election. All claims shall contain a by operation of law shall vest the title to all
statement showing the amount and nature of such property, estate, and effects in the
the claim and security, if any. The claim shall be assignee, although the same is then attached
verified by the claimant, or his duly authorized on mesne process, as the property of the
agent or attorney. No claim barred by the debtor. Such assignment shall operate to vest
statute of limitations shall be proved or allowed in the assignee all of the estate of the insolvent
against the estate of an insolvent debtor for any debtor not exempt by law from execution. It
purpose. Any person interested in the estate of shall also dissolve any attachment levied within
the insolvent may file exceptions to the legality one month next preceding the commencement
or good faith of any claim, by setting forth of the insolvency proceedings and vacate and
specifically in writing his interest in the estate, set aside any judgment entered in any action
and the grounds of his objection to such claim. commenced within thirty days immediately
Such exceptions shall be verified by the prior to the commencement of insolvency
affidavit of the party objecting, or his duly proceedings and shall vacate and set aside any
authorized agent or attorney, and the affidavit execution issued thereon and shall vacate and
shall set out that such exceptions are not made set aside any judgment entered by default or
for the purpose of delay and are made in good consent of the debtor within thirty days
faith in the best interests of said estate. immediately prior to the commencement of the
Exceptions to any claim must be filed with the insolvency proceedings.
clerk of the court at least one day before the
time appointed for the election of an assignee, Assignees right to recover insolvents
and such exceptions shall be heard and property to assignee, etc.
disposed of by the court, on affidavit or other
evidence, in a summary manner, before the SEC 33. The assignee shall have the right to
election of an assignee. No creditor or claimant recover all the estate debts, and effects of said
who holds any mortgage, pledge, or lien of any insolvent. If, at the time of the commencement
kind whatever as security for the payment of his of proceedings in insolvency, an action is
claim or attachment or execution on property of pending in the name of the debtor, for the
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recovery of a debt or other thing which might or such mortgage, contracts, pledges, judgments,
ought to pass to the assignee by the or liens.
assignment, the assignee shall be allowed and 6. To settle all matters and accounts
admitted to prosecute the action, in like manner between such debtor and his creditors, subject
and with like effect as if it had been originally to the approval of the court.
commenced by him. If there are any rights of 7. Under the order of the court or judge
action in favor of the insolvent for damages, on appointing him, to compound with any person
any account, for which an action is not pending, indebted to such debtor, and thereupon
the assignee shall have the right to prosecute discharge all demands against such person.
the same with the same effect as the insolvent 8. To recover from any person receiving a
might have done himself if no proceedings in conveyance, gift, transfer, payment, or
insolvency had been instituted. If any action or assignment, made contrary to any provision of
proceeding in which the insolvent is defendant this Act, the property thereby transferred or
is pending at the time of the adjudication, the assigned; or in case a re-delivery of the
assignee may defend the same in the same property can not be had, to recover the value
manner and with like effect as it might have thereof, with damages for the detention.
been defended by the insolvent. In a suit
prosecuted or defended by the assignee, a
certified copy of the assignment made to him
Conversion of insolvents property into
shall be conclusive evidence of his authority to
money
sue or defend.

SEC 39. The assignee shall as speedily as


Powers of assignee
possible convert the estate, real and personal,
into money. He shall keep a regular account of
SEC 36. The said assignee shall have power: all moneys received by him as assignee, to
1. To sue and recover all the estate, which every creditor or other person interested
assets, debts, and claims, belonging to or due therein may, at all reasonable times, have
to such debtor; and no set-off or counterclaim access. No private sale of any property of the
shall be allowed in any such for debts estate of any insolvent debtor shall be valid
contracted by the insolvent within thirty days unless made under the order of the court, upon
immediately preceding the filing of the petition a petition in writing, which shall set forth the
of insolvency except in case of creditors facts showing the sale to be necessary. Upon
specified in SEC fifty of this Act. filing the petition, notice of the hearing thereof
2. To take into his possession all the of at least ten days shall be given by publication
estate of such debtor except property exempt and mailing, in the same manner as is provided
by law from execution, whether attached or in SEC nineteen of this Act. If it appears that a
delivered to him, or afterwards discovered, and private sale is for the best interests of the
all books, vouchers, evidence of indebtedness, estate, the court shall order it to be made.
and securities belonging to the same.
3. In case of a non-resident or absconding
or concealed debtor, to demand and receive of
every sheriff who shall have attached any of the Proof of debts (SECs 53-62)
property of such debtor, or who shall have in his
possession any moneys arising from the sale of SEC 53. All debts due and payable from the
such property, all such property and moneys, debtor at the time of the adjudication of
on paying him his lawful costs and charges for insolvency, and all debts then existing but not
attaching and keeping the same. payable until a future time, a discount being
4. From time to time to sell at public made if no interest is payable by the terms of
auction after advertisement in the manner the contract, may be proved against the estate
provided by subSECs (1), (2), and (3) of SEC of the debtor.
four hundred and fifty-four of the Code of Civil
Procedure, upon order of the court, any of the SEC 54. If the debtor is bound as indorser,
estate, real and personal, which has come into surety, bail, or guarantor, upon any bill, bond,
his possession, and which is vested in him as note, or other specialty or contract, or for any
such assignee, and on such sales to execute the debt of any person, and his liability shall not
necessary conveyances and bills of sale. have become absolute until after the
5. To redeem all valid mortgages and adjudication of insolvency, the creditor may
conditional contracts, and all valid pledges of prove the same after such liability shall have
personal property, and to satisfy any judgments become fixed, and before the final dividend
which may be an incumbrance on any property shall have been declared.
sold by him; or to sell such property, subject to
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SEC 55. In all cases of contingent debts and before the election of an assignee, or by a sale
contingent liabilities, contracted by the debtor, thereof, to be made in such manner as the
and not herein otherwise provided for, the court or judge thereof shall direct; or the
creditor may make claim therefor and have his creditor may release or convey his claim to the
claim allowed, with the right to share in the receiver, if any, or if no receiver then to the
dividends, if the contingency shall happen sheriff, before the election of an assignee, or to
before the order of the final dividend; or he the assignee if an assignee has been elected,
may, at any time, apply to the court to have the upon such property, and be admitted to prove
present value of the debt or liability ascertained his whole debt. If the value of the property
and liquidated, which shall be done in such exceeds the sum for which it is so held as
manner as the court shall order, and it shall be security, the assignee may release to the
allowed for the amount so ascertained. creditor the debtors right of redemption
thereon on receiving such excess; or he may
SEC 56. Any person liable as bail, surety, or sell the property, subject to the claim of the
guarantor, or otherwise, for the debtor, who creditor thereon, and in either case the
shall have paid the debt, or any part thereof, in assignee and creditor, respectively, shall
discharge of the whole, shall be entitled to execute all deeds and writings necessary or
prove such debt, or to stand in the place of the proper to consummate the transaction. If the
creditor, if he shall have proved the same, property is not sold or released, and delivered
although such payments shall have been made up, or its value fixed, the creditor shall not be
after the proceedings in insolvency were allowed to prove any part of his debt, but the
commenced; and any person so liable for the assignee shall deliver to the creditor all such
debtor, and who has not paid the whole of said property upon which the creditor holds a
debt, but is still liable for the same, or any part mortgage, pledge, or lien, or upon which he has
thereof, may, if the creditor shall fail or omit to an attachment or execution.
prove such debt, prove the same in the name of
the creditor. SEC 60. No creditor, proving his debt or claim,
shall be allowed to maintain any suit therefor
SEC 57. Where the debtor is liable to pay rent, against the debtor, but shall be deemed to have
or other debt falling due at fixed and stated waived all right of action and suit against him,
periods, the creditor may prove for a and all proceedings already commenced, or any
proportionate part thereof up to the time of the unsatisfied judgment already obtained thereon,
insolvency, as if the same became due from shall be deemed to be discharged and
day to day, and not at such fixed and stated surrendered thereby; and after the debtors
periods. discharge, upon proper application and proof to
the court having jurisdiction, all such
SEC 58. In all cases of mutual debts and proceedings shall be dismissed, and such
mutual credits between the parties, the account unsatisfied judgments satisfied of record:
between them shall be stated, and one debt set Provided, That no valid lien existing in good
off against the other, and the balance only shall faith thereunder shall be thereby affected. A
be allowed and paid. But no set-off or creditor proving his debt or claim shall not be
counterclaim shall be allowed of a claim in its held to have waived his right of action or suit
nature not provable against the estate: against the debtor when a discharge has have
Provided, That no set-off or counterclaim shall been refused or the proceedings have been
be allowed in favor of any debtor to the determined without a discharge. No creditor
insolvent of a claim purchased by or transferred whose debt is provable under this Act shall be
to such debtor within thirty days immediately allowed, after the commencement of
preceding the filing, or after the filing of the proceedings in insolvency, to prosecute to final
petition by or against the insolvent. judgment any action therefor against the debtor
until the question of the debtors discharge
SEC 59. When a creditor has a mortgage, or shall have been determined, and any such suit
pledge of real or personal property of the or proceeding shall, upon the application of the
debtor, or a lien thereon, for securing the debtor or of any creditor, or the assignee, be
payment of a debt owing to him from the stayed to await the determination of the court
debtor, or an attachment or execution on on the question of discharge: Provided, That if
property of the debtor duly recorded and not the amount due the creditor is in dispute, the
dissolved under this Act, he shall be admitted suit, by leave of the court in insolvency, may
as a creditor for the balance of the debt only, proceed to judgment for the purpose of
after deducting the value of such property, such ascertaining the amount due, which amount,
value to be ascertained by agreement between when adjudged, may be allowed in the
him and the receiver, if any, and if no receiver, insolvency proceedings, but execution shall be
then upon such sum as the court or a judge stayed as aforesaid.
thereof may decide to be fair and reasonable,
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writing relating thereto; or (3) if he has been


SEC 61. Any person who shall have accepted guilty of fraud or willful neglect in the care or
any preference, having reasonable cause to custody of his property or in the delivery to the
believe that the same was made or given by the assignee of the property belonging to him at
debtor contrary to any provision of this Act, the time of the presentation of his petition and
shall not be allowed to prove the debt or claim inventory, excepting such property as he is
on account of which the preference was made permitted to retain under the provisions of this
or given, nor shall he receive any dividend Act; or (4) if, within one month before the
thereon, until he shall have surrendered to the commencement of such proceedings, he has
assignee all property, money, benefit, or procured his real estate, goods, moneys, or
advantage received by him under such chattels to be attached or seized on execution;
preference. or (5) if he has destroyed, mutilated, altered, or
falsified any of his books, documents, papers,
SEC 62. The court may, upon the application of writings, or securities, or has made, or been
the assignee, or of any creditor, or without any privy to the making of, any false or fraudulent
application, before or after adjudication in entry in any book of account or other document
insolvency, examine upon oath the debtor in with intent to defraud his creditors; or (6) if he
relation to his property and his estate and may has given any fraudulent preference, contrary
examine any other person tendering or making to the provisions of this Act, or has made any
proof of claims, and may subpoena witnesses to fraudulent payment, gift, transfer, conveyance,
give evidence relating to such matters. All or assignment of any part of his property, or
examinations of witnesses shall be had and has admitted a false or fictitious debt against
depositions shall be taken in accordance with his estate; or (7) if, having knowledge that any
and in the same manner as is provided by the person has proven such false or fictitious debt,
Code of Civil Procedure. he has not disclosed the same to his assignee
within one month after such knowledge; or (8)
if, being a merchant or tradesman, he has not
Discharge (SECs 64-69) kept proper books of account in Arabic
When debtor may apply for discharge numerals and in accordance with the provisions
of the Code of Commerce; or (9) if he, or any
other person on his account, or in his behalf,
SEC 64. At any time after the expiration of has influenced the action of any creditor, at any
three months from the adjudication of stage of the proceedings, by any pecuniary
insolvency, but not later than one year from consideration or obligation; or (10) if he has, in
such adjudication, unless the property of the contemplation of becoming insolvent, made any
insolvent has not been converted into money, pledge, payment, transfer, assignment, or
the debtor may apply to the court for a conveyance of any part of his property, directly
discharge from his debts, and the court shall or indirectly, absolutely or conditionally, for the
thereupon order notice to be given to all purpose of preferring any creditor or person
creditors who have proved their debts to appear having a claim against him, or who is, or may
on a day appointed for that purpose and show be, under liability for him, or for the purpose of
cause why a discharge should not be granted to preventing the property from coming into the
the debtor; said notice shall be given by hands of the assignee, or of being distributed
registered mail and by publication at least once under this Act in satisfaction of his debts; or
a week, for six weeks, in a newspaper published (11) if he has been convicted of any
in the province or city, or, if there be none, in a misdemeanor under this Act, or has been guilty
newspaper which, in the opinion of the judge, of fraud contrary to the true intent of this Act;
will best give notice to the creditors of the said or (12) in case of voluntary insolvency, has
insolvent: Provided, That if no debts have been received the benefit of this or any other Act of
proven, such notice shall not be required. insolvency or bankruptcy within six years next
preceding his application for discharge; or (13)
if insolvency proceedings in which he could
When discharge may not be granted
have applied for a discharge are pending by or
against him in the Court of First Instance of any
SEC 65. No discharge shall be granted, or if
other province or city in the Philippine Islands.
granted shall be valid, (1) if the debtor shall
Before any discharge is granted, the debtor
have sworn falsely in his affidavit annexed to
shall take and subscribe an oath to the effect
his petition, schedule, or inventory, or upon any
that he has not done, suffered, or been privy to
examination in the course of the proceedings in
any act, matter, or thing specified in this Act as
insolvency, in relation to any material fact
grounds for withholding such discharge or as
concerning his estate or his debts or to any
invalidating such discharge, if granted.
other material fact; or (2) if he has concealed
any part of his estate or effects, or any books or
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SEC 66. Any creditor opposing the discharge of such discharge was granted to him, setting
a debtor shall file his objections thereto, forth the same in full, and the same shall be a
specifying the grounds of his opposition, and complete bar to all suits brought on any such
after the debtor has filed and served his answer debts, claims, liabilities, or demands, and the
thereto, which pleadings shall be verified, the certificate shall be prima facie evidence in favor
court shall try the issue or issues raised, of such fact and of the regularity of such
according to the practice provided by law in discharge: Provided, however, That any creditor
civil actions. whose debt was proved or provable against the
estate in insolvency who shall see fit to contest
SEC 67. If it shall appear to the court that the the validity of such discharge on the ground
debtor has in all things conformed to his duty that it was fraudulently obtained and who has
under this Act, and that he is entitled under the discovered the facts constituting the fraud
provisions thereof to receive a discharge, the subsequent to the discharge, may, at any time
court shall grant him a discharge from all his within one year after the date thereof, apply to
debts, except as hereinafter provided, and shall the court which granted it to set it aside and
give him a certificate thereof, under the seal of annul the same.
the court, in substance as follows: In the Court
of First Instance of the _____________, Philippine
Commissions due assignee
Islands. Whereas, ______________, has been duly
adjudged an insolvent under the Insolvency Law
of the Philippine Islands, and appears to have SEC 42. Assignees shall be allowed all
conformed to all the requirements of law in that necessary expenses in the care, management,
behalf, it is therefore ordered by the court that and settlement of the estate, and shall be
said _______________ be forever discharged from entitled to charge and receive for their services
all debts and claims, which by said Insolvency commissions upon all sums of money coming to
Law are made provable against his estate, and their hands and accounted for by them, as
which existed on the _______ day of _________, follows: For the first thousand pesos, at the rate
on which the petition of adjudication was filed of seven per centum; for all above that sum and
by (or against) him, excepting such debts, if not exceeding ten thousand pesos, at the rate
any, as are by said Insolvency Law excepted of five per centum; and for all above that sum,
from the operation of a discharge in insolvency. at the rate of four per centum: Provided,
Given under my hand, and the seal of the court, however, That if the person acting as assignee
this ____ day of ______________, Anno Domini was receiver of the property of the estate
______________ Attest: ____________, clerk. (Seal) pending the election of an assignee, any
_____________, judge. compensation allowed him as such receiver
shall be deducted from the compensation to
which he otherwise would be entitled as such
Debts not discharged assignee: And provided further, That if there
should be two or more assignees the court shall
SEC 68. No tax or assessment due to the order an equitable division of the compensation
Insular Government or any provincial or herein provided, and if for any reason an
municipal government, whether proved or not assignees term is completed before the final
as provided for in this Act, shall be discharged. settlement of the estate and a successor is
Nor shall any debt created by the fraud or appointed the court shall not allow to any such
embezzlement of the debtor, or by his assignee prior to the settlement of the estate
defalcation as a public officer or while acting in an amount exceeding four per centum of the
a fiduciary capacity, be discharged under this sums of money coming into his hands. Upon the
Act, but the debt may be proved, and the final settlement of the estate an equitable
dividend thereon shall be a payment on account distribution of the compensation of the assignee
of said debt. No discharge granted under this shall be made.
Act shall release, discharge or affect any person
liable for the same debt, for or with the debtor, Composition
either as partner, joint contractor, indorser,
surety, or otherwise.
SEC 63. An insolvent may offer terms of
SEC 69. A discharge, duly granted under this composition to his creditors after, but not
Act, shall, with the exceptions aforesaid, release before, he has filed in court a schedule of his
the debtor from all claims, debts, liabilities, and property and list of his creditors as provided in
demands set forth in his schedule, or which this Act. An application for the confirmation of a
were or might have been proved against his composition may be filed in the insolvency
estate in insolvency, and may be pleaded by a court after, but not before, it has been accepted
simple averment that on the day of its date in writing by a majority in number of all
creditors whose claims have been allowed,
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which number must represent a majority in distributed ratably among his creditors, or to
amount of such claims and after the defeat the object of, or in any way hinder,
consideration to be paid by the insolvent to his impede, or delay the operation of or to evade
creditors and the money necessary to pay all any of the provisions of this Act, such
debts which have priority and the costs of attachment, sequestration, seizure, payment,
proceedings have been deposited in such place pledge, mortgage, transfer, sale, assignment, or
as shall be designated by and subject to the conveyance is void, and the assignee, or the
order of the court. A time shall be fixed by the receiver, may recover the property, or the value
court for the hearing upon an application for the thereof, as assets of such insolvent debtor. If
confirmation of a composition, and for the such payment, pledge, mortgage, conveyance,
hearing of such objections as may be made to sale, assignment, or transfer is not made in the
its confirmation. The court shall confirm a usual and ordinary course of business of the
composition if satisfied that (1) it is for the best debtor, or if such seizure is made under a
interest of the creditors; (2) that the insolvent judgment which the debtor has confessed or
has not been guilty of any of the acts, or of a offered to allow, that fact shall be prima facie
failure to perform any of the duties, which evidence of fraud. Any payment, pledge,
would create a bar to his discharge; and (3) that mortgage, conveyance, sale, assignment, or
the offer and its acceptance are in good faith, transfer of property of whatever character
and have not been made or procured except as made by the insolvent within one month before
herein provided, or by any means, promises, or the filing of a petition in insolvency by or
acts herein forbidden. Upon the confirmation of against him, except for a valuable pecuniary
a composition the consideration shall be consideration made in good faith, shall be void.
distributed as the judge shall direct, and the All assignments, transfers, conveyances,
case dismissed, and the title to the insolvents mortgages, or incumbrances of real estate shall
property shall revest in him. Whenever a be deemed, under this SEC, to have been made
composition is not confirmed, the estate in at the time the instrument conveying or
insolvency shall be administered as herein affecting such realty was filed for record in the
provided. The court may, upon application of a office of the register of deeds of the province or
party in interest, filed at any time within six city where the same is situated.
months after the composition has been
confirmed, set the same aside, and reinstate Dividends in insolvency
the case if it shall be made to appear upon a
trial that fraud was practiced in the procuring of
such composition, and that the knowledge SEC 45. Whenever any dividend has been duly
thereof has come to the petitioner since the declared, the distribution of it shall not be
confirmation of such composition. stayed or affected by reason of debts being
subsequently proved, but any creditor proving
such a debt shall be entitled to a dividend equal
Fraudulent preferences and transfers to those already received by the other creditors
before any further dividend is made to the
SEC 70. If any debtor, being insolvent, or in latter, if the failure to prove such claim shall not
contemplation of insolvency, within thirty days have resulted from his own neglect.
before the filing of a petition by or against him, Articles 2236-2251 of Civil Code
with a view to giving a preference to any
creditor or person having a claim against him or Art. 2236. The debtor is liable with all his
who is under any liability for him, procures any property, present and future, for the fulfillment
part of his property to be attached, of his obligations, subject to the exemptions
sequestered, or seized on execution, or makes provided by law. (1911a)
any payment, pledge, mortgage, assignment, Art. 2237. Insolvency shall be governed by
transfer, sale, or conveyance of any part of his special laws insofar as they are not inconsistent
property, either directly or indirectly, absolutely with this Code. (n)
or conditionally, to any one, the person Art. 2238. So long as the conjugal partnership
receiving such payment, pledge, mortgage, or absolute community subsists, its property
assignment, transfer, sale, or conveyance, or to shall not be among the assets to be taken
be benefited thereby, or by such attachment or possession of by the assignee for the payment
seizure, having reasonable cause to believe that of the insolvent debtor's obligations, except
such debtor is insolvent, and that such insofar as the latter have redounded to the
attachment, sequestration, seizure, payment, benefit of the family. If it is the husband who is
pledge, mortgage, conveyance, transfer, sale, insolvent, the administration of the conjugal
or assignment is made with a view to prevent partnership of absolute community may, by
his property from coming to his assignee in order of the court, be transferred to the wife or
insolvency, or to prevent the same from being to a third person other than the assignee. (n)
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Art. 2239. If there is property, other than that such movables are in the hotel, but not for
mentioned in the preceding article, owned by money loaned to the guests;
two or more persons, one of whom is the (11) Credits for seeds and expenses for
insolvent debtor, his undivided share or interest cultivation and harvest advanced to the debtor,
therein shall be among the assets to be taken upon the fruits harvested;
possession of by the assignee for the payment (12) Credits for rent for one year, upon the
of the insolvent debtor's obligations. (n) personal property of the lessee existing on the
Art. 2240. Property held by the insolvent debtor immovable leased and on the fruits of the
as a trustee of an express or implied trust, shall same, but not on money or instruments of
be excluded from the insolvency proceedings. credit;
(n) (13) Claims in favor of the depositor if the
depositary has wrongfully sold the thing
CHAPTER 2 deposited, upon the price of the sale.
CLASSIFICATION OF CREDITS In the foregoing cases, if the movables to which
the lien or preference attaches have been
Art. 2241. With reference to specific movable wrongfully taken, the creditor may demand
property of the debtor, the following claims or them from any possessor, within thirty days
liens shall be preferred: from the unlawful seizure. (1922a)
(1) Duties, taxes and fees due thereon to the Art. 2242. With reference to specific immovable
State or any subdivision thereof; property and real rights of the debtor, the
(2) Claims arising from misappropriation, following claims, mortgages and liens shall be
breach of trust, or malfeasance by public preferred, and shall constitute an encumbrance
officials committed in the performance of their on the immovable or real right:
duties, on the movables, money or securities (1) Taxes due upon the land or building;
obtained by them; (2) For the unpaid price of real property sold,
(3) Claims for the unpaid price of movables upon the immovable sold;
sold, on said movables, so long as they are in (3) Claims of laborers, masons, mechanics and
the possession of the debtor, up to the value of other workmen, as well as of architects,
the same; and if the movable has been resold engineers and contractors, engaged in the
by the debtor and the price is still unpaid, the construction, reconstruction or repair of
lien may be enforced on the price; this right is buildings, canals or other works, upon said
not lost by the immobilization of the thing by buildings, canals or other works;
destination, provided it has not lost its form, (4) Claims of furnishers of materials used in the
substance and identity; neither is the right lost construction, reconstruction, or repair of
by the sale of the thing together with other buildings, canals or other works, upon said
property for a lump sum, when the price thereof buildings, canals or other works;
can be determined proportionally; (5) Mortgage credits recorded in the Registry of
(4) Credits guaranteed with a pledge so long as Property, upon the real estate mortgaged;
the things pledged are in the hands of the (6) Expenses for the preservation or
creditor, or those guaranteed by a chattel improvement of real property when the law
mortgage, upon the things pledged or authorizes reimbursement, upon the immovable
mortgaged, up to the value thereof; preserved or improved;
(5) Credits for the making, repair, safekeeping (7) Credits annotated in the Registry of
or preservation of personal property, on the Property, in virtue of a judicial order, by
movable thus made, repaired, kept or attachments or executions, upon the property
possessed; affected, and only as to later credits;
(6) Claims for laborers' wages, on the goods (8) Claims of co-heirs for warranty in the
manufactured or the work done; partition of an immovable among them, upon
(7) For expenses of salvage, upon the goods the real property thus divided;
salvaged; (9) Claims of donors or real property for
(8) Credits between the landlord and the pecuniary charges or other conditions imposed
tenant, arising from the contract of tenancy on upon the donee, upon the immovable donated;
shares, on the share of each in the fruits or (10) Credits of insurers, upon the property
harvest; insured, for the insurance premium for two
(9) Credits for transportation, upon the goods years. (1923a)
carried, for the price of the contract and Art. 2243. The claims or credits enumerated in
incidental expenses, until their delivery and for the two preceding articles shall be considered
thirty days thereafter; as mortgages or pledges of real or personal
(10) Credits for lodging and supplies usually property, or liens within the purview of legal
furnished to travellers by hotel keepers, on the provisions governing insolvency. Taxes
movables belonging to the guest as long as mentioned in No. 1, Article 2241, and No. 1,
Article 2242, shall first be satisfied. (n)
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Art. 2244. With reference to other property, real others to the extent of the value of the personal
and personal, of the debtor, the following claims property to which the preference refers.
or credits shall be preferred in the order named: Art. 2247. If there are two or more credits with
(1) Proper funeral expenses for the debtor, or respect to the same specific movable property,
children under his or her parental authority who they shall be satisfied pro rata, after the
have no property of their own, when approved payment of duties, taxes and fees due the State
by the court; or any subdivision thereof. (1926a)
(2) Credits for services rendered the insolvent Art. 2248. Those credits which enjoy preference
by employees, laborers, or household helpers in relation to specific real property or real
for one year preceding the commencement of rights, exclude all others to the extent of the
the proceedings in insolvency; value of the immovable or real right to which
(3) Expenses during the last illness of the the preference refers.
debtor or of his or her spouse and children Art. 2249. If there are two or more credits with
under his or her parental authority, if they have respect to the same specific real property or
no property of their own; real rights, they shall be satisfied pro rata, after
(4) Compensation due the laborers or their the payment of the taxes and assessments
dependents under laws providing for indemnity upon the immovable property or real right.
for damages in cases of labor accident, or (1927a)
illness resulting from the nature of the Art. 2250. The excess, if any, after the payment
employment; of the credits which enjoy preference with
(5) Credits and advancements made to the respect to specific property, real or personal,
debtor for support of himself or herself, and shall be added to the free property which the
family, during the last year preceding the debtor may have, for the payment of the other
insolvency; credits. (1928a)
(6) Support during the insolvency proceedings, Art. 2251. Those credits which do not enjoy any
and for three months thereafter; preference with respect to specific property,
(7) Fines and civil indemnification arising from a and those which enjoy preference, as to the
criminal offense; amount not paid, shall be satisfied according to
(8) Legal expenses, and expenses incurred in the following rules:
the administration of the insolvent's estate for (1) In the order established in Article 2244;
the common interest of the creditors, when (2) Common credits referred to in Article 2245
properly authorized and approved by the court; shall be paid pro rata regardless of dates.
(9) Taxes and assessments due the national (1929a)
government, other than those mentioned in
Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province, 14.8 Cases
other than those referred to in Articles 2241,
No. 1, and 2242, No. 1;
Application of Civil Code provisions on
(11) Taxes and assessments due any city or
concurrence and preference of credits
municipality, other than those indicated in
Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries De Barreto vs. Villanueva G.R. L-14938
caused by a quasi-delict; Facts:
(13) Gifts due to public and private institutions Cruzado sold land (which was foreclosed
of charity or beneficence; by RFC but later resold to Cruzado) to
(14) Credits which, without special privilege, Villanueva with a stipulation that Villanueva will
appear in (a) a public instrument; or (b) in a continue payment to RFC (for the reselling
final judgment, if they have been the subject of price). Villanueva mortgaged the land to De
litigation. These credits shall have preference Barreto when it obtained a loan from the latter.
among themselves in the order of priority of the Villanueva failed to pay both Cruzado and De
dates of the instruments and of the judgments, Barreto. On the one hand, De Barreto sued for
respectively. (1924a) foreclosure and won. On the other hand,
Art. 2245. Credits of any other kind or class, or Cruzado filed a motion in that foreclosure
by any other right or title not comprised in the proceeding for the recognition of his vendors
four preceding articles, shall enjoy no lien.
preference. (1925) RTC: granted Cruzados motion that his
lien be satisfied by the foreclosure proceeds.
CHAPTER 3 SC: affirmed RTC. But on MFR, reversed
ORDER OF PREFERENCE OF CREDITS RTC ruling.

Art. 2246. Those credits which enjoy preference Held:


with respect to specific movables, exclude all
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The question as to whether the Civil


Code and the Insolvency Law can be Held:
harmonized is settled by Article 2243, Civil SC: Difontorum et al. are fools!!! It is
Code. The preferences named in Articles 2241 clear from the wording of the law that the
and 2242 are to be enforced in accordance with preferential right accorded to employees
the Involvency Law. and workers under Article 110 may be
Thus, it becomes evident that one invoked only during bankruptcy or judicial
preferred creditor's third-party claim to liquidation proceedings against the
the proceeds of a foreclosure sale (as in employer. The law is unequivocal and
the case now before us) is not the admits of no other construction.
proceeding contemplated by law for the There is no first automatic lien. What
enforcement of preferences under Article Article 110 of the Labor Code establishes
2242, unless the claimant were enforcing is not a lien, but a preference of credit in
a credit for taxes that enjoy absolute favor of employees. This simply means
priority. If none of the claims is for taxes, that during bankruptcy, insolvency or
a dispute between two creditors will not liquidation proceedings involving the
enable the Court to ascertain the pro rata existing properties of the employer, the
dividend corresponding to each, because employees have the advantage of having
the rights of the other creditors likewise their unpaid wages satisfied ahead of
enjoying preference under Article 2242 certain claims which may be proved
can not be ascertained. Wherefore, the order therein.
of the Court of First Instance of Manila now
appealed from decreeing that the proceeds of
the foreclosure sale be apportioned only
between appellant and appellee, is incorrect Contractors claim not entitled to preference in
and must be reversed. the absence of insolvency proceeding
In the absence of insolvency proceedings
(or other equivalent general liquidation of the J.L. Bernardo Construction, et al. vs. CA
debtor's estate), the conflict between the G.R. 105827
parties now before us must be decided Facts:
pursuant to the well established principle The Municipality of San Antonio failed to
concerning register lands; that a purchaser in pay petitioners for the latters construction of
good faith and for value (as the appellant the public market of San Antonio. Petitioners
concededly is) takes registered property free then sued the municipality for breach of
from liens and encumbrances other than contract, specific performance, etc. with a
statutory liens and those recorded in the prayer for the enforcement of contractors lien
certificate of title. There being no insolvency (based on Art. 2242 of the Civil Code).
or liquidation, the claim of the appellee, RTC granted petitioners motion and
as unpaid vendor, did not acquire the awarded possession and use of the building to
character and rank of a statutory lien co- them. CA reversed RTC.
equal to the mortgagee's recorded SC: affirmed CA
encumbrance, and must remain
subordinate to the latter. Held:
Article 2242 only finds application
when there is a concurrence of credits, i.e.
No lien on specific property created by Art. 110 when the same specific property of the
of the Labor Code debtor is subjected to the claims of
several creditors and the value of such
property of the debtor is insufficient to
DBP vs. Secretary of Labor G.R. 79351 pay in full all the creditors. In such a
Facts: situation, the question of preference will arise,
Difontorum and other co-employees that is, there will be a need to determine which
obtained a favorable judgment against RMC for of the creditors will be paid ahead of the others.
illegal dismissal, ULP, etc. A writ of execution Fundamental tenets of due process will dictate
was not satisfied (in 1984). In 1983, DBP that this statutory lien should then only be
foreclosed RMCs premises. Thus, Difontorum et enforced in the context of some kind of a
al. filed with the Minister of Labor and proceeding where the claims of all the preferred
Employment a motion for delivery of creditors may be bindingly adjudicated, such as
properties of RMC in possession of DBP to MOLE insolvency proceedings.
for proper disposition pursuant to Art. 110 of This is made explicit by Article 2243
the Labor Code which gives employees 1st which states that the claims and liens
preference over properties of the employer. enumerated in articles 2241 and 2242 shall be
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considered as mortgages or pledges of real or It may be that BMC had filed a petition
personal property, or liens within the purview of for rehabilitation and suspension of payments
legal provisions governing insolvency. with the SEC. The nagging fact, however is that
The action filed by petitioners in the BMC is a different juridical person from the
trial court does not partake of the nature respondent spouses. Accordingly, the alleged
of an insolvency proceeding. It is basically insolvency of BMC cannot, as petitioner
for specific performance and damages. postulates, extend to the respondent spouses
Thus, even if it is finally adjudicated that such that transaction of the latter comes within
petitioners herein actually stand in the the purview of SEC 70 of the Insolvency Law.
position of unpaid contractors and are Second, the real debtor of petitioner
entitled to invoke the contractor's lien bank in this case is BMC. The fact that the
granted under Article 2242, such lien respondent spouses bound themselves to
cannot be enforced in the present action answer for BMCs indebtedness under the
for there is no way of determining surety agreement referred to at the outset is
whether or not there exist other preferred not reason enough to conclude that the spouses
creditors with claims over the San Antonio are themselves debtors of petitioner bank.
Public Market. The records do not contain any Third, SEC 70 of the Insolvency Law
allegation that petitioners are the only creditors considers transfers made within a month
with respect to such property. The fact that no after the date of cleavage void, except
third party claims have been filed in the trial those made in good faith and for valuable
court will not bar other creditors from pecuniary consideration. The twin
subsequently bringing actions and claiming that elements of good faith and valuable and
they also have preferred liens against the sufficient consideration have been duly
property involved. established. Given the validity and the
basic legitimacy of the sale in question,
Transfers made within a month after date of there is simply no occasion to apply SEC
cleavage 70 of the Insolvency Law to nullify the
transaction subject of the instant case.
Union Bank of the Philippines vs. Spouses
Ong G.R. 152347
Facts: Additional materials
BMC (a corporation 70% of which is
owned by Spouses Ong) obtained a Php 40M
Articles 29-33 RA 7653
credit line facility from Union Bank wherein the
Ongs assumed a solidary liability undertaking.
SEC 29. Appointment of Conservator.
On Oct. 22, 1991, Spouses Ong sold to Lee their
Whenever, on the basis of a report submitted
house and lot in Greenhills. On Nov. 22, 1991,
by the appropriate supervising or examining
BMC filed a petition for rehabilitation with the
department, the Monetary Board finds that a
SEC.
bank or a quasi-bank is in a state of continuing
Petitioner avers that the Ong-Lee sales
inability or unwillingness to maintain a condition
contract partakes of a fraudulent transfer and
of liquidity deemed adequate to protect the
is null and void in contemplation of the
interest of depositors and creditors, the
aforequoted provision, the sale having
Monetary Board may appoint a conservator
occurred on October 22, 1991 or within thirty
with such powers as the Monetary Board shall
(30) days before BMC filed a petition for
deem necessary to take charge of the assets,
suspension of payments on November 22, 1991.
liabilities, and the management thereof,
reorganize the management, collect all monies
Held:
and debts due said institution, and exercise all
Petitioner's reliance on the afore-quoted
powers necessary to restore its viability. The
provision is misplaced for the following reasons:
conservator shall report and be responsible to
First, SEC 70 of the Insolvency Law
the Monetary Board and shall have the power to
specifically makes reference to
overrule or revoke the actions of the previous
conveyance of properties made by a
management and board of directors of the bank
debtor or by an insolvent who filed a
or quasi-bank.
petition, or against whom a petition for
The conservator should be competent and
insolvency has been filed. Respondent
knowledgeable in bank operations and
spouses Ong have doubtlessly not filed a
management. The conservatorship shall not
petition for a declaration of their own
exceed one (1) year.
insolvency. Neither has one been filed against
The conservator shall receive remuneration to
them. It was never proven that respondent
be fixed by the Monetary Board in an amount
spouses are likewise insolvent.
not to exceed two-thirds (2/3) of the salary of
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the president of the institution in one (1) year, of its creditors, and exercise the general powers
payable in twelve (12) equal monthly of a receiver under the Revised Rules of Court
payments: Provided, That, if at any time within but shall not, with the exception of
one-year period, the conservatorship is administrative expenditures, pay or commit any
terminated on the ground that the institution act that will involve the transfer or disposition of
can operate on its own, the conservator shall any asset of the institution: Provided, That the
receive the balance of the remuneration which receiver may deposit or place the funds of the
he would have received up to the end of the institution in non-speculative investments. The
year; but if the conservatorship is terminated receiver shall determine as soon as possible,
on other grounds, the conservator shall not be but not later than ninety (90) days from take
entitled to such remaining balance. The over, whether the institution may be
Monetary Board may appoint a conservator rehabilitated or otherwise placed in such a
connected with the Bangko Sentral, in which condition so that it may be permitted to resume
case he shall not be entitled to receive any business with safety to its depositors and
remuneration or emolument from the Bangko creditors and the general public: Provided, That
Sentral during the conservatorship. The any determination for the resumption of
expenses attendant to the conservatorship shall business of the institution shall be subject to
be borne by the bank or quasi-bank concerned. prior approval of the Monetary Board.
The Monetary Board shall terminate the If the receiver determines that the institution
conservatorship when it is satisfied that the cannot be rehabilitated or permitted to resume
institution can continue to operate on its own business in accordance with the next preceding
and the conservatorship is no longer necessary. paragraph, the Monetary Board shall notify in
The conservatorship shall likewise be writing the board of directors of its findings and
terminated should the Monetary Board, on the direct the receiver to proceed with the
basis of the report of the conservator or of its liquidation of the institution. The receiver shall:
own findings, determine that the continuance in (1) file ex parte with the proper regional trial
business of the institution would involve court, and without requirement of prior notice
probable loss to its depositors or creditors, in or any other action, a petition for assistance in
which case the provisions of SEC 30 shall apply. the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine
SEC 30. Proceedings in Receivership and Deposit Insurance Corporation for general
Liquidation. Whenever, upon report of the application to all closed banks. In case of quasi-
head of the supervising or examining banks, the liquidation plan shall be adopted by
department, the Monetary Board finds that a the Monetary Board. Upon acquiring jurisdiction,
bank or quasi-bank: the court shall, upon motion by the receiver
(a) is unable to pay its liabilities as they after due notice, adjudicate disputed claims
become due in the ordinary course of business: against the institution, assist the enforcement
Provided, That this shall not include inability to of individual liabilities of the stockholders,
pay caused by extraordinary demands induced directors and officers, and decide on other
by financial panic in the banking community; issues as may be material to implement the
(b) has insufficient realizable assets, as liquidation plan adopted. The receiver shall pay
determined by the Bangko Sentral, to meet its the cost of the proceedings from the assets of
liabilities; or the institution.
(c) cannot continue in business without (2) convert the assets of the institutions to
involving probable losses to its depositors or money, dispose of the same to creditors and
creditors; or other parties, for the purpose of paying the
(d) has willfully violated a cease and desist debts of such institution in accordance with the
order under SEC 37 that has become final, rules on concurrence and preference of credit
involving acts or transactions which amount to under the Civil Code of the Philippines and he
fraud or a dissipation of the assets of the may, in the name of the institution, and with
institution; in which cases, the Monetary Board the assistance of counsel as he may retain,
may summarily and without need for prior institute such actions as may be necessary to
hearing forbid the institution from doing collect and recover accounts and assets of, or
business in the Philippines and designate the defend any action against, the institution. The
Philippine Deposit Insurance Corporation as assets of an institution under receivership or
receiver of the banking institution. liquidation shall be deemed in custodia legis in
For a quasi-bank, any person of recognized the hands of the receiver and shall, from the
competence in banking or finance may be moment the institution was placed under such
designed as receiver. receivership or liquidation, be exempt from any
The receiver shall immediately gather and take order of garnishment, levy, attachment, or
charge of all the assets and liabilities of the execution.
institution, administer the same for the benefit
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The actions of the Monetary Board taken under Title 13


