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Commercial Law Review

Dean Eduardo Abella

- Under the NCC (Book V), there are accessory contracts securing principal
obligations (special contracts). These include pledge, mortgage, antichresis,
guaranty, and suretyship.
- a mortgage is a contract where the property is recorded (in the register of
deeds of the city and/or province) to secure a principal obligation
- example: If a mortgaged property is in Batangas City, it must be
registered in both the City and Province of Batangas (Batangas City is
the provincial capital).
- an accessory contract, collateral or security for an obligation

Return of Excess

Not required
- No recovery under the Recto
(NCC 1484 on installment sale
of personal property where the
mortgage is constituted over the
object of sale to secure the
payment of the purchase price).
For Recto Law to be applied,
mortgage must be constituted
over the object of the installment


- Recovery if not under the

Recto Law
FROM: Principal Debtor
E: Obligation is solidary with the

They are valid only if there is a principal contract.

Basic Principles
1.) Accessory Contract only exists if there is a principal contract
2.) Mortgagor is the owner of thing mortgaged
3.) Mortgage is extinguished if the principal obligation is extinguished
Scope: It may be constituted over:
(1) Personal Property (Chattel Mortgage)
(2) Real Property (Real Estate Mortgage)

EJ Foreclosure

Personal property
Real property
Existing and valid obligations;
Includes future obligations
Includes voidable, unenforceable, rescissible and natural
Extrajudicial only
EJ or Judicial
No right of redemption
Right of Redemption
RD of mortgagors residence +
location of property + LTO
(motor vehicles)

Governing Law: Act No. 1508
ACT NO. 1508
This act is considered repealed by the New Civil Code.
The ratio is that pactum commissorium is void and the Chattel Mortgage Law
considers a Chattel Mortgage as a conditional sale which becomes absolute
upon default

In Jurisprudence:
In one case there was a house that was subject to a chattel mortgage. The
reason was that the land belonged to one person and the house to another.
The Court ruled that as between the parties there is a valid chattel mortgage
as under NCC 1159, stipulations of parties valid between themselves.
However, it is not binding on other persons.

1|SMILE. Keep on moving forward!

Commercial Law Review

Dean Eduardo Abella

Collateral issue: The register of deeds was not justified in refusing to record
chattel mortgage over the house; it is a ministerial duty on the part of the
Q: May personal property also be classified as real?
A: Yes, but it is binding only as between the parties

If object is motor vehicle it should be registered with the LTO. It should be first
registered with register of deeds. After, which, register with the LTO.
Practical: Bring two copies, first to Register of Deeds then have him stamp the
copy. Bring the second copy to the LTO.
Mortgagor may or may not be the principal debtor.

While registration may be notice to world, it is still not in accordance with law.
A problem arises when the principal debtor defaults.
- Chattel Mortgage is defined in the NCC as a contract whereby personal
property is recorded in the chattel mortgage registry as security for the
performance of an obligation.
Where to Register: Residence of the mortgagor
CM is to be recorded in the Register of Deeds of the City or Province where
the mortgagor resides.
Note: There is no Register of Deeds in Municipalities.
Why: Because it can be easily moved
Nature of Requirement:
Not for the validity of the mortgage
But for Constructive Notice to the world
TRIVIA: Forms of Construction Notice:
Public Instrument, Publication, Registration
Form of Registration: Affidavit of Good Faith
- It is a sworn declaration of both the mortgagor and mortgagee that they
executed the mortgage in good faith to secure a valid obligation and not for the
purpose of fraud
a) the mortgage is still valid between the parties
b) it is invalid as to third persons because the mortgage cannot be registered
without the affidavit
Q: If an affidavit of good faith is omitted is there a valid chattel mortgage?
A: Yes, general ObliCon rule. Affidavit of good faith is for purposes of
registration. If there is no affidavit, it is not binding on third persons. Affidavit of
good faith may be demanded.
Q: What if mortgagor and property are in different locations?
A: Register first in the city or province where the mortgagor resides then where
the property is found.


1.) Sue for specific performance if the obligation is for a sum of money
mortgagee abandons mortgage by suing the principal debtor. If suit is
brought, mortgagor may demand release of mortgage.
2.) Foreclose the mortgage under the Chattel Mortgage Law
mortgaged because it must be sold in a public auction
- How does the creditor acquire possession:
Demand for the delivery of the object after default. If concealed, sue
for replevin.
- Who attends to the foreclosure sale:
Sheriff or
Notary public
- What is the process of foreclosure:
a. Petition for EJ Foreclosure with the sheriff or notary public
b. Notice of Auction Sale by the Sheriff/NP after the receipt of
the petition
- Posted in at least 3 public places,
e.g. City/Municipal Hall, Barangay Hall, Hall of Justice
- there is no law that requires the sheriff or np to
make sure that the notices stay where posted
Q: If somebody took the posted notice, will
proceeding be invalidated?
A: No, it will not, posting is enough.
- Copy furnished to the mortgagor at least 10 days before
the auction sale, otherwise the sale would be void
c. Sale to the Highest Bidder
- If sold to the mortgagee, he has no obligation to deliver any

Commercial Law Review

Dean Eduardo Abella

- If sold to a third party, the latter delivers the amount of the bid to
d. Certificate of Sale
- Whoever is the highest bidder gets certificate of sale from
sheriff or notary.
Hypothetical Q: Mortgagor did not see necessity of recording release of
mortgage. Went to get a second loan from mortgagee. He merely returned the
release of mortgage, is the mortgage revived?
A: No, obligation it secured is already extinguished

- CAFS is not required

- Note: It is ironic that the remedy is supposed to be extra-judicial or
out of court and yet sheriff is not allowed to accept the petition unless
the court fees required are paid (SC Circular March 2000)

Referral and Payment of Fees


Notice of Auction Sale

- By Whom Issued: Sheriff, NP
- Where: Where the property is situated
- How:
a) Notice in at least three public places in City or Province where the
property is located
b) Publication in a newspaper of general circulation, once a week for
two consecutive weeks
- NOTE: Publisher must be accredited by the court and
assigned the publication by raffle


Governing Law: ACT 3135
It is a special law creating the right of the mortgagee to foreclose the REM

- Should notice be furnished to the mortgagor? No because

publication is constructive notice to all (This is opposed to
the EJ Foreclosure of Chattel Mortgages where notice to the
mortgagor is required)

How to extrajudicially foreclose a REM

3135 refers to the Rule 39 of the Rules of Court
1. The Mortgagor must expressly authorize the mortgagee to sell the
mortgaged property in case of default, either in the deed of mortgage
or in a separate instrument
- EXAMPLE: In case of default, the bank shall be authorized to sell,
as it is hereby authorized to sell.
- INSUFFICIENT: Banks use printed deeds of REM with the following
provision: In case of default, the Bank can extrajudicially foreclose
pursuant to Act No. 3135. According to a SC Circular, mere
reference to Act No. 3135 is not enough.
- Thus now, in case of default, the bank must be expressly authorized
to sell the property mortgaged.
- Note: Just copy the wording/form of the law

The mortgagee must execute a verified petition

Q: How is it initiated?
A: Prepare a verified petition to foreclose the REM. The sheriff or a
notary public may handle this. The mortgagee himself may do it, but it
is often the sheriff or notary public.
- Where filed: Sheriff or Notary public


notice would be void
- How to Prove: Ask for a Certificate of Notice or Affidavit of
Publication and a copy of issue of the newspaper

Scrutiny of the Title of the Property

- If the property is wrongly described in the publication, then the entire
proceedings would be void
- REMEDY: Inform the publisher and correct the issue


Auction Sale
- Q: If there is a written agreement between the mortgagor and
mortgagee to postpone the auction sale, is it valid? YES, because it is
not contrary to law, morals, good customs, public order or policy.
However, in case of postponement, the notice requirements should
be complied with again as in the case of Nepomuceno Productions
vs. PNB.
- Three possible results of an auction sale
a. Bid exceeds the amount of the obligation: the excess is
returned to the mortgagor

Commercial Law Review

Dean Eduardo Abella


*If tender is refused: the remedy is specific performance. The amount

may not be consigned because for consignation to be allowed, there
must be a debt due.

Bid is less than the amount of the obligation: the deficiency

is recoverable
Mortgagor himself is the highest bidder: There is no need for
the amount of the bid to be delivered to the sheriff or no.

*NOTE: Present the Certificate of Title from the Register of Deeds

with the annotation of the Certificate of Sale.

NOTE: There is no longer any requirement of having at least 2



- What is the Certificate of Redemption: It cancels the certificate of


Certificate of Sale
- By whom issued: sheriff or np
- What to do: Register ASAP with RD BEC the one-year Right of
Redemption commences within one year from the date of registration

- When is the Redemption Period:

GR: 1y from registration of certificate of sale (NOT 12m)

- Nature: Right, Not a Duty; it may not be forced on the mortgagor
- It is a property right arising from property
- Real property
- Real rights

E: 90d or before the registration of tile over the property,

whichever comes first IF the mortgagor is a juridical person
and the mortgagee is a bank (General Banking Act)
- Is the right of redemption waivable? NO. Express waivers within the
period of redemption is not allowed because it is contrary to public
policy. HOWEVER, waiver may be done by not exercising the right.

- Who Exercises Right of Redemption:

a. Mortgagor
b. His successors-in-interest
c. Judgment creditor of mortgagor
- How is it Exercised:
there must be a valid tender of the redemption price
within the redemption period
- When is tender valid: If there is tender of the full amount of
in legal tender
- What is the redemption price:
a) If there is a special law that created the mortgage and there is an
indication of redemption price, then follow that.
b) If it is a bank, it depends on the law.
c) If another person:
1.) Bid price
2.) 1% interest per month on the bid price
3.) Taxes and charges paid by the highest bidder
4.) 1% interest per month on the taxes and charges paid
The Supreme Court construed this as 12% per annum.
- To whom must the amount be tendered:
Highest bidder or Sheriff/NP conducting the auction, whoever is less

- Is it transferable? YES, either onerously or gratuitously.

Redemption is a real right over real property. The right may be
inherited by succession

Acquisition of Title
- When to obtain title to the property: When the period of redemption
expired without anyone redeeming the property
- How: 2 ways
a. Have the Sheriff/NP issue a Final Certificate of Sale
b. Execute an Affidavit of Non-Redemption, which is less
expensive than the first
c. Pay BIR the taxes upon the expiration of the redemption
- Why do it: The BIR requires: (1) certificate authorizing registration
and (2) the tax clearance certificate
a. DST within five days from the month following the expiry of
the redemption period
b. CGT / Withholding Taxes 30 days from expiration of the
redemption period
c. VAT
d. Transfer Taxes of LGUs
- Pay the amount of taxes to the LGU

Commercial Law Review

Dean Eduardo Abella

- Update all realty taxes

- Obtain a Clearance from the local treasurer
- Go to the RD for the issuance of a TCT
- What is the tax base:
Before, it was the bid price.
By reason of a BIR Circular dated July 2012, the tax base is now the
highest of:
(a) Bid Price or
(b) Market Value in the Tax Declaration or
(c) BIR Valuation
10. Possession of the Property
- How: Ex parte petition for the Issuance of a Writ of Possession
- It is in the nature of a motion
- Nature:
General Rule: Ministerial duty of the court BUT if filed before the end
of the redemption period, a bond is required.
Exception: Not ministerial if there is another person with a better right.
Ex. Lessee
- REQD: GF of Applicant! Thus, the applicant must inquire into the (a)
TCT and (b) rights of the current possessor to qualify as a buyer in
good faith; otherwise, he will have no right of possession.
New buyer in good faith doctrine: Looking at certificate of
title is no longer enough; you must look at the right of the
person in actual possession of the property. Failure to do so
does not qualify one as a buyer in good faith.

Practical Matters: When Register of Deeds issues Certificate of Title, he

issues at least 2, the original and the owners copy.
There are at least 2 because co-owners may each want a copy of the
certificate of title. In which case, the co-owners duplicate should be prepared
with the original. If you are buying from co-owners, you must get all other
copies so that they may be annotated.
Remedy or the issuance of the writ of possession is the same in extrajudicial
foreclosure, judicial foreclosure and execution sale. There is no remedy if a
third party has a better right.
Q: Can PDCs be used as chattel mortgaged property?
A: Legally, yes.

Case: Person borrowed from bank. Parents executed a Real Estate Mortgage.
Borrower issued post-dated checks. The checks were dishonored. The bank
sued the borrower for BP22.
Remedies for bank are as follows:
1.) Civil Collection
2.) BP22
3.) Foreclosure
Filing of BP22 is an abandonment of the mortgage.
If buyer of mortgaged land already owns the land and the prior owner does not
want to leave, file an ex parte Petition for Issuance of Writ of Possession.

Practical Matters: Attach all certified true copies of documents in the petition
title, deed of mortgage, final certificate of sale, BIR clearance (tax clearance,
certificate authorizing registration)

Commercial Law Review

Dean Eduardo Abella

Governing Laws:
NCC (Sales)
Code of Commerce
Warehouse Receipts Act
It is an instrument or document where the bailee acknowledges goods and
contains an undertaking to deliver the goods
- DIFF with Instrument under the Negotiable Instruments Law
1) Coverage: NCC covers GOODS to be transported or safely kept.
NIL covers sums certain in money, except other properties that may
also be covered.
2) Modes of Endorsement
- In DTs, endorsements must be IN BLACK or ESPECIALLY
- In NIs, it may be blank, especially, conditional, qualified, or
Examples of Documents of Title
- Bill of Lading, issued by common carriers (Code of Commerce)
- Warehouse Receipt, issue by warehousemen (under the Warehouse
Receipts Act and the General Bonded Warehouse Act).
- Quedan, a warehouse receipt that covers rice, sugar, or tobacco
Who issues DTs:
Common carriers
Forms of DTs to facilitate trade
1. Negotiable IF it contains words of negotiability, i.e. to order, to bearer,
or those with equivalent words or phrases (e.g. holder, possessor)
2. Non-Negotiable
What if it contains deliver to bearer with a red stamp in big font of
NON-NEGOTIABLE: It is negotiable even if the bailee intends it to
be non-negotiable, as long as it contains words of negotiability.
How to Negotiate Documents of Title
1. To Order Instruments: Indorsement (Blank or Special) and Delivery
2. To Bearer: Delivery

If Originally To Bearer, then specially endorsed and delivered, the

transferee must also negotiate by endorsment and delivery.
NOTE: Once it has been especially endorsed, negotiate by
endorsement and delivery all the time thereafter
EXCEPT IF the last endorsement is in blank, then just deliver it
DIFFERENCE WITH NI: Endorsement in a bearer NI has no effect.