this SEC or under SEC 29 of this Act shall be SUSPENSION OR REVOCATION OF AUTHORITY
final and executory, and may not be restrained Sec. 247. If the Commissioner is of the opinion
or set aside by the court except on petition for upon examination of other evidence that any
certiorari on the ground that the action taken domestic or foreign insurance company is in an
was in excess of jurisdiction or with such grave unsound condition, or that it has failed to
abuse of discretion as to amount to lack or comply with the provisions of law or regulations
excess of jurisdiction. The petition for certiorari obligatory upon it, or that its condition or
may only be filed by the stockholders of record method of business is such as to render its
representing the majority of the capital stock proceedings hazardous to the public or to its
within ten (10) days from receipt by the board policyholders, or that its paid-up capital stock,
of directors of the institution of the order in the case of a domestic stock company, or its
directing receivership, liquidation or available cash assets, in the case of a domestic
conservatorship. mutual company, or its security deposits, in the
The designation of a conservator under SEC 29 case of a foreign company, is impaired or
of this Act or the appointment of a receiver deficient, or that the margin of solvency
under this SEC shall be vested exclusively with required of such company is deficient, the
the Monetary Board. Furthermore, the Commissioner is authorized to suspend or
designation of a conservator is not a revoke all certificates of authority granted to
precondition to the designation of a receiver. such insurance company, its officers and
SEC 31. Distribution of Assets. In case of agents, and no new business shall thereafter be
liquidation of a bank or quasi-bank, after done by such company or for such company by
payment of the cost of proceedings, including its agent in the Philippines while such
reasonable expenses and fees of the receiver to suspension, revocation or disability continues or
be allowed by the court, the receiver shall pay until its authority to do business is restored by
the debts of such institution, under order of the the Commissioner. Before restoring such
court, in accordance with the rules on authority, the Commissioner shall require the
concurrence and preference of credit as company concerned to submit to him a
provided in the Civil Code. business plan showing the company's estimated
SEC 32. Disposition of Revenues and Earnings. receipts and disbursements, as well as the basis
All revenues and earnings realized by the therefor, for the next succeeding three years.
receiver in winding up the affairs and (As amended by Presidential Decree No. 1455).
administering the assets of any bank or quasi-
bank within the purview of this Act shall be Title 14
used to pay the costs, fees and expenses APPOINTMENT OF CONSERVATOR
mentioned in the preceding SEC, salaries of Sec. 248. If at any time before, or after, the
such personnel whose employment is rendered suspension or revocation of the certificate of
necessary in the discharge of the liquidation authority of an insurance company as provided
together with other additional expenses caused in the preceding title, the Commissioner finds
thereby. The balance of revenues and earnings, that such company is in a state of continuing
after the payment of all said expenses, shall inability or unwillingness to maintain a condition
form part of the assets available for payment to of solvency or liquidity deemed adequate to
creditors. protect the interest of policy holders and
SEC 33. Disposition of Banking Franchise. The creditors, he may appoint a conservator to take
Bangko Sentral may, if public interest so charge the assets, liabilities, and the
requires, award to an institution, upon such management of such company, collect all
terms and conditions as the Monetary Board moneys and debts due said company and
may approve, the banking franchise of a bank exercise all powers necessary to preserve the
under liquidation to operate in the area where assets of said company, reorganize the
said bank or its branches were previously management thereof, and restore its viability.
operating: Provided, That whatever proceeds The said conservator shall have the power to
may be realized from such award shall be overrule or revoke the actions of the previous
subject to the appropriate exclusive disposition management and board of directors of the said
of the Monetary Board. company, any provision of law, or of the articles
of incorporation or by-laws of the company, to
the contrary notwithstanding, and such other
powers as the Commissioner shall deem
necessary.
The conservator may be another
insurance company doing business in the
Insurance Code Philippines, by officer or officers of such
company, or any other competent and qualified
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person, firm or corporation. The remuneration shall, if the public interest requires, order its
of the conservator and other expenses liquidation, indicate the manner of its
attendant to the conservation shall be borne by liquidation and approve a liquidation plan and
the insurance company concerned. implement it immediately. The Commissioner
The conservator shall not be subject to shall designate a competent and qualified
any action, claim or demand by, or liability to, person as liquidator who shall take over the
any person in respect of anything done or functions of the receiver previously designated
omitted to be done in good faith in the exercise, and, with all convenient speed, reinsure all its
or in connection with the exercise, of the outstanding policies, convert the assets of the
powers conferred on the conservator. insurance company to cash, or sell, assign or
The conservator appointed shall report otherwise dispose of the same to the
and be responsible to the Commissioner until policyholders, creditors and other parties for the
such time as the Commissioner is satisfied that purpose of settling the liabilities or paying the
the insurance company can continue to operate debts of such company and he may, in the
on its own and the conservatorship shall name of the company, institute such actions as
likewise be terminated should be may be necessary in the appropriate Court to
Commissioner, on the basis of the report of the collect and recover accounts and assets of the
conservator or of his own findings, determine insurance company, and to do such other acts
that the continuance in business of the as may be necessary to complete the
insurance company would be hazardous to liquidation as ordered by the Commissioner.
policy holders and creditors, in which case the The provisions of any law to the contrary
provisions of Title 15 shall apply. notwithstanding, the actions of the
Commissioner under this SEC shall be final and
Title 15 executory, and can be set aside by the Court
PROCEEDINGS UPON INSOLVENCY upon petition by the company and only if there
Sec. 249. Whenever, upon examination or is convincing proof that the action is plainly
other evidence, it shall be disclosed that the arbitrary and made in bad faith. The
condition of any insurance company doing Commissioner, through the Solicitor General,
business in the Philippines is one of insolvency, shall then file the corresponding answer reciting
or that its continuance in business would be the proceeding taken and praying the
hazardous to its policyholders and creditors, the assistance of the Court in the liquidation of the
Commissioner shall forthwith order the company. No restraining order or injunction
company to cease and desist from transacting shall be issued by the Court enjoining the
business in the Philippines and shall designate a Commissioner from implementing his actions
receiver to immediately take charge of its under this SEC, unless there is convincing proof
assets and liabilities, as expeditiously as that the action of the Commissioner is plainly
possible collect and gather all the assets and arbitrary and made in bad faith and the
administer the same for the benefit of its petitioner or plaintiff files with the Clerk or
policyholders and creditors, and exercise all the Judge of the Court in which the action is
powers necessary for these purposes including, pending a bond executed in favor of the
but not limited to, bringing suits and foreclosing Commissioner in an amount to be fixed by the
mortgages in the name of the insurance Court. The restraining order or injunction shall
company. be refused or, if granted, shall be dissolved
The Commissioner shall thereupon upon filing by the Commissioner, if he so
determine within thirty days whether the desires, of a bond in an amount twice the
insurance company may be reorganized or amount of the bond of the petitioner or plaintiff
otherwise placed in such condition so that it conditioned that it will pay the damages which
may be permitted to resume business with the petition or plaintiff may suffer by the refusal
safety to its policyholders and creditors and or the dissolution of the injunction. The
shall prescribe the conditions under which such provisions of Rule 58 of the New Rules of Court
resumption of business shall take place as well insofar as they are applicable shall govern the
as the time for fulfillment of such conditions. In issuance and dissolution of the restraining order
such case, the expenses and fees in the or injunction contemplated in this SEC.
collection and administration of the insurance All proceedings under this Title shall be
company shall be determined by the given preference in the Courts. The
Commissioner and shall be paid out of the Commissioner shall not be required to pay any
assets of such company. fee to any public officer for filing, recording, or
If the Commissioner shall determine and in any manner authenticating any paper or
confirm within the said period that the instrument relating to the proceedings.
insurance company is solvent, as defined As used in this Title, the term
hereunder, or cannot resume business with "Insolvency" shall mean the inability of an
safety to its policyholders and creditors, he insurance company to pay its lawful obligations
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as they fall due in the usual and ordinary course


of business as may be shown by its failure to
maintain the margin of solvency required under
SEC 194 of this Code. (As amended by
Presidential Decree No. 1141 and further
amended by Presidential Decree No. 1455).

Sec. 250. In case of liquidation of an insurance


company, after payment of the cost of the
proceedings, including reasonable expenses CORPORATE REHABILITATION
and fees incurred in the liquidation to be SC Rules Procedure on Corporate Rehabilitation
allowed by the Court, the Commissioner shall (AM No. 00-8-10-SC)
pay all allowed claims against such company,
under order of the Court, in accordance with Coverage (Rule 1)
their legal priority. These Rules shall apply to petitions for
rehabilitation of corporations, partnerships and
Sec. 251. The receiver or the liquidator, as the associations pursuant to Presidential Decree No.
case may be, designated under the provisions 902-A.
of this title shall not be subject to any action,
claim or demand by, or liability to, any person Definitions of terms and construction
in respect of anything done or omitted to be (Rule 2)
done in good faith in the exercise, or in
connection with the exercise, of the powers Administrative Expenses
conferred on such receiver or liquidator. (a) Reasonable and necessary expenses
that are incurred in connection with the filing of
P.D. 1529 the petition;
(b) Expenses incurred in the ordinary
SEC 83. Notice of insolvency. Whenever course of business after the issuance of the
proceeding in bankruptcy or insolvency, or stay order
analogous proceedings, are instituted against a - excluding interest payable to the creditors for
debtor who owns registered land, it shall be the loans and credit accommodations existing at
duty of the officer serving the notice of the the time of the issuance of the stay order; and
institution of such proceedings on the debtor to (c) Other expenses that are authorized under
file a copy thereof with the office of the Register this Rules.
of Deeds for the province or city where the land
of the debtor lies. The assignee or trustee "Claim"
appointed by the court in such proceedings Include all claims or demands of whatever
shall be entitled to the entry of a new certificate nature or charter against a debtor or its
of the registered land of the debtor or bankrupt, property, whether for money or otherwise
upon presenting and filing a certified copy of
the assignment in insolvency or order or "Control"
adjudication in bankruptcy with the insolvent's Power of a parent corporation to direct or
or bankrupt's duplicate certificate of title; but govern the financial and operating policies of an
the new certificate shall state that it is entered enterprise so as to obtain benefits from its
to him as assignee in insolvency or trustee in activities.
bankruptcy or other proceedings, as the case
may be.
Control is presumed to exit when:
SEC 84. Judgment or order vacating a. parent owns, directly or indirectly though
insolvency proceedings. Whenever any of subsidiaries, more than one - half () of the
the proceedings of the character named in the voting power of the voting power of an
preceding SEC against a registered owner, of enterprise unless, such ownership does not
which notice has been registered, is vacated by constitute control.
judgment, a certified copy of the judgment or b. parents owns one-half (1/2) or less of the
order may be registered. Where a new voting power of an enterprise when there is
certificate has been entered in the name of the power.
assignee or trustee, such certificate shall be
surrendered for cancellation and forthwith the a. Over more than one-half () of agreement
debtor shall be entitled to the entry of a new with investors;
certificate to him. b. To direct or govern the financial and
operating policies of the enterprise under a
statute or agreement;
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c. To appoint or remove the majority of the (I) Any pleading or motion which is similar to or
member of the board of directors or equivalent of like effect as any of the foregoing.
governing body; or
d. To cast the majority votes at meeting of the Service of pleadings and documents (Sec
board of directors or equivalent governing body. 3)
-Any pleading and/or document required by
"Foreign proceeding" these Rules may be filed with the court
Collective judicial or administrative and/or served upon the other parties by fax or
proceeding in a foreign State, pursuant to a e-mail.
law regarding solvency where the assets and -Date of transmission shall be deemed to
affairs of the debtor are subject to control or be the date of service.
supervision by a foreign court, for the purpose -Where the pleading or document is
of rehabilitation or re-organization. voluminous, the court may, upon motion,
waive the requirement of service; provided that
"Group of companies" a copy thereof together with all its attachments
Can cover only, corporations that are is duly filed with the court and is made available
financially related to one another as parent for examination and reproduction by any party,
corporation, subsidiaries and affiliates. and provided, further, that a notice of such
filing and availability is duly served on the
"Parent" parties.
A corporation directly or indirectly in control
over another company. (authors own meeting) Executory nature of orders (Sec 5)
-Any order issued by the court under these
"Rehabilitation" Rules is immediately executory.
Restoration of the debtor to a position of -A petition to review the order shall not
successful operation and solvency, if it is shown stay the execution of the order unless
that its continuance of operation is restrained or enjoined by the appellate court.
economically feasible and its creditors can
recover more if the corporation continues Nullification of Illegal Transfers and
operation. Preferences (Sec 6)
Upon motion the court may nullify any
"Secured claim" transfer of property or any other
Any clan whose payment or fulfillment is conveyance, sale, payment or agreement
secured by contract or by law, including any made in violation of its stay order or in
clam or credit enumerated under Articles 2241 violation of these Rules.
and 2242 of the civil Code and Article 110, as
amended, of the Labor code of the Philippines. Stay Order (Sec 7)

"Subsidiary" If the court finds the petition to be sufficient in


A corporation where more than fifty percent form and substance, it shall; not later than five
(50%) of its voting stock is owned or controlled (5) working days from the filing of the petition,
directly or indirectly by another corporation. issue an order:

General Provision (Rule 3) Stay of enforcement of claims (Sec 7.b)


-staying enforcement of all claims, whether
Nature of Proceeding (Sec 1) for money or otherwise and whether such
- In Rem. enforcement is by court action or otherwise,
- Jurisdiction over all persons considered as against the debtor, its guarantors and persons
acquired upon publication of the notice of the not solidarily liable with the debtor;
commencement of the proceedings in any -stay order shall not cover claims against letters
newspaper or general circulation. of credit and similar security arrangements
-The proceedings shall also be summary and issued by a third party to secure the payment of
non-adversarial in nature. the debtor's obligations;
- The following pleading are prohibited: -stay order shall not cover foreclosure by a
(a) Motion to dismiss; creditor of property not belonging to a debtor
(b) Motion for a bill of particulars: under corporate rehabilitation;
(c) Petition for relief; -where the owner of such property sought to be
(d) Motion for extension; foreclosed is also a guarantor or one who is not
(e) Motion for postponement solidarily liable, said owner shall be entitled to
(f) Third-party complaint; the benefit of excussion as such guarantor;
(g) Intervention;
(h) Motion to hear affirmative defenses; and
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Prohibition against disposition and (3) General familiarity with the rights of
encumbrances of property (Sec 7.c) creditors in suspension of payments or
-the debtor cannot sell, encumber, transfer, or rehabilitation and general understanding of the
dispose in any manner any of its properties duties and obligations of a rehabilitation
except in the ordinary course of business; receiver;
(4) Good moral character, independence and
Prohibition against payment of pre- integrity;
petition liabilities (Sec 7.d) (5) Lack of conflict of interest as defined in this
-the debtor cannot make any payment on its SEC; and
liabilities except as provided in items (e), (f) and (6) Willingness and ability to file a bond in such
(g) of this SEC or when ordered by the court amount as may be determined by the court.
pursuant to SEC 10 of Rule 3;
Disqualifications:
Prohibition against withholding of goods (1) He is creditor or stockholder of the debtor;
and services (Sec 7.e) (2) He is engaged in a line of business which
-the debtor's suppliers of goods or services competes with the debtor;
cannot withhold supply of goods and services in (3) He is, or was within two (2) years from the
the ordinary course of business for as long as filing of the petition, a director, officer, or
the debtor makes payments for the services employee or the auditor or accountant of the
and goods supplied after the issuance of the debtor;
stay order; (4) He is or was within two (2) years from the
filing of the petition, an underwriter of the
Payment of post-petition administrative outstanding securities of the debtor;
expenses (Sec 7.f) (5) He is related by consanguinity or affinity
-payment in full of all administrative expenses within the fourth civil degree to any creditor,
incurred after the issuance of the stay order; stockholder, director, officer, employee, or
underwriter of the debtor; or
Payment of post-petition credits (Sec 7.g) (6) He has any other direct or indirect material
direct the payment of new loans or other forms interest in the debtor or any creditor.
of credit accommodations obtained for the
rehabilitation of the debtor with prior court Powers and Functions of Rehabilitation
approval; Receiver (Sec 12)
- Not take over the management and
Preservation of claims against debtor (Sec control of the debtor but shall closely
7 last par) oversee and monitor the operations of
The issuance of a stay order does not affect the the debtor during the pendency of the
right to commence actions or proceedings proceedings.
insofar as it is necessary to preserve a claim
against the debtor. For this purpose, the rehabilitation receiver
shall have the powers, duties and functions of a
Concept of Adequate Protection of receiver under Presidential Decree No. 902-A
Property (Sec 10) 1. considered as an officer of the court.
the creditor lacks adequate protection if it can 2. He shall be primarily tasked to study the best
be shown that: way to rehabilitate the debtor and to ensure
(1) The debtor fails or refuses to honor a pre- that the value of the debtor's property is
existing agreement with the to keep the reasonably maintained pending the
property insured; determination of whether or not the debtor
(2) The debtor fails or refuses to take should be rehabilitated, as well as
commercially reasonable steps to maintain the 3.implement the rehabilitation plan after its
property; or approval.
(3) The property has depreciated to an extent
that the creditor is undersecured Accordingly, he shall have the following powers
and functions:
Qualifications and Disqualification of
Rehabilitation Receiver (Sec 11) (a) To verify the accuracy of the petition,
Qualifications: including its annexes such as the Schedule of
(1) Expertise and acumen to manage and Debts and Liabilities and the Inventory of Assets
operate a business similar in size and submitted in support to the petition;
complexity to that of the debtor; (b) To accept and incorporate, when justified,
(2) Knowledge in management, finance and amendments to the Schedule of Debts and
rehabilitation of distressed companies; Liabilities;
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(c) To recommend to the court the disallowance (s) To take possession, control and custody of
of claims and rejection of amendments t the the debtor's assets;
Schedule of Debts and Liabilities that lack (t) To notify counterparties and the court as to
sufficient proof and justification; contracts that the debtor has decided to
(d) To submit to the court and make available continue to perform the breach;
for review by the creditors, a revised Schedule (u) To be notified of and to attend all meetings
of Debts and Liabilities; of the board of directors and stockholder of the
(e) To investigate the acts, conduct, properties, debtor;
liabilities and financial condition of the debtor, (v) To recommend any modification of an
the operation of its business and the desirability approved rehabilitation plan as he may deem
of the continuance thereof; and, any other appropriate;
matter relevant to the proceeding or to the (w) To bring to the attention of the court any
formulation of a rehabilitation plan; material change affecting the debtor's ability to
(f) To examine under oath the directors and meet the obligations under the rehabilitation
officers of the debtor and any other witnesses plan;
that he may deem appropriate; (x) To recommend the appointment of a
(g) To make available to the creditors management committee in the cases provided
documents and notices necessary for them to for under Presidential Decree No. 902-A, as
follow and participate in the proceedings; amended;
(h) To report to the court any fact ascertained (y) To recommend the termination of the
by him pertaining to the causes of the debtor's proceedings and the dissolution of the debtor if
problems, fraud, preferences, dispositions, he determines that the continuance in business
encumbrances, misconduct, mismanagement of such entity is no longer feasible or profitable
and irregularities committed by the or no longer works to the best interest of the
stockholders, directors, management,, or any stockholders, parties-litigants, creditors or the
other person against the debtor; general public;
(i) To employ such person or persons such as (z) To apply to the court for any order or
lawyers, accountants, appraisers and staff are directive that he may deem necessary or
necessary in performing his functions and desirable to aid him in the exercise of his
duties as rehabilitation receiver; powers and performance of his duties and
(j) To monitor the operations of the debtor and functions; and
to immediately report to the court any material (aa) To exercise such other powers as may from
adverse change in the debtor's business; time to time be conferred upon him by the
(k) To evaluate the existing assets and court.
liabilities, earnings and operations of the
debtor; Contents of Rehabilitation Plan (Sec 18)
(l) To determine and recommend to the court (a) desired business targets or goals and
the best way to salvage and protect the the duration and coverage of the
interests of the creditors, stockholders and the rehabilitation;
general public; (b) terms and conditions of such
(m) To study the rehabilitation plan proposed by rehabilitation which shall include the manner
the debtor or any rehabilitation plan submitted of its implementation, giving due regard to
during the proceedings, together with any the interests of secured creditors such as, but
comments made thereon; not limited, to the non-impairment of their
(n) To prohibit and report to the court any security liens or interests;
encumbrance, transfer or disposition of the (c) material financial commitments to
debtor's property outside of the ordinary course support the rehabilitation plan;
of business or what is allowed by the court; (d) means for the execution of the
(o) To prohibit and report to the court any rehabilitation plan;
payments outside of the ordinary course of (e) a liquidation analysis; and
business; (f) such other relevant information to enable
(p) To have unlimited access to the debtor's a reasonable investor to make an informed
employees, premises, books, records and decision on the feasibility of the rehabilitation
financial documents during business hours; plan.
(q) To inspect, copy, photocopy or photograph
any document, paper, book, account or letter, Effects of Rehabilitation (Sec 20)
whether in the possession of the debtor or other (a) The plan and its provisions shall be binding
persons; upon the debtor and all persons who may
(r) To gain entry into any property for the be affected thereby, including the
purpose of inspecting, measuring, surveying or creditors, whether or not such persons
photographing it or any designated relevant have participated in the proceedings or
object or operation thereon;
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opposed the plan or whether or not their claims Opposition to or Comment on the Petition
have been scheduled; (Sec 4)
(b) The debtor shall comply with the -Every creditor of the debtor or any interested
provisions of the plan and shall take all party shall file his verified opposition to or
actions necessary to carry out the plan; comment on the petition not later than
(c) Payments shall be made to the fifteen (15) days before the date of the
creditors in accordance with the provisions of initial hearing fixed in the stay order. -After
the plan; such time, no creditor or interested party
(d) Contracts and other arrangements shall be allowed to file any comment thereon
between the debtor and its creditors shall be or opposition thereto without leave of court.
interpreted as continuing to apply to the extent -If the Schedule of Debts and Liabilities omits a
that they do not conflict with the provisions of claim or liability, the creditor concerned shall
the plan; and attach to its comment or opposition a verified
(e) Any compromises on amounts or statement of the obligations allegedly due it.
rescheduling of timing of payments by the
debtor shall be binding on creditors Approval of Rehabilitation Plan
regardless of whether or not the plan is By Court (Sec 7.b)
successfully implemented. The court shall approve the new rehabilitation
plan not later than ninety (90) days from
Termination of Rehabilitation Proceeding the date of the last initial hearing.
(Sec 21)
-Upon motion, within ninety (90) days from the By Creditors (Sec 7.b.1)
approval of the rehabilitation plan, and after Approval or endorsement of creditors
notice and hearing, the court may revoke the holding at least two-thirds (2/3) of the total
approval thereof on the ground that the liabilities of the debtor including secured
same was secured through fraud. creditors holding more than fifty percent
(50%) of the total secured claims of the debtor
Sec 23 (not in outline) and unsecured creditors holding more than
(a) Dismissal of the petition; fifty percent (50%) of the total unsecured
(b) Failure of the debtor to submit the claims of the debtor;
rehabilitation plan;
(c) Disapproval of the rehabilitation plan by the Cram Down (Sec 11)
court; The court may approve a rehabilitation
(d) Failure to achieve the desired targets or plan even over the opposition of creditors of
goals as set forth in the rehabilitation plan; the debtor, if, in its judgment, the
(e) Failure of the debtor to perform its rehabilitation of the debtor is feasible and
obligations under the plan; the opposition of the creditors is
(f) Determination that the rehabilitation plan manifestly unreasonable if the following are
may no longer be implemented in accordance present:
with its terms, conditions, restrictions or (a) The rehabilitation plan complies with
assumptions; or the requirements specified in SEC 18 of Rule
(g) Successful implementation of the 3;
rehabilitation plan. (b) The rehabilitation plan would provide
Debtor-Initiated Rehabilitation (Rule 4) the objecting class of creditors with
payments whose present value projected
Who may petition (Sec 1) in the plan would be greater than that
-Any debtor who foresees the impossibility of which they would have received if the
meeting its debts when they respectively fall assets of the debtor were sold by a liquidator
due, may petition the proper regional trial court within a six (6)-month period from the date of
for rehabilitation. filing of the petition; and
- A group of companies may jointly file a (c) The rehabilitation receiver has
petition for rehabilitation when one or more of recommended approval of the plan.
its constituent corporations foresee the
impossibility of meeting debts when they In approving the rehabilitation plan, the court
respectively fall due, and the financial distress shall ensure that the rights of the secured
would likely adversely affect the financial creditors are not impaired.
condition and/or operations of the other
member companies of the group is essential Creditor-initiated rehabilitation (Rule 5)
under the terms and conditions of the proposed
rehabilitation plan. Who May Petition (Sec 1)
Any creditor or creditors holding at least
twenty percent (20%) of the debtor's total
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liabilities may file a petition with the proper -Petition for recognition of a foreign proceeding
regional trial court for rehabilitation of a debtor shall be decided within thirty (30) days
that cannot meet its debts as they respectively from the filing thereof.
fall due.
Effect of recognition of foreign procedure
Requirements (Sec 2) (Sec 8)
The petition is accompanied by: Upon recognition of a foreign proceeding:
1. rehabilitation plan (a) Commencement or continuation of
2. list of at least three (3) nominees to the individual actions or individual
position of rehabilitation receiver and proceedings concerning the debtor's assets,
3. verified by a sworn statement that the affiant rights, obligations or liabilities is stayed;
has read the petition and that its contents are provided, that such stay does not affect the
true and correct of his personal knowledge or right to commence individual actions or
based on authentic records and that the proceedings to the extent necessary to
petition is being filed to protect the interests of preserve a claim against the debtor.
the debtor, the stockholders, the investors and (b) Execution against the debtor's assets
the creditors of the debtor. is stayed; and
(c) The right to transfer, encumber or
Pre-negotiated rehabilitation (Rule 6) otherwise dispose of any assets of the debtor is
suspended.
Requirements (Sec 1)
1. A debtor that foresees the impossibility Procedural remedies (Rule 8)
of meeting its debts as they fall due may, by
itself or jointly with any of its creditors, Motion for recognition (Sec 1)
2. file a verified petition for the approval of a. Prior to the approval of the
a pre-negotiated rehabilitation plan. rehabilitation plan.
3. The petition shall comply with SEC 2 of -No relief can be extended to the party
Rule 4 and be supported by an affidavit aggrieved by the court's order on the motion
showing the written approval or through a special civil action for certiorari
endorsement of creditors holding at least under Rule 65 of the rules of Court. Such
two-thirds (2/3) of the total liabilities of the order can only be elevated to the Court of
debtor, including secured creditors holding Appeals as an assigned error in the petition for
more than fifty percent (50%) of the total review of the decision or order approving or
secured claims of the debtor and unsecured disapproving the rehabilitation plan.
creditors holding more than fifty percent (50%) b. After the approval of rehabilitation
of the total unsecured claims of the debtor. plan.
-An order issued after the approval of the
Recognition of Foreign Proceedings (Rule rehabilitation plan can be reviewed only
7) through a special civil action for certiorari
under Rule 65 of the Rules of Court.
Scope (Sec 1)
This Rule applies where: Review of decision or order on
(a) assistance is sought in a Philippine rehabilitation plan (Sec 2)
court by a foreign court or a foreign -an order approving or disapproving a
representative in connection with a foreign rehabilitation plan can only be reviewed
proceeding; through a petition for review to the Court
(b) assistance is sought in a foreign State of Appeals under Rule 43 of the Rules of
in connection with a domestic proceeding Court within fifteen (15) days from notice of the
governed by these Rules; or decision or order.
(c) a foreign proceeding and a domestic
proceeding are concurrently taking place. Concept of debtor-in-place
-The rehabilitation receiver does not take over
The sole fact that a petition is filed the management and control of the debtor but
pursuant to this Rule does not subject the simply oversees and monitors closely the
foreign representative or the foreign operations of the debtor during the pendency of
assets and affairs of the debtor to the the proceedings
jurisdiction of the local courts for any purpose
other than the petition. Appointment of management committee
(Rule 9, Sec 1, SC Interim Rules of
Period for Recognition (Sec 5) Procedure for Intra-corporate
Controversies)
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The appointment of a management committee MWSS vs. Hon. Daway


for a corporation, partnership or association
may be applied for as incident to any of the Except when a letter of credit specifically
cases that may be filed under the Rules or the stipulates otherwise, the obligation of the banks
Interim Rules on Corporate Rehabilitation when issuing letters of credit are solidary with that of
there is imminent danger of: the person or entity requesting for its issuance,
a. dissipation, loss, wastage or destruction of the same being a direct, primary, absolute and
assets or other properties; and definite undertaking to pay the beneficiary upon
b. paralyzation of its business operations which the presentation of the set of documents
may be prejudicial to the interest of the required therein. Being a solidary obligation,
minority stockholders, parties-litigants or the the letter of credit here is excluded from the
general public. jurisdiction of the rehabilitation court.

Cases:

Equality is Equity

Alemars Sibal & Sons, Inc. vs. Elbinias, Purpose of Suspension of actions for claims
et.al., against the corporation

During rehabilitation, assets are held in trust for Sobrejuanite, et.al., vs. ASB Development
the equal benefit of all creditors. As between Corp
creditors, equality is equity. All creditors should
stand on equal footing. The purpose for the suspension of the
proceedings is to prevent a creditor from
Suspension of money claim obtaining an advantage or preference over
another and to protect and preserve the rights
PAL vs. Spouses Kurangkang, et.al., of party litigants as well as the interest of the
investing public or creditors. Such suspension is
The stay order is effective from the date intended to give enough breathing space for the
of its issuance until the dismissal of the management committee or rehabilitation
petition or the termination of the receiver to make the business viable again,
rehabilitation proceedings. The interim rules without having to divert attention and resources
must likewise be read and applied along with to litigations in various fora. The suspension
SEC 6(c) of P.D. 902-A, as so amended, would enable the management committee or
directing that upon the appointment of a rehabilitation receiver to effectively exercise
management committee, rehabilitation its/his powers free from any judicial or extra-
receiver, board or body pursuant to the judicial interference that might unduly hinder or
decree, all actions for claims against the prevent the rescue of the debtor company.
distressed corporation pending before
any court, tribunal, board or body shall be
suspended accordingly. A claim is said to Serious Situation Test
be a right to payment, whether or not It is
reduced to judgment, liquidated or Pryce Corporation vs. CA.
unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or Receivers will be appointed whenever:
equitable, and secured or unsecured. In Finasia 1. necessary in order to preserve the rights of
Investments and Finance Corporation this Court the litigants; and/or
has defined the word claim, contemplated in 2. necessary in order to protect the interest of
SEC 6(c) of P.D. 902-A, as referring to debts or the public
demands of a pecuniary nature and the - clear and imminent danger of losing
assertion of a right to have money paid as well. corporation assets if a receiver is not appointed.
Verily, the claim of private respondents
against petitioner PAL is a money claim
for the missing luggages, a financial
demand, that the law requires to be XV. SEC REORGANIZATION DECREE
suspended pending the rehabilitation PD 902-A AS AMENDED
proceedings.
Organization
Non-suspension of claims against guarantors
and sureties solidarily liable with debtor Sec 4, RA 8799
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sop 135 of 196

Administrative Agency. individual Commissioner, or staff member of


4.1. Commission.
- This Code is administered by SEC as collegial
body composed of Chairperson and 4 Sec 6, RA 8799
Commissioners Indemnification and Responsibilities of
- appointed by Pres for term of 7y ea Commissioners.
- who serve as such until successor is appointed 6.1.
& qualified - Commission shall indemnify ea Commissioner
- Commissioner appointed to fill vacancy prior and officials of Commission, incl personnel
to expiration of term for w/c his / her performing supervision & exam fcns for all costs
predecessor was appointed, serves only for & expenses reasonably incurred in connection
unexpired portion of term. w/ any civil / criminal actions, suits, proceedings
- Unless context indicates otherwise, to w/c they may be or made party by reason of
Commissioner incl Chairperson. their fcns / duties, unless theyre finally
4.2. adjudged to be liable for gross negligence /
- Commissioners must be misconduct.
- natural-born citizens - In settlement / compromise, indemnification is
- at least 40y for Chairperson and at least 35y provided only in connection w/ such matters
for Commissioners covered by settlement as to w/c Commission is
- of good moral character advised by external counsel that persons to be
- of unquestionable integrity indemnified didnt commit any gross negligence
- of known probity & patriotism / misconduct.
- w/ recognized competence in social & - Costs & expenses in defending action, suit,
economic disciplines proceeding may be pd by Commission in
- Majority of Commissioners, incl Chairperson, advance of final disposition upon receipt of
shall be members of Phil Bar. undertaking by or on behalf of Commissioner,
4.3. officer, employee to repay amt advanced shld it
- Chairperson is CEO of the Commission. be determined by Commission that he / she
- Chairperson shall isnt entitled.
- execute & administer policies, decisions, 6.2.
orders, resolutions approved by Commission - Commissioners, officers, employees of
AND Commission who willfully violate this Code OR
- have gen executive direction & supervision of are guilty of negligence, abuse, malfeasance or
work & operation of Commission and its fail to exercise extraordinary diligence in
members, bodies, boards, offices, personnel, performance of duties shall be held liable.
and all admin biz - Similar responsibility applies to
4.4. Commissioners, officers, employees of
- Salary of Chairperson & Commissioners shall Commission for
be 1. disclosure of info, discussion, resolution of
- fixed by Pres Commission of confidential nature OR abt
- based on objective classification system confidential operations of Commission, unless
- at a sum comparable to members of Monetary disclosure is
Board and commensurate to importance - in connection w/ official fcns w/ Commission
attached to position OR
4.5. - w/ prior authorization of Commissioners
- Commission holds mtgs at least once a wk OR 2. use of such info for personal gain or to
as often as necessary upon call of Chairperson detriment of govt, the Commission, 3rd parties
or upon request of 3 Commissioners. - Data / info required to be submitted to Pres
- Notice of mtg is given to all Commissioners and / or Congress or its committee OR to be
and presence of 3 Commissioners constitutes published shall not be confidential.
quorum. In absence of Chairperson, the most
senior Commissioner acts as presiding officer. Sec 7, RA 8799
4.6. Reorganization.
- Commission may delegate any of its fcns to 7.1.
any dept / ofc of the Commission, an individual - Commission is authorized to provide for its
Commissioner or staff member of Commission reorganization, to streamline structure &
except its operations, upgrade HR component and enable
- rvw / appellate authority AND it to more efficiently & effectively perform fcns
- power to adopt, alter, supplement any rule & exercise powers.
- Commission may rvw upon own initiative or 7.2.
upon petition of party any action of dept / ofc, - All positions of Commission are governed by
compensation & position classification systems
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& qualification standards approved by commodity exchanges, other similar orgs AND
Commission based on comprehensive job supervise & regulate the same; incl authority to
analysis & audit of actual duties & determine their number, size, location
responsibilities. h. pass upon, refuse, deny, after consultation
- Compensation plan shall be w/ BoI, Dept of Industry, NEDA or other govt
- comparable w/ prevailing plan in Bangko agency, the application for registration of corp,
Sentral and other govt financial institutions partnership, assn, org w/in its jurisdiction, if not
AND consistent w/ natl economic policies
- subject to periodic rvw by Commission no i. suspend, revoke, after notice & hearing, the
more than once every 2y w/o prejudice to franchise / cert of registration of corp,
yearly merit rvws / increases based on partnership, assn, upon any of grounds
productivity & efficiency. provided by law, incl:
- Commission shall be exempt fr laws, rules, 1. fraud in procuring cert of registration
regulations on compensation, position 2. serious misrepresentation as to what corp
classification, qualification standards. can do or is doing
- Commission shall endeavor to make its system 3. refusal to comply / defiance of lawful order
conform as closely as possible w/ Compensation of Commission restraining commission of acts
& Position Classification Act of 1989. w/c would amt to grave violation of franchise
4. continuous inoperation for at least 5y
Sec 76, RA 8799 5. failure to file by-laws w/in required period
Repealing Clause. 6. failure to file reports in forms determined by
- Revised Securities Act (BP 178) in its entirety Commission w/in period
AND Sec 2, 4, 8 of PD 902A as amended, are j. exercise other powers as implied, necessary,
repealed. incidental to express powers
- All other laws, orders, rules, regulations, or - Hearings are conducted by Commission OR by
parts thereof, inconsistent w/ this Code are Commissioner OR other bodies, boards,
repealed or modified. committees and / or officer created / designated
by Commission for the purpose. Decision,
Powers and Functions ruling, order may be appealed to Commission
en banc w/in 30d after receipt by appellant of
Sec 3. notice of decision, ruling, order.
- Commission has absolute jurisdiction, - Commission shall promulgate rules of
supervision, control over all corps, partnerships, procedures to govern proceedings, hearings,
assns, who are grantees of primary franchise appeals.
and / or license or permit issued by govt to - Aggrieved party may appeal order, decision,
operate in Phils ruling of Commission en banc to SC by petition
- It has power to enlist aid of any and all for rvw.
enforcement agencies of govt, civil or military.
Sec 5, RA 8799
Sec 6. Powers and Functions of the Commission.
- Commission has ff powers: 5.1.
a. issue prelim / permanent injunctions, - Commission shall act w/ transparency and
prohibitory / mandatory, where it has have powers & fcns provided by this Code, PD
jurisdiction (RoC shall apply) 902A, Corp Code, Investment Houses Law,
b. punish for contempt of Commission, direct & Financing Company Act, other laws.
indirect, in accordance w/ RoC - Commission, powers & fcns:
c. compel officers of corp / assn registered by it a. have jurisdiction & supervision over corp,
to call mtgs of stockholders / members under its partnership, assn who are grantees of primary
supervision franchises and / or license / permit issued by
d. pass upon validity of issuance & use of govt
proxies & voting trust agreements for absent b. formulate policies & recommendations on
stockholders / members issues re securities market, advise Congress &
e. issue subpoena duces tecum and summon govt agencies on securities market, propose
witnesses to appear in proceedings of legislation and amendments
Commission; in appropriate cases order search c. approve, reject, suspend, revoke, require
& seizure or cause search & seizure of docs, amendments to registration statements,
papers, files, records, books of accts of entity registration & licensing applications
under investigation d. regulate, investigate, supervise activities of
f. impose fines and / or penalties for violation of persons to ensure compliance
this Decree, laws implemented by Commission, e. supervise, monitor, suspend, take over
rules, etc activities of exchanges, clearing agencies, other
g. authorize establishment of stock exchanges, SROs
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f. impose sanctions not prevent SEC fr exercising jurisdiction under


g. prepare, approve, amend, repeal rules, PD 902A.
regulations, orders; issue opinions, provide
guidance on and supervise compliance w/ such NLRC HAS JURISDICTION OVER CASE
rules INVOLVING OFFICER WHOSE POSITION
h. enlist aid of and / or deputize enforcement IS NOT PROVIDED FOR IN THE BY-LAWS
agencies of govt, civil or military as well as pvt AND WHO WAS NOT ELECTED BY THE
institution, corp, firm, assn or person in BOARD OF DIRECTORS
implementation
i. issue cease & desist orders
Easycall Communications Phils Inc v. King
j. punish for contempt of Commission, direct &
- It had to be first established that the person
indirect, in accordance w/ RoC
removed / dismissed was a corporate officer
k. compel officers of corp or assn to call mtgs
before removal / dismissal could properly fall
of stockholders / members under its supervision
w/in jurisdiction of SEC and not NLRC.
l. issue subpoena duces tecum, summon
- Corporate officers in context of PD 902A are
witnesses to appear in proceedings of
those officers of corp who are given that
Commission, order exam, search, seizure of
character either by Corp Code or by by-laws.
docs, papers, files, records, tax returns, books
Under Sec 25 of Corp Code, the corporate
of accts of entity under investigation
officers are the pres, sec, treas and such other
m. suspend, revoke, after notice & hearing the
officers as provided for in by-laws.
franchise / cert of registration of corp,
- An office is created by charter of the corp;
partnership, assn, upon grounds provided by
the officer is elected by directors / stockholders.
law
On the other hand, an employee occupies no
n. exercise other powers provided by law as
ofc and generally is employed not by action of
well as those implied fr, or w/c are necessary /
directors / stockholders but by managing officer
incidental to express powers
who also determines compensation to be pd.
XXX
REGULATORY AND ADJUDICATORY
Jurisdiction FUNCTIONS OF SEC DISTINGUISHED

Sec 5, RA 8799 SEC v. CA, Cualoping Securities and


Powers and Functions of the Commission. Fidelity Transfers
XXX - SEC has both regulatory AND adjudicative
5.2. functions.
- Commissions jurisdiction over cases under - Under its regulatory responsibilities, SEC may
Sec 5 PD 902A is transferred to Courts of gen - pass upon applications for, suspend, revoke
jurisdiction OR RTC. (after notice & hearing), certificates of
- SC may designate RTC branches that exercise registration of corps, partnerships, assn (excl
jurisdiction over these cases. cooperatives, homeowners' assn, labor unions)
- compel legal & regulatory compliances
Cases - conduct inspections
- impose fines / penalties for violations of
Prof Catindig: Revised Securities Act, implementing rules &
Read Espino and Easycall cases together. Read directives of SEC
Cualoping and Provident cases together. - Justiciable controversy such as can occasion
Compare and contrast. exercise of SEC's exclusive jurisdiction would
require assertion of right by proper party
REMOVAL FROM EMPLOYMENT OF against another who, in turn, contests it. It is
CORPORATE OFFICERS NOT WITHIN one instituted by & against parties having
JURISDICTION OF NLRC interest in subject matter appropriate for
judicial determination predicated on given state
Espino v. NLRC of facts. That controversy must be raised by
- A corporate officer's dismissal is always party entitled to maintain action. Hes the
corporate act and / or intra-corporate person to whom right to seek judicial redress /
controversy. That nature isnt altered by relief belongs w/c can be enforced against party
reason / wisdom w/c Board may have in taking charged w/ having been responsible for, or to
such action. have given rise to, the cause of action. A
- That Espino sought payment of backwages, person / entity tasked w/ power to adjudicate
other benefits, moral & exemplary damages, stands neutral & impartial and acts on basis of
atty's fees in complaint for illegal dismissal will admissible representations of parties.
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sop 138 of 196

- In this case, the proper parties that can bring


the controversy & can cause exercise by SEC of
its orig & exclusive jurisdiction would be all or
any of those who are adversely affected by
transfer of pilfered certificates of stock. Any
peremptory judgment by SEC, w/o such
proceedings having first been initiated, would
be precipitate.
INTRA-CORPORATE CONTROVERSIES (AM
DETERMINATION OF WHICH OF TWO NO. 01-2-04-SC)
STOCK AND TRANSFER BOOKS IS VALID
NOT AN INTRA-CORPORATE DISPUTE Cases Covered (Rule 1)

Sec 1.
Provident International Resources Corp v.
a. Cases covered.
Joaquin T. Venus
- These Rules govern in civil cases involving:
- SECs regulatory authority over pvt corps
1. devices / schemes employed by OR act of
encompasses a wide margin of areas, touching
board of directors, biz associates, officers,
nearly all of corps concerns.
partners, amounting to fraud /
- Under its regulatory responsibilities, SEC may
misrepresentation w/c may be detrimental to
- pass upon applications for, suspend, revoke
public and / or stockholders, partners, members
(after notice & hearing), certificates of
of corp, partnership, assn
registration of corps, partnerships, assn (excl
2. controversies
cooperatives, homeowners' assn, labor unions)
- out of intra-corporate, partnership, assn
- compel legal & regulatory compliances
relations
- conduct inspections
- between & among stockholders, members,
- impose fines / penalties for violations of
associates
Revised Securities Act, implementing rules &
- between any or all of them and the corp,
directives of SEC
partnership, assn of w/c theyre stockholders,
- Considering that the SEC, after notice &
members, associates
hearing, has regulatory power to revoke
3. controversies in election / appointment of
corporate franchise fr w/c a corp owes its
directors, trustees, officers, managers of corp,
legal existence, SEC must likewise have lesser
partnership, assn
power of merely recalling and canceling STB
4. derivative suits
that was erroneously registered.
5. inspection of corp books
- As regulatory body, it is SECs duty to ensure
b. Prohibition against nuisance and harassment
that theres only one set of STB for ea corp.
suits.
- Nuisance & harassment suits are prohibited.
NLRC HAS NO JURISDICTION OVER CASE In determining whether suit is nuisance /
INVOLVING NON-REELECTION OF harassment suit, court considers:
DIRECTOR ETC. 1. extent of shareholding / interest of initiating
stockholder / member
Pearson and George (SE Asia) Inc v. NLRC 2. subject matter of suit
- Any question relating or incident to election of 3. legal & factual basis
new Board of Directors, non-reelection of 4. availability of appraisal rights
Llorente as Director, his loss of position of 5. prejudice to corp, partnership, assn in
Managing Director, or abolition of said ofc are relation to relief sought
intra-corporate matters. Disputes arising - In case of nuisance / harassment suits, court
therefrom are intra-corporate disputes w/c, if may, motu proprio or upon motion, dismiss the
unresolved w/in corporate structure, may be case.
resolved in appropriate action only by SEC
pursuant to its authority under Sec 5 of PD Distinguish from SC Interim Rules of Procedure
902A. on Corporate Rehabilitation
- This isnt a case of dismissal. The matter of
whom to elect is a prerogative that belongs to Modes of Discovery (Rule 3)
Board, and involves exercise of deliberate
choice and faculty of discriminative selection. Sec 1. In general.
Generally, the relationship of person to a corp, - A party can only avail of any of modes of
whether as officer or as agent or employee, discovery not later than 15d fr joinder of issues.
isnt determined by nature of the svcs
performed, but by incidents of relationship as Sec 2. Objections.
they actually exist. - Any mode of discovery may be objected to
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- w/in 10d fr receipt of discovery device AND 3. facts that need not be proven, bec theyre of
- only on ground that the matter requested is judicial notice or expressly / deemed admitted
patently incompetent, immaterial, irrelevant, 4. amendments to pleadings
privileged 5. possibility of obtaining stipulations &
- Court shall rule on objections not later than admission of facts & docs
15d fr filing. 6. objections to admissibility of testimonial,
documentary, other evidence
Sec 3. Compliance. 7. objections to form / substance of affidavit, or
- Compliance w/ mode of discovery shall be part thereof
made w/in 10d fr receipt of discovery device OR 8. simplification of issues
if there are objections, fr receipt of ruling of 9. possibility of submitting case for decision on
court. basis of position papers, affidavits,
documentary & real evidence
Sec 4. Sanctions. 10. schedule of hearing dates
- Sanctions in RoC for failure to avail of, or 11. other matters
refusal to comply w/ modes of discovery apply.
- In addition, court may upon motion, declare Sec 3. Termination.
party non-suited or as in default, as case may - Prelim conference is terminated not later than
be, if refusal to comply w/ mode of discovery is 10d after commencement, WON parties agreed
patently unjustified. to settle amicably.

Pre-trial (Rule 4) Sec 4. Judgment before pre-trial.


- If, after submission of pre-trial briefs, court
Sec 1. Pre-trial conference; mandatory nature. determines that upon consideration of
- W/in 5d after period for availment of, and pleadings, affidavits, other evidence submitted,
compliance w/ modes of discovery, whichever a judgment may be rendered, court may order
comes later, court issues & serves order parties to file simultaneously respective
- setting the case for pre-trial conference AND memoranda w/in non-extendible 20d fr receipt
- directing parties to submit pre-trial briefs of order.
- Parties shall file w/ court and furnish ea other - Court renders judgment, full or otherwise, not
copies of pre-trial brief to ensure receipt by later than 90d fr expiration of period to file
court & other party at least 5d before date set memoranda.
for pre-trial.
- Parties set forth in pre-trial briefs ff: Sec 5. Pre-trial order; judgment after pre-trial.
1. brief statement of nature of case; summarize - Proceedings in pre-trial are recorded.
theory of party in clear & concise language - W/in 10d after termination of pre-trial, court
2. allegations expressly admitted by either / issues order w/c recites
both parties - matters taken up in conference
3. allegations deemed admitted by either / - actions taken
both parties - amendments allowed in pleadings
4. docs not specifically denied under oath by - agreements / admissions made by parties
either / both parties - Court shall rule on objections to or comments
5. amendments to pleadings on admissibility of documentary / other
6. statement of issues, w/c separately evidence, incl affidavit or part thereof.
summarizes factual & legal issues - Shld action proceed to trial, order defines &
7. names of witnesses to be presented; limits issues and shall strictly follow form in
summary of their testimony as contained in Annex "A".
affidavits - Contents of order control subsequent course
8. other pcs of evidence of action, unless modified before trial to prevent
9. specific proposals for amicable settlement manifest injustice.
10. possibility of referral to mediation or other - After pre-trial, court may render judgment, full
alternative modes of dispute resolution or partial, as evidence presented during pre-
11. proposed schedule of hearings trial may warrant.
12. other matters
Election Contests (Rule 6)
Sec 2. Nature and purpose of pre-trial
conference. Sec 2. Definition.
- During pre-trial conference, court shall ensure - Election contests any controversy / dispute
that parties consider ff: involving title / claim to any elective ofc in stock
1. possibility of amicable settlement / non-stock corp, validation of proxies, manner
2. referral to mediation / other forms of dispute & validity of elections, qualifications of
resolution candidates, incl proclamation of winners to ofc
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of director, trustee, other officer directly elected - Derivative action shall not be discontinued,
by stockholders in close corp or by members of compromised, settled w/o approval of court.
non-stock corp where article of incorporation or - During pendency of action, any sale of shares
by-laws so provide. of complaining stockholders shall be approved
by court.
Inspection of Corporate Books and Records - If court determines that interest of
(Rule 7) stockholders / members are substantially
affected by discontinuance, compromise,
Sec 1. Cases covered. settlement, the court may direct that notice, by
- This Rule applies to disputes exclusively publication or otherwise, be given to
involving rights of stockholders / members to stockholders / members whose interest will be
inspect books & records and / or to be furnished affected.
w/ financial statements of corp under Corp
Code. Management Committee (Rule 9)

Sec 2. Complaint. Sec 1. Creation of a management committee.


- In addition to requirements in Sec 4 Rule 2, - As incident to cases filed under these Rules
complaint must state ff: OR Interim Rules Corporate Rehabilitation, party
1. case is for enforcement of plaintiff's right of may apply for appointment of mgmt committee
inspection of corporate orders / records and / or for corp, partnership, assn, when theres
to be furnished w/ financial statements imminent danger of:
2. demand for inspection & copying of books & 1. dissipation, loss, wastage, destruction of
records and / or to be furnished w/ financial assets / props
statements 2. paralyzation of biz w/c may be prejudicial to
3. refusal of defendant to grant demands of minority stockholders, parties-litigants, public
plaintiff and reasons given
4. reasons why refusal to grant demands of Sec 2. Receiver.
plaintiff is unjustified & illegal, stating law & - If court finds application to be sufficient in
jurisprudence form & substance, court issues order
a. appointing rcver of known probity, integrity,
Sec 7. Decision. competence and w/o conflict of interest to take
- Court renders decision based on pleadings, over corp, partnership, assn, specifying such
affidavits, documentary & other evidence powers it deems appropriate
attached w/in 15d fr receipt of last pleading. b. fixing bond of rcver
- Decision ordering defendants to allow c. directing rcver to make report w/in 60d fr
inspection and / or to furnish copies shall also time he assumes ofc
- order plaintiff to deposit estimated cost of d. prohibiting incumbent mgmt fr selling,
manpower necessary to produce books & encumbering, transferring, disposing any of its
records and cost of copying AND props except in ordinary course of biz
- state limitations & conditions to exercise of e. directing payment in full of admin expenses
right incurred after issuance of order

Derivative Suits (Rule 8) Sec 4. Composition of the management


committee.
Sec 1. Derivative action. - After notice & hearing, court may appoint
- Stockholder / member may bring action in the mgmt committee composed of 3 members
name of corp / assn provided that: chosen by court.
1. he was stockholder / member at time the - In appointment, ff qualifications are
acts / transactions occurred and the time the considered
action was filed 1. expertise & acumen to manage biz similar in
2. he exerted all reasonable efforts, and alleges size & complexity as the corp, assn, partnership
the same w/ particularity in complaint, to to be put under mgmt committee
exhaust all remedies available under articles of 2. knowledge in mgmt & finance
incorporation, by-laws, laws / rules governing 3. good moral character, independence,
the corp / partnership to obtain relief he desires integrity
3. no appraisal rights are available for acts 4. lack of conflict of interest
complained of 5. willingness & ability to file bond in amt
4. suit isnt nuisance or harassment suit determined by court
- in nuisance / harassment suit, court shall - W/o limiting generality of ff, member of mgmt
dismiss case. committee may be deemed to have conflict of
interest if he is
Sec 2. Discontinuance.
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1. engaged in line of biz w/c competes w/ corp, governing body of entity under mgmt and pass
assn, partnership sought to be placed under resolution in substitution of the same
mgmt 15. modify, nullify, revoke transactions w/c it
2. director, officer, stockholder charged w/ deems detrimental / prejudicial
mismgmt, dissipation, wastage of prop of entity 16. recommend termination of proceedings &
under mgmt dissolution of entity if continuance in biz is no
3. related by consanguinity / affinity w/in 4th longer feasible / profitable or no longer works to
civil degree to director, officer, stockholder best interest of stockholders, parties-litigants,
charged w/ mismgmt, dissipation, wastage of creditors, public
props 17. apply to court for order / directive to aid it
in exercise of powers & performance of duties
Sec 5. Powers and functions of the 18. exercise other powers conferred upon it by
management committee. court
- Upon assumption to ofc of mgmt committee,
rcver renders report AND turns over mgmt & Sec 7. Transactions deemed to be in bad faith.
control of entity to mgmt committee. - Transactions made by previous mgmt and
- Mgmt committee has power to take custody of directors are deemed fraudulent & rescissible if
& control assets & properties owned / made
possessed by entity. - w/in 30d prior to appointment of rcver / mgmt
- It shall take place of mgmt and board of committee OR
directors, assume their rights & responsibilities, - during their incumbency as rcver / mgmt
and preserve assets & properties in possession. committee
- W/o limiting generality of foregoing, mgmt
committee exercises powers & fcns: Sec 9. Immunity from suit.
1. investigate acts, conduct, props, liabilities, - Rcver & members of mgmt committee and
financial condition of corp, assn, partnership persons employed by them shall not be subject
2. examine under oath the directors & officers, to action, claim, demand in connection w/ act
other witnesses done / omitted by them in good faith in exercise
3. report to court any fact ascertained by it of their fcns & powers.
pertaining to causes of problems, fraud, - Official acts & transactions of rcver / mgmt
misconduct, mismgmt, irregularities committee approved / ratified by court render
4. employ person/s such as lawyers, them immune fr suit in connection w/ such act /
accountants, auditors, appraisers, staff as transaction.
necessary
5. report to court material adverse change in Sec 12. Discharge of the management
biz committee.
6. evaluate existing assets & liabilities, - Mgmt committee is discharged & dissolved
earnings, operations of corp, assn, partnership under ff:
7. determine & recommend to court the best 1. court, on motion or motu proprio,
way to salvage & protect interest of creditors, determined that necessity for mgmt committee
stockholders, public, incl rehab of the corp, no longer exists
assn, partnership 2. by agreement of parties
8. prohibit & report to court encumbrance, 3. upon termination of proceedings
transfer, disposition of debtor's prop outside of - Upon discharge & dissolution, mgmt
ordinary course of biz or whats allowed by committee submits final report & renders acctg.
court
9. prohibit & report to court payments made Cases
outside of ordinary course of biz
10. have unltd access to employees, premises, PURPOSE AND NATURE OF DERIVATIVE
books, records, financial docs during biz hrs SUITS
11. inspect, copy, photocopy, photograph any
doc, paper, book, acct, letter, whether in Chua v. CA
possession of corp, assn, partnership, other - Under Sec 36 of Corp Code in relation to Sec
persons 23, where corp is injured party, its power to sue
12. gain entry into prop for purposes of is lodged w/ board of directors / trustees. An
inspecting, measuring, surveying, individual stockholder is permitted to institute
photographing it or any relevant object / derivative suit on behalf of corp where he holds
operation thereon stocks to protect / vindicate corporate rights,
13. bring to attn of court any material change when officials refuse to sue, or are the ones to
affecting entity's ability to meet obligations be sued, or hold control of the corp. In such
14. revoke resolutions passed by Executive actions, suing stockholder is nominal party, w/
Committee or Board of Directors / Trustees or the corp as real party in interest.
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- Derivative action is suit by shareholder to - For minority stockholder to obtain


enforce corporate cause of action. The corp is appointment of interim mgmt committee, he
necessary party to the suit. The relief granted must do more than merely make prima facie
is judgment against 3rd person in favor of corp. showing of denial of his right to share in
Similarly, if corp has defense to action against it concerns of the corp. He must show that the
and isnt asserting it, stockholder may corporate prop is in danger of being wasted &
intervene & defend on behalf of corp. destroyed and the biz of the corp is being
- Not every suit filed in behalf of corp is diverted fr the purpose for w/c it has been
derivative suit. For derivative suit to prosper, organized and there is serious paralization of
its required that minority stockholder suing for operations all to his detriment.
and on behalf of corp must allege in his - Its only in strong case where theres showing
complaint that hes suing on derivative cause of that the majority are clearly violating chartered
action on behalf of corp and other stockholders rights of minority and putting their interests in
similarly situated who may wish to join him. imminent danger that mgmt committee may be
- Its condition sine qua non that the corp be created. Mere disagreement among
impleaded as party bec not only is the corp an stockholders as to affairs of corp wouldnt in
indispensable party, but its also the present itself suffice as ground for appointment of
rule that it must be served w/ process. mgmt committee.
Judgment must be made binding upon corp in - At least where theres no imminent danger of
order that the corp may get the benefit of suit loss of corporate prop or of any other injury to
and may not bring subsequent suit against stockholders, mgmt of corporate biz shldnt be
same defendants for same cause of action. The wrested away fr duly elected officers, who are
corp must be joined as party bec it is its cause prima facie entitled to administer affairs of corp
of action thats being litigated and bec and placed in the hands of mgmt committee.
judgment must be a res judicata against it. - However, where dissension among
stockholders is such that the corp cant
NOT ALL STOCKHOLDERS / MEMBERS ARE successfully carry on corporate fcns the
INDISPENSABLE PARTIES IN DERIVATIVE appointment of mgmt committee becomes
SUIT imperative.

Symaco Trading Corp v. Santos APPOINTMENT OF MANAGEMENT


- One of the requisites of derivative suit is that COMMITTEE NOT VALID
the party bringing suit shld be stockholder /
member at the time of action / transaction Sy Chim v. Sy Siy Ho & Sons Inc
complained of. - For minority stockholder to obtain
- The right to sue derivatively is an attribute of appointment of interim mgmt committee, he
corporate ownership w/c requires that the injury must do more than merely make prima facie
alleged be indirect as far as stockholders / showing of denial of his right to share in
members are concerned, and direct only insofar concerns of the corp. He must show that the
as corp is concerned. corporate prop is in danger of being wasted &
- The whole purpose of law authorizing destroyed and the biz of the corp is being
derivative suit is to allow stockholder / member diverted fr the purpose for w/c it has been
to enforce rights w/c are derivative (secondary) organized and there is serious paralization of
in nature. A derivative action is suit by operations all to his detriment.
shareholder / member to enforce corporate - The rationale for the need to establish
cause of action. confluence of the 2 requisites under Sec 1 Rule
- Not all MFBAI members are indispensable 9 by applicant for appointment of mgmt
parties in derivative suit. Its enough that a committee is primarily based upon fact that
member or minority of members file derivative such committee & rcver appointed by court will
suit for and in behalf of corp. After all, immediately take over mgmt of the corp,
members / stockholders who filed derivative partnership, assn incl such power as
suit are merely nominal parties, the real party- appropriate, and any of powers in Sec 5 of the
in-interest being the corp for and in whose Rule.
behalf the suit is filed. Any monetary benefits - Upon appointment of rcver, the elected /
under the decision shall pertain to the corp. appointed officers of corp are divested of mgmt
of corp in favor of mgmt committee / rcver.
APPOINTMENT OF MANAGEMENT Such transference of mgmt will certainly have
COMMITTEE VALID negative, if not crippling effect, on operations /
affairs of corp not only w/ banks & other biz
Jacinto v. First Womens Credit Corp institutions including those abroad w/c it deals
with. A wall of uncertainty is erected; the short
& long-term plans are disrupted, if not derailed.
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- The creation & appointment of mgmt Punongbayan v. Punongbayan


committee & rcver is an extraordinary & drastic - A mgmt committee is tasked to manage, take
remedy to be exercised w/ care; and only when custody of and control existing assets, funds,
requirements under Interim Rules are shown. records of corp AND to determine the best way
Its a drastic course for benefit of minority to protect interest of stockholders & creditors.
stockholders, the parties-litigants or gen public - Having the power to create mgmt committee,
are allowed only under pressing circumstances it follows that RTC can order reorganization of
and, when theres inadequate / ineffectual legal existing mgmt committee. Such appointment
or other remedies or when they have been of new members doesnt mean creation of new
exhausted. mgmt committee. Existing mgmt committee
- Neither PD 902A and RA 8799 nor the Interim wasnt abolished.
Rules of Procedure define "imminent danger."
"Danger" is a gen term, incl peril, jeopardy,
hazard, risk; as used in the Rule, it refers to
exposure / liability to injury. "Imminent" refers
to something w/c is threatening to happen at XVI. THE SECURITIES REGULATION
once, something close at hand, something to CODE
happen upon the instant, close although not yet RA 8799 (2000)
happening, and on the verge of happening.
- In the absence of strong showing of imminent LICENSING OF BROKERS
danger of dissipation, loss, wastage, destruction
of assets / props of corp and paralysis of biz
operations, the mere apprehension of future NICOLAS vs. CA
misconduct based upon prior mismanagement G.R. No. 122857
will not authorize appointment of mgmt 27 March 1998
committee / rcver.
RTC granted. CA dismissed.

Ao-As v. CA February 19, 1987 Nicolas and Buan entered


- Appointment of mgmt committee inevitably into a Portfolio Management Agreement g
results in drastic summary removal of all Nicolas will manage Buans stock transactions
directors & officers. for 3 months, with an automatic renewal clause.
- Where the corp is solvent, rcver will not be August 19, 1987 Buan sought termination of the
appointed bec of past misconduct and Agreement and requested an accounting from
subsequent mere apprehension of future Nicolas.
misdoing, where present situation and Three weeks after, Nicolas demanded
prospects for the future are not such as to management fees of P68,263.67 for June 30,
warrant receivership. July 31 and August 19, 1987 as stated in the
- Gen rule: Rcver or mgmt committee will not Agreement. g Ignored.
be appointed unless necessary either to
prevent fraud, or to save prop fr fraud / Nicolas filed in RTC a complaint for collection of
threatened destruction, or at least in case of sum of money.
solvent corporation. The burden of proof is Buans answer: Not entitled Nicolas
heavy one w/c requires clear showing that mismanaged his transactions resulting in
emergency exists. Similarly, rcver / mgmt losses.
committee shldnt be appointed in action by RTC: Granted Buan should pay Nicolas
minority stockholder against corporate officers management fees.
for accounting where corp is solvent and going
concern and rcver isnt necessary to preserve CA reversed and dismissed: Sweeping
corporate prop pending accounting. statement [that profits were generated by
- Mgmt committee shldnt be created when Nicolas transactions] were unsubstantiated
there was adequate remedy available to pvt [Nicolas profit and loss statements were
respondents for liquidation of unaccounted relevant and admissible, but they are not
funds. Appointment of rcver for going corp is credible because self-serving].
last resort remedy, and shldnt be employed Anchor Hocking Glass Corp. vs. White Cap.: The
when another remedy is available. statements simply tabulate the number of
shares acquired from each company, a column
POWER TO CREATE MANAGEMENT for profit and the last column for loss. The
COMMITTEE INCLUDES POWER TO statements were not authenticated by an
REORGANIZE THE SAME auditor, nor by the person who caused the
preparation of the same.
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certificate of deposit; whether the stock