Governing Law: Code of Commerce
Bill of Lading Common carrier of goods by water
Waybill by trucks on land
Airwaybill by aircrafts, airlines

Formal Requirements
1. It must be printed
2. It must contain the complete name and address of the printer
3. It must contain the telephone number of the printer.
4. It must contain the TIN Number of the printer.
Content of B/L (Code of Commerce)
1.) Complete name and address of consignor/shipper.
2.) Complete name and address of consignee.
3.) Complete name and address of the carrier/shipee (NCC).
4.) Complete description of goods including marks and markings, e.g.
Numbers on crates, Names in pomelo crate from Davao
5.) Amount of fare
6.) Stipulations on limited liability
- Nature: Contract of Adhesion but it is not prohibited; it is only
interpreted against the party who cause the ambiguity
Q: Are printed stipulations on Bill of Lading binding on the shipper
even if the shipper does not sign?
A: GR: Yes, a contract is perfected by mere consent. Here, consent is
implied even if it is signed only by the carriers representative.
EXCEPTION: There is no consent if print is too small that the shipper
could not have read it as in the Shewaram Case.

Commercial Law Review

Dean Eduardo Abella

Effect of Issuance of a B/L: Disputable presumption that the carrier received

the goods. It is not conclusive.
Purposes of Documents of Title and Bills of Lading
1.) As a Receipt
2.) As a Written Contract between parties
3.) As a Symbol, standing for the goods mentioned therein (Symbol)

Governing Law: GENERAL BONDED WAREHOUSE ACT governs the
conduct and business of warehousing
Who issues WR: Warehouseman.
Requirements for Issuance
1. Annual license from DTI Director.
2. Bond must be posted before the issuance of a license, to answer for
damages to goods suffered while the goods are in storage. The bond
is coterminous with the license.
3. Insurance against fire over all the goods stored in the warehouse.
Is there a prescribed minimum area for warehouses? NONE.
What is its difference with a Customs-Bonded Warehouse: WH is licensed and
bonded, while a customs-bonded WH is a facility by importers of raw materials.

2.) He must surrender the original to the warehouseman.

3.) He must express his willingness to sign the receipt upon delivery of
the goods to him.
Liens of the Warehouseman
Nature: Possessory and Waivable by parting with the goods
1.) Storage fees
2.) Other arrangements with the depositor, e.g. premium and interest for
additional insurance coverage
3.) Cost of packaging and repackaging (though the latter is illegal)
Q: What should warehouseman do with the original receipt?
A: Cancel it. If he fails to cancel it and the receipt falls into the hands of
someone in good faith and who got it for value, warehouseman is liable to the
Q: May goods covered by a document of title be levied upon on attachment for
A: Yes.
Effect of Loss of Original Receipt
- The claimant must file an action in court to prove his ownership or right over
the goods. In practice, the claimant merely posts a bond with the
- It would be the claimants problem because he cannot oblige the
warehouseman to deliver the goods without the original receipt
- To protect the warehouseman, the claimant must post a bond for the value of
the goods.

What if a warehouseman issues more copies of WH receipts: He must indicate

that it is only a copy and not the original. Otherwise, he is liable to a TP who
receive it in GF and for value
If a warehouseman issues more than one copy of a warehouse
receipt, he should indicate on copies that they are merely copies and
not the original. If he fails to indicate it as a copy and a person in good
faith received the receipt for value, he would be entitled to the goods
as if his warehouse receipt were original.
Negotiability of WH Receipts
A warehouse receipt is negotiable or non-negotiable.
Effect of Negotiation: Transferee acquires the direct right to receive goods from
the warehouseman. However, the right is conditioned upon the following:
1.) Person claiming the goods must first satisfy the liens of the

Commercial Law Review

Dean Eduardo Abella



Purpose of the law: To enable persons borrowing money or buying goods on

installment or credit to know the actual cost in money of the credit.

Purpose of the law: To protect creditors from fraudulent schemes of their


History: When cost of money had gone beyond a profitable rate and the
interest was also subject to the usury law, banks thought of other ways to
make money. Banks started charging different fees to avoid the usury law. In
effect, every move by the bank had a price (Processing fee, application fee,
appraisal fee). Thus, the law obliges lenders to fully disclose all charges
before the consummation of the transaction.

Acts covered and regulated:

1. Sale, assignment, mortgage, or other forms of transfer of all or
substantially all of the stocks of goods, wares or merchandise other
than in the ordinary course of business
2. Sale, assignment, mortgage, or other forms of transfer of all or
substantially all of the businesses of a person, the business/es
3. Sale, assignment, mortgage, or other forms of transfer of all or
substantially all of fixtures and equipment used in the conduct of

How: Disclosure Statement.

Prior to consummation, person lending money or selling on credit/installment
should deliver to the debtor a written statement showing the breakdown of the
charges. Note that this is already after a meeting of the minds. (Section 4)

WHY All or Substantially All: These are extraordinary transfers

Content of Disclosure Statement
1.) Cash Price less down payment = amount to be financed
2.) Payable in XX installments
3.) Total amount to be paid in installments
4.) Total Cost
5.) Other charges
Regulating Body: Monetary Board of the BSP is the body that oversees the
implementation of the law. Violation of the Act is a crime; penalty is fine of
P100 to P2000 and imprisonment of at least 1 month but not more than 5
Case: Solidbank extended a credit line of P200k to a client, not just as an
ordinary loan but also as a standby source of funds which earns no interest
unless it is drawn. When the borrower draws money, the credit diminishes and
he pays only what is actually received. But, there were accumulated service
fees which were not made available to the borrower.
Credit Line when bank sets aside a certain amount for client that
client may draw on at any time.
SC did not allow Solidbank to collect amount because the additional charges
were not indicated in the promissory notes.
In 2009, there was another case where the fees were included in the
promissory notes but there was no delivery of disclosure statements, collection
still not allowed.

Note: Not every sale is covered. Sales in the ordinary course of business is
not covered, e.g. If all goods were sold while engaged in the wholesale
Requirements: Must be strictly complied with; OTHERWISE, Void sale
1. Notify the creditors in writing of the intended transfer at least 10 days
before the intended transaction
2. Deliver to the prospective transferees, a sworn statement stating the
full names and addresses of creditors and the amounts due them.
3. Furnish a copy to the Director of the Bureau of Commerce/Bureau of
Domestic Trade a copy of the sworn statement
Note: Transfer without compliance with requirements is void even if the
buyer acted in GF; the buyer is considered a trustee.
Exemptions from Requirements:
1. Judicial sales (execution, assignee in insolvency)
2. Sales or transfers of property exempt from execution
3. Sale by manufacturer of his own products
4. Written waiver by the creditors
SC: Sale of a foundry shop (Horseshoe maker/metal fabricator)

Commercial Law Review

Dean Eduardo Abella


(R.A. No. 1405)
Purpose of the law: To encourage people to deposit their money in banks for
the purpose of promoting the national economy.
Scope: Includes investments in government securities
Reserve Requirements
What: Percentage of deposit received by the bank is to be deposited with the
How much: Percentage depends on the deposit liabilities
1. Highest Checking
2. Medium- Savings
3. Low Time Deposit
Q: How does BSP use reserve requirements to manage money supply? Why
is there a need to manage money supply?
A: If there were a lot of money in circulation, prices would go up. The reserve
requirement is also there in order for the BSP to have money to lend to banks.
- Promissory notes are used as security
Note: It is illegal for a bank officer or employee to disclose any information
regarding bank deposits and government securities.
1. Written authority from depositor himself Self explanatory
2. In case of impeachment ex. Clarissa Ocampo
3. Court order in case of bribery, dereliction of duty of public officer,
violation of Anti-graft and Corrupt Practices Act, extending to the
spouses and relatives, close friends and associates in cases of
4. Where deposit is the subject matter of litigation Must be read
literally, e.g. settlement of estate; wife channels funds out of a
5. By Order of the CA in relation to the Anti-Money Laundering Act
6. Examination of books of banks by the BSP
7. Independent auditors they are not bank employees/officers


Definition: BANK
- It is a corporation authorized by the Monetary Board to accept deposits from
the public and to grant loans.
Kinds of Banks
1. Universal Banks
2. Commercial Banks
3. Thrift Banks
a. Savings and Mortgage Bank retail banks catering small
deposits; accepts deposits of small depositors for homebuilding purposes (Amount is smaller than those of the
universal banks, e.g. P500 in BPI Family Bank)
b. Private Development Bank accepts deposits and grants
loans; once the bank runs out of capital, it can invite the DBP
to invest in it and DBP would require membership in its BOD;
Development is in its corporate name
c. Stock Savings and Loan Associations it can be non-stock,
where it cannot accept deposits from the public but only from
the restricted groups of persons.
4. Cooperative Bank
5. Rural Bank
6. Islamic Bank

Commercial Bank
Definition: It is not defined in law. The law only identifies its powers and
1) To accept deposits subject to withdrawal by check.
However, the BSP may license other banks to accept similar deposits
2) To open letters of credit.
MB licensed savings bank to do the same, e.g Ph Business Bank
3) To engage in allied enterprises
4) To exercise the powers of a corporation

As a matter of right, only commercial banks should accept deposits in checking

accounts/current accounts/commercial accounts/demand deposit
1.) May issue letters of credit
2.) Lend money

Commercial Law Review

Dean Eduardo Abella

3.) Trading of government securities

4.) Foreign transactions
5.) Safety deposit box
Ownership of Other Banks
KB can own 100% of just one other KB. There is no limit on the number of
smaller banks it can own.
Why: To encourage merger or consolidation.
Commercial bank limit is 35% of equity, but still with a maximum of 25% per

Universal Bank
Nature: Actually a commercial bank, but also authorized by Monetary Board to
engage in the business of an investment house.
Functions and Powers:
1) To accept deposits subject to withdrawal by check.
2) To open letters of credit.
3) To engage in business of investment house
4) To engage in allied or non-allied enterprises. Non-allied enterprises
have nothing to do with banking.
5) To sell life or non-life insurance policies cross-selling with
insurance companies where bank owns 5% of outstanding shares
Definition of an Investment House
Q: What is an investment house?
A: It is a quasi-bank with two major functions:
1.) Rediscounting of receivables one entity goes to an Investment
House and as collateral pledges its receivables. (Ex. Business sells
on credit and needs capital again, so it borrows from an Investment
2.) Underwriting for securities where a corporation offers to the market
securities for sale with certain commitments (ex. In corporation that
needs more capital that cant be raised from stockholders securities
only if 20 or more persons) Get SEC approval first, then have them
sold by securities underwriters

UB can own 100% of just one other UB or KB. There is no limit on the number
of smaller banks it can own.
Q: if Universal Bank invests allied or non-allied, what is the limit?
A: Equivalent to 50% of net worth but only up to 25% in a single enterprise

Thrift Bank
1. Savings and mortgage - To lend money to those that want to
construct houses. For small depositors (small amounts of money).
Banks prefer big depositors as maintenance costs are the same
2. Private development bank organized for development of
community. If it needs additional capital, it may invite DBP to invest
with it. To recognize it, check corporate name, it always has
development in its name.
3. Stock savings and loan associations Theres also a non-stock but
not bank. If non-stock no ACS. If stock, may accept deposits from
general public, if non-stock only from limited clientele (ex. AFPLSAI
restricted only to AFP, PNP and family members; MESALA, Meralco
employees including the Lopez group) Many corporations have
savings and loan associations and a credit union.

Cooperative Bank
What: It is one set up and owned by cooperatives. There are no individual
stockholders, all are cooperatives. Under cooperative office, but bank under
the BSP.

Rural Bank
What: It is organized to provide banking services in rural communities, to
farmers/tenants or simply stated, in rural areas. It is recognizable by Rural in
its corporate name.

Islamic Banks

Example: House of Investment, Inc. and State Investment House, Inc.

Ownership of Other Banks

Note: There is only one, owned by the government of the DBP as a controlling


Commercial Law Review

Dean Eduardo Abella

Why: There are no interests earned on deposits because it is considered

immoral, but there may be profit sharing.


All banks should be organized as a stock corporation and comply with the
requirements of the Monetary Board for licensing. Before a corporation can be
organized, it must go through bank. After requirements submitted to the
Monetary Board and completed, endorsement by Monetary Board to SEC,
which then has a ministerial duty to register it.

Is the bank allowed to lend any amount?

No. The amount of money lent must be secured by titled real properties and it
must be subject to the Single Borrowers Limit, the maximum amount which
any borrower may borrow. DOSRI may borrow from banks on the condition
that it is approved by the BOD in a meeting of the BOD with quorum, without
counting the officer involved in the quorum and approval votes, unless the loan
is part of a package, e.g. fringe benefits.

There is paid-up capital required by the Monetary Board. There is a period

increase in paid-up capital in order for banks to be more stable.

What is the amount of the SBL: 20% of net worth of the bank but may be
increased by 10% of its net worth provided that the additional liabilities of any
borrower are adequately secured by trust receipts, shipping documents,
warehouse receipts or other similar documents transferring or securing title
covering readily marketable, non-perishable goods which must be fully covered
by insurance.

Q: How many directors may a bank have?

A: 5-15, odd or even, no law obliges the BOD number to be odd. If
consolidated, it may have a maximum of 21.

For banks to open branches and ATMs, it must first obtain a permit from the
Banks should have employees on permanent basis.

There must be two independent directors who are neither officers nor
employees of the bank.

Do the SBL and DOSRI include legitimate interests only? No, it includes
illegitimate interests.

Directors and officers not just anybody may be a director or officer. There is
the fit and proper rule.

What is the remedy for SBL: Syndicated Loans where loans from several
banks are obtained.

Fit and proper rule Monetary Board came out with qualifications.
Must be a college grad.

If secured by real property: Loans may be secured by Real Property; however,

according to Section 37, the maximum amount that may be lent is 75% of the
appraised value of the land. If it has improvements, the value lent is not to
exceed 60% of the appraised value of improvements. Improvements must be

Quorum in meetings GBA allows meeting via tele- or video-conferencing

Bank should not acquire treasury shares of its own
Treasury Shares shares already issued by a corporation but which
shares a corporation reacquires in its own name.
Subscribed and Issued Shares no difference between them in terms of rights

Under the law, only corporations under supervision of the Monetary Board may
use Bank or Banking in corporate name.
Banks are prohibited from directly engaging in the business of insurance as an
insurer BUT UB can sell insurance policies of insurance companies which it
may own.

If a bank acquires treasury shares, they should be gotten rid of in 6 months.

Under the General Banking Act, bank should cause to be published at least
every quarter their financial statements.
Clearing House Bangko Central Lending facility for purpose of collecting
checks drawn on one bank but deposited in another.


Commercial Law Review

Dean Eduardo Abella

Ex. BPI Katipunan depositor deposited checks from other banks such as
Metrobank and Allied Bank.
Clearing house is where banks swap checks they received drawn on other
banks. Physically there is no cash involved, but transactions recorded.
Under present rules, if within 24 hours a bank dishonors check, check should
be returned or else considered cleared.
Bank cannot declare dividends if clearing house account are overdrawn. There
is only movement of cash if clearing house account is overdrawn.

In the 1960s to the 70s, there were so many bank closures leading to the loss
of the publics confidence. To restore faith in banking that is vital to the
economy, the Uniform Currency Act was repealed and the PDIC was created.
What is insured: Savings, current, time deposits (credit-debtor relationship).
The PDIC insures only deposits in savings, current or time accounts, not any
other investments even if made with or through a bank. It excludes money
market transactions, and marginal deposits (amount required to open a L/C).
Q: Why are money market placements not insured in PDIC?
A: They are not deposits but investments. There is no debtor-creditor
Money Market Placements transactions through bank but bank is
not borrower. Borrowers are other corporations that need to borrow
for a short time. Reason for Money Market Placements is that normal
loans take time. Bank is an intermediary between the borrower and
lender in the Money Market Placement.
It is lending to another person. Advanced is that in case of bank
closure, you make get Promissory Note by borrower.

Joint Accounts: It is insured separately and independently. Before, when a

bank is ordered closed, all deposits of a person in different accounts in
different banks will be collated. In the present law, joint accounts are insured
separately. So, it is P500k per sole account per bank, and a total of P500k for
all joint accounts combined per bank.
Definition: A joint account is an account in the name of 2 or more
persons. It is indicated by the words and/or (survivorship account,
each can withdraw on his own) and and (all depositors required to
sign withdrawal slip).
Kinds of Joint Accounts:
a. & - all depositors must sign the withdrawal slip
b. &/or or survivorship accounts withdrawal may be made through
the signature of one or all
Under the law, deposits in joint account are presumed co-owned in equal parts
unless the contrary is proved.
Example 1:
Sir + Wife Joint
Sir + GF Joint
Recoverable by Sir
Example 2:
Sir + Wife Joint
Sir + GF1 Joint
Sir + GF2 Joint
Recoverable by Sir



What is the maximum indemnity: P500k per person per bank in the
Philippines, whether in Philippine or foreign currency. If it is a foreign currency
deposit unit, indemnity amount in pesos on the day the bank is ordered closed.


Commercial Law Review

Dean Eduardo Abella

New Central Bank Act

Purpose of law: Because of the bankruptcy of the Central Bank, the Bangko
Sentral was created, having a corporate existence and is controlled by a
board, the Monetary Board.
Composition of MB
1. BSP Governor. The BSP Governor has a term of 6 years, except
when it is to fill a vacancy for an unexpired term. He may be reappointed once for a total term of 12 years.
2. Cabinet Member depends on the President who to send, currently it
is DTI Secretary
3. 5 Fulltime members from the private sector so that the BSP will not
become a dumping ground of political lame ducks. Private sector
representatives need not necessarily be from privately owned private
corporations. They may come from GOCCs such as the DBP, SSS,
GSIS but the appointment is staggered for a 6-year term. They may
be re-appointed once for a total term of 12 years.
Prohibition to Join Private Banks - Within the period of 2 years from
separation from the Monetary Board, neither the governor nor the full time
directors may serve in any capacity in corporations under the supervision of
the Monetary Board (banks, quasi-banks and investment houses), except if he
would be representing the interest of the Philippine Government.
Business: The Monetary Board is obliged to meet every other week because
it has to closely monitor the prices and take action. In every meeting, there
should be a quorum of at least 4. To pass a resolution, at least 4 members
should concur. If the Governor cannot attend, he should send a Deputy
Governor. If the Secretary cant attend, he should send an Undersecretary.
Functions of the BSP
1.) Supervision of the banking system
2.) Manages currency and money supply
3.) Gold purchasing
Q; What is MONEY?
A: Any medium of exchange, anything could be money
Money vs. Currency
Currency is defined by law as notes and coins issued by the BSP and are in

Currency has 2 qualifications:

1.) Issued by the BSP
2.) In circulation, meaning out of the BSP vaults
BSP prints the notes and mints the coins. Production is local but materials are
imported. Notes are not paper; they are cloth. The cost of materials is very
The currency is called Peso. Its symbol is the capital letter P. There are 2
other countries that use Peso; they are Argentina and Mexico. Part of Peso is
called a Centavo. The sign for a Centavo is the small letter c.
A note contains 2 sets of serial numbers; they are located at the upper left and
lower right. They also have 2 signatures on them, one belongs to the
Philippine President, and the other belongs to the BSP Governor.
The life of a note is estimated to be 5 years, but in Metro Manila, it is merely 1
year. If the estimated life is over, it is withdrawn and demonetized, i.e. it loses
the character of money.
Q: May a damaged note be replaced or accepted for deposit?
A: Yes, it may, but it must fulfill the following requirements:
1. If damaged, there must be at least 3/5 of the note present.
2. It must have at least one set of complete serial numbers
3. It must have at least one signature present
4. There must be no intentional defacement (Its a crime). BSP issued a
circular for banks not to accept for deposit or replacement notes
showing intentional defacement.
Coins have a much longer existence. Damaged coins may also be replaced if
there is no sign of filing, clipping or perforation; the reason for this is that the
metal content would be diminished. Ideally, the amount stated is the total cost
of making coins; however, Philippine coins are worth more than their stated
In case of possession of damages coins, the possessor is presumed to have
caused the damage.
The year in front of the coin is the year it was minted.
A: Legal tender is currency in such quantity prescribed by law to be accepted
in payment of obligations.


Commercial Law Review

Dean Eduardo Abella

All Philippine notes are legal tender for all obligations. However, coins are
legal tender only up to a certain amount.
A Monetary Board Circular changed the amount of what may be legal tender
for coins. All centavo coins are legal tender up to P100 while all one peso
coins are legal tender up to P1000. Contrast this with the law that states that
for coins worth 10 centavos or less, they are legal tender only up to P20, while
coins worth 25 centavos and up are legal tender only up to P50.


Commercial Law Review

Dean Eduardo Abella


Q: Why is there a need to specificy the beneficiary? Why not just bearer or
A: Because of obligations to each other.

Governing law: Code of Commerce, which deals with merchants.

Definition: L/C
- It is a letter addressed by a merchant to another merchant to enable the
person names in the letter to attend to a commercial transaction.
- A form of bank facility or accommodation to enable persons to have a
commercial transaction where the buyer is assured of the delivery of the goods
he is buying and the seller is assured of payment.
It is buy and sell.
He is a person, natural or juridical,
having the capacity to engage in commerce and regularly engages in it
Regularly engages means habitual, not necessarily a big volume of
If a natural person:
1.) At least 18 years of age
2.) With the capacity to enter into contracts of sale
If a juridical person partnerships and stock corporations
1.) Organized according to law
2.) SEC Certificate of Registration (corporations)
Persons Involved
1. The sender or maker, who is a merchant
2. The addressee who is also a merchant, and
3. The beneficiary or person name in the letter who may or may not be a
Requirements for a Letter of Credit
1.) The person to whom credit is extended is stated. It must not be a
bearer instrument.
2.) The amount or maximum amount of credit to be extended to that
person shall be stated. It must not be an open L/C. Addressee must
not have the discretion as to how much is to be given under the L/C.
If the requirements are not met, it is called a Letter of Recommendation. A
letter of credit cannot be in negotiable form.

1.) Domestic all parties in the same country; good for 6 months
2.) Foreign different countries; good for 12 months

Who issues L/Cs: Commercial banks as a general rule are allowed to issue
letters of credit, but Monetary Board may allow other banks to issue Letters of
How do L/Cs work
1. Buyer and seller are insecure
2. Buyer goes to the full service branch of a bank to open a L/C in favor
of the seller
3. Bank requires a marginal deposit, the amount required by banks of
the purpose of opening L/C
4. Bank remits the amount to the seller only after the seller presents
proof of delivery
BPI QC requests BPI Cebu to open a L/C in favor of a seller in Cebu.
BPI Cebu communicates to the Cebuano seller to ship the goods and upon
proof of such delivery, BPI Cebu will pay him. Shipper thus ships the goods
and the shipping company issues a bill of lading. If the goods are delivered to
the common carrier and it issues a B/L, it is considered as delivery to the
BPI Cebu gets the B/L from the seller, pays the seller, forwards the B/L to BPI
Buyer pays BPI Manila, claims the B/L, and receives the goods under the B/L
from the carrier.
What is the benefit of L/Cs to banks
Service fees and interest on advance.
Example: Purchase price is P200k. The marginal deposit required is
P120k, from which the bank advances P80k to the seller. Interest on
the P80k advanced by the bank is payable by the buyer to the bank.
What is a Letter of Credit Trust Receipt Line
A trust receipt is a receipt with undertakings. In lieu of a 100% marginal
deposit, the buyer has the option to execute a Trust Receipt in addition to the
marginal deposit. Under the Trust Receipt, the bank releases the B/L to


Commercial Law Review

Dean Eduardo Abella

enable the buyer to acquire the goods which he would sell and either (a) use
the proceeds thereof in paying the bank within a stipulated period, and/or (b)
return the goods unsold.
- A trust receipt is a receipt with undertakings.
- In a trust receipt transaction, the entruster, who has security interests over
the goods, entrusts those goods to the entrustee so that the entrustee may sell
those goods and remit the proceeds of the sale within the stipulated period. If
the amount owing to the entruster has not been met within the period, the
entrustee is to return the goods not sold.
- Trust receipts are issued to guarantee debts due to failure to pay the amount
bank advanced in the Letter of Credit.
Undertakings of the Entrustee
1. To sell the goods and from the proceeds of the sale, remit the amount
owing to the entruster within the period stipulated. The proceeds
mentioned include the profits as long as there is still an amount owing
to the entrustee.
2. If the amount owed cannot be remitted, to return the goods within the

Consequences of the Entrustees Failure:

- Before, there are two views
1. Violation of a TR is a criminal act under Art. 315 of the RPC.
2. Violation of a TR only leads to civil liability.
- NOW, the TR Law explicitly provides for criminal liability and requires the
entrustee to insure the goods against all risks.
When a document has the same stipulations as a promissory note along with
undertakings present in a trust receipt, then it is still considered a trust receipt.
In banks, the transaction is often called an L/C-T/R line because of the
interrelation of the 2 transactions.
- It is the use of TR but is not a trust receipt by provision of law because the
buyer did not intend to sell the goods sold but to use it.

Parties to a T/R
- Entrustee
- Entruster, who has security interests over the goods, e.g. holder of a B/L
which is a document of title
SC: In a TR, the entruster is the theoretical owner of the goods as he
advanced the full payment of the goods.
Note: Trust receipts may be between individuals
Effect of Returning Goods to Entruster
- The entrustee has the option of returning all of the goods to the entruster if
the due date is near and he has not sold the goods to avoid a prosecution for
estafa. In this event, the bank would be the one to sell the goods and deduct
the proceeds from the debt of the entrustee.
- Returning the goods does not extinguish the obligation to pay the amount
advanced by the bank.
Why is there a need for the Trust Receipts Law:
The bankruptcy of bank became rampant from their failure to collect from
borrowing importers who did not remit any amount to the banks after they have
claimed the goods. The P.D. regulating trust receipts was made to protect the
banking system. The PD requires the entrustee to insure the goods against all


Commercial Law Review

Dean Eduardo Abella

Definition: A common carrier is a person natural or juridical who is regularly
engaged in the transportation of goods, passengers or both, offering its
services to the public for a fee.
1.) Transporting goods, passengers or both.
2.) Offering service to the public
3.) For a fee
The common carrier is at liberty to transport what they want.
Q: What is the public?
A: It is not necessarily the general public; it may merely be a narrow segment
of the public, e.g. school bus operator is a common carrier; pipeline is also
considered a common carrier, transporting fuel, and its clients are Shell and
Q: Do you need a motor vehicle?
A: No.
Importance of Classification: The diligence required of a common carrier is
extraordinary diligence.
When to exercise ED:
General Rule: Extraordinary diligence is to be exercised when
the goods are unconditionally placed at the disposal of the common carrier,
until the goods shall have been delivered to the consignee or
until consignee has been informed of arrival of the goods and given a
reasonable opportunity to claim the goods.
Reasonable opportunity is dependent upon the circumstances.
Exception: When the shipper exercises the right of stoppage in transitu.
Q: In case of stoppage in transit, what is the relationship of the common carrier
to the shipper?
A: The common carrier is merely a bailee, where the diligence required is only
that of a good father of a family.