Sample Statement submitted by Nicolas: certificates were deposited in a bank or
Profit & Loss Statement of Atty. Blesilo Buan professional custodian, and others) to support
for the Period Ended June 30, 1987 his claim that profits were indeed realized.
Shares Issue Profit Loss
1,500 PLDT P 7,265.62 Nicolas's complaint is similar to an action for
damages. The recoverable damage not only be
The ledger of accounts as proof of the capable of proof but must actually be proved
transactions entered into only shows the with a reasonable degree of certainty. The
following data: awarding court must posit specific facts as
(1) dates in which the stocks were acquired; sufficient basis for measuring compensatory or
(2) classified the acquired stocks to be in long actual damages.
or short term trading;
(3) the price of each stock; Lastly, Nicolas cant recover because he traded
(4) which company's stocks were acquired; and, securities for the account of others without the
(5) the total amount paid for each stock. necessary license from the Securities and
It does not show how much profit was realized Exchange Commission (SEC), violating SEC 19
from each transaction." of the Revised Securities Act.
Agbayani: Purpose = protect the public and
SC: CA affirmed. strengthen the securities mechanism.
Portfolio Management Agreement states that
Buan would pay Nicolas 20% of all realized Am Jur: ". . ., an unlicensed person may not
profits every end of the month as his recover compensation for services as a broker
management fees. where a statute or ordinance requiring a license
"Profits" = "excess of return over expenditure in is applicable and such statute or ordinance is of
a transaction or series of transactions" or a regulatory nature, was enacted in the
"series of an amount received over the amount exercise of the police power for the purpose of
paid for goods and services." protecting the public, requires a license as
Nicolas bears burden of proving that the evidence of qualification and fitness, and
transaction realized gains or profits. expressly precludes an unlicensed person from
recovering compensation by suit, or at least
Yes, stock brokers are entitled to commercial manifests an intent to prohibit and render
fees or compensation: unlawful the transaction of business by an
"Revised Securities Act Rule 19-13. Charges for unlicensed person."
Services Performed.
Charges by brokers or dealersshall be WHERE BOTH PARTIES ARE EQUALLY AT FAULT, NEITHER
reasonable and not unfairly discriminatory ONE COULD HAVE RECOURSE AGAINST THE OTHER
between customers."
Bauer & Cie vs. O'Donnel: Any fee or
commission must be with due regard to ABACUS SECURITIES CORPORATION vs.
relevant circumstances. AMPIL
G.R. No. 160016
But here, the statements are incomplete, 27 February 2006
yielding easily to the inclusion or deletion of
certain matters.. There are no concrete bases or Facts:
specifics as to the method of arriving at the Abacus is engaged in business as a broker and
amounts indicated. It does not state when the dealer of securities of listed companies at the
stocks were purchased, the type of stocks Philippine Stock Exchange Center.
(whether Class "A" or "B" or common or On April 8, 1997, Ampil opened a cash account
preferred) bought, when the stocks were sold, with Abacus for his transactions in securities;
the acquisition and selling price of each stock, Ampils purchases were consistently unpaid
when the profits, if any, were delivered to the from April 10 to 30, 1997;
private respondent, the cost of safekeeping or Ampil failed to pay in full, or even just his
custody of the stocks, as well as the taxes paid deficiency, for the transactions on April 10 and
for each transaction. 11, 1997;
Bauer & Cie vs. O'Donne: Where a profit or loss Despite Ampils failure to cover his initial
statement shows a loss, the statement must deficiency, Abacus subsequently purchased and
show income and items of expense to explain sold securities for Ampils account on April 25
the method of determining such loss. and 29;
Abacus did not cancel or liquidate a substantial
There were no credible documentary evidence amount of Ampils stock transactions until May
(e.g. receipts of the transactions, order ticket, 6, 1997.
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RTC RULING: RTC held that Abacus violated credit initially extended in conformity with the
SECs 23 and 25 of the Revised Securities Act rules and regulations of the Commission and (ii)
(RSA) and Rule 25-1 of the Rules Implementing in cases where the extension or maintenance of
the Act (RSA Rules) when it failed to: 1) require credit is not for the purpose of purchasing or
the Ampil to pay for his stock purchases within carrying securities or of evading or
three or four days from trading; and 2) request circumventing the provisions of subparagraph
from the appropriate authority an extension of (1) of this subSEC.
time for the payment of Ampils cash xxx
purchases. RTC noted that despite Ampils non-
payment within the required period, Abacus did SEC. 25. Enforcement of margin requirements
not cancel the purchases of Ampil. Neither did and restrictions on borrowings. To prevent
it require him to deposit cash payments before indirect violations of the margin requirements
it executed the buy and/or sell orders under SEC 23 hereof, the broker or dealer shall
subsequent to the first unsettled transaction. require the customer in nonmargin transactions
According to the RTC, by allowing Ampil to to pay the price of the security purchased for
trade his account actively without cash, Abacus his account within such period as the
effectively induced him to purchase securities Commission may prescribe, which shall in no
thereby incurring excessive credits. case exceed three trading days; otherwise, the
RTC also found Ampil to be equally at fault, by broker shall sell the security purchased starting
incurring excessive credits and waiting to see on the next trading day but not beyond ten
how his investments turned out before deciding trading days following the last day for the
to invoke the RSA. Thus, the RTC concluded customer to pay such purchase price, unless
that Abacus and Ampil were in pari delicto and such sale cannot be effected within said period
therefore without recourse against each other. for justifiable reasons. The sale shall be without
CA RULING: CA upheld the lower courts prejudice to the right of the broker or dealer to
finding that the parties were in pari delicto. It recover any deficiency from the customer. x x
castigated Abacus for allowing Ampil to keep on x.
trading despite the latters failure to pay his
outstanding obligations. It explained that the RSA RULE 25-1
reason [behind Abacuss act] is elemental in its Purchases and Sales in Cash Account
simplicity. And it is not exactly altruistic. (a) Purchases by a customer in a cash
Because whether [Ampils] trading transaction account shall be paid in full within three (3)
would result in a surplus or deficit, he would still business days after the trade date.
be liable to pay Abacus its commission. (b) If full payment is not received within the
[Abacuss] cash register will keep on ringing to required time period, the broker or dealer shall
the sound of incoming money, no matter what cancel or otherwise liquidate the transaction, or
happened to Ampil. the unsettled portion thereof, starting on the
Hence, this Petition. next business day but not beyond ten (10)
business days following the last day for the
Issue: WON the pari delicto rule is applicable in customer to pay, unless such sale cannot be
the present case. effected within said period for justifiable
Held: In Pari Delicto rule applies only to reasons.
transactions entered into AFTER the initial (c) If a transaction is cancelled or otherwise
trades made on April 10 and 11, 1997. liquidated as a result of non-payment by the
Ratio: customer, prior to any subsequent purchase
The provisions governing the above during the next ninety (90) days, the customer
transactions are SECs 23 and 25 of the RSA and shall be required to deposit sufficient funds in
Rule 25-1 of the RSA Rules, which state as the account to cover each purchase transaction
follows: prior to execution.
SEC. 23. Margin Requirements. xxx xxx xxx
xxx (f) Written application for an extension of
(b) It shall be unlawful for any member of an the period of time required for payment under
exchange or any broker or dealer, directly or paragraph (a) be made by the broker or dealer
indirectly, to extend or maintain credit or to the Philippine Stock Exchange, in the case of
arrange for the extension or maintenance of a member of the Exchange, or to the
credit to or for any customer Commission, in the case of a non-member of
(1) On any security other than an exempted the Exchange. Applications for the extension
security, in contravention of the rules and must be based upon exceptional circumstances
regulations which the Commission shall and must be filed and acted upon before the
prescribe under subSEC (a) of this SEC; expiration of the original payment period or the
(2) Without collateral or on any collateral expiration of any subsequent extension.
other than securities, except (i) to maintain a
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SEC 23(b) above -- the alleged violation of the Exchange. Since the principals of the broker
Abacus which provides the basis for Ampils are generally undisclosed, the broker is
defense -- makes it unlawful for a broker to personally liable for the contracts thus made.
extend or maintain credit on any securities Hence, Abacus had to advance the payments
other than in conformity with the rules and for Ampils trades. Brokers have a right to be
regulations issued by Securities and Exchange reimbursed for sums advanced by them with
Commission (SEC). SEC 25 lays down the rules the express or implied authorization of the
to prevent indirect violations of SEC 23 by principal (in this case, Ampil).
brokers or dealers. RSA Rule 25-1 prescribes in In the present case, Abacus obviously failed to
detail the regulations governing cash accounts. enforce the terms and conditions of its
The margin requirements set out in the RSA are Agreement with Ampil, purportedly acting on
primarily intended to achieve a macroeconomic the plea of Ampil to give him time to raise funds
purpose -- the protection of the overall therefor. By failing to ensure Ampils payment
economy from excessive speculation in of his first purchase transaction within the
securities. Their recognized secondary purpose period prescribed by law, thereby allowing him
is to protect small investors. to make subsequent purchases, Abacus
The law places the burden of compliance with effectively converted Ampils cash account into
margin requirements primarily upon the brokers a credit account. However, extension or
and dealers. SECs 23 and 25 and Rule 25-1, maintenance of credits on nonmargin
otherwise known as the mandatory close-out transactions, are specifically prohibited under
rule, clearly vest upon Abacus the obligation, SEC 23(b). Thus, Abacus was remiss in its duty
not just the right, to cancel or otherwise and cannot be said to have come to court with
liquidate a customers order, if payment is not clean hands insofar as it intended to collect
received within three days from the date of on transactions subsequent to the initial trades
purchase. of April 10 and 11, 1997.
Ampil is liable for the first, but not for the Ampil is equally guilty for subsequent
subsequent trades trades
Nonetheless, these margin requirements are On the other hand, we find Ampil equally guilty
applicable only to transactions entered into by in entering into the transactions in violation of
the present parties subsequent to the initial the RSA and RSA Rules. We are not prepared to
trades of April 10 and 11, 1997. Thus, we hold accept his self-serving assertions of being an
that Abacus can still collect from Ampil to the innocent victim in all the transactions. Rather,
extent of the difference between the latters he is an experienced and knowledgeable trader
outstanding obligation as of April 11, 1997 less who is well versed in the securities market and
the proceeds from the mandatory sell out of the who made his own investment decisions.
shares pursuant to the RSA Rules. Abacuss We note that it was Ampil who repeatedly asked
right to collect is justified under the general law for some time to pay his obligations for his
on obligations and contracts. stock transactions. Abacus acceded to his
The right to collect cannot be denied to Abacus requests. It is only when sued upon his
as the initial transactions were entered indebtedness that Ampil raised as a defense the
pursuant to the instructions of Ampil. The invalidity of the transactions due to alleged
obligation of Ampil for stock transactions made violations of the RSA. It was Ampils privilege to
and entered into on April 10 and 11, 1997 gamble or speculate, as he apparently did so by
remains outstanding. These transactions asking for extensions of time and refraining
were valid and the obligations incurred by from giving orders to his broker to sell, in the
Ampil concerning his stock purchases on hope that the prices would rise. Sustaining his
these dates subsist. At that time, there was argument now would amount to relieving him of
no violation of the RSA yet. Abacuss fault the risk and consequences of his own
arose only when it failed to: 1) liquidate the speculation and saddling them on the Abacus
transactions on the fourth day following the after the result was known to be unfavorable.
stock purchases, or on April 14 and 15, 1997; In the final analysis, both parties acted in
and 2) complete its liquidation no later than ten violation of the law and did not come to court
days thereafter, applying the proceeds thereof with clean hands with regard to transactions
as payment for Ampils outstanding obligation. subsequent to the initial trades made on April
Elucidating further, since the buyer was not 10 and 11, 1997. Thus, the peculiar facts of
able to pay for the transactions that took place the present case bar the application of the
on April 10 and 11,, the broker was duty-bound pari delicto rule -- expressed in the maxims
to advance the payment to the settlement Ex dolo malo non oritur action and In pari
banks without prejudice to the right of the delicto potior est conditio defendentis -- to all
broker to collect later from the client. the transactions entered into by the parties.
In securities trading, the brokers are essentially The pari delecto rule refuses legal remedy to
the counterparties to the stock transactions at
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either party to an illegal agreement and leaves Company of the Philippines, Inc., a minority
them where they were. stockholder of UCC, sent a letter to Cemco
In this case, the pari delicto rule applies demanding the latter to comply with the rule on
only to transactions entered into AFTER mandatory tender offer.
the initial trades made on April 10 and 11, Cemco, however, refused.
1997. 5 August 2004: a Share Purchase Agreement
Since the INITIAL trades are valid and was executed by ACC and BCI, as sellers, and
subsisting obligations, Ampil is liable for Cemco, as buyer.
them. 19 August 2004: Respondent National Life filed
Dispositive: WHEREFORE, CA Decision and a complaint with the SEC asking it to reverse its
Resolution are MODIFIED. Ampil is ordered to 27 July 2004 Resolution and to declare the
pay Abacus the difference between the formers purchase agreement of Cemco void and praying
outstanding obligation as of April 11, 1997 less that the mandatory tender offer rule be applied
the proceeds from the mandatory sell out of to its UCC shares.
shares pursuant to the RSA Rules, with interest Cemco, UCC, UCHC, BCI and ACC (all
thereon at the legal rate until fully paid. impleaded) filed their comments:
COMMON POINT: the tender offer rule applied
TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION only to a direct acquisition of the shares of the
OF SHARES listed company and did not extend to an
indirect acquisition arising from the purchase of
the shares of a holding company of the listed
CEMCO HOLDINGS, INC. vs. NATIONAL LIFE firm.
INSURANCE COMPANY CEMCO: while the SEC can take cognizance of
G.R. 171815 respondents complaint on the alleged violation
7 August 2007 by petitioner Cemco of the mandatory tender
offer requirement under SEC 19 of Republic Act
Facts: No. 8799, the same statute does not vest the
Union Cement or UCC (publicly listed) has 2 SEC with jurisdiction to adjudicate and
principal SH (stockholders) UCHC (non-listed) determine the rights and obligations of the
owning 60.51% and Cemco owning 17.03%. parties since, under the same statute, the SECs
Majority of UCHCs stocks were owned by BCI authority is purely administrative.
(21.31%) and ACC (29.69%). Cemco owned 9% Having been vested with purely administrative
of UCHCs stocks. authority, the SEC can only impose
5 July 2004: BCI informed the Philippine Stock administrative sanctions such as the imposition
Exchange (PSE) that it and its subsidiary ACC of administrative fines, the suspension or
had passed resolutions to sell to Cemco all of revocation of registrations with the SEC, and
the stocks of BCI and ACC in UCHC. the like.
8 July 2004: In PSE Circular for Brokers No. Nothing in the statute authorizes the SEC to
3146-2004 it was stated that as a result of issue orders granting affirmative reliefs.
Cemcos acquisition of BCI and ACCs shares in Since the SECs order commanding it to make a
UCHC, its total beneficial ownership, direct and tender offer is an affirmative relief fixing the
indirect, in UCC has increased by 36% and respective rights and obligations of parties,
amounted to at least 53% of the shares of UCC. such order is void.
15 July 2004: As a consequence of this In the absence of any specific grant of
disclosure, the PSE, in a letter to the SEC jurisdiction by Congress, the SEC cannot, by
inquired as to whether the Tender Offer Rule mere administrative regulation, confer on itself
under Rule 19 of the Implementing Rules of the that jurisdiction.
Securities Regulation Code is not applicable to ALSO, the ruling on mandatory tender offer rule
Cemcos purchase of the majority of shares of by the SEC and the Court of Appeals should not
UCC. have retroactive effect or be made to apply to
16 July 2004: Director Justina Callangan of the its purchase of the UCHC shares as it relied in
SECs Corporate Finance Department replied good faith on the letter dated 27 July 2004 of
that it was the stance of the department that the SEC which opined that the proposed
the tender offer rule was not applicable. acquisition of the UCHC shares was not covered
However, the matter must still have to be by the mandatory offer rule.
confirmed by the SEC en banc. 14 Feb 2005: SEC ruled in favor of the
27 July 2004: In a subsequent letter, Director respondent reversed and set aside its 27 July
Callangan confirmed that the SEC en banc had 2004 Resolution and directed petitioner Cemco
resolved that the Cemco transaction was not to make a tender offer for UCC shares to
covered by the tender offer rule. respondent and other holders of UCC shares
28 July 2004, feeling aggrieved by the similar to the class held by UCHC in accordance
transaction, respondent National Life Insurance
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with SEC 9(E), Rule 19 of the Securities to carry out, the performance of the
Regulation Code. administrative duties entrusted to it.
The CA affirmed: It ruled that the SEC has As a regulatory agency, it has the incidental
jurisdiction to render the questioned decision power to conduct hearings and render decisions
and, in any event, Cemco was barred by fixing the rights and obligations of the parties.
estoppel from questioning the SECs In fact, to deprive the SEC of this power would
jurisdiction. It, likewise, held that the tender render the agency inutile, because it would
offer requirement under the Securities become powerless to regulate and implement
Regulation Code and its Implementing Rules the law.
applies to Cemcos purchase of UCHC stocks. Moreover, petitioner is barred from questioning
the jurisdiction of the SEC. It must be pointed
Issue/s & Held: out that petitioner had participated in all the
WON the SEC has jurisdiction over respondents proceedings before the SEC and had prayed for
complaint and to require Cemco to make a affirmative relief.
tender offer for respondents UCC shares - YES In fact, petitioner defended the jurisdiction of
WON the rule on mandatory tender offer applies the SEC in its Comment dated 15 September
to the indirect acquisition of shares in a listed 2004. Petitioner did not question the jurisdiction
company, in this case, the indirect acquisition of the SEC when it rendered an opinion
by Cemco of 36% of UCC, a publicly-listed favorable to it, such as the 27 July 2004
company, through its purchase of the shares in Resolution, where the SEC opined that the
UCHC, a non-listed company - YES Cemco transaction was not covered by the
WON the questioned ruling of the SEC can be mandatory tender offer rule.
applied retroactively to Cemcos transaction
which was consummated under the authority of Second Issue applicability of the mandatory
the SECs prior resolution - YES tender offer rule
Tender offer is a publicly announced intention
Ratio: by a person acting alone or in concert with
other persons to acquire equity securities of a
First Issue - Jurisdiction public company. A public company is defined
SEC was acting pursuant to Rule 19(13) of the as a corporation which is listed on an exchange,
Amended Implementing Rules and Regulations or a corporation with assets exceeding
of the Securities Regulation Code, to wit: P50,000,000.00 and with 200 or more
13. Violation: If there shall be violation of this stockholders, at least 200 of them holding not
Rule by pursuing a purchase of equity shares of less than 100 shares of such company.
a public company at threshold amounts without Stated differently, a tender offer is an offer by
the required tender offer, the Commission, upon the acquiring person to stockholders of a public
complaint, may nullify the said acquisition and company for them to tender their shares
direct the holding of a tender offer. This shall therein on the terms specified in the offer.
be without prejudice to the imposition of other Tender offer is in place to protect minority
sanctions under the Code. shareholders against any scheme that dilutes
The foregoing rule emanates from the SECs the share value of their investments. It gives
power and authority to regulate, investigate or the minority shareholders the chance to exit the
supervise the activities of persons to ensure company under reasonable terms, giving them
compliance with the Securities Regulation Code, the opportunity to sell their shares at the same
more specifically the provision on mandatory price as those of the majority shareholders.
tender offer under SEC 19 thereof. See text of Sec 19.1, SRC:
Another provision of the statute, which provides (a) Any person or group of persons acting in
the basis of Rule 19(13) of the Amended concert who intends to acquire at least fifteen
Implementing Rules and Regulations of the percent (15%) of any class of any equity
Securities Regulation Code, is SEC 5.1(n): security of a listed corporation or of any class of
The Commission shall have, among others, the any equity security of a corporation with assets
following powers and functions: of at least Fifty million pesos (P50,000,000.00)
(n) Exercise such other powers as may be and having two hundred (200) or more
provided by law as well as those which may be stockholders with at least one hundred (100)
implied from, or which are necessary or shares each or who intends to acquire at least
incidental to the carrying out of, the express thirty percent (30%) of such equity over a
powers granted the Commission to achieve the period of twelve (12) months shall make a
objectives and purposes of these laws tender offer to stockholders by filing with the
The foregoing provision bestows upon the SEC Commission a declaration to that effect; and
the general adjudicative power which is implied furnish the issuer, a statement containing such
from the express powers of the Commission or of the information required in SEC 17 of this
which is incidental to, or reasonably necessary Code as the Commission may prescribe.
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Such person or group of persons shall publish walang gustong bumili kung hindi yung majority
all requests or invitations for tender, or owner. And they will not buy. They already have
materials making a tender offer or requesting or 67%. They already have control. And this
inviting letters of such a security. Copies of any protects the minority. And we have had a case
additional material soliciting or requesting such in Cebu wherein Ayala A who already owned
tender offers subsequent to the initial 40% of Ayala B made an offer for another 40%
solicitation or request shall contain such of Ayala B without offering the 20%. Kawawa
information as the Commission may prescribe, naman yung nakahawak ngayon ng 20%. Ang
and shall be filed with the Commission and sent baba ng share sa market. But we did not have a
to the issuer not later than the time copies of law protecting them at that time.
such materials are first published or sent or CHAIRMAN ROCO. So what is it that you want to
given to security holders. achieve?
Under existing SEC Rules, the 15% and 30% SEN. S. OSMEA. That if a certain group
threshold acquisition of shares under the achieves a certain amount of ownership in a
foregoing provision was increased to thirty-five corporation, yeah, he is obligated to buy
percent (35%). It is further provided therein anybody who wants to sell.
that mandatory tender offer is still applicable CHAIRMAN ROCO. Pro-rata lang.
even if the acquisition is less than 35% when REP. TEODORO. As long as it reaches 30, ayan
the purchase would result in ownership of over na. Any type of acquisition just as long as it will
51% of the total outstanding equity securities of result in 30... (p.50)... reaches 30, ayan na. Any
the public company. type of acquisition just as long as it will result in
The SEC and the Court of Appeals ruled that the 30, general tender, pro-rata.
indirect acquisition by petitioner of 36% of UCC Petitioner counters that the legislator's
shares through the acquisition of the non-listed reference to "any type of acquisition" during the
UCHC shares is covered by the mandatory deliberations on the Securities Regulation Code
tender offer rule. This interpretation given by does not indicate that congress meant to
the SEC and the Court of Appeals must be include the "indirect" acquisition of shares of a
sustained. public corporation to be covered by the tender
The rule in this jurisdiction is that the offer rule.
construction given to a statute by an Petitioner also avers that it did not directly
administrative agency charged with the acquire the shares in UCC and the incidental
interpretation and application of that statute is benefit of having acquired the control of the
entitled to great weight by the courts, unless said public company must not be taken against
such construction is clearly shown to be in it.
sharp contrast with the governing law or These arguments are not convincing. The
statute. legislative intent of SEC 19 of the Code is to
The rationale for this rule relates not only to the regulate activities relating to acquisition of
emergence of the multifarious needs of a control of the listed company and for the
modern or modernizing society and the purpose of protecting the minority stockholders
establishment of diverse administrative of a listed corporation. Whatever may be the
agencies for addressing and satisfying those method by which control of a public company is
needs; it also relates to accumulation of obtained, either through the direct purchase of
experience and growth of specialized its stocks or through an indirect means,
capabilities by the administrative agency mandatory tender offer applies.
charged with implementing a particular statute. The petitioner posits that what it acquired were
The SEC and the Court of Appeals accurately stocks of UCHC and not UCC. By happenstance,
pointed out that the coverage of the mandatory as a result of the transaction, it became an
tender offer rule covers not only direct indirect owner of UCC. We are constrained,
acquisition but also indirect acquisition or "any however, to construe ownership acquisition to
type of acquisition." This is clear from the mean both direct and indirect. What is decisive
discussions of the Bicameral Conference is the determination of the power of control.
Committee on the Securities Act of 2000, on 17 The legislative intent behind the tender offer
July 2000: rule makes clear that the type of activity
SEN. S. OSMEA. Eto ang mangyayari diyan, intended to be regulated is the acquisition of
eh. Somebody controls 67% of the Company. Of control of the listed company through the
course, he will pay a premium for the first 67%. purchase of shares. Control may [be] effected
Control yan, eh. Eh, kawawa yung mga through a direct and indirect acquisition of
maiiwan, ang 33% because the value of the stock, and when this takes place, irrespective of
stock market could go down, could go down the means, a tender offer must occur.
after that, because there will be no more The bottomline of the law is to give the
market. Wala nang gustong bumenta. Wala shareholder of the listed company the
nang... I mean maraming gustong bumenta,
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opportunity to decide whether or not to sell in h. Rome Convention (1961) Protection of


connection with a transfer of control. Performers, Producers of Phonograms
and Broadcasting Organizations
Third Issue retroactive application of SEC i. Locarno Agreement (1968)
ruling International Classifications of Industrial
The action of the SEC on the PSE request for Designs
opinion on the Cemco transaction cannot be j. Patent Cooperation Treaty (1970)
construed as passing merits or giving approval simultaneous filing of international
to the questioned transaction. patent application
The letter dated 27 July 2004 of the SEC was k. Geneva Convention (1971) Protection
nothing but an approval of the draft letter of Producers of Phonograms against
prepared by Director Callanga. There was no Unauthorized Duplication of their
public hearing where interested parties could Phonograms
have been heard. Hence, it was not issued upon l. Strasbourg Agreement (1971)
a definite and concrete controversy affecting International Patent Application
the legal relations of parties thereby making it a m. Vienna Agreement (1973)
judgment conclusive on all the parties. Said International Classification of the
letter was merely advisory. Figurative Elements of Marks
Jurisprudence has it that an advisory opinion of n. Brussels Convention (1974)
an agency may be stricken down if it deviates Distribution of Programme-Carrying
from the provision of the statute. Since the Signals Transmitted by Satellite
letter dated 27 July 2004 runs counter to the o. Budapest Treaty (1977) deposit of
Securities Regulation Code, the same may be microorganisms for purposes of patent
disregarded as what the SEC has done in its procedure
decision dated 14 February 2005. p. Nairobi Treaty (1981) Protection of
Moreover, the implementing rules and Olympic Symbol
regulations of the Code are sufficient to inform q. Washington Treaty (1989) Intellectual
and guide the parties on how to proceed with Property in Respect of Integrated
the mandatory tender offer. Circuits
r. Protocol on Madrid Agreement (1989)
International Registration of Marks
s. Trademark Law Treaty (1994) make
registration systems
XVII. INTELLECTUAL PROPERTY t. WIPO Copyright Treaty (1996)
CODE computer program and databases,
RA 8923 (1997), AS AMENDED BY RA u. WIPO Performances and Phonogram
9150 (2001) Treaty (1996)