Exception to the exception: Eordinary Diligence if the shipper asks for delivery
back to himself.
Q: Is the common carrier an insurer of the goods?
A: No, the common carrier is not an insurer against all risks related to
When may the CC avoid liability for loss or damage to goods:
1.) When the proximate and only cause is a storm, earthquake, lightning,
or other natural calamity.
2.) When the proximate and only cause is an act of a public enemy in
times of war, whether civil or international.
3.) When the proximate and only cause is the character of goods or a
defect in the container or packaging.
4.) When the proximate and only cause is the act or omission of the
shipper himself.
5.) When the proximate and only cause is the order of a competent
public authority.
REQD: There must be no unnecessary delay in the prosecution of the
voyage. The carrier should not have committed an improper deviation.
The diligence required is still extraordinary diligence (BUT, according to
NCC 1739, it is only Due Diligence).
Q: If not one of these five occurred, might the carrier excuse itself from
A: Yes it may, but it is the obligation of the Common Carrier to prove that
under the circumstances, it exercised extraordinary diligence. The burden of
proof is on the common carrier.
Q: If one of these five occurred, is there a chance to recover from the common
A: Yes, but the burden of proof is on the shipper to prove that there is failure to
exercise the required standard of care, still extraordinary diligence.
Q: May a common carrier and shipper validly stipulate on a standard of care
less than extraordinary?
A: Yes, but it must conform to the following requirements:
1.) Must be in writing and signed by both parties
2.) It must be supported by consideration other than to transport (ex.
3.) The stipulated standard of care must not be less than that of a good
father of a family.
4.) If there are other stipulations, they must be fair and reasonable.


Commercial Law Review

Dean Eduardo Abella

There are 2 prestations in a bilateral contract to transport. With respect to the

carrier its prestation is the promise of the shipper to pay the fare. With respect
of the shipper, it is the promise of the carrier to transport the goods.
Standards of Care:
1.) Utmost diligence of a very cautious person (transportation of person)
2.) Extraordinary diligence (transportation of goods)
3.) Good father of a family.
Note: There is no name for the standard of care in between
extraordinary diligence and that of a good father of family.
The shipper also has the obligation to minimize damage to itself.
Q: When should diligence start?
A: When the carrier agrees to take in the person as a passenger.
Q: May the passenger and the carrier stipulate a lower standard of care?
A: No
Q: Is a common carrier insurer against all risks?
A: No, it is not, BUT in case of mechanical defects or when a common carrier
violates a traffic rule, the common carrier is always liable.
Employees Negligence: The common carrier shall be liable for acts
or omission of its employees although said employees may have
acted without or in excess of their authority
Strangers Negligence: For acts or omissions of other passengers or
third persons, if the common carrier could have prevent death or
injury by merely exercising the diligence of a good father of a family
and it failed to do so, the carrier is liable.
Q: When may a common carrier be liable for moral damages?
A: In the following instances:
1.) Death of passengers in favor of the heirs
2.) When passenger suffers physical injuries
3.) When the common carrier acts in bad faith
A common carrier is liable for moral damages against a waitlisted passenger
whose number is called, given a boarding pass, allowed to proceed to the predeparture area but not allowed to board.


The COGSA is a law of American origin; it was made part of our laws during
the American occupation.
In case of conflict between the Code of Commerce and the COGSA, the
former prevails due to specific provision in the COGSA.
Scope of COGSA
It covers the shipment of goods by sea coming from another country into the
Philippines. The shipment of goods must be covered by a B/L.
It is not applicable to:
1.) Inter-island or coast-wise shipping
2.) Shipment of livestock
3.) Those not covered by BL
4.) Before, COGSA does not apply also to shipment of goods on deck.
But NOW, there is no more transportation on deck because goods are
transported only via containers.
Salient Features

Time of filing claims:

o Apparent Loss or Damage: File it right away, immediately
with the carrier
o Not Apparent: 3 days from delivery
Note: Under general law (Civil Code and Code of Commerce), the
claim must be filed right away if the damage is apparent; if it is not
apparent, it must be filed within 24h from delivery (Code of

Actions of the Carrier on the Claim

o Settle it right away
o Not to act on it
o Reject the claim.
What is the remedy of the consignee in case of rejection: If the claim
is denied, the claim should be filed in court within 1 year from the
delivery of the goods by the common carrier to the arrastre operator.
This is because the transfer of the goods from the carrier to the
arrastre is documented in a tally sheet after an ocular inspection by
the arrastre operator. When the arrastre receives the goods, it


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Dean Eduardo Abella

inspects the goods and lists the defects in the tally sheet. If there are
defects found, they are formalized in the Bad Order Form.
Q: Is the filing of a claim with the common carrier a condition precedent to
recover from the carrier by complaint in court?
A: Under COGSA, no, it is not required. But under the Code of Commerce, it
is a condition precedent and thus constitutes the cause of action.
Q: When goods are insured and turned over to the arrestre operator and loss
or damage is determined, where and when should the claim by the insurer be
A: Claim of the consignee must be filed with the insurer also within one year
from delivery to the arrestre operator. The insurer merely subrogates and
steps into the rights of the insured.
Q: If the insurer did not act on the claim of the insured until after 1y, can it
involve prescription?
A: No. Prescription between the insurer and the insured is as stated in the
insurance policy or Insurance Code.
Q: What if the goods are not annotated as damaged in the tally sheet or bad
order form upon turnover to the arratre, but the goods are damaged upon
turnover by the arrastre to the consignee?
A: The suit should be against the arrastre on the basis of quasi-delict since
there is no pre-existing contractual relation between the arrastre and the
Q: If the goods are insured but no claim is made by the insured against the
insurer within 1 year from delivery of goods, is the claim against the insurer
barred after one year?
A: No.
Q: What if there is no damage annotation on the tally sheet, and the customs
broker received the goods from the arrastre, but upon delivery by the customs
broker to the consigee, there is damage which is not annotated on the delivery
A: Sue the broker on the basis of breach of contract of carriage, because the
customs broker is a common carrier. The ruling is that a customs broker who
offers to transport goods to client as part of services qualifies as a common
Q: In case of missing goods, or, if the vessel arrives but the goods are not offloaded, when should the claim be filed?

A: Within one year from the last day when the carrier had the last chance to
deliver the goods to the arrastre operator, e.g. before the ship sails to another
Q: If the prescriptive period is about to expire, can the consignee extend it by
sending a Demand Letter to the carrier?
A: No.

Qualifications to be a Vessel: Not every watercraft is a vessel; it has to have
the following qualifications:
1.) It must not be a mere accessory to another watercraft (ex. Lifeboats)
2.) It must be registered with the MARINA
3.) It must be used to transport goods, passengers or both
4.) It is seagoing
Q: Who may own a vessel?
A: Anybody. If a vessel is owned by more than one person, there is a
disputable presumption that a partnership exists.
Hypothecary Rule
The limited liability of a shipowner.
It is the value of the vessel, plus
earned freightage plus
insurance, if any.
Q: Who participates in admiralty?
A: Those involved in navigation (crew) and housekeeping (compliment)
Crew of a Vessel:
1.) Captain
The title captain is used to refer to the commanding officer of a ship
that goes abroad.
The title master is used to refer to the commanding officer of a ship
that is engaged in local/inter-island travel.
A ship captain has three roles:
a. Represent the owner of the vessel
b. Be the technical director of the vessel
c. Represent the country where the vessel is registered.
2.) Mates (1st, 2nd, 3rd etc.)
3.) Engineers.


Commercial Law Review

Dean Eduardo Abella

Contracts in Admiralty:
1.) Charter party
2.) Bottomry
3.) Respondentia
4.) Marine Insurance

Procedure for General Average:

1.) Captain calls a meeting with the representatives of the owners of
2.) They make a decision to throw away certain cargo.
3.) If the decision is urgent, the captain may choose from the largest and
of least value proceeding to the smallest of the most value.

Charter Party
Definition: A contract of lease over a vessel

Supercargoes: representatives of owners of cargoes. They sell cargo for the

owner. Generally, they are only able to use profits to buy goods. If they have
a special power of attorney, they may use capital to buy goods.

1.) Bareboat/demise, where the lessor provides only the vessel, without
crew, stores (things you eat), provisions (water and fuel).
2.) Affreightment
3.) Time-charter, or a lease for a specific term of the vessel, with stores
and provisions
4.) Voyage-charter, or a lease of a vessel for a voyage or series of
voyages, with stores and provisions.
According to the Supreme Court, the true charter is the bareboat charter.
The time and voyage charter are merely subtypes of affreightment, which is a
contract of carriage.
Ship Agent: Corporation representing the owner in every port where the
vessel may make a call or stop. The ship agent is in charge of provisioning the
Q: What will be the liability of a ship agent for procurement of provisions?
A: A ship agent is solidarily liable with the ship owner for contracts entered into
for provisions of the vessel. This liability is different from that of a mere agent,
who is not liable if he discloses his principal and acts within the authority given

Bottomry: Loan taken by the ship-owner secured by the vessel. If the vessel
sinks, the creditor loses the right to collect and the obligation to pay is
extinguished. If loan exceeds the value of the vessel, the excess is an
ordinary loan.
Respondentia: Loan taken by the cargo owner and secured by the cargo. If
loan exceeds the value of the cargo, the excess is an ordinary loan.
Marine Insurance: Insurance over the vessel or freightage, cargoes or profits
expected from cargo.
Accidents in Admiralty:
1.) Collision, or the impact of two or more moving vessels
As opposed to Allision,
the impact of one stationary and one moving vessel
2.) Arrival under stress, or when a vessel is forced to sail to the nearest
Q: What is the obligation of a ship captain in arrival under
A: The captain must execute a MARITIME PROTEST, a
sworn statement where the captain relates what transpired.

Husbanding Agent: Agent in charge of freightage and settlement of averages

Q: What are AVERAGES?
A: In admiralty, they refer to damages
Types of Averages:
1.) Gross/General Average, or damages suffered by the vessel or
owners of cargo that shall benefit not only the ship-owner but also the
owners of the other cargo.
2.) Specific/Particular Average or those that do not benefit anyone.

a. Natural calamity along route.
b. Avoidance of pirates
c. Loss of provisions
d. Accident that renders the
prosecuting the voyage




3.) Shipwreck
Q: Is the owner of a barge a party to a contract of carriage?


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Dean Eduardo Abella

A: No, he is not a party, unless the barge is self-propelled. The contracting

party is the owner of the towing vessel.

Currency of Indemnity: Before, original indemnity used to be fixed in Swiss

Francs; now, this was changed to US Dollars.

Three zones of time in Collision:

1.) First time anytime the danger of collision appears.
2.) Second time from the time the danger appears until it becomes a
practical certainty
3.) Third time from the time it becomes a practical certainty to impact.

What are the fixed liabilities of the carrier

1.) Death of a passenger: $100k, no question asked.
2.) Physical injuries: $100k maximum, depending on the severity of the
3.) Checked-in articles: $1k per kilo UNLESS a greater value is declared
and the fare corresponding to the bigger value is paid
The value must be proven to be at least $1/kilogram;
otherwise it is only value you can prove.
4.) Hand-carried articles: $1k maximum regardless of weight and actual


If there is a collision of two vessels and it cannot be determined who is at fault,
each bears his own loss. However, both ship-owners are solidarily liable for
the damage to all cargoes.

Why are liabilities fixed: Because of the different ways to assess damages
for injuries or loss of goods

What: It is an agreement among sovereign nations for:
1.) Having uniform documents in international air transportation,
2.) Fixing the liabilities for international air carriers.

What to do to claim the full amount:

1.) Declare the value
2.) Pay fare according to the value

Who are the parties:

The signatories are referred to as HIGH CONTRACTING PARTIES.
The Philippines was not an original party because at the time, it was not yet a
state and it had no aircraft. Ph was a party by accession to the US.
- One where the port of origin is in one country and the port of destination is in
- One where the port of origin is in one country and the port of destination is in
the same country but the agreed stopping place is in another country. This
often occurred when there were multiple colonies, e.g. LA (US) Tokyo
(Japan) Guam (US).
- Movement of goods by land or water to the aircraft
What documents must be uniform:
1.) Passenger Ticket, issued by the carrier
2.) Baggage Check, the white strip of long sticker with a bar code
3.) Airwaybill, it is a B/L


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Dean Eduardo Abella

Who may render public service
- Ph citizens or
- Corporations with 60% ownership by Ph citizens

According to the SC, there is an employer-employee relationship

between the driver and the operator by reason of the control test.
OLD OPERATOR RULE: If someone is already rendering the service, it must
first be allowed to offer to add the same service

Grandfather Rule: Control test where the citizenship of the

corporation owning another is taken into consideration in determining
the 60% Filipino ownership
Who regulates public service
Under the 1935 Constitution, it was the Public Service Commission.
Now, it is regulated by different government agencies: DOTC, LTFRB, CAB,
MARINA, LGUs (lakes, rivers)
How to engage in public service
1. Application by petition
2. Hearing
authority issued by the government regulator to enable persons to
engage in public service
NECESSITY: Latter authorizes public service for which service, a
legislative franchise is required. This is because franchises are no
longer exclusively legislative.
Requirements or Qualifications to engage in PS
1. Ph citizenship
2. Willingness to engage in PS
3. Financial capacity why:
a. Acquiring equipment to engage in PS
b. Settling damage claims
KABIT SYSTEM it is an illegal manner of engaging PS by doing it
through others where it does not itself possess of the qualifications
PRIOR APPLICANT RULE: If two or more persons apply to render the same
public service, the one who first filed the application should be granted the
Example: Boundary System where the driver pays an amount to the
operator of a jeep for use of the motor vehicle for an agreed period.


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Dean Eduardo Abella


Purpose of law: to encourage and entice foreign investments to bring in more
foreign currency. It was formerly illegal for transactions to be paid in foreign
currency or in relation to foreign currency.
Salient Features

Foreigners can own 100% of any enterprise related to exports so long

as it is not covered by Negative List A & B

Negative List A, activities reserved by the Constitution or other

special laws to Filipinos
e.g. advertising, public service

Negative List B, activities that are exclusively for Filipinos

e.g. those relating to ammunition and firearms (unless the Secretary
of National Defense consents), pyrotechnics, nightclubs, beerhouses,
steambaths, and massage parlours.

Inward Remittance: A foreigner may also own 100% of a domestic

market enterprise if the foreigner remits and makes an investment
worth $200k or equivalent but not in areas where there are health
related risks ex. Bars, beer houses, massage parlors, sauna baths,
dancing halls.

If the enterprise advances technology, as determined by the

DOST and hires more than 50 Filipino employees; the investment
must also be no less than $100k; or

If the alien is a former natural-born Filipino, then he is allowed to

own urban properties with an area of 5000sqm. or rural
properties up to 3 hectares. If both spouses are formerly natural
born Filipinos, their total lands must not exceed the above-stated
land areas, and the land acquired must be in different locations.

Filipino Corporations:
a. Domestic corporations must be at least 60% owned by
b. Foreign corporations must be 100% Filipino owned.


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Governing Law: Intellectual Property Code. It is a compilation of old laws on
patent, copyright, trade marks, trade names, service names, service marks.
The Code is administered by the Intellectual Property Office. The head is the
Director-General who must be at least 40 years of age and a lawyer. The term
of the Director-General is 5 years, eligible for a single re-appointment.
However, the first Director-General appointed has a term of 7 years without reappointment.
Kinds of Intellectual Properties:
1.) Patents
2.) Copyrights
3.) Industrial Designs
4.) Layout or Topography of Integrated Circuits
5.) Trademarks and Tradenames
6.) Geographic indication
7.) Trade-Related Aspects of Intellectual Property Rights

What is a patent: It is issued upon an invention, granting the exclusive right to
mass produce or license the mass production of the invention.
What are patentable inventions?
1. New
2. Involves an inventive step
3. Capable of industrial application
What is NEW:
It is new if it is not part of prior art and if it is a different technology.
eg. Heat-operated microphone
GR: It involves an inventive step if it is not just newly discovered but
involved a process of trying this and that until one finds what works.
eg. X tripped and fell on carabao grass, face first and discovered its
magical effect on pimples. This cannot be patented because it is merely
discovered without any inventive step. BUT IF X first tried guava leaves,
then malunggay leaves, then garlic, then chili, and then flour to make a

paste to cure pimples, then such involved an inventive step and is thus
E: Microorganisms
eg Those which improve the digestive process or eat garbage.
The invention develops a new industry or an existing one for mass
production of the invention. It could lead to development of new or
existing industry.

What are not patentable inventions?

1. Those contrary to law, eg substitutes for shabu or prohibited
2. Those contrary to morals or public order, eg vibrator which moves
back and forth at different speeds. HOWEVER, though these may
not be patentable, they may be mass produced because their mass
production is not prohibited by law.
3. Mere concepts or ideas, eg sound makes people move
4. Mathematical solutions
5. Surgical procedures, eg horizontal cut for caesarian birth.
HOWEVER, the gadgets used are patentable.

To whom are patents issued?

1. Inventor
2. Co-owners IF two or more invented it UNLESS there is an agreement
to the contrary
3. One who first files an application IF the invention was arrived at by
two or more persons individually and independently
4. Employer IF the employee-inventor was hired to work on the
invention, UNLESS there is agreement to the contrary
eg. Chemist is hired by AVON to work on makeup products
5. Employee-Inventor IF he was hired to do something else, though he
made the invention during his working hours
eg Security guard invented something while on duty
What is the advantage in patenting ones invention: It is only the
patent holder who gets the exclusive right to mass produce the
invention or to license the same.
How do you know if an invention is already patented?
The patent symbol P and number are already in the invention itself.


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Dean Eduardo Abella

How long is the duration of a patent: 20y from the filing of the application
How soon does the applicant get the patent: Only god knows
1. VOLUNTARY, or by agreement between the patent holder and the
Can the holder just impose anything? No, there are prohibited
stipulations and the list is not exclusive. The list includes the number
of products produced; prohibition on export; limit on the price of sale;
source of raw materials, which must be a person nominated by the
holder; hiring of employees which must be recommended by the
holder; any other. These are prohibited because of the great moral
ascendancy of the holder over the applicant
What is the right of a patent holder in the license:
ROYALTIES. These are not in any amount because the IPO
prescribes the amount and computation
NOTE: Patent and the patented article are two different properties
that must be dealt with separately.

How: A person applies with the IPO for a license to mass produce a
patented article.
Proceedings are then held before the
IPO. The licensee would still be liable for royalties

When the patented article is food or medicine

And it is not being mass produced despite demand for it
Or its current mass production cannot meet the demand for
the product

Is any unauthorized copying of a patented article an infringement?

NO. The following do not constitute infringement:
personal and exclusive use
use by the government, BUT it must pay royalties
research and development
Unauthorized copying
Patent must be registered

Copying a product of another and passing
them off as ones own. This is a felony.
Product may not be patented

What are the remedies of a patent holder against infringement?

1. Civil: Injunction and Actual Damages (Royalties)
a. Prove actual damages. This is not easy, so just ask for
b. Ask for royalties
2. Criminal: ONLY IF the infringement is repeated

It is a combination of lines, or of colors, or of lines and colors. Lines need not
be straight.
eg Shirts with stripes; floral designs; Burberry and Luis Vuitton

What: The pattern of a mother board is intellectual property.

What is a TRADE NAME:
The name that a person gives to his products to identify them and to
distinguish them from the products of others.
How is it different from a BUSINESS NAME: A business name is
the name that a person uses to identify his place of business.
It is governed by the Business Names Law. If using a business name
different from true name, you register with the DTI, Bureau of
Domestic Trade. There is a need for a public record of who owns
businesses in order to know who to sue. This is needed for signs or
printed documents.


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Dean Eduardo Abella

It is a sign, emblem, or mark that a person uses to identify and distinguish his
products from that of others.
It is the name, sign, emblem, or mark that is used to identify service (eg. Good
Year Servitek, Rapide). It covers both things and services.
What is the DURATION OF PROTECTION: 10y, with limitless renewals. But
after five years, the owner must file an affidavit of use (Declaration of Actual
Use) of the Trademark or Trade name with the IPO over the past period.
Mj: Under the IPC, the Declaration must be filed 3y from filing and 1y
from the fifth anniversary (124.2, 145).
Why do you need to register Trademarks or Trade names
To enjoin the use by others or to file a suit for infringement
Certain Rules
Exclusivity: Once a TM or TN is registered in the name of a person,
no other person may use a similar or confusingly similar name or
mark in connection with a similar or closely-related product.
eg. You cant use Del Monte in connection with foodstuff but
you can use it for underwear.
Trade names may be trade marks at the same time, but both must be
registered to be protected. eg Selecta is a trade name and how it is
packaged is a trade mark
Trade names and Marks include service name and mark
Taste is not protected.
First to File System; prior use is not required


Under this doctrine, there is colorable imitation when a person gives his
product an appearance that is similar or confusingly similar in appearance
to the product of another calculated to make the ordinary buyer believe that
his product is the same as the product of another.
Mj: Under jurisprudence, it is such a close or ingenious imitation as to
be calculated to deceive ordinary persons or such a resemblance to
the original as to deceive an ordinary purchaser giving such attention
as a purchaser usually gives, as to cause him to purchase the one
supposing it to be the other.
Q: Who is an ordinary buyer?
A: Buyer relying on the general appearance, images, and color
combinations of products.

1. Bottles of Del Monte are patented. One case involved the Sunshine
brand of ketchup that used the bottles of Del Monte because the
owner of Sunshine could not afford to make his own bottles. The
manufacturer replaced the labels of the bottles but the labels had the
same color combination. Add to this the fact that the bottles had
markings that they were products of Del Monte. It was not ordinary
buyers that were misled but also those that read the labels.

Beer na Beer Case. In the 70s, Asia Brewery created Beer na Beer
(Beer housen) that had the same taste as San Miguel (pale pilsen),
but Asia Brewery also used the same shape of bottles. The Supreme
Court held that there was no unfair competition, applying the holistic
test. The beer of AB could not be mistaken for San Miguel because
the prices of the former are cheaper.
1.) DOMINANCY TEST when the prevalent features are likely
to confuse one product with another. To determine whether
there is possible confusion between products, look into the
dominant features.
2.) HOLISTIC TEST consider not just the prevalent features
but also other factors. Even if there is similarity, there is
likelihood that they will not be confused with each other.
Example of Dominancy Test
1.) Converse vs Custombuilt both shoes use the same star
2.) Alaska All Purpose Milk vs Alacta Infant Preparation not
likely to be confused with each other because each is used
for different purposes. One if infant formula, the other is
cows milk.
Del Monte in shoes.
Esso in cigarettes.


When a name is used so long and so exclusively to identify a product, that
whenever the name is mentioned, reference is readily made to said product,
although the name is not registered because it is not registrable, no other
person may use that name in connection with a similar or closely related


Commercial Law Review

Dean Eduardo Abella

Why do we have this doctrine: Because not all names are registrable.
Geographic words or names
Names, sign, or portrait of Past Presidents, UNLESS the widow
Flags and simulations
Coat of arms and simulations

Scope of Copyright
Other intellectual creations, such as books, musical compositions, adaptations,
song lyrics, melodies, photos, computer programs, and slogans.
Copyright is one property and the copyrighted work is another
There is copyright for the lyrics and another for the melody in
Adaptation of musical compositions are works patterned after the
works of others
Patterns of TV and radio programs are not copyrightable
Who owns copyright
1. Intellectual creator
2. Co-creators IF 2 or more persons created the same, UNLESS there is
an agreement to the contrary. There is no first to file doctrine due to
impossibility of making the same intellectual creation.
3. Employer IF the person is hired to do intellectual creation, UNLESS
there is an agreement to the contrary.
4. Employee IF he is hired to do another thing, even though done during
work hours.
5. Commissioned person: If a person is commissioned to create
intellectual property, the work belongs to the commissioner while the
person commissioned owns the copyright, UNLESS there is an
agreement to the contrary
Is registration required for protection? NO.
system, NOT the first-to-file.

It follows the first-to-use

What is the DURATION OF COPYRIGHT: Copyright is protected from

creation and lasts until the lifetime of the copyright holder and 5y from his
death (which is counted from the first day of the year following his death).
If a person wants copyright protected, within 30d of becoming public, register
the work.
Mj: BUT under the IPC, Registration is purely for recording the date of
registration and deposit of the work and shall not be conclusive as to
copyright ownership or the term of copyrights or the rights of the
copyright owner, including neighboring rights.
Advantage of Copyright: Copyright cannot be attached while it belongs to the
intellectual creator. However, when transferred to another, it may be levied.
This is different from patent which can be attached even if owned by the
intellectual creator.


1. A copyright is an economic right. Economic rights include:
a. the right to mass produce the work or to license it;
b. the right to make other versions of the work
2. A copyright includes moral rights, or the right of the owner to demand
that his authorship be acknowledged and in a certain manner of
presentation. If there are errors, he can demand rectification of the


Civil action for injunction and damages

Criminal prosecution. Repetition of infringement is not required! The

very first act of infringement is already criminal. But for the
prosecution of piracy, the original is required. The law provides for
the destruction of printed materials, plates and stencils.
Are there acts of copying that are not infringing? YES
1. Personal use, one copy only
2. Quotations of portions from books, with acknowledgement
3. Fair use of legitimate computer programs, eg one computer, one
4. Libraries with old books may reproduce these books so long as they
are no longer being published. However, this is only for library use
and not for resale.
5. Rebroadcasting, which is only a simultaneous broadcasting.
Q: Whom do our intellectual property laws protect?
A: The following:


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Citizens, nationals
Residents with an effective establishment
Residents of a country that participated in an international convention
where the Philippines also participated.
Citizens of countries that offer reciprocal rights to Filipinos.

Q: May foreign corporation, not registered with the SEC as a foreign

corporation, sue in our courts for the protection of intellectual property rights?
A: Yes, Philippines is part of Paris Convention for Protection of Intellectual
Property Rights.
Mj: As long as there is reciprocity.