The WTO and TRIPS Agreements


THE TRIPS AGREEMENT
Trade-Related Aspects of Intellectual Property
17.1 Topics Rights (TRIPS) Agreement - binding on all
members of WTO
International Agreements on Intellectual a) National Treatment each WTO member
Property shall accord to the nationals of other members
a. Paris Convention (1883) Protection of treatment no less favorable than that which it
Industrial Property accords to its own nationals with regard to the
b. Berne Convention (1896) Protection of protection of intellectual property (subject to
Literary and Artistic Works certain exceptions provided in the Paris, Berne
c. Madrid Agreement (1891) Repression and Rome conventions and in the Treaty on
of False or Deceptive Indications of Intellectual Property in respect of Integrated
Source of Goods Circuits)
d. Madrid Agreement (1891) International b) Most-Favored Nation Treatment with
Registration of Marks regard to the protection of intellectual property,
e. Hague Agreement (1925) International any advantage, favor, privilege or immunity
Deposit of Industrial Designs granted by a member to the nationals of any
f. Nice Agreement (1957) International other country shall be accorded immediately
Classification of Goods and Services for and unconditionally to the nationals of all other
the Purposes of the Registration of Marks members
g. Lisbon Agreement (1958) Protection of
Appellations of Origin and their 17.2 Case
International Registration
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WTO Agreement not unconstitutional (b) if there is a substantial likelihood that the
identical product was made by the process and
TAADA vs. ANGARA the owner of the patent has been unable
272 SCRA 18 through reasonable efforts to determine the
1997 process actually used.
2. Any Member shall be free to provide that the
Facts: burden of proof indicated in paragraph 1 shall
After WWII, the GATT (General Agreement on be on the alleged infringer only if the condition
Tariffs and Trade) was born. Later, the WTO referred to in subparagraph (a) is fulfilled or
(World Trade Organization) was constituted to only if the condition referred to in subparagraph
be the treatys administering body. (b) is fulfilled.
The WTO was signed in Morocco by its founding 3. In the adduction of proof to the contrary, the
members, one of which was the Philippines. legitimate interests of defendants in protecting
The President of the Philippines (Ramos) ratified their manufacturing and business secrets shall
the WTO. The Senate concurred in this be taken into account.
ratification. From the above, a WTO Member is required to
The senate ratification is the subject of this provide a rule of disputable (note the words in
petition for certiorari, mandamus, and the absence of proof to the contrary)
prohibition, which questions the presumption that a product shown to be
constitutionality of the WTO. identical to one produced with the use of a
The WTO Final Act signed by the Philippines patented process shall be deemed to have been
includes various agreements and associated obtained by the (illegal) use of the said
legal instruments, among which is the TRIPS patented process, (1) where such product
(Agreement on Trade-Related Aspects of obtained by the patented product is new, or (2)
Intellectual Property Rights) where there is substantial likelihood that the
The petition questions the constitutionality of identical product was made with the use of the
certain provisions in the WTO Agreement. said patented process but the owner of the
Among those questioned are provisions of the patent could not determine the exact process
TRIPS on evidence used in obtaining such identical product.
Hence, the burden of proof contemplated by
Issue: WON certain provisions of the Article 34 should actually be understood as the
Agreement impair the exercise of judicial power duty of the alleged patent infringer to
by this Honorable Court in promulgating the overthrow such presumption. Such burden,
rules of evidence. properly understood, actually refers to the
Held: No burden of evidence (burden of going forward)
Ratio: placed on the producer of the identical (or fake)
Petitioners aver that paragraph 1, Article 34 of product to show that his product was produced
the General Provisions and Basic Principles of without the use of the patented process.
the Agreement on Trade-Related Aspects of The foregoing notwithstanding, the patent
Intellectual Property Rights (TRIPS) intrudes on owner still has the burden of proof since,
the power of the Supreme Court to promulgate regardless of the presumption provided under
rules concerning pleading, practice and paragraph 1 of Article 34, such owner still has
procedures. to introduce evidence of the existence of the
Article 34 alleged identical product, the fact that it is
Process Patents: Burden of Proof identical to the genuine one produced by the
1. For the purposes of civil proceedings in patented process and the fact of newness of
respect of the infringement of the rights of the the genuine product or the fact of substantial
owner referred to in paragraph 1(b) of Article likelihood that the identical product was made
28, if the subject matter of a patent is a process by the patented process.
for obtaining a product, the judicial authorities The foregoing should really present no problem
shall have the authority to order the defendant in changing the rules of evidence as the present
to prove that the process to obtain an identical law on the subject, Republic Act No. 165, as
product is different from the patented process. amended, otherwise known as the Patent Law,
Therefore, Members shall provide, in at least provides a similar presumption in cases of
one of the following circumstances, that any infringement of patented design or utility
identical product when produced without the model, thus:
consent of the patent owner shall, in the SEC. 60. Infringement. - Infringement of a
absence of proof to the contrary, be deemed to design patent or of a patent for utility model
have been obtained by the patented process: shall consist in unauthorized copying of the
(a) if the product obtained by the patented patented design or utility model for the purpose
process is new; of trade or industry in the article or product and
in the making, using or selling of the article or
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product copying the patented design or utility g) Coordinate with other government agencies
model. Identity or substantial identity with the and the private sector efforts to formulate and
patented design or utility model shall constitute implement plans and policies to strengthen the
evidence of copying. protection of intellectual property rights in the
Moreover, it should be noted that the country.
requirement of Article 34 to provide a 5.2. The Office shall have custody of all records,
disputable presumption applies only if (1) the books, drawings, specifications, documents, and
product obtained by the patented process is other papers and things relating to intellectual
NEW or (2) there is a substantial likelihood that property rights applications filed with the Office.
the identical product was made by the process (n)
and the process owner has not been able SEC 6. The Organizational Structure of the IPO.
through reasonable effort to determine the - 6.1. The Office shall be headed by a Director
process used. Where either of these two General who shall be assisted by two (2)
provisos does not obtain, members shall be free Deputies Director General.
to determine the appropriate method of 6.2. The Office shall be divided into six (6)
implementing the provisions of TRIPS within Bureaus, each of which shall be headed by a
their own internal systems and processes. Director and assisted by an Assistant Director.
Suffice it to say that the reciprocity clause more These Bureaus are:
than justifies such intrusion, if any actually a) The Bureau of Patents;
exists. Besides, Article 34 does not contain an b) The Bureau of Trademarks;
unreasonable burden, consistent as it is with c) The Bureau of Legal Affairs;
due process and the concept of adversarial d) The Documentation, Information and
dispute settlement inherent in our judicial Technology Transfer Bureau;
system. e) The Management Information System and
So too, since the Philippine is a signatory to EDP Bureau; and
most international conventions on patents, f) The Administrative, Financial and Personnel
trademarks and copyrights, the adjustment in Services Bureau.
legislation and rules of procedure will not be 6.3. The Director General, Deputies Director
substantial. General, Directors and Assistant Directors shall
be appointed by the President, and the other
officers and employees of the Office by the
INTELLECTUAL PROPERTY OFFICE Secretary of Trade and Industry, conformably
17.3 Topics with and under the Civil Service Law. (n)
SEC 7. The Director General and Deputies
Structure and Functions Director General. - 7.1. Functions. - The Director
General shall exercise the following powers and
SEC 5. Functions of the Intellectual Property functions:
Office (IPO). - 5.1. To administer and implement a) Manage and direct all functions and activities
the State policies declared in this Act, there is of the Office, including the promulgation of
hereby created the Intellectual Property Office rules and regulations to implement the
(IPO) which shall have the following functions: objectives, policies, plans, programs and
a) Examine applications for grant of letters projects of the Office: Provided, That in the
patent for inventions and register utility models exercise of the authority to propose policies and
and industrial designs; standards in relation to the following: (1) the
b) Examine applications for the registration of effective, efficient, and economical operations
marks, geographic indication, integrated of the Office requiring statutory enactment; (2)
circuits; coordination with other agencies of government
c) Register technology transfer arrangements in relation to the enforcement of intellectual
and settle disputes involving technology property rights; (3) the recognition of attorneys,
transfer payments covered by the provisions of agents, or other persons representing
Part II, Chapter IX on Voluntary Licensing and applicants or other parties before the Office;
develop and implement strategies to promote and (4) the establishment of fees for the filing
and facilitate technology transfer; and processing of an application for a patent,
d) Promote the use of patent information as a utility model or industrial design or mark or a
tool for technology development; collective mark, geographic indication and other
e) Publish regularly in its own publication the marks of ownership, and for all other services
patents, marks, utility models and industrial performed and materials furnished by the
designs, issued and approved, and the Office, the Director General shall be subject to
technology transfer arrangements registered; the supervision of the Secretary of Trade and
f) Administratively adjudicate contested Industry;
proceedings affecting intellectual property b) Exercise exclusive appellate jurisdiction over
rights; and all decisions rendered by the Director of Legal
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Affairs, the Director of Patents, the Director of SEC 9. The Bureau of Trademarks. - The Bureau
Trademarks, and the Director of the of Trademarks shall have the following
Documentation, Information and Technology functions:
Transfer Bureau. The decisions of the Director 9.1. Search and examination of the applications
General in the exercise of his appellate for the registration of marks, geographic
jurisdiction in respect of the decisions of the indications and other marks of ownership and
Director of Patents, and the Director of the issuance of the certificates of registration;
Trademarks shall be appealable to the Court of and
Appeals in accordance with the Rules of Court; 9.2. Conduct studies and researches in the field
and those in respect of the decisions of the of trademarks in order to assist the Director
Director of Documentation, Information and General in formulating policies on the
Technology Transfer Bureau shall be appealable administration and examination of trademarks.
to the Secretary of Trade and Industry; and (n)
c) Exercise original jurisdiction to resolve SEC 10. The Bureau of Legal Affairs. - The
disputes relating to the terms of a license Bureau of Legal Affairs shall have the following
involving the author's right to public functions:
performance or other communication of his 10.1. Hear and decide opposition to the
work. The decisions of the Director General in application for registration of marks;
these cases shall be appealable to the cancellation of trademarks; subject to the
Secretary of Trade and Industry. provisions of SEC 64, cancellation of patents,
7.2. Qualifications. - The Director General and utility models, and industrial designs; and
the Deputies Director General must be natural petitions for compulsory licensing of patents;
born citizens of the Philippines, at least thirty- 10.2. (a) Exercise original jurisdiction in
five (35) years of age on the day of their administrative complaints for violations of laws
appointment, holders of a college degree, and involving intellectual property rights: Provided,
of proven competence, integrity, probity and That its jurisdiction is limited to complaints
independence: Provided, That the Director where the total damages claimed are not less
General and at least one (1) Deputy Director than Two hundred thousand pesos (P200,000):
General shall be members of the Philippine Bar Provided further, That availment of the
who have engaged in the practice of law for at provisional remedies may be granted in
least ten (10) years: Provided further, That in accordance with the Rules of Court. The
the selection of the Director General and the Director of Legal Affairs shall have the power to
Deputies Director General, consideration shall hold and punish for contempt all those who
be given to such qualifications as would result, disregard orders or writs issued in the course of
as far as practicable, in the balanced the proceedings. (n)
representation in the Directorate General of the (b) After formal investigation, the Director for
various fields of intellectual property. Legal Affairs may impose one (1) or more of the
7.3. Term of Office. - The Director General and following administrative penalties:
the Deputies Director General shall be (i) The issuance of a cease and desist order
appointed by the President for a term of five (5) which shall specify the acts that the respondent
years and shall be eligible for reappointment shall cease and desist from and shall require
only once: Provided, That the first Director him to submit a compliance report within a
General shall have a first term of seven (7) reasonable time which shall be fixed in the
years. Appointment to any vacancy shall be order;
only for the unexpired term of the predecessor. (ii) The acceptance of a voluntary assurance of
7.4. The Office of the Director General. - The compliance or discontinuance as may be
Office of the Director General shall consist of imposed. Such voluntary assurance may include
the Director General and the Deputies Director one or more of the following:
General, their immediate staff and such Offices (1) An assurance to comply with the provisions
and Services that the Director General will set of the intellectual property law violated;
up to support directly the Office of the Director (2) An assurance to refrain from engaging in
General. (n) unlawful and unfair acts and practices subject
SEC 8. The Bureau of Patents. - The Bureau of of the formal investigation;
Patents shall have the following functions: (3) An assurance to recall, replace, repair, or
8.1. Search and examination of patent refund the money value of defective goods
applications and the grant of patents; distributed in commerce; and
8.2. Registration of utility models, industrial (4) An assurance to reimburse the complainant
designs, and integrated circuits; and the expenses and costs incurred in prosecuting
8.3. Conduct studies and researches in the field the case in the Bureau of Legal Affairs.
of patents in order to assist the Director The Director of Legal Affairs may also require
General in formulating policies on the the respondent to submit periodic compliance
administration and examination of patents. (n)
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reports and file a bond to guarantee compliance seminars and lectures, and other similar
of his undertaking; activities;
(iii) The condemnation or seizure of products 11.4. Establish working relations with research
which are subject of the offense. The goods and development institutions as well as with
seized hereunder shall be disposed of in such local and international intellectual property
manner as may be deemed appropriate by the professional groups and the like;
Director of Legal Affairs, such as by sale, 11.5. Perform state-of-the-art searches;
donation to distressed local governments or to 11.6. Promote the use of patent information as
charitable or relief institutions, exportation, an effective tool to facilitate the development of
recycling into other goods, or any combination technology in the country;
thereof, under such guidelines as he may 11.7. Provide technical, advisory, and other
provide; services relating to the licensing and promotion
(iv) The forfeiture of paraphernalia and all real of technology, and carry out an efficient and
and personal properties which have been used effective program for technology transfer; and
in the commission of the offense; 11.8. Register technology transfer
(v) The imposition of administrative fines in arrangements, and settle disputes involving
such amount as deemed reasonable by the technology transfer payments. (n)
Director of Legal Affairs, which shall in no case SEC 12. The Management Information Services
be less than Five thousand pesos (P5,000) nor and EDP Bureau. - The Management Information
more than One hundred fifty thousand pesos Services and EDP Bureau shall:
(P150,000). In addition, an additional fine of not 12.1. Conduct automation planning, research
more than One thousand pesos (P1,000) shall and development, testing of systems, contracts
be imposed for each day of continuing violation; with firms, contracting, purchase and
(vi) The cancellation of any permit, license, maintenance of equipment, design and
authority, or registration which may have been maintenance of systems, user consultation, and
granted by the Office, or the suspension of the the like; and
validity thereof for such period of time as the 12.2. Provide management information support
Director of Legal Affairs may deem reasonable and service to the Office. (n)
which shall not exceed one (1) year; SEC 13. The Administrative, Financial and
(vii) The withholding of any permit, license, Human Resource Development Service Bureau.
authority, or registration which is being secured - 13.1. The Administrative Service shall: (a)
by the respondent from the Office; Provide services relative to procurement and
(viii) The assessment of damages; allocation of supplies and equipment,
(ix) Censure; and transportation, messengerial work, cashiering,
(x) Other analogous penalties or sanctions. payment of salaries and other Office's
(Secs. 6, 7, 8, and 9, Executive Order No. 913 obligations, office maintenance, proper safety
[1983]a) and security, and other utility services; and
10.3. The Director General may by Regulations comply with government regulatory
establish the procedure to govern the requirements in the areas of performance
implementation of this SEC. (n) appraisal, compensation and benefits,
SEC 11. The Documentation, Information and employment records and reports;
Technology Transfer Bureau. - The (b) Receive all applications filed with the Office
Documentation, Information and Technology and collect fees therefor, and
Transfer Bureau shall have the following (c) Publish patent applications and grants,
functions: trademark applications, and registration of
11.1. Support the search and examination marks, industrial designs, utility models,
activities of the Office through the following geographic indication, and lay-out-designs of
activities: integrated circuits registrations.
(a) Maintain and upkeep classification systems 13.2. The Patent and Trademark Administration
whether they be national or international such Services shall perform the following functions
as the International Patent Classification (IPC) among others:
system; (a) Maintain registers of assignments, mergings,
(b) Provide advisory services for the licenses, and bibliographic on patents and
determination of search patterns; trademarks;
(c) Maintain search files and search rooms and (b) Collect maintenance fees, issue certified
reference libraries; and copies of documents in its custody and perform
(d) Adapt and package industrial property similar other activities; and
information. (c) Hold in custody all the applications filed with
11.2. Establish networks or intermediaries or the office, and all patent grants, certificate of
regional representatives; registrations issued by the office, and the like.
11.3. Educate the public and build awareness 13.3. The Financial Service shall formulate and
on intellectual property through the conduct of manage a financial program to ensure
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availability and proper utilization of funds; the enforcement of the provisions of this Act.
provide for an effective monitoring system of (Sec. 3, R.A. No. 165a)
the financial operations of the Office; and SEC 16. Seal of Office. - The Office shall have a
13.4. The Human Resource Development seal, the form and design of which shall be
Service shall design and implement human approved by the Director General. (Sec. 4, R.A.
resource development plans and programs for No. 165a)
the personnel of the Office; provide for present SEC 17. Publication of Laws and Regulations. -
and future manpower needs of the organization; The Director General shall cause to be printed
maintain high morale and favorable employee and make available for distribution, pamphlet
attitudes towards the organization through the copies of this Act, other pertinent laws,
continuing design and implementation of executive orders and information circulars
employee development programs. (n) relating to matters within the jurisdiction of the
SEC 14. Use of Intellectual Property Rights Office. (Sec. 5, R.A. No. 165a)
Fees by the IPO. - 14.1. For a more effective and SEC 18. The IPO Gazette. - All matters required
expeditious implementation of this Act, the to be published under this Act shall be
Director General shall be authorized to retain, published in the Office's own publication to be
without need of a separate approval from any known as the IPO Gazette. (n)
government agency, and subject only to the SEC 19. Disqualification of Officers and
existing accounting and auditing rules and Employees of the Office. - All officers and
regulations, all the fees, fines, royalties and employees of the Office shall not apply or act as
other charges, collected by the Office under this an attorney or patent agent of an application for
Act and the other laws that the Office will be a grant of patent, for the registration of a utility
mandated to administer, for use in its model, industrial design or mark nor acquire,
operations, like upgrading of its facilities, except by hereditary succession, any patent or
equipment outlay, human resource utility model, design registration, or mark or
development, and the acquisition of the any right, title or interest therein during their
appropriate office space, among others, to employment and for one (1) year thereafter.
improve the delivery of its services to the (Sec. 77, R.A. No. 165a)
public. This amount, which shall be in addition
to the Office's annual budget, shall be Jurisdiction over IP disputes and Appeals
deposited and maintained in a separate account SEC 7. The Director General and Deputies
or fund, which may be used or disbursed Director General. - 7.1. Functions. - The Director
directly by the Director General. General shall exercise the following powers and
14.2. After five (5) years from the coming into functions:
force of this Act, the Director General shall, b) Exercise exclusive appellate jurisdiction over
subject to the approval of the Secretary of all decisions rendered by the Director of Legal
Trade and Industry, determine if the fees and Affairs, the Director of Patents, the Director of
charges mentioned in SubSEC 14.1 hereof that Trademarks, and the Director of the
the Office shall collect are sufficient to meet its Documentation, Information and Technology
budgetary requirements. If so, it shall retain all Transfer Bureau. The decisions of the Director
the fees and charges it shall collect under the General in the exercise of his appellate
same conditions indicated in said SubSEC 14.1 jurisdiction in respect of the decisions of the
but shall forthwith, cease to receive any funds Director of Patents, and the Director of
from the annual budget of the National Trademarks shall be appealable to the Court of
Government; if not, the provisions of said Appeals in accordance with the Rules of Court;
SubSEC 14.1 shall continue to apply until such and those in respect of the decisions of the
time when the Director General, subject to the Director of Documentation, Information and
approval of the Secretary of Trade and Industry, Technology Transfer Bureau shall be appealable
certifies that the above-stated fees and charges to the Secretary of Trade and Industry; and
the Office shall collect are enough to fund its c) Exercise original jurisdiction to resolve
operations. (n) disputes relating to the terms of a license
SEC 15. Special Technical and Scientific involving the author's right to public
Assistance. - The Director General is performance or other communication of his
empowered to obtain the assistance of work. The decisions of the Director General in
technical, scientific or other qualified officers these cases shall be appealable to the
and employees of other departments, bureaus, Secretary of Trade and Industry.
offices, agencies and instrumentalities of the
Government, including corporations owned, SEC 10. The Bureau of Legal Affairs. - The
controlled or operated by the Government, Bureau of Legal Affairs shall have the following
when deemed necessary in the consideration of functions:
any matter submitted to the Office relative to 10.1. Hear and decide opposition to the
application for registration of marks;
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cancellation of trademarks; subject to the more than One hundred fifty thousand pesos
provisions of SEC 64, cancellation of patents, (P150,000). In addition, an additional fine of not
utility models, and industrial designs; and more than One thousand pesos (P1,000) shall
petitions for compulsory licensing of patents; be imposed for each day of continuing violation;
10.2. (a) Exercise original jurisdiction in (vi) The cancellation of any permit, license,
administrative complaints for violations of laws authority, or registration which may have been
involving intellectual property rights: Provided, granted by the Office, or the suspension of the
That its jurisdiction is limited to complaints validity thereof for such period of time as the
where the total damages claimed are not less Director of Legal Affairs may deem reasonable
than Two hundred thousand pesos (P200,000): which shall not exceed one (1) year;
Provided further, That availment of the (vii) The withholding of any permit, license,
provisional remedies may be granted in authority, or registration which is being secured
accordance with the Rules of Court. The by the respondent from the Office;
Director of Legal Affairs shall have the power to (viii) The assessment of damages;
hold and punish for contempt all those who (ix) Censure; and
disregard orders or writs issued in the course of (x) Other analogous penalties or sanctions.
the proceedings. (n) (Secs. 6, 7, 8, and 9, Executive Order No. 913
(b) After formal investigation, the Director for [1983]a)
Legal Affairs may impose one (1) or more of the 10.3. The Director General may by Regulations
following administrative penalties: establish the procedure to govern the
(i) The issuance of a cease and desist order implementation of this SEC. (n)
which shall specify the acts that the respondent SEC 11. The Documentation, Information and
shall cease and desist from and shall require Technology Transfer Bureau. - The
him to submit a compliance report within a Documentation, Information and Technology
reasonable time which shall be fixed in the Transfer Bureau shall have the following
order; functions:
(ii) The acceptance of a voluntary assurance of 11.1. Support the search and examination
compliance or discontinuance as may be activities of the Office through the following
imposed. Such voluntary assurance may include activities:
one or more of the following: (a) Maintain and upkeep classification systems
(1) An assurance to comply with the provisions whether they be national or international such
of the intellectual property law violated; as the International Patent Classification (IPC)
(2) An assurance to refrain from engaging in system;
unlawful and unfair acts and practices subject (b) Provide advisory services for the
of the formal investigation; determination of search patterns;
(3) An assurance to recall, replace, repair, or (c) Maintain search files and search rooms and
refund the money value of defective goods reference libraries; and
distributed in commerce; and (d) Adapt and package industrial property
(4) An assurance to reimburse the complainant information.
the expenses and costs incurred in prosecuting 11.2. Establish networks or intermediaries or
the case in the Bureau of Legal Affairs. regional representatives;
The Director of Legal Affairs may also require 11.3. Educate the public and build awareness
the respondent to submit periodic compliance on intellectual property through the conduct of
reports and file a bond to guarantee compliance seminars and lectures, and other similar
of his undertaking; activities;
(iii) The condemnation or seizure of products 11.4. Establish working relations with research
which are subject of the offense. The goods and development institutions as well as with
seized hereunder shall be disposed of in such local and international intellectual property
manner as may be deemed appropriate by the professional groups and the like;
Director of Legal Affairs, such as by sale, 11.5. Perform state-of-the-art searches;
donation to distressed local governments or to 11.6. Promote the use of patent information as
charitable or relief institutions, exportation, an effective tool to facilitate the development of
recycling into other goods, or any combination technology in the country;
thereof, under such guidelines as he may 11.7. Provide technical, advisory, and other
provide; services relating to the licensing and promotion
(iv) The forfeiture of paraphernalia and all real of technology, and carry out an efficient and
and personal properties which have been used effective program for technology transfer; and
in the commission of the offense; 11.8. Register technology transfer
(v) The imposition of administrative fines in arrangements, and settle disputes involving
such amount as deemed reasonable by the technology transfer payments. (n)
Director of Legal Affairs, which shall in no case
be less than Five thousand pesos (P5,000) nor Administrative Penalties
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SEC 10.2 (b) After formal investigation, the (x) Other analogous penalties or sanctions.
Director for Legal Affairs may impose one (1) or (Secs. 6, 7, 8, and 9, Executive Order No. 913
more of the following administrative penalties: [1983]a)
(i) The issuance of a cease and desist order
which shall specify the acts that the respondent Prescriptive Period of Actions for Damages
shall cease and desist from and shall require
him to submit a compliance report within a SEC 79. Limitation of Action for Damages. - No
reasonable time which shall be fixed in the damages can be recovered for acts of
order; infringement committed more than four (4)
(ii) The acceptance of a voluntary assurance of years before the institution of the action for
compliance or discontinuance as may be infringement.
imposed. Such voluntary assurance may include
one or more of the following: SEC 226. Damages. - No damages may be
(1) An assurance to comply with the provisions recovered under this Act after four (4) years
of the intellectual property law violated; from the time the cause of action arose.
(2) An assurance to refrain from engaging in
unlawful and unfair acts and practices subject
of the formal investigation;
(3) An assurance to recall, replace, repair, or INTELLECTUAL PROPERTY RIGHTS IN
refund the money value of defective goods GENERAL
distributed in commerce; and
(4) An assurance to reimburse the complainant PATENTS
the expenses and costs incurred in prosecuting
the case in the Bureau of Legal Affairs. 17.5 Topics
The Director of Legal Affairs may also require
the respondent to submit periodic compliance Patentable Inventions
reports and file a bond to guarantee compliance
of his undertaking;
SEC 21. Patentable Inventions. - Any technical
(iii) The condemnation or seizure of products
solution of a problem in any field of human
which are subject of the offense. The goods
activity which is new, involves an inventive step
seized hereunder shall be disposed of in such
and is industrially applicable shall be
manner as may be deemed appropriate by the
Patentable. It may be, or may relate to, a
Director of Legal Affairs, such as by sale,
product, or process, or an improvement of any
donation to distressed local governments or to
of the foregoing. (Sec. 7, R.A. No. 165a)
charitable or relief institutions, exportation,
recycling into other goods, or any combination
thereof, under such guidelines as he may Novelty
provide;
(iv) The forfeiture of paraphernalia and all real SEC 23. Novelty. . - An invention shall not be
and personal properties which have been used considered new if it forms part of a prior art.
in the commission of the offense; (Sec. 9, R.A. No. 165a)
(v) The imposition of administrative fines in
such amount as deemed reasonable by the Prior Art
Director of Legal Affairs, which shall in no case
be less than Five thousand pesos (P5,000) nor SEC 24. Prior Art. - Prior art shall consist of:
more than One hundred fifty thousand pesos 24.1. Everything which has been made
(P150,000). In addition, an additional fine of not available to the public anywhere in the world,
more than One thousand pesos (P1,000) shall before the filing date or the priority date of the
be imposed for each day of continuing violation; application claiming the invention; and
(vi) The cancellation of any permit, license, 24.2. The whole contents of an application for a
authority, or registration which may have been patent, utility model, or industrial design
granted by the Office, or the suspension of the registration, published in accordance with this
validity thereof for such period of time as the Act, filed or effective in the Philippines, with a
Director of Legal Affairs may deem reasonable filing or priority date that is earlier than the
which shall not exceed one (1) year; filing or priority date of the application:
(vii) The withholding of any permit, license, Provided, That the application which has validly
authority, or registration which is being secured claimed the filing date of an earlier application
by the respondent from the Office; under SEC 31 of this Act, shall be prior art with
(viii) The assessment of damages; effect as of the filing date of such earlier
(ix) Censure; and application: Provided further, That the applicant
or the inventor identified in both applications
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are not one and the same. (Sec. 9, R.A. No. SEC 29. First to File Rule. - If two (2) or more
165a) persons have made the invention separately
and independently of each other, the right to
Inventive Step or Non-Obviousness the patent shall belong to the person who filed
an application for such invention, or where two
SEC 26. Inventive Step. - An invention involves or more applications are filed for the same
an inventive step if, having regard to prior art, it invention, to the applicant who has the earliest
is not obvious to a person skilled in the art at filing date or, the earliest priority date. (3rd
the time of the filing date or priority date of the sentence, Sec. 10, R.A. No. 165a.)
application claiming the invention. (n)
Right of Priority
[CTS]
Industrial Applicability
SEC 31. Right of Priority. . - An application for
SEC 27. Industrial Applicability. - An invention patent filed by any person who has previously
that can be produced and used in any industry applied for the same invention in another
shall be industrially applicable. (n) country which by treaty, convention, or law
affords similar privileges to Filipino citizens,
Non-Patentable Inventions shall be considered as filed as of the date of
filing the foreign application: Provided, That: (a)
the local application expressly claims priority;
SEC 22. Non-Patentable Inventions. - The
(b) it is filed within twelve (12) months from the
following shall be excluded from patent
date the earliest foreign application was filed;
protection:
and (c) a certified copy of the foreign
[DMTPAP]
application together with an English translation
22.1. Discoveries, scientific theories and
is filed within six (6) months from the date of
mathematical methods;
filing in the Philippines. (Sec. 15, R.A. No. 165a)
22.2. Schemes, rules and methods of
performing mental acts, playing games or doing
business, and programs for computers; Contents of Application
22.3. Methods for treatment of the human or [RRDCA]
animal body by surgery or therapy and
diagnostic methods practiced on the human or SEC 33. Appointment of Agent or
animal body. This provision shall not apply to Representative. - An applicant who is not a
products and composition for use in any of resident of the Philippines must appoint and
these methods; maintain a resident agent or representative in
22.4. Plant varieties or animal breeds or the Philippines upon whom notice or process for
essentially biological process for the production judicial or administrative procedure relating to
of plants or animals. This provision shall not the application for patent or the patent may be
apply to micro-organisms and non-biological served. (Sec. 11, R.A. No. 165a)
and microbiological processes. SEC 34. The Request. - The request shall
Provisions under this subSEC shall not preclude contain a petition for the grant of the patent,
Congress to consider the enactment of a law the name and other data of the applicant, the
providing sui generis protection of plant inventor and the agent and the title of the
varieties and animal breeds and a system of invention. (n) [PNT]
community intellectual rights protection: SEC 35. Disclosure and Description of the
22.5. Aesthetic creations; and Invention. - 35.1. Disclosure. - The application
22.6. Anything which is contrary to public order shall disclose the invention in a manner
or morality. (Sec. 8, R.A. No. 165a) sufficiently clear and complete for it to be
carried out by a person skilled in the art. Where
Right to a Patent the application concerns a microbiological
[IHA] process or the product thereof and involves the
use of a micro-organism which cannot be
sufficiently disclosed in the application in such a
SEC 28. Right to a Patent. - The right to a
way as to enable the invention to be carried out
patent belongs to the inventor, his heirs, or
by a person skilled in the art, and such material
assigns. When two (2) or more persons have
is not available to the public, the application
jointly made an invention, the right to a patent
shall be supplemented by a deposit of such
shall belong to them jointly. (Sec. 10, R.A. No.
material with an international depository
165a)
institution. [SCC-PSA-MDM]
35.2. Description. - The Regulations shall
First-to-File Rule prescribe the contents of the description and
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the order of presentation. (Sec. 14, R.A. No. 42.2. The Regulations shall determine the
165a) procedure for the re-examination and revival of
SEC 36. The Claims. - 36.1. The application an application as well as the appeal to the
shall contain one (1) or more claims which shall Director of Patents from any final action by the
define the matter for which protection is examiner. (Sec. 16, R.A. No. 165a)
sought. Each claim shall be clear and concise,
and shall be supported by the description. SEC 43. Classification and Search. - An
[ODCC] application that has complied with the formal
36.2. The Regulations shall prescribe the requirements shall be classified and a search
manner of the presentation of claims. (n) conducted to determine the prior art. (n)
SEC 37. The Abstract. - The abstract shall
consist of a concise summary of the disclosure SEC 44. Publication of Patent Application. -
of the invention as contained in the description, 44.1. The patent application shall be published
claims and drawings in preferably not more in the IPO Gazette together with a search
than one hundred fifty (150) words. It must be document established by or on behalf of the
drafted in a way which allows the clear Office citing any documents that reflect prior
understanding of the technical problem, the gist art, after the expiration of eighteen (18) months
of the solution of that problem through the from the filing date or priority date.
invention, and the principal use or uses of the 44.2. After publication of a patent application,
invention. The abstract shall merely serve for any interested party may inspect the
technical information. (n) [CCD] application documents filed with the Office.
44.3. The Director General subject to the
Procedure of Grant of Patent approval of the Secretary of Trade and Industry,
may prohibit or restrict the publication of an
SEC 40. Filing Date Requirements. - 40.1. The application, if in his opinion, to do so would be
filing date of a patent application shall be the prejudicial to the national security and interests
date of receipt by the Office of at least the of the Republic of the Philippines. (n)
following elements: [EID]
(a) An express or implicit indication that a SEC 45. Confidentiality Before Publication. - A
Philippine patent is sought; patent application, which has not yet been
(b) Information identifying the applicant; and published, and all related documents, shall not
(c) Description of the invention and one (1) or be made available for inspection without the
more claims in Filipino or English. consent of the applicant. (n)
40.2. If any of these elements is not submitted
within the period set by the Regulations, the SEC 46. Rights Conferred by a Patent
application shall be considered withdrawn. (n) Application After Publication. - The applicant
shall have all the rights of a patentee under SEC
SEC 41. According a Filing Date. - The Office 76 against any person who, without his
shall examine whether the patent application authorization, exercised any of the rights
satisfies the requirements for the grant of date conferred under SEC 71 of this Act in relation to
of filing as provided in SEC 40 hereof. If the the invention claimed in the published patent
date of filing cannot be accorded, the applicant application, as if a patent had been granted for
shall be given an opportunity to correct the that invention: Provided, That the said person
deficiencies in accordance with the had: [AK-RWN]
implementing Regulations. If the application 46.1. Actual knowledge that the invention that
does not contain all the elements indicated in he was using was the subject matter of a
SEC 40, the filing date should be that date when published application; or
all the elements are received. If the deficiencies 46.2. Received written notice that the invention
are not remedied within the prescribed time that he was using was the subject matter of a
limit, the application shall be considered published application being identified in the
withdrawn. (n) said notice by its serial number: Provided, That
the action may not be filed until after the grant
SEC 42. Formality Examination. - 42.1. After of a patent on the published application and
the patent application has been accorded a within four (4) years from the commission of the
filing date and the required fees have been paid acts complained of. (n)
on time in accordance with the Regulations, the
applicant shall comply with the formal SEC 47. Observation by Third Parties. -
requirements specified by SEC 32 and the Following the publication of the patent
Regulations within the prescribed period, application, any person may present
otherwise the application shall be considered observations in writing concerning the
withdrawn. patentability of the invention. Such
observations shall be communicated to the
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applicant who may comment on them. The SEC 54. Term of Patent. - The term of a patent
Office shall acknowledge and put such shall be twenty (20) years from the filing date of
observations and comment in the file of the the application. (Sec. 21, R.A. No. 165a)
application to which it relates. (n)
SEC 55. Annual Fees. - 55.1. To maintain the
SEC 48. Request for Substantive Examination. - patent application or patent, an annual fee shall
48.1. The application shall be deemed be paid upon the expiration of four (4) years
withdrawn unless within six (6) months from the from the date the application was published
date of publication under SEC 41, a written pursuant to SEC 44 hereof, and on each
request to determine whether a patent subsequent anniversary of such date. Payment
application meets the requirements of SECs 21 may be made within three (3) months before
to 27 and SECs 32 to 39 and the fees have been the due date. The obligation to pay the annual
paid on time. fees shall terminate should the application be
48.2. Withdrawal of the request for examination withdrawn, refused, or cancelled.
shall be irrevocable and shall not authorize the 55.2. If the annual fee is not paid, the patent
refund of any fee. (n) application shall be deemed withdrawn or the
patent considered as lapsed from the day
SEC 49. Amendment of Application. - An following the expiration of the period within
applicant may amend the patent application which the annual fees were due. A notice that
during examination: Provided, That such the application is deemed withdrawn or the
amendment shall not include new matter lapse of a patent for non-payment of any annual
outside the scope of the disclosure contained in fee shall be published in the IPO Gazette and
the application as filed. (n) the lapse shall be recorded in the Register of
the Office.
SEC 50. Grant of Patent. - 50.1. If the 55.3. A grace period of six (6) months shall be
application meets the requirements of this Act, granted for the payment of the annual fee,
the Office shall grant the patent: Provided, That upon payment of the prescribed surcharge for
all the fees are paid on time. delayed payment. (Sec. 22, R.A. No. 165a)
50.2. If the required fees for grant and printing
are not paid in due time, the application shall SEC 56. Surrender of Patent. - 56.1. The owner
be deemed to be withdrawn. of the patent, with the consent of all persons
50.3. A patent shall take effect on the date of having grants or licenses or other right, title or
the publication of the grant of the patent in the interest in and to the patent and the invention
IPO Gazette. (Sec. 18, R.A. No. 165a) covered thereby, which have been recorded in
the Office, may surrender his patent or any
SEC 51. Refusal of the Application. - 51.1. The claim or claims forming part thereof to the
final order of refusal of the examiner to grant Office for cancellation.
the patent shall be appealable to the Director in 56.2. A person may give notice to the Office of
accordance with this Act. his opposition to the surrender of a patent
51.2. The Regulations shall provide for the under this SEC, and if he does so, the Bureau
procedure by which an appeal from the order of shall notify the proprietor of the patent and
refusal from the Director shall be undertaken. determine the question.
(n) 56.3. If the Office is satisfied that the patent
may properly be surrendered, he may accept
SEC 52. Publication Upon Grant of Patent. - the offer and, as from the day when notice of
52.1. The grant of the patent together with his acceptance is published in the IPO Gazette,
other related information shall be published in the patent shall cease to have effect, but no
the IPO Gazette within the time prescribed by action for infringement shall lie and no right
the Regulations. compensation shall accrue for any use of the
52.2. Any interested party may inspect the patented invention before that day for the
complete description, claims, and drawings of services of the government. (Sec. 24, R.A. No.
the patent on file with the Office. (Sec. 18, R.A. 165a)
No. 165a)
SEC 57. Correction of Mistakes of the Office. -
SEC 53. Contents of Patent. - The patent shall The Director shall have the power to correct,
be issued in the name of the Republic of the without fee, any mistake in a patent incurred
Philippines under the seal of the Office and shall through the fault of the Office when clearly
be signed by the Director, and registered disclosed in the records thereof, to make the
together with the description, claims, and patent conform to the records. (Sec. 25, R.A.
drawings, if any, in books and records of the No. 165)
Office. (Secs. 19 and 20, R.A. No. 165a)
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SEC 58. Correction of Mistake in the using, selling or offering for sale, or importing
Application. - On request of any interested any product obtained directly or indirectly from
person and payment of the prescribed fee, the such process.
Director is authorized to correct any mistake in 71.2. Patent owners shall also have the right to
a patent of a formal and clerical nature, not assign, or transfer by succession the patent,
incurred through the fault of the Office. (Sec. and to conclude licensing contracts for the
26, R.A. No. 165a) same. (Sec. 37, R.A. No. 165a)

SEC 59. Changes in Patents. - 59.1. The owner Term


of a patent shall have the right to request the
Bureau to make the changes in the patent in SEC 54. Term of Patent. - The term of a patent
order to: shall be twenty (20) years from the filing date of
(a) Limit the extent of the protection conferred the application. (Sec. 21, R.A. No. 165a)
by it;
(b) Correct obvious mistakes or to correct Cancellation of Patents
clerical errors; and
(c) Correct mistakes or errors, other than those
SEC 61. Cancellation of Patents. - 61.1. Any
referred to in letter (b), made in good faith:
interested person may, upon payment of the
Provided, That where the change would result in
required fee, petition to cancel the patent or
a broadening of the extent of protection
any claim thereof, or parts of the claim, on any
conferred by the patent, no request may be
of the following grounds:
made after the expiration of two (2) years from
[NN-ND-CP]
the grant of a patent and the change shall not
(a) That what is claimed as the invention is not
affect the rights of any third party which has
new or Patentable;
relied on the patent, as published.
(b) That the patent does not disclose the
59.2. No change in the patent shall be
invention in a manner sufficiently clear and
permitted under this SEC, where the change
complete for it to be carried out by any person
would result in the disclosure contained in the
skilled in the art; or
patent going beyond the disclosure contained in
(c) That the patent is contrary to public order or
the application filed.
morality.
59.3. If, and to the extent to which the Office
61.2. Where the grounds for cancellation relate
changes the patent according to this SEC, it
to some of the claims or parts of the claim,
shall publish the same. (n)
cancellation may be effected to such extent
only. (Secs. 28 and 29, R.A. No. 165a)
SEC 60. Form and Publication of Amendment. -
An amendment or correction of a patent shall
be accomplished by a certificate of such Remedies of True and Actual Inventor
amendment or correction, authenticated by the
seal of the Office and signed by the Director, SEC 68. Remedies of the True and Actual
which certificate shall be attached to the Inventor. - If a person, who was deprived of the
patent. Notice of such amendment or correction patent without his consent or through fraud is
shall be published in the IPO Gazette and copies declared by final court order or decision to be
of the patent kept or furnished by the Office the true and actual inventor, the court shall
shall include a copy of the certificate of order for his substitution as patentee, or at the
amendment or correction. (Sec. 27, R.A. No. option of the true inventor, cancel the patent,
165) and award actual and other damages in his
favor if warranted by the circumstances. (Sec.
Rights Conferred by a Patent 33, R.A. No. 165a)

SEC 71. Rights Conferred by Patent. - 71.1. A Limitations on the Rights of Patentees
patent shall confer on its owner the following
exclusive rights: SEC 72. Limitations of Patent Rights. - The
[RPP-MUSI-MDUSOSI-ATL] owner of a patent has no right to prevent third
(a) Where the subject matter of a patent is a parties from performing, without his
product, to restrain, prohibit and prevent any authorization, the acts referred to in SEC 71
unauthorized person or entity from making, hereof in the following circumstances:
using, offering for sale, selling or importing that [APEIS]
product; 72.1. Using a patented product which has been
(b) Where the subject matter of a patent is a put on the market in the Philippines by the
process, to restrain, prevent or prohibit any owner of the product, or with his express
unauthorized person or entity from using the consent, insofar as such use is performed after
process, and from manufacturing, dealing in,
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that product has been so put on the said


market; Patent Infringement
72.2. Where the act is done privately and on a
non-commercial scale or for a non-commercial SEC 76. Civil Action for Infringement. - 76.1.
purpose: Provided, That it does not significantly The making, using, offering for sale, selling, or
prejudice the economic interests of the owner importing a patented product or a product
of the patent; obtained directly or indirectly from a patented
72.3. Where the act consists of making or using process, or the use of a patented process
exclusively for the purpose of experiments that without the authorization of the patentee
relate to the subject matter of the patented constitutes patent infringement. [MUOSIUWA]
invention;
72.4. Where the act consists of the preparation Civil Action
for individual cases, in a pharmacy or by a
medical professional, of a medicine in SEC 76. Civil Action for Infringement. - 76.1.
accordance with a medical prescription or acts The making, using, offering for sale, selling, or
concerning the medicine so prepared; importing a patented product or a product
72.5. Where the invention is used in any ship, obtained directly or indirectly from a patented
vessel, aircraft, or land vehicle of any other process, or the use of a patented process
country entering the territory of the Philippines without the authorization of the patentee
temporarily or accidentally: Provided, That such constitutes patent infringement.
invention is used exclusively for the needs of [DAIDC]
the ship, vessel, aircraft, or land vehicle and not 76.2. Any patentee, or anyone possessing any
used for the manufacturing of anything to be right, title or interest in and to the patented
sold within the Philippines. (Secs. 38 and 39, invention, whose rights have been infringed,
R.A. No. 165a) may bring a civil action before a court of
competent jurisdiction, to recover from the
SEC 73. Prior User. - 73.1. Notwithstanding SEC infringer such damages sustained thereby, plus
72 hereof, any prior user, who, in good faith attorney's fees and other expenses of litigation,
was using the invention or has undertaken and to secure an injunction for the protection of
serious preparations to use the invention in his his rights.
enterprise or business, before the filing date or 76.3. If the damages are inadequate or cannot
priority date of the application on which a be readily ascertained with reasonable
patent is granted, shall have the right to certainty, the court may award by way of
continue the use thereof as envisaged in such damages a sum equivalent to reasonable
preparations within the territory where the royalty.
patent produces its effect. 76.4. The court may, according to the
73.2. The right of the prior user may only be circumstances of the case, award damages in a
transferred or assigned together with his sum above the amount found as actual
enterprise or business, or with that part of his damages sustained: Provided, That the award
enterprise or business in which the use or does not exceed three (3) times the amount of
preparations for use have been made. (Sec. 40, such actual damages.
R.A. No. 165a) 76.5. The court may, in its discretion, order that
the infringing goods, materials and implements
SEC 74. Use of Invention by Government. - predominantly used in the infringement be
74.1. A Government agency or third person disposed of outside the channels of commerce
authorized by the Government may exploit the or destroyed, without compensation.
invention even without agreement of the patent 76.6. Anyone who actively induces the
owner where: infringement of a patent or provides the
[PI-JAAC] infringer with a component of a patented
(a) The public interest, in particular, national product or of a product produced because of a
security, nutrition, health or the development of patented process knowing it to be especially
other sectors, as determined by the appropriate adopted for infringing the patented invention
agency of the government, so requires; or and not suitable for substantial non-infringing
(b) A judicial or administrative body has use shall be liable as a contributory infringer
determined that the manner of exploitation, by and shall be jointly and severally liable with the
the owner of the patent or his licensee is anti- infringer. (Sec. 42, R.A. No. 165a)
competitive.
74.2. The use by the Government, or third Defenses
person authorized by the Government shall be [FKI]
subject, mutatis mutandis, to the conditions set
forth in SECs 95 to 97 and 100 to 102. (Sec. 41,
SEC 79. Limitation of Action for Damages. - No
R.A. No. 165a)
damages can be recovered for acts of
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infringement committed more than four (4) the commission of the crime. (Sec. 48, R.A. No.
years before the institution of the action for 165a)
infringement. (Sec. 43, R.A. No. 165)
SEC 80. Damages, Requirement of Notice. - Voluntary Licensing
Damages cannot be recovered for acts of
infringement committed before the infringer Prohibited Clauses
had known, or had reasonable grounds to know
of the patent. It is presumed that the infringer SEC 87. Prohibited Clauses. - Except in cases
had known of the patent if on the patented under SEC 91, the following provisions shall be
product, or on the container or package in deemed prima facie to have an adverse effect
which the article is supplied to the public, or on on competition and trade:
the advertising material relating to the [SPVCP TREUP CRALE]
patented product or process, are placed the 87.1. Those which impose upon the licensee the
words "Philippine Patent" with the number of obligation to acquire from a specific source
the patent. (Sec. 44, R.A. No. 165a) capital goods, intermediate products, raw
SEC 81. Defenses in Action for Infringement. - materials, and other technologies, or of
In an action for infringement, the defendant, in permanently employing personnel indicated by
addition to other defenses available to him, the licensor;
may show the invalidity of the patent, or any 87.2. Those pursuant to which the licensor
claim thereof, on any of the grounds on which a reserves the right to fix the sale or resale prices
petition of cancellation can be brought under of the products manufactured on the basis of
SEC 61 hereof. (Sec. 45, R.A. No. 165) the license;
87.3. Those that contain restrictions regarding
Burden of Proof in Infringement Process the volume and structure of production;
87.4. Those that prohibit the use of competitive
SEC 78. Process Patents; Burden of Proof . - If technologies in a non-exclusive technology
the subject matter of a patent is a process for transfer agreement;
obtaining a product, any identical product shall 87.5. Those that establish a full or partial
be presumed to have been obtained through purchase option in favor of the licensor;
the use of the patented process if the product is 87.6. Those that obligate the licensee to
new or there is substantial likelihood that the transfer for free to the licensor the inventions or
identical product was made by the process and improvements that may be obtained through
the owner of the patent has been unable the use of the licensed technology;
despite reasonable efforts, to determine the 87.7. Those that require payment of royalties to
process actually used. In ordering the the owners of patents for patents which are not
defendant to prove that the process to obtain used;
the identical product is different from the 87.8. Those that prohibit the licensee to export
patented process, the court shall adopt the licensed product unless justified for the
measures to protect, as far as practicable, his protection of the legitimate interest of the
manufacturing and business secrets. (n) licensor such as exports to countries where
exclusive licenses to manufacture and/or
Criminal Action distribute the licensed product(s) have already
IMP 6MOS-3 YRS been granted;
FINE 100K-300K 87.9. Those which restrict the use of the
3 YRS technology supplied after the expiration of the
technology transfer arrangement, except in
SEC 84. Criminal Action for Repetition of cases of early termination of the technology
Infringement. - If infringement is repeated by transfer arrangement due to reason(s)
the infringer or by anyone in connivance with attributable to the licensee;
him after finality of the judgment of the court 87.10. Those which require payments for
against the infringer, the offenders shall, patents and other industrial property rights
without prejudice to the institution of a civil after their expiration, termination arrangement;
action for damages, be criminally liable therefor 87.11. Those which require that the technology
and, upon conviction, shall suffer imprisonment recipient shall not contest the validity of any of
for the period of not less than six (6) months the patents of the technology supplier;
but not more than three (3) years and/or a fine 87.12. Those which restrict the research and
of not less than One hundred thousand pesos development activities of the licensee designed
(P100,000) but not more than Three hundred to absorb and adapt the transferred technology
thousand pesos (P300,000), at the discretion of to local conditions or to initiate research and
the court. The criminal action herein provided development programs in connection with new
shall prescribe in three (3) years from date of products, processes or equipment;
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87.13. Those which prevent the licensee from Compulsory Licensing