Commercial Law Review

Dean Eduardo Abella

Insurance is a contract whereby one person, known as the insurer, agrees to
indemnify another person, known as the insured, against loss, damage, or
liability arising from an unknown or contingent event.
What is an ASSURANCE: It is a life insurance initiated by the
beneficiary himself.
1. Insured
2. Insurer
3. Assured
What are the CHARACTERISTICS of an Insurance
1. Aleatory contract. It involves the assumption of risks
2. Indemnity contract. It is not a wagering contract where one invests
and hopes to profit. In insurance, one invests to be restored to the
same status prior to the risk happening. The insured does not expect
to profit.
3. Risk-distributing. It is not a risk-shifting device as guarantees or
Insured does not expect to profit:
ex A new car is insured against theft so that in case of loss, the insurer
gives the insured money to acquire another car.
In life, the money is given not to buy another person but to divert and
assuage the feeling of loss
The insurer insures the same risk with another. eg Your life is insured with A
for P10M. Then A finds out that you are entering politics, and thus the
chances of dying increased. A thus goes to B to reinsure your life for P6M.
Thus, when you die, A pays only P4M from his own funds, while B pays for
Q: If the insurance company is bankrupt, can the beneficiary claim
from the reinsurer? It cannot, because there was no privity of
contract. However, the beneficiary may still file with the bankruptcy
court because the claims against the reinsurer are part of the
receivables of the corporation. The reinsurance will be part of the bulk
of assets of the insurance and be distributed according to the Civil
Code provisions on preference of credits

Who may be an INSURER

1. GR: Only CORPORATIONS may be insurers, NOT individuals or
E: Insular Life (previously a limited partnership but now a mutual
benefit company)
Why: In cases of individuals or partnerships, they may predecease
the insured
2. Certificate of Authority (a yearly license) must be obtained from the
Insurance Commissioner. The insurer must first obtain a clearance
from the IC, who will issue a formal indorsement of incorporation
papers to SEC. The Insurance Commission prescribes a minimum
paid-up capital for insurers. For non-life insurance it must be P250M,
for life insurance it must be P500M. By 2016, the minimum paid-up
capital required for both is P1B.
Who may be INSURED
Anyone with an insurable interest.
A person who has such a relationship to the thing or life insured that he will
benefit from its preservation or damnified by its loss or destruction.
Kinds of Insurance

Property or non-life, insurance over a thing

Life, over a human life

Insurable Interest in Property Insurance
1. Existing right, eg mortgagee
2. Expectancy founded on an existing interest, eg purchaser of crops
3. Inchoate right founded on an existing right, eg SHs of a corp.
When must Insurable Interest exist?
At the time of taking the insurance and at the time of loss, EVEN IF in the
interim, it does not exist.
Insurable Interest in Life Insurance




Another upon whom one depends for support

One who is obliged to pay him a sum of money or whose death may
delay the performance of an obligation, eg Debtors, obligors

Another upon whose life an estate depends, eg usufructuary who

sells his usufruct to another, reservista in reserva troncal


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condition. The policy was therefore rescinded and refused to be paid

because of concealment of a material fact. The SC affirmed the
insurer. What is concealed or misrepresented need not be the
proximate cause of death. HOWEVER, the insurer must refund the
premiums paid.

When must Insurable Interest exist?

At the time the insurance is taken; thereafter it need no longer exist.
Q: If one is insuring a debtor, for how long is the insurance effective?
A: Theoretically, there is no limit. Insurance is effective even after
payment because insurable interest in life insurance should exist only
when it is taken. However, in practice, it is only up to the end of the
Q: What is meant by upon whose life an estate depends?
A: An example is when the assignee insures the life of an assignor.
Another example is in case of reserve troncal, the life if the reservista is

Can the insurer rescind the policy at any time? NO. 2y!

As a general rule, the insurer is entitled to rescind the policy only within
two years from the last reinstatement or from issuance of the policy.
OTHERWISE, after the two-year period, the insurer can no longer contest
the insurability of the insured.

How does one get to be insured?

One must file an application for insurance coverage with the insurer. The
application form asks basis information and representations.
These are matters truthfully stated by the application in the application form,
which information may influence the insurer in acting on the application.
Untruthful statements on matters which may influence the insurer in acting on
the application.
It is the omission or neglect to communicate what one knows and ought to
The misrepresentation of a material fact entitles the insurer to rescind the
Who determines materiality: It is the insurer because materiality is
determined by the influence which the misrepresentation or
concealment has on the insurer in assessing the risk it is to assume.
Case of Sun Life Canada: The person applied for insurance
coverage. In the application form, there was a question on whether or
not the applicant had any consultation or treatment with a doctor for
the past two years. It was not answered, and the policy was issued.
The insured then died from a plane crash. It was discovered by the
insurer that the insured had been previously hospitalized for a heart

EXCEPT! In cases of FRAUD OF THE VICIOUS TYPE, the policy may be

contested beyond two years. eg When the applicant for life insurance
substitutes his urine sample.

In PROPERTY insurance, the property is insured for a value over the value of
the insurable interest. It is a void insurance as to the excess.
eg Property is P800 worth but is insured for P1M.
Why only in property insurance: Life is incapable of pecuniary
estimation. BUT IN PRACTICE, earning capacity is taken into
consideration in determining the policies.
What is the VALUE OF THE PROPERTY? Acquisition cost and
replacement costs, estimated at the value of the property at present.
In PROPERTY INSURANCE, a person insures his property for an amount less
than the value of his insurable interest. This is valid.
eg Property is worth P1M but the fire insurance taken is only for
What is the effect in case of loss:

In case of total loss, the insurer pays the amount insured in full.

In case of partial loss, the insurer only pays the amount insured
in proportion to the total value of the thing insured


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eg Property is worth P1M, and is insured for P400k. If the

loss in estimated at P200k, the amount of the indemnity is
only 40% (400k / 1M) of P200k, which is P80k.

It is similar to co-ownership and exists only in practice. It can arise in two
situations: in double insurance and in under insurance (full and partial loss).
DOUBLE INSURANCE: When the same thing and the same interest
are insured against the same risk with more than one insurer. There
are thus two or more insurers who apportions the indemnity to the
extent of the amount agreed upon under the policy. It is valid as long
as the total insurance coverage is within the insurable interest.


A policy is the instrument embodying the insurance.

It must be printed. What is not printed is the personal information

of the insured.

Policies of insurers contain almost identical provisions because

drafts are pre-approved by the Insurance Commissioner to avoid
1. OPEN, where parties agree on the maximum amount of insurance
coverage and the premium is paid on such amount, BUT the value of
the thing insured is determined at the time of loss. This is availed of
when the prices of the object fluctuate.

VALUED, or when the parties have already agreed on the value of

the thing insured; eg Car is valued at P1M. In case of loss, the
indemnity shall be that agreed upon.


RUNNING, which contemplates successive insurance contracts

where the insurance coverage over goods sold are transferred to
goods which serve as replenishment. Insurance coverage on some
things, after they have been disposed of, shall also apply to the
replacements. eg. Merchant on his inventory and structure; Grocery

UNDER-INSURANCE: In case of partial losses.

Example 1: Property is worth P1M. It is insured with A for P500k, B
for P300k, and C for P200k. If there is a loss estimated at P400k,
who pays the loss? Is it A because he insured the property for
P500k? NO. The indemnity is shared proportionally as follows:
Amount insured
Total amount insured

THUS, the liability of

A is (500k/1M) (400k)
B is (300k/1M) (400k)
C is (200k/1M) (400k)

x Amount of Loss

or P200k
or P120k
or P80k.

Example 2: If the property worth P1M is insured only for P600k

(under-insurance), the owner becomes a self-insurer to the extent of
P400k and bears the risk of loss alone like someone who did not
insure his property. In this case, the property owner is considered as
a co-insurer.
Example 3: In case of partial loss in under-insurance where the value
of the property is P1M and the loss is P200k, the loss is apportioned
Insurer is (600k/1M) (200k)
or P120k
Owner is (400k/1M) (200k)
or P80k


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Dean Eduardo Abella

What is Life Insurance: It is the policy where the insurer agrees to pay the
indemnity in case the insured dies. It includes casualty insurance, which also
insures against death, whether natural or accidental
1. TERM, or when the insurance coverage is for a definite period agreed
upon at the beginning. The parties agree on a period of insurance
coverage. The premium is low because it does not have nonforfeiture values.
a. If the insured survives, the policy expires.
b. As a general rule, the surviving insured does not get
c. The exception is a contract of ENDOWMENT, where the
insured will receive the face value of the policy if he survives
the expiration of the term but he is no longer insured. If he
dies within the term, the amount will be paid to his

ORDINARY, or when there is no term and the insured remains

insured as long as he pays the premium. The duration depends on
the contract or policy. Premiums are thus payable for as long as the
insured is alive.
OLD! Upon reaching such age, the amount of the policy is
paid because the contract of insurance had lapsed. As to
the insurer, the insured already died.
b. There are variations of life insurance. 20 pay life is when the
insured pays for the full premiums for 20 years while pay life
at 65 is when the insured pays the premiums until the age of


These are living benefits. These do not exist in term insurance where the
insured only gets the face value of the policy.

Example: In Year 1, the premium of P20k is paid and the insured survives. In
Y2, P20k is paid and the insured survives. At this point, the P40k paid goes
down the drain if the insured survives because of the overriding commissions
of salesmen. The case value begins to accumulate on the third year. Thus, in
Y3, from the premium of P20k, the cash value is P1k and the rest goes down
the drain. In Y4, the cash value is now P2k, and so on. The longer you pay
premium, the more goes to the cash value, such that in Y20, 80% of the
premium paid is cash value.
What is its advantage: if you need money but you want to remain insured, you
can first surrender the policy and borrow the cash value. If you are unable to
pay, interests are charged.
If the policy is returned and the premium is no longer to be paid.
insurance ceases.


When: The insured, without having to pay additional premium, is insured for
the rest of his life at an amount corresponding to the cash value, and no longer
at the original amount. The insured is fully paid for the rest of his/her life but
for a lower amount of insurance.
Example: Insurance is originally for P1M, but now, he is insured only for P600k
to be paid from his cash value.
When: When the insured is no longer paying an additional amount but is still
insured at the same price, but only for a specified duration.
Example: The insured is originally insured for P1M, for 21y5m. If he dies, the
beneficiaries get the amount in full. If he survives, the policy lapses.
What is the nature of these non-forfeiture values? They are alternative.
Normally, the policy stipulates that upon failure to pay the premium, the
insurance would be converted into paid-up or extended.
NOTE: Many insurers now offer participatory plans. The insured, although not
a stockholder, receives a portion of the net profits of the insurer.

When: From the third year of premium payment, part of every premium
payment made by the insured is set aside by the insurer for the insured. Every
year, the rate of case value increases.


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These are the amounts the insured has promised to pay the insurer to keep
the policy active.
How is it computed in Property Insurance
As a general rule, they are computed on an annual basis and fully paid in
How are premiums paid: CASH ON DELIVERY (COD) of policy. In the
policy, there is a printed acknowledgement of premium payment. Policies
thus serve as receipts as well.
May premiums be paid on credit and in the meantime, be insured already?
These days, premiums may also be paid by credit card which is as good
as cash. According to the SC, it is not prohibited by law. THUS, when the
risk happens when the premium is not yet paid, the insurer is obliged to
pay as long as the premium is paid within the credit term. The insured
must thus pay the premium first before he files his claim.
UCPB v. Masagana: Masagana procured fire insurance from an agent. It
was not able to pay immediately because of the internal processing time
of the check. The policy was delivered to Masagana, but before its check
was released to the agent, fire broke and damaged the properties.
Masagana tried to pay the insurer and the insurer accepted. The following
day, it filed a claim, but the claim was rejected because premium had not
been paid. The SC considered the insurer in estoppel because it was
regular procedure for the insured and insurer to pay at a date later than
the effectivity of the policy. There was a customary date of payment.

o SHORT-TERM RATES, where the insurance is for a period less than
1y, thus the rate is on a short-term rate.
o HEIRS BOND, where the premium is computed and paid on an
annual basis but for two-years worth. This is in line with the
requirement in the Rules of Court to answer for the claims of creditors
and excluded heirs in extrajudical settlements.

Note: The more premiums are paid, the higher the amounts because
of high administrative costs.
When do you pay the premiums? Every time a premium is due in a
life insurance policy, there is a ONE-MONTH GRACE PERIOD. If the
same is not paid, the amount is deducted from the insurance.
Why is there a grace period? Insurers do not want their
policies to lapse.
What if the insured fails to pay after 1m?
accumulated cash value would cover the unpaid premium as a
Example: Premium is due on Dec. 15, 2012. It remains
outstanding until January 22. The policy could have lapsed
already but the accumulated cash value was used as a loan to
pay for the premium. If the insured dies, the insurer pays the
policy less the amount of the loan and the interests.
2. IF there is no such clause, the policy lapses.
What are the options of the insured when the policy lapses?

He can apply for a new policy (BUT with higher rates

because he is now older)

He can apply for a reinstatement of his policy, where the

premium is at the original rate, BUT he must first pay all
accrued premium and interests due in lump sum. There is
no limit as to the number of times the insured reinstates his
insurance. He must either undergo the same process for
application of a new policy, or merely issue a Health
Statement. HOWEVER, it is best not to reinstate because
the contestability period is renewed.
NOTE: Reinstatement is not a matter of right, but
discretionary on the part of the insurer.

How is it computed in Life Insurance

It is computed annually but the frequency of payment depends on the
agreement of the parties.
Annual payment is cheapest; Semi-annual or semestral is higher than
the annual; Quarterly; Monthly; Daily (for industrial life insurance
taken by a group of persons) which is the most expensive premium


Commercial Law Review

Dean Eduardo Abella

What are LOSSES in Property Insurance?

1. PARTIAL, or when only a part of the thing insured is lost. There is
partial loss only in property insurance.
2. TOTAL, or when the thing is lost in its entirety.
BUT in Marine Insurance, total loss can either be:
a. When more than of the thing insured is lost or
damaged, or
b. When the damage is not big but to put the thing back to
its original condition, more than of its value will have
to be spent
When is the insurer obliged to pay?
If the proximate cause of the loss or damage is the risk insured against,
although the direct and immediate cause is not the risk insured against.
eg House is insured against fire. During a storm, a lightning hit the
electric post near the house. The firemen directed the water against
the post and as a result, the post fell and collapsed on the roof. The
damage is covered by the insurance. Though the house was not
directly damaged by the fire, it was the burning of the electric post
that caused the damage.
What must the insured do in case of loss or damage?
1. He must file with the insurer: a claim for indemnity and a
preliminary proof of loss or damage
eg Pictures are sufficient proof. They need not be in the same degree
as required by courts.
In practice, the insurer refers the claim to an INSURANCE
ADJUSTER, an independent third party who is licensed by the
Insurance Commissioner and paid by the insurer to determine the
extent of the loss or damage, and to inform the insurers who acts on
his recommendation.