adapting the imported technology to local
conditions, or introducing innovation to it, as Ground for Grant of Compulsory License
long as it does not impair the quality standards SEC 93. Grounds for Compulsory Licensing. -
prescribed by the licensor; The Director of Legal Affairs may grant a license
87.14. Those which exempt the licensor for to exploit a patented invention, even without
liability for non-fulfilment of his responsibilities the agreement of the patent owner, in favor of
under the technology transfer arrangement any person who has shown his capability to
and/or liability arising from third party suits exploit the invention, under any of the following
brought about by the use of the licensed circumstances:
product or the licensed technology; and [NPJPN]
87.15. Other clauses with equivalent effects. 93.1. National emergency or other
(Sec. 33-C (2), R.A 165a) circumstances of extreme urgency;
93.2. Where the public interest, in particular,
Mandatory Provisions national security, nutrition, health or the
development of other vital sectors of the
SEC 88. Mandatory Provisions. - The following national economy as determined by the
provisions shall be included in voluntary license appropriate agency of the Government, so
contracts: requires; or
[PCAT] 93.3. Where a judicial or administrative body
88.1. That the laws of the Philippines shall has determined that the manner of exploitation
govern the interpretation of the same and in by the owner of the patent or his licensee is
the event of litigation, the venue shall be the anti-competitive; or
proper court in the place where the licensee has 93.4. In case of public non-commercial use of
its principal office; the patent by the patentee, without satisfactory
88.2. Continued access to improvements in reason;
techniques and processes related to the 93.5. If the patented invention is not being
technology shall be made available during the worked in the Philippines on a commercial
period of the technology transfer arrangement; scale, although capable of being worked,
88.3. In the event the technology transfer without satisfactory reason: Provided, That the
arrangement shall provide for arbitration, the importation of the patented article shall
Procedure of Arbitration of the Arbitration Law constitute working or using the patent. (Secs.
of the Philippines or the Arbitration Rules of the 34, 34-A, 34-B, R.A. No. 165a)
United Nations Commission on International
Trade Law (UNCITRAL) or the Rules of Terms and Conditions of Grant
Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the SEC 100. Terms and Conditions of Compulsory
venue of arbitration shall be the Philippines or License. - The basic terms and conditions
any neutral country; and including the rate of royalties of a compulsory
88.4. The Philippine taxes on all payments license shall be fixed by the Director of Legal
relating to the technology transfer arrangement Affairs subject to the following conditions:
shall be borne by the licensor. (n) [SNNPTP]
100.1. The scope and duration of such license
Unenforceability of Non-Complying shall be limited to the purpose for which it was
Technology Transfer Agreement authorized;
100.2. The license shall be non-exclusive;
SEC 92. Non-Registration with the 100.3. The license shall be non-assignable,
Documentation, Information and Technology except with that part of the enterprise or
Transfer Bureau. - Technology transfer business with which the invention is being
arrangements that conform with the provisions exploited;
of SECs 86 and 87 need not be registered with 100.4. Use of the subject matter of the license
the Documentation, Information and shall be devoted predominantly for the supply
Technology Transfer Bureau. Non-conformance of the Philippine market: Provided, That this
with any of the provisions of SECs 87 and 88, limitation shall not apply where the grant of the
however, shall automatically render the license is based on the ground that the
technology transfer arrangement patentee's manner of exploiting the patent is
unenforceable, unless said technology transfer determined by judicial or administrative
arrangement is approved and registered with process, to be anti-competitive.
the Documentation, Information and 100.5. The license may be terminated upon
Technology Transfer Bureau under the proper showing that circumstances which led to
provisions of SEC 91 on exceptional cases. (n) its grant have ceased to exist and are unlikely
to recur: Provided, That adequate protection
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shall be afforded to the legitimate interest of without notice, unless, it is so recorded in the
the licensee; and Office, within three (3) months from the date of
100.6. The patentee shall be paid adequate said instrument, or prior to the subsequent
remuneration taking into account the economic purchase or mortgage. (Sec. 53, R.A. No. 165a)
value of the grant or authorization, except that
in cases where the license was granted to Utility Models
remedy a practice which was determined after
judicial or administrative process, to be anti- SEC 109. Special Provisions Relating to Utility
competitive, the need to correct the anti- Models. - 109.1. (a) An invention qualifies for
competitive practice may be taken into account registration as a utility model if it is new and
in fixing the amount of remuneration. (Sec. 35- industrially applicable.
B, R.A. No. 165a)
Term
Licensees Exemption from Liability
109.3. A utility model registration shall expire,
SEC 102. Licensee's Exemption from Liability. - without any possibility of renewal, at the end of
Any person who works a patented product, the seventh year after the date of the filing of
substance and/or process under a license the application.
granted under this Chapter, shall be free from
any liability for infringement: Provided however, 17.6 Cases
That in the case of voluntary licensing, no
collusion with the licensor is proven. This is Test of Infringement
without prejudice to the right of the rightful
owner of the patent to recover from the licensor
GODINES V CA
whatever he may have received as royalties
Facts:
under the license. (Sec. 35-E, R.A. No. 165a)
The patent involved in this case is Letters
Patent No. UM-2236 issued by the Philippine
Assignment or Transfer of Patent Patent Office to one Magdalena S. Villaruz on
July 15, 1976. It covers a utility model for a
Form hand tractor or power tiller. The above
mentioned patent was acquired by SV-Agro
SEC 105. Form of Assignment. - The Industries Enterprises, Inc., herein private
assignment must be in writing, acknowledged respondent, from Magdalena Villaruz, its
before a notary public or other officer chairman and president, by virtue of a Deed of
authorized to administer oath or perform Assignment executed by the latter in its favor.
notarial acts, and certified under the hand and On October 31, 1979. In 1979, SV-Agro
official seal of the notary or such other officer. Industries suffered a decline of more than 50%
(Sec. 52, R.A. No. 165) [WAC] in sales in its Molave, Zamboanga del Sur
branch. Upon investigation, it discovered that
Need for Recording to Bind Third Parties power tillers similar to those patented by
private respondent were being manufactured
SEC 106. Recording. - 106.1. The Office shall and sold by petitioner herein. Consequently,
record assignments, licenses and other private respondent notified Pascual Godines
instruments relating to the transmission of any about the existing patent and demanded that
right, title or interest in and to inventions, and the latter stop selling and manufacturing similar
patents or application for patents or inventions power tillers. Upon petitioner's failure to comply
to which they relate, which are presented in with the demand, SV-Agro Industries filed
due form to the Office for registration, in books before the Regional Trial Court a complaint for
and records kept for the purpose. The original infringement of patent and unfair competition.
documents together with a signed duplicate RTC: held Pascual Godines liable for
thereof shall be filed, and the contents thereof infringement of patent and unfair competition.
should be kept confidential. If the original is not CA: decision was affirmed by the appellate
available, an authenticated copy thereof in court.
duplicate may be filed. Upon recording, the
Office shall retain the duplicate, return the Issue: WON Petitioner is guilty of Patent
original or the authenticated copy to the party Infringement.
who filed the same and notice of the recording Held: Yes
shall be published in the IPO Gazette. Ratio:
106.2. Such instruments shall be void as We find no merit in his arguments. The question
against any subsequent purchaser or of whether petitioner was manufacturing and
mortgagee for valuable consideration and selling power tillers is a question of fact better
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addressed to the lower courts. In dismissing the In appearance and form, both the floating
first argument of petitioner herein, the Court of power tillers of the defendant and the turtle
Appeals quoted the findings of the court, to wit: power tiller of the plaintiff are virtually the
It is the contention of defendant that he did not same.
manufacture or make imitations or copies of Viewed from any perspective or angle, the
plaintiff's turtle power tiller as what he merely power tiller of the defendant is identical and
did was to fabricate his floating power tiller similar to that of the turtle power tiller of
upon specifications and designs of those who plaintiff in form, configuration, design and
ordered them. However, this contention appearance. The parts or components thereof
appears untenable in the light of the following are virtually the same.
circumstances: Moreover, it is also observed that petitioner also
he admits in his Answer that he has been called his power tiller as a floating power tiller.
manufacturing power tillers or hand tractors, (b) the DOCTRINE OF EQUIVALENTS:
selling and distributing them long before according to this doctrine, (a)n infringement
plaintiff started selling its turtle power tiller in also occurs when a device appropriates a prior
Zamboanga del Sur and Misamis Occidental, invention by incorporating its innovative
meaning that defendant is principally a concept and, albeit with some modification and
manufacturer of power tillers, not upon change, performs substantially the same
specification and design of buyers, but upon function in substantially the same way to
his own specification and design; achieve substantially the same result.
it would be unbelievable that defendant would The reason for the doctrine of equivalents is
fabricate power tillers similar to the turtle that to permit the imitation of a patented
power tillers of plaintiff upon specifications of invention which does not copy any literal detail
buyers without requiring a job order where the would be to convert the protection of the patent
specification and designs of those ordered are grant into a hollow and useless thing.
specified. A careful examination between the two power
No document was (sic) ever been presented tillers will show that they will operate on the
showing such job orders, and it is rather same fundamental principles.
unusual for defendant to manufacture More specifically, it is necessary and sufficient
something without the specification and to constitute equivalency that the same
designs, considering that he is an engineer by function can be performed in substantially the
profession and proprietor of the Ozamis same way or manner, or by the same or
Engineering shop. substantially the same, principle or mode of
On the other hand, it is also highly unusual for operation; but where these tests are satisfied,
buyers to order the fabrication of a power tiller mere differences of form or name are
or hand tractor and allow defendant to immaterial.
manufacture them merely based on their verbal
instructions. Compulsory Licensing
This is contrary to the usual business and
manufacturing practice. This is not only time SMITH KLINE & FRENCH LABORATORIES V CA
consuming, but costly because it involves a trial Facts:
and error method, repeat jobs and material Petitioner is a foreign corporation with principal
wastage. Defendant judicially admitted two (2) office at Welwyn Garden City, England. It owns
units of the turtle power tiller sold by him to Philippine Letters Patent No. 12207 issued by
Policarpio Berondo. the Bureau of Patents, Trademarks and
Tests used in the case: Technology Transfer (BPTTT) for the patent of
- Tests have been established to determine the drug Cimetidine.
infringement. Private respondent is a domestic corporation
These are : engaged in the business of manufacturing and
LITERAL INFRINGEMENT: in using literal distributing pharmaceutical products. On 30
infringement as a test, ". . . resort must be had, March 1987, it filed a petition for compulsory
in the first instance, to the words of the claim. If licensing[3] with the BPTTT for authorization to
accused matter clearly falls within the claim, manufacture its own brand of medicine from
infringement is made out and that is the end of the drug Cimetidine and to market the resulting
it." product in the Philippines. The petition was
To determine whether the particular item falls filed pursuant to the provisions of SEC 34 of
within the literal meaning of the patent claims, Republic Act No. 165 (An Act Creating a Patent
the court must juxtapose the claims of the Office Prescribing Its Powers and Duties,
patent and the accused product within the Regulating the Issuance of Patents, and
overall context of the claims and specifications, Appropriating Funds Therefor), which provides
to determine whether there is exact identity of for the compulsory licensing of a particular
all material elements. patent after the expiration of two years from
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the grant of the latter if the patented invention compulsory licenses to prevent abuses which
relates to, inter alia, medicine or that which is might result from the exercise of the exclusive
necessary for public health or public safety. rights conferred by the patent. An example
Private respondent alleged that the grant of provided of possible abuses is "failure to work;"
Philippine Letters Patent No. 12207 was issued however, as such is merely supplied by way of
on 29 November 1978; that the petition was an example, it is plain that the treaty does not
filed beyond the two-year protective period preclude the inclusion of other forms or
provided in SEC 34 of R.A. No. 165; and that it categories of abuses.
had the capability to work the patented product Also Article 34 of R.A. No. 165 states:
or make use of it in its manufacture of EC. 34. Grounds for Compulsory Licensing. --
medicine. (1) Any person may apply to the Director for
Petitioner opposed, arguing that private the grant of a license under a particular patent
respondent had no cause of action and lacked at any time after the expiration of two years
the capability to work the patented product; the from the date of the grant of the patent, under
petition failed to specifically divulge how private any of the following circumstances:
respondent would use or improve the patented (e) If the patented invention or article
product; and that private respondent was relates to food or medicine or manufactured
motivated by the pecuniary gain attendant to products or substances which can be used as
the grant of a compulsory license. Petitioner food or medicine, or is necessary for public
also maintained that it was capable of satisfying health or public safety.
the demand of the local market in the Parenthetically, it must be noted that paragraph
manufacture and marketing of the medicines (4) of SEC A, Article 5 of the Paris Convention
covered by the patented product. setting time limitations in the application for a
BPTTT decided for the Private Respondent compulsory license refers only to an instance
approving the application for a license. This was where the ground therefor is "failure to work or
affirmed by the CA. insufficient working," and not to any ground or
circumstance as the treaty signatories may
Issue: WON the grant of the license was reasonably determine.
proper Neither may petitioner validly invoke what it
Held: Yes designates as the GATT Treaty, Uruguay Round.
Ratio: This act is better known as the Uruguay Final
Article 5 of the Paris Convention for the Act signed for the Philippines on 15 April 1994
Protection of Industrial Property,[8] or Paris by Trade and Industry Secretary Rizalino
Convention, for short, of which the Philippines Navarro. Forming integral parts thereof are the
became a party thereto only in 1965.[9] Agreement Establishing the World Trade
Pertinent portions of said Article 5, SEC A, Organization, the Ministerial Declarations and
provide: Decisions, and the Understanding on
A. xxx Commitments in Financial Services. The
(2) Each country of the union shall have Agreement establishing the World Trade
the right to take legislative measures providing Organization includes various agreements and
for the grant of compulsory licenses to prevent associated legal instruments. It was only on 14
the abuses which might result from the exercise December 1994 that the Philippine Senate, in
of the exclusive rights conferred by the patent, the exercise of its power under SEC 21 of Article
for example, failure to work. VII of the Constitution, adopted Senate
xxx Resolution No. 97 concurring in the ratification
(4) A compulsory license may not be by the President of the Agreement. The
applied for on the ground of failure to work or President signed the instrument of ratification
insufficient working before the expiration of a on 16 December 1994. But plainly, this treaty
period of four years from the date of filing of the has no retroactive effect. Accordingly, since the
patent application or three years from the date challenged BPTTT decision was rendered on 14
of the grant of the patent, whichever period February 1994, petitioner cannot avail of the
expires last; it shall be refused if the patentee provisions of the GATT treaty.
justifies his inaction by legitimate reasons. It cannot likewise be claimed that petitioner
Such a compulsory license shall be non- was unduly deprived of its property rights, as
exclusive and shall not be transferable, even in R.A. No. 165 not only grants the patent holder a
the form of the grant of a sub-license, except protective period of two years to enjoy his
with that part of the enterprise or goodwill exclusive rights thereto; but subsequently, the
which exploits such license. law recognizes just compensation in the form of
It is thus clear that SEC A(2) of Article 5 above royalties.
unequivocally and explicitly respects the right In Parke, Davies & Co. v. Doctors'
of member countries to adopt legislative Pharmaceuticals, Inc., we held:
measures to provide for the grant of
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The right to exclude others from the sometime in 1986, Creser began supplying the
manufacturing, using, or vending an invention AFP with the said aerial fuze;
relating to, food or medicine should be Floro's aerial fuze is identical in every respect to
conditioned to allowing any person to the Creser's fuze;
manufacture, use, or vend the same after a only difference: are miniscule and merely
period of three [now two] years from the date of cosmetic in nature.
the grant of the letters patent. After all, the Creser prays for the issuance of TRO/injunction
patentee is not entirely deprived of any be issued enjoining Floro from manufacturing,
proprietary right. In fact, he has been given the marketing and/or profiting therefrom, and/or
period of three years [now two years] of from performing any other act in connection
complete monopoly over the patent. therewith or tending to prejudice and deprive it
Compulsory licensing of a patent on food or of any rights, privileges and benefits to which it
medicine without regard to the other conditions is duly entitled as the first, true and actual
imposed in SEC 34 [now SEC 35] is not an inventor of the aerial fuze. g TRO granted.
undue deprivation of proprietary interests over Floros defense: Creser has no patent g no
a patent right because the law sees to it that cause of action for infringement; Creser's
even after three years of complete monopoly available remedy = petition for cancellation.
something is awarded to the inventor in the RTC: Granted. Floro enjoined.
form of bilateral and workable licensing RTC MFR: Affirmed.
agreement and a reasonable royalty to be Creser developed its aerial fuze way back in
agreed upon by the parties and in default of 1981 while Floro began manufacturing only in
such an agreement, the Director of Patents may 1987. g Creser's aerial fuze was PRESUMABLY
fix the terms and conditions of the license. copied or imitated.
Floro's assertion that an action for infringement
Patent Infringement may only be brought by "anyone possessing
right, title or interest to the patented invention,"
CRESER PRECISION SYSTEMS V CA (SEC 42, RA 165) qualified by Sec. 10, RA 165 to
include only "the first true and actual inventor,
Facts: his heirs, legal representatives or assignees, "
Floro International Corp. (Floro) is a domestic g untenable.
corporation engaged in the manufacture, Sec. 10 merely enumerates the persons who
production, distribution and sale of military may have an invention patented BUT does not
armaments, munitions, airmunitions and other necessarily limit to these persons the right to
similar materials. institute an action for infringement.
January 23, 1990 Floro granted a Patent by Floro will not suffer irreparable injury. Floro's
Bureau of Patents, Trademarks and Technology claim is primarily hinged on its patent the
Transfer (BPTTT) covering an aerial fuze, duly validity of which is being questioned in this
published in the September-October-1990 issue case.
of the Bureau of Patent's Official Gazette. Floros grounds before CA:
November 1993 Floros president, Mr. Gregory Creser has no patent;
Floro, Jr., discovered that Creser Precision In an action for cancellation or invalidation of
Systems, Inc. (Creser): Floro's Letters Patent g proper venue = Office
submitted samples Floros patented aerial fuze of the Director of Patents;
to the AFP for testing. CA: Granted, RTC Reversed.
was claiming the aerial fuze as its own Creser: I can file, under SEC 42 of the Patent
was planning to bid and commercially Law (R.A. 165), an action for infringement, not
manufacture it without license or authority from as a patentee BUT as an entity in possession of
Floro. a right, title or interest in and to the patented
December 3, 1993 Floro sent a letter to Creser invention.
advising it of its existing patent and its rights Absence of a patent DOES NOT:
thereunder, warning Creser of a possible court prevent one from lawfully suing another for
action and/or application for injunction, should it infringement of said patent,
proceed with the scheduled testing by the bar the first true and actual inventor of the
military on December 7, 1993. patented invention from suing another who was
December 8, 1993 Creser filed in the RTC a granted a patent in a suit for declaratory or
complaint for injunction and damages arising injunctive relief g a remedy likened to a civil
from the alleged infringement, alleging that: action for infringement under SEC 42.
Creser is the first, true and actual inventor of an
aerial fuze denominated as "Fuze, PDR 77 CB4" Issue: Can a non-patentee as the true inventor
developed as early as December 1981 under sue for patent infringement?
the Self-Reliance Defense Posture Program Held: No, CA affirmed
(SRDP) of the AFP; Ratio:
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R.A. 165 SEC. 42. Civil action for infringement. legally and factually the first and true inventor
Any patentee, or anyone possessing any right, of the invention.
title or interest in and to the patented invention, Aguas vs. De Leon: "The validity of the patent
whose rights have been infringed, may bring a and the question over the investments, novelty
civil action before the proper CFI (now RTC), to and usefulness of the improved process therein
recover from the infringer damages sustained specified and described are matters better
by reason of the infringement and to secure an determined by the Philippines Patent Office. The
injunction for the protection of his right... technical Staff of the Philippines Patent Office,
Only the patentee or his successors-in-interest composed of experts in their field, have, by the
may file an action for infringement. issuance of the patent in question, accepted the
"anyone possessing any right, title or interest in thinness of the respondent's new tiles as a
and to the patented invention" = refers only to discovery. There is a presumption that the
the patentee's successors-in-interest, assignees Philippine Patent Office has correctly
or grantees g Moore vs. Marsh: since actions determined the patentability of the
for infringement of patent may be brought in improvement by the respondent of the process
the name of the person or persons interested, in question."
whether as patentee, assignees, or as grantees,
of the exclusive right.
no infringement of a patent until a patent has
been issued g Anchor Hocking Glass Corp. vs.
White Cap.: since whatever right one has to the
invention covered by the patent arises alone
from the grant of patent.
Peck vs. Collins: a person or entity who has not
been granted letters patent over an invention
and has not acquired any right or title thereto
either as assignee or as licensee, has no cause
of action for infringement because the right to
maintain an infringement suit depends on the INDUSTRIAL DESIGNS AND LAYOUT
existence of the patent. DESIGNS (TOPOGRAPHIES) OF
Creser admits it has no patent over its aerial INTEGRATED CIRCUITS
fuze g no legal basis or cause of action for
injunction and damages arising from Floros 17.7 Topics
alleged infringement.
While Creser = FIRST INVENTOR g STILL it has Definitions of Industrial Design,
NO RIGHT of property upon which it can Integrated Circuits and Layout Design
maintain a suit unless it obtains a patent.
Bauer & Cie vs. O'Donnel: An inventor has no SEC. 112. Definition of Terms:"
common-law right to a monopoly of his "1. An Industrial Design is any composition of
invention. He has the right to make, use and lines or colors or any three-dimensional form,
vend his own invention, but if he voluntarily whether or not associated with lines or colors:
discloses it, such as by offering it for sale, the Provided, That such composition or form gives a
world is free to copy and use it with impunity. A special appearance to and can serve as pattern
patent, however, gives the inventor the right to for an industrial product or handicraft;
exclude all others. As a patentee, he has the "2. Integrated Circuit means a product, in its
exclusive right of making, using or selling the final form, or an intermediate form, in which the
invention. elements, at least one of which is an active
Remedy of declaratory judgment or injunctive element and some or all of the interconnections
suit on patent similar to civil action for are integrally formed in and/or on a piece of
infringement under SEC 42 of the Patent Law. material, and which is intended to perform an
Infringement = available only to the patent electronic function; and
holder or his successors-in-interest. "3. Layout-Design is synonymous With
BUT Creser still has a remedy g he can, under 'Topography' and means the three-dimensional
SEC 28: disposition, however expressed, of the
file a petition for cancellation of the patent elements, at least one of which is an active
within three (3) years from the publication of element, and of some or all of the
said patent with the Director of Patents AND interconnections of an integrated circuit, or
raise as ground that patentee Floro is not the such a three-dimensional disposition prepared
true and actual inventor. for an integrated circuit intended for
Creser however failed to do so g cannot now manufacture.
assail validity of Floro's patent. Floros patent
when issued is presumably valid, and NOW he is Substantive Conditions for Protection
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SEC. 113. Substantive Conditions/or Protection. Rights Conferred on Registered Owner of


- 113.1. Only industrial designs that are new or Layout Design
ornamental shall benefit from protection under
this Act. 119.4. Rights Conferred to the Owner of a
"113.2. Industrial designs dictated essentially Layout-Design Registration. - The owner of a
by technical or functional considerations to layout-design registration shall enjoy the
obtain a technical result or those that are following rights:
contrary to public order, health or morals shall "(1) to reproduce, whether by incorporation in
not be protected. an integrated circuit or otherwise, the
"113.3. Only layout -designs of integrated registered layout-design in its entirety or any
circuits that are original shall benefit from part thereof, except the act of reproducing any
protection under this Act. A layout-design shall part that does not comply with the requirement
be considered original if it is the result of its of originality; and
creator's own intellectual effort and is not "(2) to sell or otherwise distribute for
commonplace among creators of layout-designs commercial purposes the registered layout
and manufacturers of integrated circuits at the design, an article or an integrated circuit in
time of its creation. which the registered layout-design is
"113.4. A layout-design consisting of a incorporated.
combination of elements and interconnections
that are commonplace shall be protected only if TRADEMARKS
the combination, taken as a whole, is original.
Definitions of marks, collective marks, and
Term trade names

SEC. 118. The Term of Industrial Design or SEC. 121. Definitions--


Layout-Design Registration. - 118.1. The As used in Part III, the following terms have
registration of an industrial design shall be for a the following meanings:
period of five (5) years from the filing date of 121.1. "Mark" means any visible sign capable of
the application. distinguishing the goods (trademark) or
" 118.2. The registration of an industrial design services (service mark) of an enterprise and
may be renewed for not more than two (2) shall include a stamped or marked container of
consecutive periods of five (5) years each, by goods; (Sec. 38, R.A. No. 166a)
paying the renewal fee.
"118.3. The renewal fee shall be paid within 121.2. "Collective mark" means any visible sign
twelve (12) months preceding the expiration of designated as such in the application for
the period of registration. However, a grace registration and capable of distinguishing the
period of six (6) months shall be granted for origin or any other common characteristic,
payment of the fees after such expiration, upon including the quality of goods or services of
payment of a surcharge. different enterprises which use the sign under
"118.4. The Regulations shall fix the amount of the control of the registered owner of the
renewal fee, the surcharge and other collective mark; (Sec. 40, R.A. No. 166a)
requirements regarding the recording of
renewals of registration. 121.3. "Trade name" means the name or
" 118.5. Registration of a layout-design shall be designation identifying or distinguishing an
valid for a period often (10) years, without enterprise; (Sec. 38, R.A. No. 166a)
renewal, and such validity to be counted from
the date of commencement of the protection Notes:
accorded to the layout-design. The protection of - A mark may be a word mark such as a
a layout-design under this Act shall commence: full name (Pierre Cardin), a first name
"a) on the date of the first commercial (Paloma), a surname (Honda), or a
exploitation, anywhere in the world, of the composite mark (i.e., a combination of a
layout-design by or with the consent of the right word or letter and a device such as the
holder: Provided, That an application for mark Caltex which has the word Caltex
registration is filed with the Intellectual Property written across the representation of a
Office within two (2) years from such date of star, all of which are enclosed by a circle
first commercial exploitation; or device.
"b) on the filing date accorded to the - A mark could also be a device mark
application for the registration of the layout- which may be a geometrical figure
design if the layout-design has not been (Olympic rings), a stylized rendering of
previously exploited commercially anywhere in the Alphabet (M of McDonalds), or a
the world." representation of any object (IBM World).
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123.1. A mark cannot be registered if it:


Acquisition of ownership of mark (a) Consists of immoral, deceptive or
scandalous matter, or matter which may
SEC. 122. How Marks are AcquiredThe disparage or falsely suggest a connection with
rights in a mark shall be acquired through persons, living or dead, institutions, beliefs, or
registration made validly in accordance with the national symbols, or bring them into contempt
provisions of this law. (Sec. 2-A, R.A. No. 166a) or disrepute;
(b) Consists of the flag or coat of arms or other
Notes: insignia of the Philippines or any of its political
How Ownership Acquired subdivisions, or of any foreign nation, or any
Mark Trade name simulation thereof;
Acquired solely Acquired through (c) Consists of a name, portrait or signature
through registration adoption and use. identifying a particular living individual except
Registration is not by his written consent, or the name, signature,
required. or portrait of a deceased President of the
- Any person may apply for registration Philippines, during the life of his widow, if any,
who is domiciled or has a real and except by written consent of the widow;
effective industrial establishment in a (d) Is identical with a registered mark belonging
country to a different proprietor or a mark with an
o Which is a party to any earlier filing or priority date, in respect of:
convention, treaty or agreement (i) The same goods or services, or
relating to IPR or the repression (ii) Closely related goods or services,
of unfair competition, to which or
the Philippines is also a party; OR (iii) If it nearly resembles such a
o Extends reciprocal rights to mark as to be likely to deceive or cause
nationals of the Philippines. confusion;
(e) Is identical with, or confusingly similar to, or
Acquisition of trade names constitutes a translation of a mark which is
considered by the competent authority of the
Philippines to be well-known internationally and
Sec. 165. Trade Names or Business Names
in the Philippines, whether or not it is registered
165.1. A name or designation may not be used
here, as being already the mark of a person
as a trade name if by its nature or the use to
other than the applicant for registration, and
which such name or designation may be put, it
used for identical or similar goods or services:
is contrary to public order or morals and if, in
Provided, That in determining whether a mark is
particular, it is liable to deceive trade circles or
well-known, account shall be taken of the
the public as to the nature of the enterprise
knowledge of the relevant sector of the public,
identified by that name.
rather than of the public at large, including
knowledge in the Philippines which has been
165.2. (a) Notwithstanding any laws or
obtained as a result of the promotion of the
regulations providing for any obligation to
mark;
register trade names, such names shall be
(f) Is identical with, or confusingly similar to, or
protected, even prior to or without registration,
constitutes a translation of a mark considered
against any unlawful act committed by third
well-known in accordance with the preceding
parties.
paragraph, which is registered in the Philippines
(b) In particular, any subsequent use of the
with respect to goods or services which are not
trade name by a third party, whether as a trade
similar to those with respect to which
name or a mark or collective mark, or any such
registration is applied for: Provided, That use of
use of a similar trade name or mark, likely to
the mark in relation to those goods or services
mislead the public, shall be deemed unlawful.
would indicate a connection between those
goods or services, and the owner of the
165.3. The remedies provided for in SECs 153 to
registered mark: Provided further, That the
156 and SECs 166 and 167 shall apply mutatis
interests of the owner of the registered mark
mutandis.
are likely to be damaged by such use;
(g) Is likely to mislead the public, particularly as
165.4. Any change in the ownership of a trade
to the nature, quality, characteristics or
name shall be made with the transfer of the
geographical origin of the goods or services;
enterprise or part thereof identified by that
(h) Consists exclusively of signs that are generic
name. The provisions of SubSECs 149.2 to
for the goods or services that they seek to
149.4 shall apply mutatis mutandis.
identify;
(i) Consists exclusively of signs or of indications
Non-registrable marks that have become customary or usual to
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designate the goods or services in everyday nature and and quality of the
language or in bona fide and established trade goods or services is controlled by
practice; the registrant (i.e. franchise)
(j) Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, Tests to determine confusing similarity between
geographical origin, time or production of the marks
goods or rendering of the services, or other
characteristics of the goods or services; 123.1 (d) Is identical with a registered mark
(k) Consists of shapes that may be necessitated belonging to a different proprietor or a mark
by technical factors or by the nature of the with an earlier filing or priority date, in respect
goods themselves or factors that affect their of:
intrinsic value;
(l) Consists of color alone, unless defined by a (i) The same goods or services, or
given form; or (ii) Closely related goods or
(m) Is contrary to public order or morality. services, or
(iii) If it nearly resembles such a mark as to be
Notes: likely to deceive or cause confusion;
- If a component of an otherwise
registrable mark is not registrable, the Notes:
applicant could disclaim the - How to determine if there is confusing
unregistrable component. similarity between the marks
o The labels, packages or
Use of mark as a requirement containers are presented for
examination and comparison.
124.2. The applicant or the registrant shall file a o Where they are not presented,
declaration of actual use of the mark with then the spelling, sound or
evidence to that effect, as prescribed by the pronunciation of the marks may
Regulations within three (3) years from the be resorted to. Similarity of sound
filing date of the application. Otherwise, the or pronunciation may be
application shall be refused or the mark shall be sufficient to make two marks
removed from the Register by the Director. confusingly similar.
- TEST OF DOMINANCY: Focuses not
Notes: simply on similarities in size, form or
- Prior use is no longer a condition of color but on the main or essential
filing. However, the applicant shall file a features of each mark, taken together.
declaration of actual use of the mark, The test requires that if the competing
with evidence to that effect, within three trademark contains the main or essential
years from the filing date of the features of another and confusion and
application; otherwise, the application deception is likely to result, infringement
shall be refused or the mark removed takes place. Duplication or imitation is
from the register. not necessary.
- AFTER FILING: The registrant is required - HOLISTIC TEST: Considers the mark as a
to file a declaration of actual use, and whole and not as dissected. If the buyer
evidence to that effect, within 1 year is deceived, it is attributable to the mark
from the 5th anniversary of the date of as a totality, not usually to any part of it.
registration of the mark; otherwise the - RELATED GOODS PRINCIPLE: Goods are
mark shall be removed from the register related when they belong to the same
(SEC 145) class or have the same descriptive
properties or physical attributes, or they
- AFTER FILING: Non-use of a mark may be serve the same purpose or flow through
excused if caused by circumstances
the same channel of trade. It is held that
arising independently of the will of the
the use of identical marks on non-
trademark owner. Lack of funds is not an
competing and unrelated goods is not
excuse (SEC 152)
likely to cause confusion.
- AFTER FILING; USE OF OTHER ENTITY:
Use of another entity may be considered
Cases:
use of the owner if
o the company is related to the
Holistic Test
registrant; or
o if the use of the mark by such
Del Monte Corporation et. al. vs. CA and
unrelated person in respect of the
Sunshine Sauce Manufacturing Industry (1990)
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FACTS: Del Monte authorized Philpack to At that, even if the labels were analyzed
register with the Patent Office the Del Monte together it is not difficult to see that the
bottle configuration for which it was granted Sunshine label is a colorable imitation of the Del
trademark registration. It also obtained Monte trademark. The predominant colors used
registration certificates for its trademark DEL in the Del Monte label are green and red-
MONTE and its logo. Respondent Sunshine orange, the same with Sunshine. The word
Sauce Manufacturing was issued a Certificate of "catsup" in both bottles is printed in white and
Registration by the Bureau of Domestic Trade to the style of the print/letter is the same.
engage in manufacturing, packing, distributing Although the logo of Sunshine is not a tomato,
and sale of various kinds of sauce, identified by the figure nevertheless approximates that of a
the Sushine Fruit Catsup logo. This was tomato.
registered in the supplemental registered. The As previously stated, the person who infringes a
product was contained in various kinds of bottle trade mark does not normally copy out but only
including the Del Monte bottle which it bought makes colorable changes, employing enough
from junk shops. points of similarity to confuse the public with
Philpack, after making a demand upon Sunshine enough points of differences to confuse the
to desist from using the Del Monte bottles filed courts. When as in this case, Sunshine chose,
a complaint against the latter for infringement without a reasonable explanation, to use the
of trademark and unfair competition. same colors and letters as those used by Del
Sunshine contended that it has ceased to use Monte though the field of its selection was so
the said bottles and that its logo was broad, the inevitable conclusion is that it was
substantially different from the Del Monte logo done deliberately to deceive .
and would not confuse the buying public to the
detriment of petitioners. Test of Dominancy
RTC dismissed the complaint holding that there
were substantial differences between the logos Asia Brewery vs. CA and San Migue (1993)
or trademarks of the parties; that the defendant FACTS: San Miguel Corporation (SMC) filed a
ceased to use petitioners bottles and that in complaint against Asia Brewery Inc. (ABI) for
any case, it became owner thereof upon infringement of trademark and unfair
purchase from junk yards. It further held that competition on account of the latters Beer Pale
complainants failed to establish bad faith which Pilsen or Beer na Beer product which has been
was an essential element of infringement of competing with SMCs San Miguel Pale Pilsen.
trademark or unfair competition. The said The RTC dismissed the complaint holding that
decision was affirmed by the CA. ABI has not committed trademark infringement
HELD: (Note that this case was decided under or unfair competition against SMC. The CA
SEC 22 and 29 of R.A. No. 166 or the Trademark reversed the ruling of the RTC holding that the
Law) bottles used by ABI are substantially identical
The Supreme Court disagrees with the with the bottles of SMC and that this is
conclusion that there was no infringement or calculated to deceive purchasers and
unfair competition. consumers into the belief that the beer is the
As correctly held by the lower court, side-by- product of the plaintiff. ABI was therefore found
side comparison is not the final test of guilty of infringement of trademark and unfair
similarity. competition.
The question is not whether the two articles are ISSUE: The lone issue is whether ABI infringes
distinguishable by their label when set side by SMCs trademark: San Miguel Pale Pilsen with
side but whether the general confusion made rectangular hops and malt design and thereby
by the article upon the eye of the casual commits unfair competition against the latter.
purchaser who is unsuspicious and off his HELD: ABIs Beer Pale Pilsen Labor or design
guard, is such as to likely result in his does not infringe on SMCs San Miguel Pale
confounding it with the original. Pilsen design.
A number of courts have held that to determine Infringement is determined by the "test of
whether a trademark has been infringed, we dominancy" rather than by differences or
must consider the mark as a whole and not as variations in the details of one trademark and of
dissected. If the buyer is deceived, it is another. Similarity in size, form and color, while
attributable to the marks as a totality, not relevant, is not conclusive. If the competing
usually to any part of it. The court therefore trademark contains the main or essential or
should be guided by its first impression, for a dominant features of another, and confusion
buyer acts quickly and is governed by a casual and deception is likely to result, infringement
glance, the value of which may be dissipated as takes place. Duplication or imitation is not
soon as the court assumes to analyze carefully necessary; nor it is necessary that the infringing
the respective features of the mark. label should suggest an effort to imitate (Co
Tiong Sa vs. Director of Patents).
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There is hardly any dispute that the dominant filed a verified Notice of Opposition against
feature of SMC's trademark is the name of the respondents application claiming that the
product: SAN MIGUEL PALE PILSEN, written in trademark MacJoy and Device so resembles its
white Gothic letters with elaborate serifs at the corporate logo otherwise known as the Golden
beginning and end of the letters "S" and "M" on Arches and its marks (Mc) such that, when
an amber background across the upper portion used on identical or related goods, the
of the rectangular design. trademark applied for would confuse or deceive
On the other hand, the dominant feature of purchasers into believing that the goods
ABI's trademark is the name: BEER PALE originate from the same source or origin. It
PILSEN, with the word "Beer" written in large further alleged that the use of MacJOy and
amber letters, larger than any of the letters device falsely tends to suggest a connection or
found in the SMC label. affiliation with McDonalds.
The trial court perceptively observed that the The IPO held that the predominance of the
word "BEER" does not appear in SMC's letter M and the prefixes Mac/Mc in both marks
trademark, just as the words "SAN MIGUEL" do lead to the conclusion that there is confusing
not appear in ABI's trademark. Hence, there is similarity between them especially since both
absolutely no similarity in the dominant are used on almost the same products. The CA
features of both trademarks. reversed the decision finding no confusing
The use of ABI of the steinie bottle, similar but similarity between the two holding that the IPO
not identical to the SAN MIGUEL PALE PILSEN unreasonably overlooked the differences in the
bottle, is not unlawful. As pointed out by ABI's device, letters and marks.
counsel, SMC did not invent but merely HELD: Petition is impressed with merit.
borrowed the steinie bottle from abroad and it In determining similarity and likelihood of
claims neither patent nor trademark protection confusion, jurisprudence has developed two
for that bottle shape and design. SMC's being tests, the dominancy test and the holistic test.
the first to use the steinie bottle does not give The dominancy test focuses on the similarity of
SMC a vested right to use it to the exclusion of the prevalent features of the competing
everyone else. Being of functional or common trademarks that might cause confusion or
use, and not the exclusive invention of any one, deception. In contrast, the holistic test requires
it is available to all who might need to use it the court to consider the entirety of the marks
within the industry. ABI makes its own steinie as applied to the products, including the labels
bottle which has a fat bulging neck to and packaging, in determining confusing
differentiate it from SMC's bottle. similarity. Under the latter test, a comparison of
Neither in sound, spelling or appearance can the words is not the only determinant factor.
BEER PALE PILSEN be said to be confusingly The IPO used the dominancy test in concluding
similar to SAN MIGUEL PALE PILSEN. No one that there was confusing similarity between the
who purchases BEER PALE PILSEN can possibly two trademarks. In reversing the IPO, the CA
be deceived that it is SAN MIGUEL PALE PILSEN. while seemingly applying the dominancy test, in
No evidence whatsoever was presented by SMC fact actually applied the holistic test.
proving otherwise. The Court finds that the dominancy test is more
The Court likewise found several dissimilarities suitable. Under the dominancy test, courts give
in the trade dress or appearance of the greater weight to the similarity of the
competing products. appearance of the product arising from the
The fact that the words pale pilsen are part of adoption of the dominant features of the
ABIs trademark does not constitute an registered mark, disregarding minor
infringement of SMCs trademark for those differences. Courts will consider more the aural
words are generic words descriptive of color and visual impressions created by the marks in
and of the type of beer thus, those words may the public mind, giving little weight to factors
not be appropriated by SMC for its exclusive use like prices, quality, sales outlets and market
even if they are part of their registered segments. The totality or holistic test only relies
trademark. on visual comparisons between two trademarks
whereas the dominancy test relies not only on
the visual but also on the aural and connotative
McDonalds Corporation vs. Macjoy Fastfood comparisons and overall impressions between
Corporation (2007) the two trademarks.
FACTS: MacJoy Fastfood Corporation filed with The court noted the use of the corporate M
the Bureau of Patents, Trademarks and design logo and the prefixes Mc/Mac. It also
Technology Trasfer (now IPO) an application for noted that both trademarks are used in the sale
registration of the trademark Macjoy & Device of fastfood products. The differences and
for fried chicken, chicken barbeque, burgers, variations in styles as the device depicting a
fries, spaghetti, palabok, tacos, sandwiches, head of chicken with cap and bowtie and wings
halo-halo and steaks. McDonalds corporation sprouting on both sides of the chicken head, the
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heart-shaped "M," and the stylistic letters in o The interests of the owner of the
"MACJOY & DEVICE;" in contrast to the arch-like registered mark are likely to be
"M" and the one-styled gothic letters in damaged by such use.
McDonalds marks are of no moment. These Also, an owner of a well-known mark may sue in
minuscule variations are overshadowed by the the Philippines for acts committed prior to the
appearance of the predominant features date the said mark was registered in the
mentioned hereinabove. Philippines (Sec. 131.3)

Well-known marks 147.2. The exclusive right of the owner of a


well-known mark defined in SubSEC 123.1(e)
123.1 (e) Is identical with, or confusingly similar which is registered in the Philippines, shall
to, or constitutes a translation of a mark which extend to goods and services which are not
is considered by the competent authority of the similar to those in respect of which the mark is
Philippines to be well-known internationally and registered: Provided, That use of that mark in
in the Philippines, whether or not it is registered relation to those goods or services would
here, as being already the mark of a person indicate a connection between those goods or
other than the applicant for registration, and services and the owner of the registered mark:
used for identical or similar goods or services: Provided further, That the interests of the owner
Provided, That in determining whether a mark is of the registered mark are likely to be damaged
well-known, account shall be taken of the by such use. (n)
knowledge of the relevant sector of the public,
rather than of the public at large, including Application requirements and procedure
knowledge in the Philippines which has been (SECs 124-144)
obtained as a result of the promotion of the
mark; Notes:
(f) Is identical with, or confusingly - The mark must not be one of those
similar to, or constitutes a translation of a mark considered as non-registrable
considered well-known in accordance with the - FORMAL REQUIREMENTS OF AN
preceding paragraph, which is registered in the APPLICATION FOR REGISTRATION OF A
Philippines with respect to goods or services MARK:
which are not similar to those with respect to a. Application must be in Filipino or
which registration is applied for: Provided, That English
use of the mark in relation to those goods or b. Appointment of an agent or
services would indicate a connection between representative if applicant is not
those goods or services, and the owner of the domiciled in the Philippines
registered mark: Provided further, That the c. Additional requirements to be
interests of the owner of the registered mark satisfied if the applicant claims the
are likely to be damaged by such use; priority of an earlier application
o If the applicant is claiming priority
Notes: right, his application for
- A well known mark is one which a registration of a mark in the
competent authority of the Philippines Philippines will not be granted
has designated to be well-known until such mark has been
internationally and in the Philippines. registered in the country of origin
- TEST: Account shall be taken of the og the applicant.
knowledge of the relevant sector of the d. Classification of the goods or services
public, rather than the public at large, e. Signature of the applicant
including knowledge in the Philippines
obtained by promotion of the mark. - PROCEDURE FOR REGISTRATION
- EFFECT: The general rule that the a. Examination of requirements
exclusive right to use a trademark shall for the grant of a filing date
extend only to goods and services (SEC 132)
similar to those in respect of which said b. Examination to determine if
trademark is registered does not apply. mark is registrable (SEC 133)
When it comes to a well known mark, c. Denial of the application or
the exclusive right shall extend to those amendment thereof or
good which are not similar provided that: publication (SEC 133.3)
o The use of the mark in relation to d. Opposition, notice, hearing,
those goods or services would decision, appeal to the
indicate a connection between Director of Bureau of
those goods or services and the Trademarks, appeal to the IPO
owner of a registered mark, and
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Director General, appeal to filed as of the day the application was first filed
the CA in the foreign country.
e. Issuance of certificate of
registration (SEC 136) 131.2. No registration of a mark in the
f. Publication in the IPO Gazette Philippines by a person described in this SEC
of the fact of registration (SEC shall be granted until such mark has been
136) registered in the country of origin of the
applicant.
Classification of goods and services
131.3. Nothing in this SEC shall entitle the
owner of a registration granted under this SEC
124.1 (k) The names of the goods or services
to sue for acts committed prior to the date on
for which the registration is sought, grouped
which his mark was registered in this country:
according to the classes of the Nice
Provided, That, notwithstanding the foregoing,
Classification, together with the number of the
the owner of a well-known mark as defined in
class of the said Classification to which each
SEC 123.1(e) of this Act, that is not registered in
group of goods or services belongs; and
the Philippines, may, against an identical or
confusingly similar mark, oppose its
Sec. 144. Classification of Goods and
registration, or petition the cancellation of its
Services
registration or sue for unfair competition,
144.1. Each registration, and any publication of
without prejudice to availing himself of other
the Office which concerns an application or
remedies provided for under the law.
registration effected by the Office shall indicate
the goods or services by their names, grouped
131.4. In like manner and subject to the same
according to the classes of the Nice
conditions and requirements, the right provided
Classification, and each group shall be preceded
in this SEC may be based upon a subsequent
by the number of the class of that Classification
regularly filed application in the same foreign
to which that group of goods or services
country: Provided, That any foreign application
belongs, presented in the order of the classes of
filed prior to such subsequent application has
the said Classification.
been withdrawn, abandoned, or otherwise
disposed of, without having been laid open to
144.2. Goods or services may not be considered
public inspection and without leaving any rights
as being similar or dissimilar to each other on
outstanding, and has not served, nor thereafter
the ground that, in any registration or
shall serve, as a basis for claiming a right of
publication by the Office, they appear in
priority. (Sec. 37, R.A. No. 166a)
different classes of the Nice Classification. (Sec.
6, R.A. No. 166a)
Notes:
- An owner of a registered mark cannot
Disclaimer sue in the Philippines for acts committed
prior to the date on which the mark was
SEC. 126. DisclaimersThe Office may allow registered in the Philippines, except in
or require the applicant to disclaim an the case of a well-known mark (SEC
unregistrable component of an otherwise 131.3)
registrable mark but such disclaimer shall not
prejudice or affect the applicants or owners Term
rights then existing or thereafter arising in the
disclaimed matter, nor such shall disclaimer Sec. 145. DurationA certificate of
prejudice or affect the applicants or owners registration shall remain in force for ten (10)
right on another application of later date if the years: Provided, That the registrant shall file a
disclaimed matter became distinctive of the declaration of actual use and evidence to that
applicants or owners goods, business or effect, or shall show valid reasons based on the
services. (Sec. 13, R.A. No. 166a) existence of obstacles to such use, as
prescribed by the Regulations, within one (1)
Priority Right year from the fifth anniversary of the date of
the registration of the mark. Otherwise, the
Sec. 131. Priority Right mark shall be removed from the Register by the
131.1. An application for registration of a mark Office. (Sec. 12, R.A. No. 166a)
filed in the Philippines by a person referred to in
SEC 3, and who previously duly filed an
application for registration of the same mark in Rights conferred by registration
one of those countries, shall be considered as
Sec. 147. Rights Conferred
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147.1. The owner of a registered mark shall Private Respondent may be permitted to
have the exclusive right to prevent all third register the trademark Brute for briefs
parties not having the owners consent from produced by it.
using in the course of trade identical or similar In as much as petitioner has not ventured in the
signs or containers for goods or services which production of briefs, an item which is not listed
are identical or similar to those in respect of in its certificate of registration, petitioner
which the trademark is registered where such cannot and should not be allowed to feign that
use would result in a likelihood of confusion. In private respondent had invaded petitioners
case of the use, of an identical sign for identical exclusive domain. The certificate of registration
goods or services, a likelihood of confusion shall issued by the Director of Patents can confer
be presumed. upon petitioner the exclusive right to use its
own symbol only to those goods specified in the
147.2. The exclusive right of the owner of a certificate, subject to any conditions and
well-known mark defined in SubSEC 123.1(e) limitations stated therein.
which is registered in the Philippines, shall One who has adopted and used a trademark on
extend to goods and services which are not his goods does not prevent the adoption and
similar to those in respect of which the mark is use of the same trademark by other for
registered: Provided, That use of that mark in products which are of different description.
relation to those goods or services would
indicate a connection between those goods or Canon Kabushiki Kaisha vs. CA and NSR Rubber
services and the owner of the registered mark: Corporation (2000)
Provided further, That the interests of the owner
of the registered mark are likely to be damaged FACTS: NSR Rubber Corporation filed an
by such use. (n) application for registration of the mark CANON
for sandals with the Bureau of Patents,
Notes: Trademarks and Technology Transfer. A verified
- A certificate of registration is evidence of notice of opposition was filed by petitioner, a
the ff: foreign corporation duly organized and existing
o Validity of registration under the laws of Japan, alleging that it will be
o Registrants ownership of the damaged by the said registration. Petitioner
mark, and presented evidence showing registration for the
o Registrants exclusive right to use mark CANON in various countries covering
the mark in connection with the goods such as paints, chemical products, toner,
goods or services and those that and dye stuff. It also showed a trademark
are related thereto as specified in registration in the Philippines.
the certificate The BPTTT dismissed the opposition and said
- LIMITATIONS ON SUCH RIGHT: decision was affirmed by the CA.
o Duration HELD: Petitioners arguments lack merit.
o Territorial (except for well-known Ordinarily, the ownership of a trademark or
marks) tradename is a property right that the owner is
entitled to protect as mandated by the
Cases: Trademark Law. However, when a trademark is
- Protection Limited to goods specified in used by a party for a product in which the other
registration certificate party does not deal, the sue of the same
trademark on the latters product cannot be
Faberge Inc. vs. IAC and Co Beng Kay (1992) validly objected to. There is a world of
difference between the paints, chemical
FACTS: The Director of Patents authorized Co products, toner, and dyestuff of petitioner and
Beng Kay to register the trademark Brute for the sandals of private respondent.
briefs manufactured and sold by his The certificate of registration confers upon the
corporation. Petitioner Faberge opposed on the trademark owner the exclusive right to use its
ground of similarity of said trademark with own symbol only to those goods specified in the
petitioners own symbol Brut which it certificate, subject to the conditions and
registered for after shave lotion, shaving cream, limitations stated therein.11 Thus, the exclusive
deodorant, talcum powder and toilet soap. The right of petitioner in this case to use the
CA ruled in favor of respondents holding that trademark CANON is limited to the products
the identical trademark can be used by different covered by its certificate of registration.
manufacturers for products that are non- In cases of confusion of business or origin, the
competing and unrelated. question that usually arises is whether the
HELD: (Note that this case was decided under respective goods or services of the senior user
the old law) and the junior user are so related as to likely
cause confusion of business or origin, and
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thereby render the trademark or tradenames 149.5. Assignments and transfers shall have no
confusingly similar. Goods are related when effect against third parties until they are
they belong to the same class or have the same recorded at the Office. (Sec. 31, R.A. No. 166a)
descriptive properties; when they possess the
same physical attributes or essential
characteristics with reference to their form, Cancellation of registration
composition, texture or quality. They may also
be related because they serve the same Sec. 151. Cancellation
purpose or are sold in grocery stores.
151.1. A petition to cancel a registration of a
Use by third parties of names, etc. similar to mark under this Act may be filed with the
registered mark Bureau of Legal Affairs by any person who
believes that he is or will be damaged by the
Sec. 148. Use of Indications by Third registration of a mark under this Act as follows:
Parties for Purposes Other than those for (a) Within five (5) years from the date of
which the Mark is Used--Registration of the the registration of the mark under this Act.
mark shall not confer on the registered owner (b) At any time, if the registered mark
the right to preclude third parties from using becomes the generic name for the goods or
bona fide their names, addresses, pseudonyms, services, or a portion thereof, for which it is
a geographical name, or exact indications registered, or has been abandoned, or its
concerning the kind, quality, quantity, registration was obtained fraudulently or
destination, value, place of origin, or time of contrary to the provisions of this Act, or if the
production or of supply, of their goods or registered mark is being used by, or with the
services: Provided, That such use is confined to permission of, the registrant so as to
the purposes of mere identification or misrepresent the source of the goods or
information and cannot mislead the public as to services on or in connection with which the
the source of the goods or services. (n) mark is used. If the registered mark becomes
the generic name for less than all of the goods
or services for which it is registered, a petition
Assignment and transfer of mark to cancel the registration for only those goods
or services may be filed. A registered mark shall
Sec. 149. Assignment and Transfer of not be deemed to be the generic name of goods
Application and Registration or services solely because such mark is also
used as a name of or to identify a unique
149.1. An application for registration of a mark, product or service. The primary significance of
or its registration, may be assigned or the registered mark to the relevant public
transferred with or without the transfer of the rather than purchaser motivation shall be the
business using the mark. (n) test for determining whether the registered
mark has become the generic name of goods or
149.2. Such assignment or transfer shall, services on or in connection with which it has
however, be null and void if it is liable to been used. (n)
mislead the public, particularly as regards the (c) At any time, if the registered owner
nature, source, manufacturing process, of the mark without legitimate reason fails to
characteristics, or suitability for their purpose, use the mark within the Philippines, or to cause
of the goods or services to which the mark is it to be used in the Philippines by virtue of a
applied. license during an uninterrupted period of three
(3) years or longer.
149.3. The assignment of the application for
registration of a mark, or of its registration, 151.2. Notwithstanding the foregoing
shall be in writing and require the signatures of provisions, the court or the administrative
the contracting parties. Transfers by mergers or agency vested with jurisdiction to hear and
other forms of succession may be made by any adjudicate any action to enforce the rights to a
document supporting such transfer. registered mark shall likewise exercise
jurisdiction to determine whether the
149.4. Assignments and transfers of registration registration of said mark may be cancelled in
of marks shall be recorded at the Office on accordance with this Act. The filing of a suit to
payment of the prescribed fee; assignment and enforce the registered mark with the proper
transfers of applications for registration shall, court or agency shall exclude any other court or
on payment of the same fee, be provisionally agency from assuming jurisdiction over a
recorded, and the mark, when registered, shall subsequently filed petition to cancel the same
be in the name of the assignee or transferee. mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of
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Legal Affairs shall not constitute a prejudicial o Only injunction for future printing
question that must be resolved before an action against an innocent infringing
to enforce the rights to same registered mark printer
may be decided. (Sec. 17, R.A. No. 166a) o Only an injunction against
presentation of infringing
Notes: advertising matter in future
- When registration of a mark could be issues against innocent infringing
cancelled advertisers.
(a) Within 5 years from the date of
registration of the mark; Sec. 155. Remedies; InfringementAny
(b) at any time if the registered mark person who shall, without the consent of the
a. becomes generic for the goods owner of the registered mark:
for which it was registered; 155.1. Use in commerce any reproduction,
b. has been abandoned counterfeit, copy, or colorable imitation of a
c. registration was obtained registered mark or the same container or a
fraudulently dominant feature thereof in connection with the
d. is being used by, or with the sale, offering for sale, distribution, advertising
permission of the registrant to of any goods or services including other
misrepresent the source of goods preparatory steps necessary to carry out the
or services sale of any goods or services on or in
(c) If the registered owner of the mark connection with which such use is likely to
without legitimate reason, fails to use cause confusion, or to cause mistake, or to
the mark within the Philippines, or to deceive; or
cause it to be used by virtue of a license,
for an uninterrupted period of at least 3 155.2. Reproduce, counterfeit, copy or colorably
years. imitate a registered mark or a dominant feature
thereof and apply such reproduction,
Infringement and Remedies counterfeit, copy or colorable imitation to
(Sec. 155-160) labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be
What constitutes infringement used in commerce upon or in connection with
Notes: the sale, offering for sale, distribution, or
- There is infringement if a registered advertising of goods or services on or in
mark is used in commerce by a person connection with which such use is likely to
without the consent of the registered cause confusion, or to cause mistake, or to
owner thereof. deceive, shall be liable in a civil action for
- REMEDIES: infringement by the registrant for the remedies
o Damages (156.1) hereinafter set forth: Provided, That the
o Impounding of infringing goods infringement takes place at the moment any of
(156.2) the acts stated in SubSEC 155.1 or this subSEC
o Double damages (156.3) are committed regardless of whether there is
o Injunction (156.4) actual sale of goods or services using the
o Disposal of infringing goods infringing material. (Sec. 22, R.A. No 166a)
outside the channels of
commerce (157.1) Damages
o Destruction of infringing goods Notes:
(157.1) - To bring a civil action for infringement, it
o Criminal Action (170) is not required that there be an actual
o Administrative Sanctions sale of the goods or services using the
- LIMITATIONS infringing material. Infringement takes
o No action for infringement can be place upon the mere use or reproduction
taken against a of the registered mark.
person who, in good faith,
before filing date or
Sec. 156. Actions, and Damages and
priority date,
Injunction for Infringement
was using the mark for the
purposes of his business
156.1. The owner of a registered mark may
or enterprise.
recover damages from any person who infringes
Note: Such person may assign or transfer his
his rights, and the measure of the damages
right to use the registered mark only together
suffered shall be either the reasonable profit
with his business or enterprise.
which the complaining party would have made,
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had the defendant not infringed his rights, or business or services, who shall commit
the profit which the defendant actually made any acts calculated to produce said
out of the infringement, or in the event such result.
measure of damages cannot be readily
ascertained with reasonable certainty, then the Infringement of Unfair
court may award as damages a reasonable Trademark Competition
percentage based upon the amount of gross Nature of Unauthorized Passing off
sales of the defendant or the value of the offense use of a ones goods as
services in connection with which the mark or trademark that of another
trade name was used in the infringement of the Fraudulent Not necessary Essential
rights of the complaining party. (Sec. 23, first Intent element
par., R.A. No. 166a) Need for Prior registration Registration is
Registratio is a pre-requisite not necessary
156.2. On application of the complainant, the n
court may impound during the pendency of the
action, sales invoices and other documents
evidencing sales. (n) SEC. 168. Unfair Competition, Rights,
Regulation and Remedies
156.3. In cases where actual intent to mislead
the public or to defraud the complainant is 168.1. A person who has identified in the mind
shown, in the discretion of the court, the of the public the goods he manufactures or
damages may be doubled. (Sec. 23, first par., deals in, his business or services from those of
R.A. No. 166) others, whether or not a registered mark is
employed, has a property right in the goodwill
156.4. The complainant, upon proper showing, of the said goods, business or services so
may also be granted injunction. (Sec. 23, identified, which will be protected in the same
second par., R.A. No. 166a) manner as other property rights.

Notice Requirement 168.2. Any person who shall employ deception


or any other means contrary to good faith by
Sec. 158. Damages; Requirement of Notice which he shall pass off the goods manufactured
In any suit for infringement, the owner of the by him or in which he deals, or his business, or
registered mark shall not be entitled to recover services for those of the one having established
profits or damages unless the acts have been such goodwill, or who shall commit any acts
committed with knowledge that such imitation calculated to produce said result, shall be guilty
is likely to cause confusion, or to cause mistake, of unfair competition, and shall be subject to an
or to deceive. Such knowledge is presumed if action therefor.
the registrant gives notice that his mark is
registered by displaying with the mark the 168.3. In particular, and without in any way
words "Registered Mark" or the letter R within a limiting the scope of protection against unfair
circle or if the defendant had otherwise actual competition, the following shall be deemed
notice of the registration. (Sec. 21, R.A. No. guilty of unfair competition:
166a) (a) Any person, who is selling his goods
and gives them the general appearance of
Unfair competition or passing off goods of another manufacturer or dealer, either
as to the goods themselves or in the wrapping
Notes: of the packages in which they are contained, or
- Colorable imitation is a form of unfair the devices or words thereon, or in any other
competition whereby an article is made feature of their appearance, which would be
to look or sound like the real thing but it likely to influence purchasers to believe that the
is not. goods offered are those of a manufacturer or
dealer, other than the actual manufacturer or
dealer, or who otherwise clothes the goods with
Notes: such appearance as shall deceive the public
- UNFAIR COMPETITION is the use by a and defraud another of his legitimate trade, or
person of a deception or other means in any subsequent vendor of such goods or any
bad faith by which he passes of the agent of any vendor engaged in selling such
goods manufactured by him or in which goods with a like purpose;
he deals, or his business or services, for (b) Any person who by any artifice, or
those of another person who has device, or who employs any other means
established goodwill in the goods such calculated to induce the false belief that such
person manufactures or deals in, or his person is offering the services of another who
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has identified such services in the mind of the and are dealt with together in the Trademark
public; or Law (now, both are covered by the IP Code).
(c) Any person who shall make any false Hence, even if one fails to establish his
statement in the course of trade or who shall exclusive property right to a trademark, he may
commit any other act contrary to good faith of a still obtain relief on the ground of his
nature calculated to discredit the goods, competitors unfairness or fraud. Conduct
business or services of another. constitutes unfair competition if the effect is to
168.4. The remedies provided by SECs 156, 157 pass off on the public the goods of one man as
and 161 shall apply mutatis mutandis. (Sec. 29, the goods of another. It is not necessary that
R.A. No. 166a) any particular means should be used to this
end.
Cases: The Paris Convention protects well-known
- Trademark infringement, unfair trademarks only (to be determined by domestic
competition and well known marks authorities), while the Trademark Law protects
all trademarks, whether well-known or not,
Mighty Corporation and La Campana Fabreca de provided that they have been registered and
Tobaco vs. E.J. Gallo Winery, et al and Andersen are in actual commercial use in the Philippines.
Group Inc. (2004) A crucial issue in any trademark infringement
FACTS: Gallo Winery is a foreign corporation not case is the likelihood of confusion, mistake or
doing business in the Philippines but organized deceit as to the identity, source or origin of the
under the laws of America where all its wineries goods or identity of the business as a
are located. It produces different kinds of wines consequence of using a certain mark. Likelihood
and brandy and sells them under different of confusion is admittedly a relative term, to be
registered trademarks including the GALLO and determined rigidly according to the particular
ERNEST & JULIO GALLO Trademarks. (and sometimes peculiar) circumstances of
Respondent domestic corporation is the each case. Thus, in trademark cases, more than
distributor of Gallo Winery in the Philippines. in other kinds of litigation, precedents must be
Gallo Winerys GALLO wine trademark and studied in the light of each particular case.
Ernest and Julio Gallo wine trademark were In this case, the differences especially in the
registered in the Philippine Patent Office (now goods to which the trademark is registered for
IPO). defeats respondents claims.
Petitioners Mighty Corporation and La Campana There are two types of confusion in trademark
are engaged in the cultivation, manufacture, infringement. The first is "confusion of goods"
distribution and sale of tobacco products for when an otherwise prudent purchaser is
which they have been using the Gallo Cigarette induced to purchase one product in the belief
Trademark since 1973. that he is purchasing another, in which case
Respondent sued petitioners for trademark and defendants goods are then bought as the
trade name infringement and unfair plaintiffs and its poor quality reflects badly on
competition. the plaintiffs reputation. The other is "confusion
The CA ruled in favor of respondents holding of business" wherein the goods of the parties
that Gallo cigarettes and Gallo wines were are different but the defendants product can
identical, similar or related goods for the reason reasonably (though mistakenly) be assumed to
that they are forms of vice and that the goods originate from the plaintiff, thus deceiving the
passed through the same channels of trade. public into believing that there is some
HELD: The Court reversed the ruling of the CA, connection between the plaintiff and defendant
finding that there was no trademark which, in fact, does not exist.
infringement or unfair competition. In determining the likelihood of confusion, the
Although the laws on trademark infringement Court must consider: [a] the resemblance
and unfair competition have a common between the trademarks; [b] the similarity of
conception at their root, that is, a person shall the goods to which the trademarks are
not be permitted to misrepresent his goods or attached; [c] the likely effect on the purchaser
his business as the goods or business of and [d] the registrants express or implied
another, the law on unfair competition is consent and other fair and equitable
broader and more inclusive than the law on considerations.
trademark infringement. The latter is more
limited but it recognizes a more exclusive right McDonalds Corporation, et al. vs. L.C. Big Mak
derived from the trademark adoption and Burger, Inc. (2004)
registration by the person whose goods or FACTS: McDonlads owns a family of marks
business is first associated with it. The law on including the Big Mac mark for its double-
trademarks is thus a specialized subject distinct decker hamburger sandwich which has been
from the law on unfair competition, although registered under Philippine laws. Respondent LC
the two subjects are entwined with each other Big Mak Burger Inc. operates fast food outlets
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and snack vans. It includes in its menu Filipino language, even the last letters of both
hamburger sandwiches and other food items. marks are the same.
When it applied for registration of its mark, The essential elements of an action for unfair
McDonalds opposed respondents application competition are (1) confusing similarity in the
on the ground that Big Mak was a colorable general appearance of the goods, and (2) intent
imitation of its registered mark. Thereafter, to deceive the public and defraud a
petitioner sued respondent for trademark competitor.The confusing similarity may or may
infringement and unfair competition. not result from similarity in the marks, but may
RTC found respondent corporation liable. Said result from other external factors in the
finding however, was reversed by the CA. packaging or presentation of the goods. The
HELD: (Note that this case was decided under intent to deceive and defraud may be inferred
RA No. 166 or the old Trademark Law) from the similarity of the appearance of the
Respondents use of Big Mak results in the goods as offered for sale to the public.Actual
likelihood of confusion. fraudulent intent need not be shown.
To establish trademark infringement, the Unfair competition is broader than trademark
following elements must be shown: (1) the infringement and includes passing off goods
validity of plaintiff's mark; (2) the plaintiff's with or without trademark infringement.
ownership of the mark; and (3) the use of the Trademark infringement is a form of unfair
mark or its colorable imitation by the alleged competition.Trademark infringement
infringer results in "likelihood of confusion." Of constitutes unfair competition when there is not
these, the likelihood of confusion is the merely likelihood of confusion, but also actual
gravamen of trademark infringement. or probable deception on the public because of
SEC 22 covers two types of confusion arising the general appearance of the goods. There can
from the use of similar or colorable imitation be trademark infringement without unfair
marks, namely, confusion of goods (product competition as when the infringer discloses on
confusion) and confusion of business (source or the labels containing the mark that he
origin confusion). manufactures the goods, thus preventing the
Under the Law, while there is confusion of public from being deceived that the goods
goods when the products are competing, originate from the trademark owner. Passing off
confusion of business exists when the products (or palming off) takes place where the
are non-competing but related enough to defendant, by imitative devices on the general
produce confusion of affiliation. The registered appearance of the goods, misleads prospective
trademark owner may use his mark on the purchasers into buying his merchandise under
same or similar products, in different segments the impression that they are buying that of his
of the market, and at different price levels competitors.
depending on variations of the products for
specific segments of the market. The Court has
recognized that the registered trademark owner
enjoys protection in product and market areas
that are the normal potential expansion of his Tradenames or business names (see Sec. 165
business. supra)
Applying the dominancy test, the Court finds Notes:
that respondents' use of the "Big Mak" mark - Tradenames are protected even if they
results in likelihood of confusion. First, "Big are not registered because they are not,
Mak" sounds exactly the same as "Big Mac." in the first place, required to be
Second, the first word in "Big Mak" is exactly registered.
the same as the first word in "Big Mac." Third,
the first two letters in "Mak" are the same as Collective marks
the first two letters in "Mac." Fourth, the last
letter in "Mak" while a "k" sounds the same as Sec. 167. Collective Marks
"c" when the word "Mak" is pronounced. Fifth, in
Filipino, the letter "k" replaces "c" in spelling, 167.1. Subject to SubSECs 167.2 and 167.3,
thus "Caloocan" is spelled "Kalookan." SECs 122 to 164 and 166 shall apply to
In short, aurally the two marks are the same, collective marks, except that references therein
with the first word of both marks phonetically to "mark" shall be read as "collective mark."
the same, and the second word of both marks
also phonetically the same. Visually, the two 167.2 (a) An application for registration of a
marks have both two words and six letters, with collective mark shall designate the mark as a
the first word of both marks having the same collective mark and shall be accompanied by a
letters and the second word having the same copy of the agreement, if any, governing the
first two letters. In spelling, considering the use of the collective mark.
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(b) The registered owner of a collective mark refused entry at any customhouse under this
shall notify the Director of any changes made in SEC may have any recourse under the customs
respect of the agreement referred to in revenue laws or may have the remedy given by
paragraph (a). this Act in cases involving goods refused entry
or seized. (Sec. 30, R.A. No. 166a)
167.3. In addition to the grounds provided in
SEC 149, the Court shall cancel the registration Criminal penalties for infringement, unfair
of a collective mark if the person requesting the competition, false designation, origin, and false
cancellation proves that only the registered description or misrepresentation
owner uses the mark, or that he uses or permits
its use in contravention of the agreements SEC. 170. PenaltiesIndependent of the civil
referred to in SubSEC 166.2 or that he uses or and administrative sanctions imposed by law, a
permits its use in a manner liable to deceive criminal penalty of imprisonment from two (2)
trade circles or the public as to the origin or any years to five (5) years and a fine ranging from
other common characteristics of the goods or Fifty thousand pesos (P50,000) to Two hundred
services concerned. thousand pesos (P200,000), shall be imposed
on any person who is found guilty of committing
167.4. The registration of a collective mark, or any of the acts mentioned in SEC 155, SEC 168
an application therefor shall not be the subject and SubSEC 169.1. (Arts. 188 and 189, Revised
of a license contract. (Sec. 40, R.A. No. 166a) Penal Code)

Cross-border protection of marks and trade COPYRIGHTS


names
Sec. 166. Goods Bearing Infringing Marks Basic Principles of copyright
or Trade NamesNo article of imported
merchandise which shall copy or simulate the 172.2. Works are protected by the sole fact of
name of any domestic product, or their creation, irrespective of their mode or
manufacturer, or dealer, or which shall copy or form of expression, as well as of their content,
simulate a mark registered in accordance with quality and purpose. (Sec. 2, P.D. No. 49a)
the provisions of this Act, or shall bear a mark
or trade name calculated to induce the public to SEC. 175. Unprotected Subject Matter
believe that the article is manufactured in the Notwithstanding the provisions of SEC 172 and
Philippines, or that it is manufactured in any 173, no protection shall extend, under this law,
foreign country or locality other than the to any idea, procedure, system method or
country or locality where it is in fact operation, concept, principle, discovery or mere
manufactured, shall be admitted to entry at any data as such, even if they are expressed,
customhouse of the Philippines. In order to aid explained, illustrated or embodied in a work;
the officers of the customs service in enforcing news of the day and other miscellaneous facts
this prohibition, any person who is entitled to having the character of mere items of press
the benefits of this Act, may require that his information; or any official text of a legislative,
name and residence, and the name of the administrative or legal nature, as well as any
locality in which his goods are manufactured, a official translation thereof. (n)
copy of the certificate of registration of his mark
or trade name, to be recorded in books which SEC. 181. Copyright and Material Object
shall be kept for this purpose in the Bureau of The copyright is distinct from the property in
Customs, under such regulations as the the material object subject to it. Consequently,
Collector of Customs with the approval of the the transfer or assignment of the copyright shall
Secretary of Finance shall prescribe, and may not itself constitute a transfer of the material
furnish to the said Bureau facsimiles of his object. Nor shall a transfer or assignment of the
name, the name of the locality in which his sole copy or of one or several copies of the work
goods are manufactured, or his registered mark imply transfer or assignment of the copyright.
or trade name, and thereupon the Collector (Sec. 16, P.D. No. 49)
of Customs shall cause one (1) or more copies
of the same to be transmitted to each collector Notes:
or to other proper officer of the Bureau of - PRINCIPLE OF AUTOMATICE
Customs. (Sec. 35, R.A. No. 166) PROTECTION- The Berne Convention
provides that the enjoyment and
169.2. Any goods marked or labeled in exercise of copyright, including moral
contravention of the provisions of this SEC shall rights, shall not be subject of any
not be imported into the Philippines or admitted formality
entry at any customhouse of the Philippines.
The owner, importer, or consignee of goods Cases:
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- Format of a show not copyrightable ISSUE: WON the copyright and patent over the
name and container of a beauty cream product
Joaquin Jr., et al. vs. Drilon, et al. (1999) would entitle the registrant to the use and
(as discussed in the textbook) ownership over the same to the exclusion of
FACTS: BJ Productions Inc. (BJPI) is the holder of others.
a Certificate of copyright issued by the National HELD: NO.
Laibrary for the TV dating game show called Trademark, copyright and patents are different
Rhoda and me. While watching television, intellectual property rights that cannot be
petitioner Francisco Joaquin Jr. president of BJPI, interchanged with one another. A trademark is
saw on RPN Channel 9 an episode of Its a Date, any visible sign capable of distinguishing the
which was produced by IXL Productions, Inc. He goods (trademark) or services (service mark) of
wrote a letter to private respondent Gabriel an enterprise and shall include a stamped or
Zosa that BJPI had a copyright to Rhoda and Me marked container of goods. In relation thereto,
and demanding that it discontinue airing Its a a trade name means the name or designation
Date. identifying or distinguishing an enterprise.
HELD: The format of a show is not Meanwhile, the scope of a copyright is confined
copyrightable. IN enumerating what are subject to literary and artistic works which are original
to copyright, the law refers to finished works intellectual creations in the literary and artistic
and not concepts. domain protected from the moment of their
The format or mechanics of a TV show is not creation. Patentable inventions, on the other
copyrightable as copyright does not extend to hand, refer to any technical solution of a
ideas, procedures, processes, systems, problem in any field of human activity which is
methods of operation, concepts, principles or new, involves an inventive step and is
discoveries regardless of the form in which they industrially applicable.
are described, explained, illustrated or Petitioner has no right to support her claim for
embodied. Moreover, the format of a television the exclusive use of the subject trade name and
show is not included in the list of protected its container. The name and container of a
works and for this reason, the protection beauty cream product are proper subjects of a
afforded by law cannot be extended to cover trademark inasmuch as the same falls squarely
the same. within its definition. In order to be entitled to
Finally, the subject matter of BJ Productions exclusively use the same in the sale of the
copyright is audiovisual recordings of each beauty cream product, the user must
episode of Rhoda and Me which falls under the sufficiently prove that she registered or used it
category of cinematographic works and works before anybody else did. The petitioner's
produced by a process analogous to copyright and patent registration of the name
cinematography or any processes for making and container would not guarantee her the right
audio-visual recordings. to the exclusive use of the same for the reason
that they are not appropriate subjects of the
COMMENTS: The list provided in the law is not said intellectual rights.
intended to be exhaustive. At the end of the
provision there is a catch all clause other
literary, scholarly, scientific and artistic works.
In other words, the copyrightability of a work is
not dependent on its being mentioned in the list
of works as it may fall in the catchall category.
Copyrightable works
- Name and container of beauty cream Original works
product not proper subjects of copyright
and patent SEC. 172. Literary and Artistic Works
172.1 Literary and artistic works, hereinafter
Kho vs. CA (2002) referred to as "works", are original intellectual
FACTS: Elidad Kho is doing business under the creations in the literary and artistic domain
name and style of KEC Cosmetics and was the protected from the moment of their creation
registered owner of the copyrights Chin Chun and shall include in particular:
Cu and Oval Facial Cream Container/Case. She (a) Books, pamphlets, articles and other
also has patent rights for medicated cream. writings;
Respondent Summerville advertised and sold (b) Periodicals and newspapers;
petitioners cream products under the brand (c) Lectures, sermons, addresses,
Chin Chun Su in similar containers allegedly dissertations prepared for oral delivery, whether
misleading the public. Respondents argue that or not reduced in writing or other material form;
they are the exclusive and authorized importer (d) Letters;
of the products manufactured from Taiwan.
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(e) Dramatic or dramatico-musical originality is meant that the material was not
compositions; choreographic works or copied, and evidences at least minimal
entertainment in dumb shows; creativity; that it was independently created by
(f) Musical compositions, with or without the author and that it possesses at least same
words; minimal degree of creativity. Copying is shown
(g) Works of drawing, painting, by proof of access to copyrighted material and
architecture, sculpture, engraving, lithography substantial similarity between the two works.
or other works of art; models or designs for The applicant must thus demonstrate the
works of art; existence and the validity of his copyright
(h) Original ornamental designs or because in the absence of copyright protection,
models for articles of manufacture, whether or even original creation may be freely copied.
not registrable as an industrial design, and It is worthy to state that the works protected
other works of applied art; under the Law on Copyright are: Literary or
(i) Illustrations, maps, plans, sketches, artistic works and derivative works. The Leaf
charts and three-dimensional works relative to Spring Eye Bushing and Vehicle Bearing
geography, topography, architecture or science; Cushion fall on neither classification.
(j) Drawings or plastic works of a Accordingly, if in the first place, the item
scientific or technical character; subject of the petition is not entitled to be
(k) Photographic works including works protected by the law on copyright, how can
produced by a process analogous to there be any violation?
photography; lantern slides; A Certificate of Registration creates no
(l) Audiovisual works and rebuttable presumption of copyright validity
cinematographic works and works produced by where other evidence in the record casts doubt
a process analogous to cinematography or any on the question. In such case, the validity will
process for making audio-visual recordings; not be presumed.
(m) Pictorial illustrations and Plainly, these are not literary or artistic works.
advertisements; They are not intellectual creations in the literary
(n) Computer programs; and and artistic domain, or works of applied art.
(o) Other literary, scholarly, scientific They are certainly not ornamental designs or
and artistic works. one having decorative quality or value.
It bears stressing that the focus of copyright is
Cases: the usefulness of the artistic design, and not its
- Meaning of originality of copyrighted marketability. The central inquiry is whether the
material; proof of copying; no copyright article is a work of art. Works for applied art
protection for works of applied art or include all original pictorials, graphics, and
industrial design. sculptural works that are intended to be or have
been embodied in useful article regardless of
Jessie G. Ching vs. William Salinas, et. al., factors such as mass production, commercial
(2005) exploitation, and the potential availability of
FACTS: Jessie Ching is the owner and general design patent protection. A useful article may
manager of Jeschicris Manufacturing Co., the be copyrightable only if and only to the extent
maker and manufacturer of a Utility Model, that such design incorporates pictorial, graphic,
described as Leaf Spring Eye Bushing for or sculptural features that can be identified
Automobile made up of plastic. separately from, and are capable of existing
Ching and Joseph Yu were issued National independently of the utilitarian aspects of the
Library Certificates of Copyright Registration article.
and Deposit for the said work. Ching requested It bears stressing that there is no copyright
the NBI to investigate and apprehend alleged protection for works of applied art or industrial
illegal manufacturers and distributers of his design which have aesthetic or artistic features
work. After investigation, NBI filed applications that cannot be identified separately from the
for search warrants against Salinas and utilitarian aspects of the article.
company, allegedly, for reproducing and
distributing the works of Ching and Yu. Derivative works
Respondents argued that the works covered by
the certificates are not artistic in nature and are SEC. 173. Derivative Works
considered automotive spare parts and pertain 173.1. The following derivative works shall also
to technology. Moreover, they alleged that the be protected by copyright:
models are not original and as such, are the (a) Dramatizations, translations,
proper subject of patent and not of copyright. adaptations, abridgments, arrangements, and
HELD: The petition has no merit. other alterations of literary or artistic works;
Ownership of copyrighted material is shown by and
proof of originality and copyrightability. By
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(b) Collections of literary, scholarly or copyright or to authorize any use or


artistic works, and compilations of data and appropriation of such work without the consent
other materials which are original by reason of of the copyright owners. (Sec. 9, third par., P.D.
the selection or coordination or arrangement of No. 49)
their contents. (Sec. 2, [P] and [Q], P.D. No. 49)
Rights of copyright owner
173.2. The works referred to in paragraphs (a)
and (b) of SubSEC 173.1 shall be protected as a - Generally, the rights of an author are as
new works: Provided however, That such new follows
work shall not affect the force of any subsisting 1. Economic rights
copyright upon the original works employed or a. to reproduce
any part thereof, or be construed to imply any b. to create derivative works
right to such use of the original works, or to c. to first public distribution
secure or extend copyright in such original d. to rent out
works. (Sec. 8, P.D. 49; Art. 10, TRIPS) e. to public display
f. to public performance
Non-Copyrightable works g. to other communication of the
work to the public
SEC. 175. Unprotected Subject Matter 2. Moral Rights
Notwithstanding the provisions of SEC 172 and a. of attribution or paternity right
173, no protection shall extend, under this law, b. of alteration or non publication
to any idea, procedure, system method or c. to preservation of integrity
operation, concept, principle, discovery or mere d. not to be identified with work of
data as such, even if they are expressed, others or with distorted work
explained, illustrated or embodied in a work;
news of the day and other miscellaneous facts 3. Droit de suite
having the character of mere items of press
information; or any official text of a legislative, copyright or economic rights
administrative or legal nature, as well as any
official translation thereof. (n) SEC. 177. Copy or Economic Rights
Subject to the provisions of Chapter VIII,
SEC. 176. Works of the Government copyright or economic rights shall consist of the
176.1. No copyright shall subsist in any work of exclusive right to carry out, authorize or
the Government of the Philippines. However, prevent the following acts:
prior approval of the government agency or
office wherein the work is created shall be 177.1. Reproduction of the work or substantial
necessary for exploitation of such work for portion of the work;
profit. Such agency or office may, among other
things, impose as a condition the payment of 177.2 Dramatization, translation, adaptation,
royalties. No prior approval or conditions shall abridgment, arrangement or other
be required for the use of any purpose of transformation of the work;
statutes, rules and regulations, and speeches,
lectures, sermons, addresses, and dissertations, 177.3. The first public distribution of the original
pronounced, read or rendered in courts of and each copy of the work by sale or other
justice, before administrative agencies, in forms of transfer of ownership;
deliberative assemblies and in meetings of
public character. (Sec. 9, first par., P.D. No. 49) 177.4. Rental of the original or a copy of an
audiovisual or cinematographic work, a work
176.2. The Author of speeches, lectures, embodied in a sound recording, a computer
sermons, addresses, and dissertations program, a compilation of data and other
mentioned in the preceding paragraphs shall materials or a musical work in graphic form,
have the exclusive right of making a collection irrespective of the ownership of the original or
of his works. (n) the copy which is the subject of the rental; (n)