Who may be a BENEFICIARY

GR: The insured may designate anyone. Beneficiary need not have
insurable interest in the life of the insured.
o Those disqualified by law from making or receiving donations inter


Guilty of adultery. BUT One may designate his kabit who is single
and who he sees only during lunch because there is no adultery and
no cohabitation.
Government officers

How many beneficiaries may be designated?

1. PRIMARY, one whom the insured wants the proceeds ahead of the
2. CONTINGENT or SECONDARY, in case the primary can no longer
receive the value
NOTE: In the absence of a qualified beneficiary, it pertains to the
estate of the insured.
How may beneficiaries be designated?
1. IRREVOCABLE. This is the general rule. The written consent of the
beneficiary is required in case of revocation and change.
Why require written consent? Because in effect, all rights
under the policy have already transferred to the beneficiary.
where the innocent spouse may revoke without it.

REVOCABLE, where the beneficiary may be changed at any time.

There is a small box in the application form if the insured wishes to
the designation to be revocable.

In case of death, what are required to be filed with the insurer?

1. Death Certificate
2. Birth Certificate, to ascertain the true statement of age when the
insured applied for insurance
If there is a misrepresentation on age: This is a material
misrepresentation. BUT if the two-year contestability period
has lapsed, the insurer is allowed by equity to adjust the
amount of insurance indemnity based on the true age of the
insured. The premium that the insured paid will be used to
pay for an amount of insurance coverage corresponding to
your true age. If the insured is younger, this has no effect.
This applies only if the insured is actually older than his
stated age.
3. Sworn Affidavit from two persons that they know the insured and that
he is already dead
How to settle claims in property insurance
a. Pay the cash value
b. Replace the thing with another property of the same kind and quality


Commercial Law Review

Dean Eduardo Abella

Note: This is common in motor vehicle insurance, where

other insured abandoned the insured thing to the insurer.
Insurer salvages parts from the vehicles left to replace those
needed in the currently insured vehicle. However,
replacement needs to be in good condition

A: The insured may still recover. It is only when the insured breaches a
promissory warranty or intentionally acts to cause damage that he may not


Scope of Insurance: Strictly speaking, fire insurance includes earthquake
insurance, but in practice the fire insurance excludes earthquake as a risk.
The insured and insurer negotiate as to its inclusion where the insurer checks
the plans and foundation of the property.

Q: If you want to vary the policy, how do you vary it?

A: On the policy, the insurer adds a rider.
Q: What is a rider?
A: In a policy, the rider is a strip of paper containing a stipulation varying what
is printed. The rider is glued to the policy. An authorized representative of the
insurer signs it.

What is casualty insurance? Where the insurer pays indemnity upon the
death of the insured or upon the loss of certain body parties due to an
accident. It is generally used only for loss of body parts but it now includes
accidental death.
What is the scope of protection: Indemnities are added with additional
What are compensable body parts? Either eye; Either arm; Either Leg
The full amount of insurance coverage is given for loss of both eyes, both
arms, or both legs. If you lose only one of each, indemnity shall only be . If
you lose one arm and one leg, the indemnity is still .
In the Philippines, we do not have insurance for individual body parts.

What are the Kinds of Fire
1. Friendly fire, used for beneficial purposes.
2. Hostile fire, damages property. When friendly fire goes out of
control, it becomes hostile.
What is the amount of insurance: If you are going to insure your house or
structure, the insurer will normally insure it for acquisition or replacement cost.
Higher premiums are paid for the replacement cost.
TIP: Do not insure the foundation because it would not be destroyed
by fire.
When is the insurer not liable: In fire insurance, the insurer will not be liable
to pay the indemnity if there was breach of a warranty.
- Affirmative warranty representations
- Promissory warranty undertakings ex. You will not bring into
your house two tanks of LPG.
Q: What if the house burns because of the insureds negligence?

What is Marine Insurance: It is insurance over a vessel, its freightage, its

cargoes, and its expected profits from cargoes, against loss, damage, or
liability arising from the perils of the sea (NOT perils of the ship).
What is the extent of insurable interest:
OF THE SHIP OWNER: Value of the vessel, LESS the amount of loan on
OF THE CARGO OWNER: Value of the cargo, LESS the amount of loan
on respondentia
Why deduct the amount of the loans: The borrower loses his interest equal
to the amount loaned because if the thing is destroyed, it need not pay.
What is the difference between fire and marine insurance:
In fire insurance, the obligation of the insurer to pay continues to exist even if
the house is burned.
In marine insurance, the obligation to pay the loan, in case there are loans on
bottomry and respondentia, is extinguished if the vessel is destroyed or sinks,
or when the cargo is lost. The value of the owners interest is already paid.


Commercial Law Review

Dean Eduardo Abella

When is deviation proper:

1. To avoid natural calamity
2. To avoid pirates
3. To save human lives

What are the PERILS OF THE SEA

These are the danger and risks related to the action of the wind and water.
These are risks related to navigation.
These relate to the physical condition of the vessel, to the incompetence of the
crew, or both.
NOTE: Marine insurance does not cover perils of the ship BECAUSE
in every contract of marine insurance (either over the vessel or the
cargo), there is an implied warranty that the vessel is seaworthy.
What is SEAWORTHINESS: Seaworthiness is a relative term in
relation to cargoes. A vessel may be brand new but absent any
refrigerating facilities, then it would not be seaworthy for raw meat. It
would, however, be seaworthy for livestock.
Why does the warranty apply to cargo owners: Because he can
choose the shipping company to be used.

What happens when the insurer pays the insured? When the insurer pays
the indemnity, he is subrogated to the rights of the insured and can run after
the person/s who cause the loss or damage.
TIP: If you are counsel for the insurer and you file a claim based on
the subrogation, present a DEED OF SUBROGATION and a COPY
OF THE INSURANCE POLICY. The deed of subrogation proves the
subrogation but not the contract of insurance. Thus, prove the latter
with the best proof: policy.

In marine insurance, the adjustment company and insurer must have
absolutely no interest in each other.

Authority of Insurance Commissioner is broadened, now it also has

supervision of pre-need contracts. PRE-NEED CONTRACTS are those
where the corporation, in consideration of the promise of a person to pay
an agreed amount of money in cash or in installments, agrees to deliver to
the latter an agreed amount of money or to render a particular service
upon arrival of a period or upon the happening of an event.

What is Suretyship: As a general rule, it is not a contract of insurance but a
risk-shifting device. EXCEPT! Suretyship is part of the insurance business IF it
is carried out by an insurer.
Examples of sureties: bail bonds, performance bonds; surety bond;
fidelity bond.
In case of court bonds, must have accreditation from the Supreme Court,
renewed on a monthly basis.

What are the KINDS OF LOSSES in Marine Insurance?

Losses may be partial or total. Total loss may be actual or constructive. There
is CONSTRUCTIVE LOSS when loss or damage is more than or even
though not more than , more than of the value shall be spent to restore it.
In constructive total loss, the insured entitled to recover as if there was actual
total loss. However, the insured has to abandon the property insured to the
insurer. Abandonment may be total or unconditional.

What is the effect of deviation on the liability of the insurer:

If the deviation is proper, then there is no effect. Insurer still liable.
If improper, the insurer shall be relieved from liability.


Commercial Law Review

Dean Eduardo Abella

Applicability of the Law:
It is an obsolete law but there are still provisions which are still in practice.
Thus, it must be read it with the Civil Code.


These are instruments of credit which involve money except when the
instrument gives the holder the right to deliver another thing. They could be
either a promissory note or a bill of exchange, known as money substitutes.
They can be assigned or negotiated.
When negotiated: If the instrument qualifies as negotiable under
section 1.
When assigned: If it does not qualify under sec. 1
These instruments of credit where the obligor who borrows money from
another or incurs the obligation to another, binds himself to pay.
It involves obligations but instead of the obligor binding himself to pay, he
orders another person to pay.


1. It must be in writing and signed by the maker
2. It must contain an unconditional promise to pay a sum certain in
3. It must be payable on demand, or at a fixed, or determinable future
4. It must be payable to order or bearer


It must be in writing and signed by the drawer
It must contain an unconditional order to pay a sum certain in money
It must be payable on demand, or at a fixed, or determinable future
It must be payable to order or bearer
The drawee must be named or indicated therein with reasonable

Who are the parties in a Promissory Note?

1. MAKER of the promise
2. PAYEE, to whom the promise is made
Who are the parties in a B/E: There are two original parties
1. DRAWER, who signs the B/E
3. DRAWEE who is ordered to pay the instrument BUT who does not
become a party EVEN IF his name appears on the instrument UNTIL
he accepts the B/E and becomes a party as ACCEPTOR.

1 Requirement:


Under the Civil Code, it is a future or uncertain event, or past event unknown to
the parties. It may either be Suspensive or Resolutory, which are valid, or
Potestative, which is void.
SUSPENSIVE CONDITION: It holds in abeyance the demandability
of the obligation. As long as it is not fulfilled, the creditor cannt
demand the fulfillment of the obligation.
RESOLUTORY CONDITION: One which puts an end to an
What is required in the NIL:
There must be no suspensive or resolutory condition.
It is also invalid to stipulate that the amount would be paid from a
particular fund. BUT in a B/E ONLY, IF payment is not from a particular
fund, but its reimbursement is from a particular fund, the instrument is still
Why is it required to be unconditional:
To serve the purpose of negotiable instruments, which is to facilitate
commercial transactions where one can transact without having cash on hand.
Q: If the instrument does not meet the requirements of sec.1, or it is nonnegotiable, is it valid?
A: YES, negotiability is different from validity. It is also transferrable but by


Commercial Law Review

Dean Eduardo Abella



What does it mean: What is to be paid is sure to be money.
GR: Instruments involve money
E: The instrument is still negotiable if it gives the holder the right to
demand the delivery of another thing. The right must be given to the
holder, and NOT the drawer, maker, or drawee. Otherwise, the
instrument is only non-negotiable; it is still valid. eg I promise to pay
P20k on or before April 2, 1992, or at the option of the holder, I agree
to deliver a pig instead.
Example: Promise to pay bearer one thousand is INVALID because it stated
no currency.
Example: A provision for payment of interest at an agreed rate is valid. I
promise to pay bearer P30k on or before December 31, 2012, together with
interest of 2% per month. This is valid. If the date of reckoning of the interest
does not appear, then it is the date of issue. If the date of issue is not stated,
then the holder may insert the true date of issue.
DATE OF ISSUE is not required in Sec. 1 but it is not totally
irrelevant. It is merely not required for negotiability but it is important
in relation to the obligation to pay interests.
POSTDATED: Date of issue is stated in the future
ANTEDATED: Date of issue is stated in the past
NOTE: Ante- and post-dating do not affect negotiability but could
affect rights of holder and liabilities of maker or drawer.
Example: I promise to pay bearer P30k on or before April 2, 2012, with
interest. This is valid because the interest rate would then be the legal rate of
12% pa, if no rate is stated.
Example: I promise to pay bearer P30k on or before April 2, 2012, with
interest of 30%. This is valid even if there is no indication as to the frequency
of interest payment. In such case, payment would only be once.
What if the instrument is payable in installments
In case of stated installments, there must be certainty in the amount of every
installment and date of payment or when every installment is payable.
Example: I promise to pay B, P10k in two equal monthly installments. This is
NOT NEGOTIABLE. Though the amount is determinable, there is no
indication as to when it is payable.

What is a DIVISIBLE OBLIGATION: When the amount of the obligation is

payable in stated installments, it is a divisible obligation that may be performed
in parts.
What is the Effect of a Divisible Obligation: If the obligor defaults
on the first installment, the creditor cannot sue yet for the entire
obligation because the period had not yet lapsed, as provided under
the Civil Code. The creditors remedy is to put an acceleration
NOTE: It is also a sum certain even if there is a proviso for compounded
interests, the payment of attorneys fees, costs of suit and expenses of
litigation. Negotiability is also not affected by a statement of the transaction
that gave rise to the issuance of an instrument.


When is the instrument PAYABLE ON DEMAND
When it is so stated to be payable on demand or
When no date is mentioned as to payment (pure obligation), or
When it is payable on sight.
eg When the creditor demands payment, literally, and no
period is involved. The creditor, upon handing the money to
the debtor, collects the same two minutes later.
When the obligor is to pay ON a particular date
or ON OR BEFORE a particular date.
On or before is construed favorably to the debtor. Under the Civil
Code, when the period is fixed, the creditor cannot demand payment,
and neither can the debtor demand acceptance earlier than the
period. But under the NIL, the creditor must accept the amount even
if it is tendered before the expiration of the period.
If, for example, it is payable within 15d from the proclamation of the 2013
elected senators. It not valid if the period states on or after April 12, 2012
because it is not determinable.
What is the remedy in case of uncertainty in period?
Ask the court to fix the period.


Commercial Law Review

Dean Eduardo Abella



What is payable to order or to bearer
These are the WORDS OR PHRASES OF NEGOTIABILITY. The instrument
can also use holder or possessor. It is important to know the presence of
these words to determine the manner of negotiation.
A stipulation that an instrument is NON-NEGOTIABLE is immaterial because
it is always payable to order in the following cases:
Pay to Jose Cruz or order
Pay to the order of Jose Cruz
Pay to the order of Jose Cruz and Pedro (joint where there are two
Pay to the order of Jose Cruz or Pedro Cruz (several)
Pay to the order of the holder of office for the time being
How is an order instrument negotiated?
By Indorsement of the holder, followed by delivery. Otherwise, the negotiation
would be ineffective/
Pay to bearer
Pay to Jose Cruz or bearer (NOT to bearer Jose Cruz where the
designation of bearer is only descriptive and thus the instrument is
Pay to order of Batman (to the order of a fictitious person and such
fact must be known to the person making it so payable)
Pay to the order of Adolf Hitler (to the order of a non-existing person
and such fact must be known to the person making it so payable)
Pay to the order of cash (to the order of a payee who does not purport
to be a name of any person)
When the last indorsement is in blank


If the instrument is already completed but not yet delivered, and it falls
into the hands of a holder in due course, then the HDC is protected
and his rights are not subject to personal defenses EXCEPT Forgery.