176.3. Notwithstanding the foregoing 177.5. Public display of the original or a copy of
provisions, the Government is not precluded the work;
from receiving and holding copyrights
transferred to it by assignment, bequest or 177.6. Public performance of the work; and
otherwise; nor shall publication or republication
by the government in a public document of any 177.7. Other communication to the public of the
work in which copy right is subsisting be taken work (Sec. 5, P.D. No. 49a)
to cause any abridgment or annulment of the
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Right to proceeds of subsequent 195.1. To use the name of the author, or the
transfers or droite de suite title of his work, or otherwise to make use of his
reputation with respect to any version or
SEC. 200. Sale or Lease of WorkIn every adaptation of his work which, because of
sale or lease of an original work of painting or alterations therein, would substantially tend to
sculpture or of the original manuscript of a injure the literary or artistic reputation of
writer or composer, subsequent to the first another author; or
disposition thereof by the author, the author or
his heirs shall have an inalienable right to 195.2. To use the name of the author with
participate in the gross proceeds of the sale or respect to a work he did not create. (Sec. 36,
lease to the extent of five percent (5%). This P.D. No. 49)
right shall exist during the lifetime of the author
and for fifty (50) years after his death. (Sec. 31, SEC. 196. Contribution to Collective Work
P.D. No. 49) When an author contributes to a collective
work, his right to have his contribution
SEC. 201. Works Not CoveredThe attributed to him is deemed waived unless he
provisions of this Chapter shall not apply to expressly reserves it. (Sec. 37. P.D. No. 49)
prints, etchings, engravings, works of applied
art, or works of similar kind wherein the author SEC. 197. Editing, Arranging and
primarily derives gain from the proceeds of Adaptation of WorkIn the absence of a
reproductions. (Sec. 33, P.D. No. 49) contrary stipulation at the time an author
licenses or permits another to use his work, the
Moral Rights necessary editing, arranging or adaptation of
such work, for publication, broadcast, use in a
SEC. 193. Scope of Moral RightsThe motion picture, dramatization, or mechanical or
author of a work shall, independently of the electrical reproduction in accordance with the
economic rights in SEC 177 or the grant of an reasonable and customary standards or
assignment or license with respect to such requirements of the medium in which the work
right, have the right: is to be used, shall not be deemed to
contravene the author's rights secured by this
193.1. To require that the authorship of the chapter. Nor shall complete destruction of a
works be attributed to him, in particular, the work unconditionally tranferred by the author
right that his name, as far as practicable, be be deemed to violate such rights. (Sec. 38, P.D.
indicated in a prominent way on the copies, and No. 49)
in connection with the public use of his work;
SEC. 198. Term of Moral Rights
193.2. To make any alterations of his work prior
to, or to withhold it from publication; 198.1. The rights of an author under this
chapter shall last during the lifetime of the
193.3. To object to any distortion, mutilation or author and for fifty (50) years after his death
other modification of, or other derogatory action and shall not be assignable or subject to
in relation to, his work which would be license. The person or persons to be charged
prejudicial to his honor or reputation; and with the posthumous enforcement of these
rights shall be named in writing to be filed with
193.4. To restrain the use of his name with the National Library. In default of such person
respect to any work not of his own creation or in or persons, such enforcement shall devolve
a distorted version of his work. (Sec. 34, P.D. upon either the author's heirs, and in default of
No. 49) the heirs, the Director of the National Library.

SEC. 194. Breach of ContractAn author 198.2. For purposes of this SEC, "Person" shall
cannot be compelled to perform his contract to mean any individual, partnership, corporation,
create a work or for the publication of his work association, or society. The Director of the
already in existence. However, he may be held National Library may prescribe reasonable fees
liable for damages for breach of such contract. to be charged for his services in the application
(Sec. 35, P.D. No. 49) of provisions of this SEC. (Sec. 39, P.D. No. 49)

SEC. 195. Waiver of Moral RightsAn SEC. 199. Enforcement RemediesViolation


author may waive his rights mentioned in SEC of any of the rights conferred by this Chapter
193 by a written instrument, but no such waiver shall entitle those charged with their
shall be valid where its effects is to permit enforcement to the same rights and remedies
another: available to a copyright owner. In addition,
damages which may be availed of under the
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Civil Code may also be recovered. Any damage or other stipulations among the creators, the
recovered after the creator's death shall be held producers shall exercise the copyright to an
in trust for and remitted to his heirs, and in extent required for the exhibition of the work in
default of the heirs, shall belong to the any manner, except for the right to collect
government. (Sec. 40, P.D. No. 49) performing license fees for the performance of
musical compositions, with or without words,
Notes: which are incorporated into the work; and
- COPYRIGHT TO A WORK OF
ARCHITECTURE- shall include the right to 178.6. In respect of letters, the copyright shall
control the erection of any building belong to the writer subject to the provisions of
which reproduces the whole or a Article 723 of the Civil Code. (Sec. 6, P.D. No.
substantial part of the work but not the 49a)
right to control the reconstruction or
rehabilitation of the building. SEC. 179. Anonymous and Pseudonymous
WorksFor purposes of this Act, the publishers
Rules of ownership of copyright shall be deemed to represent the authors of
articles and other writings published without the
SEC. 178. Rules on Copyright Ownership names of the authors or under pseudonyms,
Copyright ownership shall be governed by the unless the contrary appears, or the
following rules: pseudonyms or adopted name leaves no doubts
as to the authors identity, or if the author of
178.1. Subject to the provisions of this SEC, in the anonymous works discloses his identity.
the case of original literary and artistic works, (Sec. 7, P.D. 49)
copyright shall belong to the author of the work;
Notes:
178.2. In the case of works of joint authorship, - RULES ON OWNERSHIP: Who owns the
the co-authors shall be the original owners of copyright in a piece of work?
the copyright and in the absence of agreement, o In general, the author (178.1)
their rights shall be governed by the rules on o In case of co-authors, both unless
co-ownership. If, however, a work of joint there is a contrary agreement or
authorship consists of parts that can be used unless the work constitutes parts
separately and the author of each part can be which may be attributed
identified, the author of each part shall be the separately
original owner of the copyright in the part that o In case of work created in the
he has created; course of employment, the
employee or employer (178.3)
178.3. In the case of work created by an author o In case of commissioned work,
during and in the course of his employment, the the creator unless there is
copyright shall belong to: contrary stipulation (178.4)
(a) The employee, if the creation of the o In case of audio-visual work, all
object of copyright is not a part of his regular who contributed, with the
duties even if the employee uses the time, producer exercising copyright to
facilities and materials of the employer. the extent necessary to exhibit
(b) The employer, if the work is the the work
result of the performance of his regularly- o In case of a letter, the writer
assigned duties, unless there is an agreement, o In case of anonymous work the
express or implied, to the contrary. author with the publisher as
representative
178.4. In the case of a work-commissioned by a
person other than an employer of the author Transfer or assignment of copyright
and who pays for it and the work is made in
pursuance of the commission, the person who SEC. 180. Rights of Assignee
so commissioned the work shall have ownership
of work, but the copyright thereto shall remain 180.1. The copyright may be assigned in whole
with the creator, unless there is a written or in part. Within the scope of the assignment,
stipulation to the contrary; the assignee is entitled to all the rights and
remedies which the assignor had with respect
178.5. In the case of audiovisual work, the to the copyright.
copyright shall belong to the producer, the
author of the scenario, the composer of the
music, the film director, and the author of the
work so adapted. However, subject to contrary
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180.2. The copyright is not deemed assigned (c) The reproduction or communication
inter vivos in whole or in part unless there is a to the public by mass media of articles on
written indication of such intention. current political, social, economic, scientific or
religious topic, lectures, addresses and other
180.3. The submission of a literary, works of the same nature, which are delivered
photographic or artistic work to a newspaper, in public if such use is for information purposes
magazine or periodical for publication shall and has not been expressly reserved: Provided,
constitute only a license to make a single That the source is clearly indicated; (Sec. 11,
publication unless a greater right is expressly P.D. No. 49)
granted. If two (2) or more persons jointly own a (d) The reproduction and
copyright or any part thereof, neither of the communication to the public of literary,
owners shall be entitled to grant licenses scientific or artistic works as part of reports of
without the prior written consent of the other current events by means of photography,
owner or owners. (Sec. 15, P.D. No. 49a) cinematography or broadcasting to the extent
necessary for the purpose; (Sec. 12, P.D. No.
SEC. 181. Copyright and Material Object 49)
The copyright is distinct from the property in (e) The inclusion of a work in a
the material object subject to it. Consequently, publication, broadcast, or other communication
the transfer or assignment of the copyright shall to the public, sound recording or film, if such
not itself constitute a transfer of the material inclusion is made by way of illustration for
object. Nor shall a transfer or assignment of the teaching purposes and is compatible with fair
sole copy or of one or several copies of the work use: Provided, That the source and of the name
imply transfer or assignment of the copyright. of the author, if appearing in the work, are
(Sec. 16, P.D. No. 49) mentioned;
(f) The recording made in schools,
SEC. 182. Filing of Assignment of License universities, or educational institutions of a
An assignment or exclusive license may be filed work included in a broadcast for the use of such
in duplicate with the National Library upon schools, universities or educational institutions:
payment of the prescribed fee for registration in Provided, That such recording must be deleted
books and records kept for the purpose. Upon within a reasonable period after they were first
recording, a copy of the instrument shall be, broadcast: Provided, further, That such
returned to the sender with a notation of the recording may not be made from audiovisual
fact of record. Notice of the record shall be works which are part of the general cinema
published in the IPO Gazette. (Sec. 19, P.D. No. repertoire of feature films except for brief
49a) excerpts of the work;
(g) The making of ephemeral recordings
SEC 183. Designation of SocietyThe by a broadcasting organization by means of its
copyright owners or their heirs may designate a own facilities and for use in its own broadcast;
society of artists, writers or composers to (h) The use made of a work by or under
enforce their economic rights and moral rights the direction or control of the Government, by
on their behalf. (Sec. 32, P.D. No. 49a) the National Library or by educational, scientific
or professional institutions where such use is in
Limitations on copyright the public interest and is compatible with fair
use;
SEC. 184. Limitations on Copyright (i) The public performance or the
184.1. Notwithstanding the provisions of communication to the public of a work, in a
Chapter V, the following acts shall not place where no admission fee is charged in
constitute infringement of copyright: respect of such public performance or
(a) the recitation or performance of a communication, by a club or institution for
work, once it has been lawfully made accessible charitable or educational purpose only, whose
to the public, if done privately and free of aim is not profit making, subject to such other
charge or if made strictly for a charitable or limitations as may be provided in the
religious institution or society; (Sec. 10(1), P.D. Regulations; (n)
No.49) (j) Public display of the original or a copy
(b) The making of quotations from a of the work not made by means of a film, slide,
published work if they are compatible with fair television image or otherwise on screen or by
use and only to the extent justified for the means of any other device or process: Provided,
purpose, including quotations from newspaper That either the work has been published, or,
articles and periodicals in the form of press that original or the copy displayed has been
summaries: Provided, That the source and the sold, given away or otherwise transferred to
name of the author, if appearing on the work, another person by the author or his successor in
are mentioned; (Sec. 11, third par., P.D. No. 49) title; and
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(k) Any use made of a work for the research and private study, shall be permitted,
purpose of any judicial proceedings or for the without the authorization of the owner of
giving of professional advice by a legal copyright in the work.
practitioner.
187.2. The permission granted under SubSEC
184.2. The provisions of this SEC shall be 187.1 shall not extend to the reproduction of:
interpreted in such a way as to allow the work (a) A work of architecture in form of
to be used in a manner which does not conflict building or other construction;
with the normal exploitation of the work and (b) An entire book, or a substantial past
does not unreasonably prejudice the right thereof, or of a musical work in which graphics
holder's legitimate interest. form by reprographic means;
(c) A compilation of data and other
SEC. 185. Fair Use of a Copyrighted Work materials;
185.1. The fair use of a copyrighted work for (d) A computer program except as
criticism, comment, news reporting, teaching provided in SEC 189; and
including multiple copies for classroom use, (e) Any work in cases where
scholarship, research, and similar purposes is reproduction would unreasonably conflict with a
not an infringement of copyright. normal exploitation of the work or would
Decompilation, which is understood here to be otherwise unreasonably prejudice the legitimate
the reproduction of the code and translation of interests of the author.(n)
the forms of the computer program to achieve
the inter-operability of an independently SEC. 188. Reprographic Reproduction by
created computer program with other programs Libraries
may also constitute fair use. In determining 188.1. Notwithstanding the provisions of
whether the use made of a work in any SubSEC 177.6, any library or archive whose
particular case is fair use, the factors to be activities are not for profit may, without the
considered shall include: authorization of the author of copyright owner,
(a) The purpose and character of the make a single copy of the work by reprographic
use, including whether such use is of a reproduction:
commercial nature or is for non-profit education (a) Where the work by reason of its
purposes; fragile character or rarity cannot be lent to user
(b) The nature of the copyrighted work; in its original form;
(c) The amount and substantiality of the (b) Where the works are isolated articles
portion used in relation to the copyrighted work contained in composite works or brief portions
as a whole; and of other published works and the reproduction
(d) The effect of the use upon the is necessary to supply them; when this is
potential market for or value of the copyrighted considered expedient, to person requesting
work. their loan for purposes of research or study
instead of lending the volumes or booklets
185.2 The fact that a work is unpublished shall which contain them; and
not by itself bar a finding of fair use if such (c) Where the making of such a copy is
finding is made upon consideration of all the in order to preserve and, if necessary in the
above factors. event that it is lost, destroyed or rendered
unusable, replace a copy, or to replace, in the
SEC. 186. Work of ArchitectureCopyright permanent collection of another similar library
in a work of architecture shall include the right or archive, a copy which has been lost,
to control the erection of any building which destroyed or rendered unusable and copies are
reproduces the whole or a substantial part of not available with the publisher.
the work either in its original form or in any
form recognizably derived from the original; 188.2. Notwithstanding the above provisions, it
Provided, That the copyright in any such work shall not be permissible to produce a volume of
shall not include the right to control the a work published in several volumes or to
reconstruction or rehabilitation in the same produce missing tomes or pages of magazines
style as the original of a building to which the or similar works, unless the volume, tome or
copyright relates. (n) part is out of stock; Provided, That every library
which, by law, is entitled to receive copies of a
SEC. 187. Reproduction of Published Work printed work, shall be entitled, when special
187.1. Notwithstanding the provision of SEC reasons so require, to reproduce a copy of a
177, and subject to the provisions of SubSEC published work which is considered necessary
187.2, the private reproduction of a published for the collection of the library but which is out
work in a single copy, where the reproduction is of stock. (Sec. 13, P.D. 49a)
made by a natural person exclusively for
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SEC. 189. Reproduction of Computer Provided, That such copies do not exceed three
Program (3).

189.1. Notwithstanding the provisions of SEC 190.2. Copies imported as allowed by this SEC
177, the reproduction in one (1) back-up copy may not lawfully be used in any way to violate
or adaptation of a computer program shall be the rights of owner the copyright or annul or
permitted, without the authorization of the limit the protection secured by this Act, and
author of, or other owner of copyright in, a such unlawful use shall be deemed an
computer program, by the lawful owner of that infringement and shall be punishable as such
computer program: Provided, That the copy or without prejudice to the proprietors right of
adaptation is necessary for: action.
(a) The use of the computer program in
conjunction with a computer for the purpose, 190.3. Subject to the approval of the Secretary
and to the extent, for which the computer of Finance, the Commissioner of Customs is
program has been obtained; and hereby empowered to make rules and
(b) Archival purposes, and, for the regulations for preventing the importation of
replacement of the lawfully owned copy of the articles the importation of which is prohibited
computer program in the event that the lawfully under this SEC and under treaties and
obtained copy of the computer program is lost, conventions to which the Philippines may be a
destroyed or rendered unusable. party and for seizing and condemning and
disposing of the same in case they are
189.2. No copy or adaptation mentioned in this discovered after they have been imported. (Sec.
SEC shall be used for any purpose other than 30, P.D. No. 49)
the ones determined in this SEC, and any such
copy or adaptation shall be destroyed in the Doctrine of Fair Use (see Sec. 185)
event that continued possession of the copy of
the computer program ceases to be lawful. Cases:
189.3. This provision shall be without prejudice - Copyright infringement
to the application of SEC 185 whenever
appropriate. (n)
Habana, et al. vs. Robles, et al., (1999)
(As discussed in the textbook)
SEC. 190. Importation for Personal
Facts: Habana, Cinco, and Fernando are the
Purposes
authors of a book entitled College English for
190.1. Notwithstanding the provision of SubSEC
Today, while Robles is the author of a book on
177.6, but subject to the limitation under the
the same subject entitled Developing English
SubSEC 185.2, the importation of a copy of a
Proficiency. In the course of revising their book,
work by an individual for his personal purposes
Habana came upon the book of Robles and
shall be permitted without the authorization of
Found that it was strikingly similar to their own
the author of, or other owner of copyright in,
book. Habana thereafter filed a complaint for
the work under the following circumstances:
infringement and/or unfair competition, with
(a) When copies of the work are not
damages, against Robles and her publisher
available in the Philippines and:
Goodwill Trading Co., Inc.
(i) Not more than one (1) copy at one
The lower court dismissed the complaint of
time is imported for strictly individual use only;
Habana on the ground that there was no
or
infringement of copyright committed by Robles.
(ii) The importation is by authority of
Upon appeal the CA affirmed the decision of the
and for the use of the Philippine Government; or
lower court.
(iii) The importation, consisting of not
HELD: The decision of the CA is reversed.
more than three (3) such copies or likenesses in
A perusal of the records yields several pages of
any one invoice, is not for sale but for the use
the book DEP that are similar if not identical
only of any religious, charitable, or educational
with the text of CET.
society or institution duly incorporated or
A pirate cannot claim that copied portions of
registered, or is for the encouragement of the
copyrighted book are also found in foreign
fine arts, or for any state school, college,
books and other grammar books and that the
university, or free public library in the
similarity between styled and that of other
Philippines.
authors cannot be avoided since they come
(b) When such copies form parts of
from the same background and orientation.
libraries and personal baggage belonging to
Under SEC 184 of RA 8293, the making of
persons or families arriving from foreign
quotations from a published work if they are
countries and are not intended for sale:
compatible with fair use and only to the extent
justified for the purpose, must provide for the
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source and name of the author. A copy of a operability of an independently created


piracy is an infringement of the original and it is program with other programs (Sec. 185)
no defense that a pirate, in such cases, did not
know whether or not he was infringing any Notice of copyright
copyright; he at least knew that what he was
copying was not his, and he copied at his peril. SEC. 192. Notice of CopyrightEach copy of a
To determine whether there is a substantial work published or offered for sale may contain a
reproduction of a book, it does not necessarily notice bearing the name of the copyright
require that the entire copyrighted work, or owner, and the year of its first publication, and,
even a large portion of it, be copied. If so much in copies produced after the creators death,
is taken that the value of the original work is the year of such death. (Sec. 27, P.D. No. 49a)
substantially diminished, there is an
infringement of copyright and to an injurious Neighboring or related rights
extent, the work is appropriated.
The amount of matter copied from the SEC. 202. DefinitionsFor the purpose of this
copyrighted work is an important consideration. Act, the following terms shall have the following
It is not necessary that the whole or even a meanings:
large portion shall have been copied. Copying
alone is not what is prohibited. The copying 202.1. "Performers" are actors, singers,
must likewise produce an injurious effect. Here, musicians, dancers, and other persons who act,
the injury consists in that respondent Robles sing, declaim, play in, interpret, or otherwise
lifted from petitioners book materials that were perform literary and artistic work;
the result of the latters research work and
compilation and misrepresented them as her 202.2. "Sound recording" means the fixation of
own. Hence, there is a clear case of the sounds of a performance or of other sounds,
appropriation of copyrighted work for her or representation of sound, other than in the
benefit. form of a fixation incorporated in a
cinematographic or
COMMENTS: Sir takes exception to the fact that other audiovisual work;
the Court did not provide a justification for
overturning the findings of fact of both the RTC 202.3. An "audiovisual work or fixation" is a
and the CA. Moreover, he agrees with Justice work that consists of a series of related images
Davide that there was no copying and which impart the impression of motion, with or
therefore, no question of fair or unfair use without accompanying sounds, susceptible of
arises. being made visible and, where accompanied by
sounds, susceptible of being made audible;
Notes:
- Factors considered 202.4. "Fixation" means the embodiment of
a. PURPOSE and CHARACTER of the sounds, or of the representations thereof, from
use- whether commercial, which they can be perceived, reproduced or
educational, non-profit, etc. communicated through a device;
b. NATURE OF THE COPYRIGHTED
WORK- implies that certain types 202.5. "Producer of a sound recording" means
of copyrighted material are more the person, or the legal entity, who or which
amenable to fair use than others takes the initiative and has the responsibility for
c. AMOUNT or SUBSTANTIALITY of the first fixation of the sounds of a performance
the portion used- In general, the or other sounds, or the representation of
bigger or more important the sounds;
greater the adverse effect. Note
the DE MINIMIS RULEevery 202.6. "Publication of a fixed performance or a
copying of copyrighted material is sound recording" means the offering of copies
not necessarily an infringement if of the fixed performance or the sound recording
what was copied was trivial or to the public, with the consent of the right
negligible. holder: Provided, That copies are offered to the
d. EFFECT OF THE USE upon the public in reasonable quality;
potential market for or value of
the copyrighted work 202.7. "Broadcasting" means the transmission
by wireless means for the public reception of
- DECOMPILATION- reproduction of the sounds or of images or of representations
code and translation of the forms of the thereof; such transmission by satellite is also
computer program to achieve the inter- "broadcasting" where the means for decrypting
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are provided to the public by the broadcasting modification of his performances that would be
organization or with its consent; prejudicial to his reputation.
202.8. "Broadcasting organization" shall include
a natural person or a juridical entity duly 204.2. The rights granted to a performer in
authorized to engage in broadcasting; and accordance with SubSEC 203.1 shall be
maintained and exercised fifty (50) years after
202.9. "Communication to the public of a his death, by his heirs, and in default of heirs,
performance or a sound recording" means the the government, where protection is claimed.
transmission to the public, by any medium, (Sec. 43, P.D. no. 49)
otherwise than by broadcasting, of sounds of a
performance or the representations of sounds SEC. 205. Limitation on Right
fixed in a sound recording. For purposes of SEC 205.1. Subject to the provisions of SEC 206,
209, "communication to the public" includes once the performer has authorized the
making the sounds or representations of sounds broadcasting or fixation of his performance, the
fixed in a sound recording audible to the public. provisions of SECs 203 shall have no further
application.
SEC. 203. Scope of Performers' Rights
Subject to the provisions of SEC 212, 205.2. The provisions of SEC 184 and SEC 185
performers shall enjoy the following exclusive shall apply mutatis mutandis to performers. (n)
rights:
SEC. 206. Additional Remuneration for
203.1. As regards their performances, the right Subsequent Communications or
of authorizing: BroadcastsUnless otherwise provided in the
(a) The broadcasting and other contract, in every communication to the public
communication to the public of their or broadcast of a performance subsequent to
performance; and the first communication or broadcast thereof by
(b) The fixation of their unfixed the broadcasting organization, the performer
performance. shall be entitled to an additional remuneration
equivalent to at least five percent (5%) of the
203.2. The right of authorizing the direct or original compensation he or she received for
indirect reproduction of their performances the first communication or broadcast. (n)
fixed in sound recordings, in any manner or
form; SEC. 207. Contract TermsNothing in this
203.3. Subject to the provisions of SEC 206, the Chapter shall be construed to deprive
right of authorizing the first public distribution performers of the right to agree by contracts on
of the original and copies of their performance terms and conditions more favorable for them
fixed in the sound recording through sale or in respect of any use of their performance. (n)
rental or other forms of transfer of ownership;
SEC. 208. Scope of RightSubject to the
203.4. The right of authorizing the commercial provisions of SEC 212, producers of sound
rental to the public of the original and copies of recordings shall enjoy the following exclusive
their performances fixed in sound recordings, rights:
even after distribution of them by, or pursuant
to the authorization by the performer; and 208.1. The right to authorize the direct or
indirect reproduction of their sound recordings,
203.5. The right of authorizing the making in any manner or form; the placing of these
available to the public of their performances reproductions in the market and the right of
fixed in sound recordings, by wire or wireless rental or lending;
means, in such a way that members of the
public may access them from a place and time 208.2. The right to authorize the first public
individually chosen by them. (Sec. 42, P.D. No. distribution of the original and copies of their
49a) sound recordings through sale or rental or other
forms of transferring ownership; and
SEC. 204. Moral Rights of Performers
204.1. Independently of a performer's economic 208.3. The right to authorize the commercial
rights, the performer, shall, as regards his live rental to the public of the original and copies of
aural performances or performances fixed in their sound recordings, even after distribution
sound recordings, have the right to claim to be by them by or pursuant to authorization by the
identified as the performer of his performances, producer. (Sec. 46, P.D. No. 49a)
except where the omission is dictated by the
manner of the use of the performance, and to SEC. 209. Communication to the PublicIf
object to any distortion, mutilation or other a sound recording published for commercial
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purposes, or a reproduction of such sound 213.2. In case of works of joint authorship, the
recording, is used directly for broadcasting or economic rights shall be protected during the
for other communication to the public, or is life of the last surviving author and for fifty (50)
publicly performed with the intention of making years after his death. (Sec. 21, second
and enhancing profit, a single equitable sentence, P.D. no. 49)
remuneration for the performer or performers,
and the producer of the sound recording shall 213.3. In case of anonymous or pseudonymous
be paid by the user to both the performers and works, the copyright shall be protected for fifty
the producer, who, in the absence of any (50) years from the date on which the work was
agreement shall share equally. (Sec. 47, P.D. first lawfully published: Provided, That where,
No. 49a) before the expiration of the said period, the
author's identity is revealed or is no longer in
SEC. 210. Limitation of RightSECs 184 and doubt, the provisions of SubSECs 213.1 and
185 shall apply mutatis mutandis to the 213.2 shall apply, as the case may be: Provided,
producer of sound recordings. (Sec. 48, P.D. No. further, That such works if not published before
49a) shall be protected for fifty (50) years counted
from the making of the work. (Sec. 23, P.D. No.
SEC. 211. Scope of RightSubject to the 49)
provisions of SEC 212, broadcasting
organizations shall enjoy the exclusive right to 213.4. In case of works of applied art the
carry out, authorize or prevent any of the protection shall be for a period of twenty-five
following acts: (25) years from the date of making. (Sec. 24(B),
P.D. No. 49a)
211.1. The rebroadcasting of their broadcasts;
213.5. In case of photographic works, the
211.2. The recording in any manner, including protection shall be for fifty (50) years from
the making of films or the use of video tape, of publication of the work and, if unpublished, fifty
their broadcasts for the purpose of (50) years from the making. (Sec. 24(C), P.D.
communication to the public of television 49a)
broadcasts of the same; and
213.6. In case of audio-visual works including
211.3. The use of such records for fresh those produced by process analogous to
transmissions or for fresh recording. (Sec. 52, photography or any process for making audio-
P.D. No. 49) visual recordings, the term shall be fifty (50)
years from date of publication and, if
Sec. 212. Limitations on RightsSECs 203, 208 unpublished, from the date of making. (Sec.
and 209 shall not apply where the acts referred 24(C), P.D. No. 49a)
to in those SECs are related to:
212.1. The use by a natural person exclusively SEC. 214. Calculation of TermThe term of
for his own personal purposes; protection subsequent to the death of the
author provided in the preceding SEC shall run
212.2. Using short excerpts for reporting from the date of his death or of publication, but
current events; such terms shall always be deemed to begin on
the first day of January of the year following the
212.3. Use solely for the purpose of teaching or event which gave rise to them. (Sec. 25, P.D.
for scientific research; and No. 49)

212.4. Fair use of the broadcast subject to the SEC. 215. Term of Protection for
conditions under SEC 185. (Sec. 44, P.D. no. Performers, Producers and Broadcasting
49a) Organizations
215.1. The rights granted to performers and
Term producers of sound recordings under this law
shall expire:
SEC. 213. Term of Protection (a) For performances not incorporated in
213.1. Subject to the provisions of SubSECs recordings, fifty (50) years from the end of the
213.2 to 213.5, the copyright in works under year in which the performance took place; and
SECs 172 and 173 shall be protected during the (b) For sound or image and sound recordings
life of the author and for fifty (50 years after his and for performances incorporated therein, fifty
death. This rule also applies to posthumous (50) years from the end of the year in which the
works. (Sec. 21, first sentence, P.D. No. 49a) recording took place.
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215.2. In case of broadcasts, the term shall be evidence in the court proceedings. (Sec. 28,
twenty (20) years from the date the broadcast P.D. No. 49a)
took place. The extended term shall be applied
only to old works with subsisting protection SEC. 217. Criminal Penalties
under the prior law. (Sec. 55, P.D. No. 49a) 217.1. Any person infringing any right secured
by provisions of Part IV of this Act or aiding or
Notes: abetting such infringement shall be guilty of a
- Terms shall always be deemed to begin crime punishable by:
on the first day of January of the year (a) Imprisonment of one (1) year to
following the event which gave rise to three (3) years plus a fine ranging from Fifty
them. thousand pesos (P50,000) to One hundred fifty
thousand pesos (P150,000) for the first offense.
Concept of copying or infringement of copyright (b) Imprisonment of three (3) years and
[Insert notes] one (1) day to six (6) years plus a fine ranging
from One hundred fifty thousand pesos
Remedies for infringement (P150,000) to Five hundred thousand pesos
(P500,000) for the second offense.
SEC. 216. Remedies for Infringement (c) Imprisonment of six (6) years and
216.1. Any person infringing a right protected one (1) day to nine (9) years plus a fine ranging
under this law shall be liable: from Five hundred thousand pesos (P500,000)
(a) To an injunction restraining such to One million five hundred thousand pesos
infringement. The court may also order the (P1,500,000) for the third and subsequent
defendant to desist from an infringement, offenses.
among others, to prevent the entry into the (d) In all cases, subsidiary imprisonment
channels of commerce of imported goods that in cases of insolvency.
involve an infringement, immediately after
customs clearance of such goods. 217.2. In determining the number of years of
(b) Pay to the copyright proprietor or his imprisonment and the amount of fine, the court
assigns or heirs such actual damages, including shall consider the value of the infringing
legal costs and other expenses, as he may have materials that the defendant has produced or
incurred due to the infringement as well as the manufactured and the damage that the
profits the infringer may have made due to such copyright owner has suffered by reason of the
infringement, and in proving profits the plaintiff infringement.
shall be required to prove sales only and the
defendant shall be required to prove every 217.3. Any person who at the time when
element of cost which he claims, or, in lieu of copyright subsists in a work has in his
actual damages and profits, such damages possession an article which he knows, or ought
which to the court shall appear to be just and to know, to be an infringing copy of the work for
shall not be regarded as penalty. the purpose of:
(c) Deliver under oath, for impounding (a) Selling, letting for hire, or by way of
during the pendency of the action, upon such trade offering or exposing for sale, or hire, the
terms and conditions as the court may article;
prescribe, sales invoices and other documents (b) Distributing the article for purpose of
evidencing sales, all articles and their trade, or for any other purpose to an extent that
packaging alleged to infringe a copyright and will prejudice the rights of the copyright owner
implements for making them. in the work; or
(d) Deliver under oath for destruction (c) Trade exhibit of the article in public,
without any compensation all infringing copies shall be guilty of an offense and shall be liable
or devices, as well as all plates, molds, or other on conviction to imprisonment and fine as
means for making such infringing copies as the above mentioned. (Sec. 29, P.D. No. 49a)
court may order.
(e) Such other terms and conditions, GEOGRAPHICAL INDICATIONS
including the payment of moral and exemplary
damages, which the court may deem proper, Article 22 (TRIPS AGREEMENT)
wise and equitable and the destruction of Protection of Geographical Indications
infringing copies of the work even in the event 1. Geographical indications are, for the
of acquittal in a criminal case. purposes of this Agreement, indications which
identify a good as originating in the territory of
216. 2. In an infringement action, the court shall a Member, or a region or locality in that
also have the power to order the seizure and territory, where a given quality, reputation or
impounding of any article which may serve as other characteristic of the good is essentially
attributable to its geographical origin.
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2. In respect of geographical indications,


Members shall provide the legal means for
interested parties to prevent:
(a) the use of any means in the designation
or presentation of a good that indicates or
suggests that the good in question originates in
a geographical area other than the true place of
origin in a manner which misleads the public as
to the geographical origin of the good;
(b) any use which constitutes an act of unfair
competition within the meaning of Article 10bis
of the Paris Convention (1967).
3. A Member shall, ex officio if its legislation so
permits or at the request of an interested party,
refuse or invalidate the registration of a
trademark which contains or consists of a
geographical indication with respect to goods
not originating in the territory indicated, if use
of the indication in the trademark for such
goods in that Member is of such a nature as to
mislead the public as to the true place of origin.
4. The protection under paragraphs 1, 2 and 3
shall be applicable against a geographical
indication which, although literally true as to
the territory, region or locality in which the
goods originate, falsely represents to the public
that the goods originate in another territory.

UNDISCLOSED INFORMATION

RULE 1 (o), IPO Rules and Regulations on


Voluntary Licensing
o) Undisclosed Information shall
mean information which:
(i) Is secret in the sense that it is not, as a
body or in the precise configuration and
assembly of its components, generally
known among or readily accessible to
persons within the circles that normally deal
with the kind of information in question;
(ii) has commercial value because it is
secret; and
(iii) has been subject to reasonable
steps under the circumstances to keep it
secret, by the person lawfully in control of
the information.

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