2. BILL OF EXCHANGE: Drawer and the Drawee Who Accepts
3. PN/BE: Endorsers
4. Forgers
Who are Endorsers
Endorsers are persons who sign the instrument. Only those whose signature
appears in the instrument are liable thereon. In cases of negotiation by
delivery, they are liable only to the immediate transferee.
What is the liability of Endorsers?
Their liability may either be general or irregular, as when they sign the
instrument but they have no concern therein.
May they sign through agents? YES, as long as the agent discloses the
principal and acts within the scope of his authority.

How is a bearer instrument negotiated?

By mere delivery. Any indorsement is a mere surplusage.


1. If the instrument is signed and delivered but there are blanks therein,
then the holder-deliveree has the implied authority to fill in the blanks
according to the true agreement of the parties
2. If the instrument is not yet delivered, then it cannot be enforced
against the maker or drawer. It is unenforceable.


Commercial Law Review

Dean Eduardo Abella

Negotiation is the transfer of an instrument as to constitute the transferee the
holder thereof.
1. ORDER: Indorsement and Deliver
2. BEARER: Delivery
It is negotiation through the signature of the person who has the right over the
instrument or document.
Where is the indorsement placed? The law is silent.
- It is customary to be made at the back so as not to confuse the
endorsers signature with that of the maker or drawer, especially in
cases of PNs stating I promise to pay and there are two signatures
appear, the result being the two signatures treated as co-makers.
- It may also be made in an ALLONGE, or a separate sheet of paper
attached to the instrument where the indorsements can be made.

Are there limits on the number of indorsements?

Under the NIL, there are none. BUT under a Circular of the Monetary
Board, banks are prohibited from accepting any check with more than
one endorsement to avoid forgeries against banks.
1. IN BLANK, when the holder merely signs his name
2. SPECIAL, when the transferee is named and the holder signs
the same. The indorsement need not contain the words of
negotiability, eg Pay to Jose Cruz. Such words are required
only on the face of the instrument and not on specific
eg Pay to order of Jose Cruz only is a special and
restrictive endorsement.
3. CONDITIONAL, as when it states Pay to X only if he graduates
on March 2013. This is also a special indorsement and which
does not affect negotiability.
4. QUALIFIED, if the holder adds without recourse to his
signature. There is no recourse to him if the instrument is
5. RESTRICTIVE, as when the endorser states Pay to Jose Cruz
only or Pay to trustee only for the purpose of collection without
authority to enter into subsequent contracts. This affects and
ends the negotiability of the instrument.


The first in the list is presumed to be the first endorser. As such,
subsequent transferees can run after prior endorsers. Thus, in
practice, endorsers first sign at the bottom, or sign with a date.
eg Pedro Cruz first signed the instrument. Jose Santos then
endorsed it to Juan Reyes. Juan Reyes can then run after Pedro and
Jose should the instrument be dishonored.
When a name is stricken off, the holder cannot run after the stricken
off endorser and all the endorsers subsequent to such name because
they are relieved from liability as there are no more indorsements in
their favor.


1. Holder for value
2. Holder in due course


A holder in due course is one who acquired the instrument under the following
conditions (Sec. 52)
a. That it is complete and regular upon its face;
b. That he took it in good faith and for value;
c. That he became the holder of it before it was overdue, and without
notice that it has been previously dishonored, if such was the fact;
d. That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.


When is an instrument complete? No blanks
When is it NOT REGULAR?
RE: CROSSED CHECKS: Crossing of checks, or the placing of two parallel
lines on the upper left corner of a check, makes the instrument no longer
regular on its face (SIHI Case). This is because such crossing indicates that
the check is not intended for encashment but only for deposit to the bank
account of the payee. It may thus be endorsed only once, ie for deposit to the
payees account.


Commercial Law Review

Dean Eduardo Abella

La Suerte Cigarette Company v. SIHI: The cigarette company sold its

products through agents. The clients deposited post-dated checks
with the agents who rediscounted the same with SIHI but
appropriated the proceeds. The clients refused to pay the checks
because the products were not delivered to them. SIHI thus failed to
collect. It was not considered as a HDC.

If there are alterations it might not appear regular upon its face, it
might be considered irregular.




Can the PAYEE be a HDC
As a general rule, NO because the fourth requirement contemplates a
transfer, at the time it was negotiated to him. And between immediate
and direct parties (payee and maker/drawer), personal defenses are
available. The purpose of the principle of HDC is to build confidence in
instruments of credit as a money substitute.
An exception is provided by the SC where the payee is treated as a HDC
because of the peculiar circumstances of the case. A owed B, and B
owed C. B requested A to make As check payable directly to C. C thus
sued A for collection, and C was treated as a HDC.

When is it acquired IN GOOD FAITH:

When the transaction is above fraud.
When it is acquired FOR VALUE
When the acquisitions is for a valuable consideration under the law on
contracts, and
When the consideration is not contrary to law, morals, good customs,
public order and public policy
Example: Law endorses the check he obtained from his client to a
prostitute. The prostitute is not a holder in due course because her
services do not constitute a valuable consideration under the contract
law. BUT IF the check is endorsed to a massage lady or house
cleaner, then the latter is a HDC because the check was acquired


What are the advantages of being a HDC?

1. He is not subject to personal defenses, EXCEPT Forgery, EXCEPT
EXCEPT The maker can still be liable if the forgery is ratified or due
to estoppel.
2. Prior parties are liable to him
3. Subsequent transferees acquire the rights of a HDC
NOTE: While a person does not qualify as a HDC but derives his right
from a HDC, then he will have the same rights as the HDC.
Example: Client issued a check to his lawyer. Lawyer indorsed it to
the store owner in payment of his overdue account. The store owner
is thus a HDC. If the store owner indorses it to a prostitute, the latter
is not a HDC but acquires the rights of the store owner who is a HDC.

When is an instrument overdue

When the date of payment has passed.
Example: If a PN shows that it is payable today and it is negotiated to you
today, you are a HDC because the date of payment, which is today, has not
yet passed.
Example: If a check is dated 25 December 2012, but it is negotiated to you
only today, 3 February 2013, you are still a HDC. CHECKS NEVER BECOME
jurisprudence, the demand for payment must be made within a reasonable
period determined on a case-to-case basis, eg six months.
REMEDY OF THE HOLDER: Ask the drawer to re-date it with his


Commercial Law Review

Dean Eduardo Abella

Who are the PARTIES IN A NI

A person is liable on an instrument only if his/her signature appears on it
(maker, drawer, acceptor, general indorser, irregular indorser, forger).
Irregular indorser: Person is not a party to the instrument but
indorses the instrument

NOTE: Holder goes to the drawee, bringing the bill of exchange.

There must be presentment of instrument for acceptance.
When drawee refuses to return or destroys the bill of exchange when
presented for acceptance, it is deemed accepted.
If the bill is dishonored, the holder should give notice of dishonor to all
prior parties within a reasonable period. A party not notified shall be

Per Procuration: Signing authority but with limitation.

a. Person negotiating by mere delivery
The person who negotiated by mere delivery is liable to the person to
whom he negotiated the instrument (the immediate transferee)
b. Person who was duly represented by his/her agent, subject to two
conditions: that the agent discloses his principal and the agent acts
within his authority.
1. MAKER: To pay and to warrant the existence and capacity of the
payee because he borrowed from the payee himself
2. DRAWER: To warrant the existence and capacity of the payee; that
upon presentment, the drawee shall honor the check; if it is
dishonored, then he will pay after notice


1. Making
2. Negotiation
3. Payment
Q: In case of promissory notes, do they need to be presented for
A: No, they are presented for payment.
What are the STAGES OF LIFE OF B/E
1. Drawing/Issue
2. Presentment for Acceptance By the Drawee
Two possibilities:
- Drawee accepts
- Drawee dishonors the check by non-acceptance.
REMEMBER: The drawee is not an original party and only becomes a
party as an acceptor upon his acceptance. And in case he accepts,
he is bound only by the terms of his acceptance, and not by the terms
of the b/e.


Presentment for Payment
Why: Presentment of acceptance is not an assurance of payment.
Thus, there are also two possibilities here.
- Payment by the drawee
- Dishonor by non-payment




1. Payment in due course by the person primarily liable, to the
person entitled to receive the payment, at the place agreed upon
When it is made at or after the maturity date. If payment is made
before the maturity date, then there is no discharge yet because the
payor can still further negotiate the instrument. But in practice, a
fresh PN is requested after payment is already made.

Who is the person primarily liable:

For PN, maker. For B/E, acceptor. The accommodated party is also
primarily liable.
He who signs the instrument as a maker, drawer, acceptor, or
endorser but without receiving anything of value therefor and only for
the purpose of lending his name. He is liable under the instrument
even if the payee knows that he is signing only as an accommodation
NOTE: For one to be an accommodation party, he must
Person in whose favor it is signed.


Commercial Law Review

Dean Eduardo Abella

What if the accommodation party pays the instrument?

It is not yet discharged because he can still run after the
accommodated party.


They are usually used in importation to facilitate payment of obligations
between persons in distant places.


Intentional cancellation of the instrument by the holder

Effect: The obligation is NOT extinguished. Condonation of a debt
requires the acceptance of the debtor.


Any other mode of existing an obligation to pay a sum of money

Example: Compensation; Confusion of the rights of the debtor and

How do they work

The drawer prepares the B/E in two copies, the original and the duplicate
indicated as such. He makes an instruction as follows: Pay this bill (Bill 1) if
the other bill (Bill 2) is not paid. The contents are the same. The payee then
presents both bills to the drawee.


Discharge of the primary party

Q: How may a party secondarily liable be relieved from liability?

a. Payment in due course by the person primarily liable
b. By discharge of a prior party
c. By striking out indorsement (this relieves not only the person whose
name was stricken out but all those after him/her)
d. Valid tender of payment by a prior party.

How to Discharge of Foreign Bills of Exchange

A domestic bill of exchange is also called an inland bill of exchange.
A bill of exchange is foreign when the parties are in different countries. If
a foreign bill of exchange is dishonored you make a protest.
Q: Who makes a protest?
A: It is made either by a notary public or a reputable member of the community
in the presence of 2 or more persons.

If the payee negotiates both bills to different persons with different interests,
the drawer is liable only to the one whose bill is first accepted by the drawee.
The remedy of the other holder is against the payee.


These are checks certified by banks to be credit-worthy, where the debtor is
certified as having enough money for the same. It is no longer used today
because of the inconvenience to the banks.
Now, banks issues managers checks. The advantages are its convenience
and the fact that the obligation of the bank to pay is not affected by any
garnishment of the drawers account. Its disadvantage is the effect of the
banks insolvency, making the holder an unsecured creditor of the bank.

Certified Check
It is an ordinary check that has already been accepted by a bank with money
set aside for it.
Eventually, banks stopped the practice of certifying checks and just issued
managers checks. The managers check is disadvantageous because in case
of insolvency of the bank, the holder is considered an unsecured creditor.
Bills in Set
A bill of exchange prepared with more than one copy. It facilitates payment
between persons on distant places. When one bill is lost, the other bills may
take its place.
24-Hour Clearing Process
A clearinghouse is a facility of the BSP for the convenient collection of checks
drawn on different banks but deposited in another bank.


Commercial Law Review

Dean Eduardo Abella

At an agreed time, representatives of banks convene in a particular place in

order to swap checks. The banks process the checks. Within 24 hours from
receipt, the drawee bank must return these checks to clearing house if it
intends to dishonor them.
A BSP Circular provides that when a check is received from the clearinghouse
and the check should be returned due to insufficiency of funds, the banks
should dishonor the checks. This is the reason why overdrafts no longer occur.

When are checks not cleared:

DAIF: Drawn against insufficient funds.
DAUD: Drawn against uncollected deposits.
Are banks required to accept any check
NO. There is a MB Rule that banks should not accept
checks presented for deposit or encashment by anyone
other than the payee.


1. As a general rule, the bank suffers the loss ultimately if what is forged
is the drawers signature, and the check is presented for over-thecounter encashment or deposit with the drawee or collecting bank
who pays.
EXCEPTIONS: The drawer is made solely or solidarily liable in some
Why is the bank ultimately liable:
- The bank ought to know the genuine signature of its depositors and
- There is breach of contract by the bank, ie the specimen signature
card, where it undertook to pay only on the basis of any of the
signatures therein.

If what is forged is the payees signature:

a. Drawee ultimately suffers the loss if the check is presented
for over-the-counter encashment because it failed to
properly identify the payee and thus the drawee bank paid
the wrong person due to negligence.
b. Collecting bank ultimately suffers the loss if the check (of
another bank) is presented for deposit because of its failure
to properly identify the payee and because of its breach of
warranty, that All prior endorsers guaranteed, before it
presented the check in the clearing house.
It is a facility of the BSP for convenient collection by banks of
the checks drawn on other banks but deposited with them.
Within 24h from receiving checks from the clearing house, a
bank must return the checks un-cleared. Otherwise, they
would be cleared.


Commercial Law Review

Dean Eduardo Abella

A corporation is an artificial being, created by operation of law, having the right
of succession and the powers and attributes which are expressly conferred by
law or incidental to its existence. It is a juridical person.
Two Kinds of Persons
1. Natural
2. Juridical artificial beings that include the State, political
subdivisions, partnerships and corporations

Manner of Creation
GR: By mere agreement of the parties. Need
- By law
not be in writing
- By operation of law
- Pship Agreement must be in writing IF the
capital contribution exceeds P3000
- Pship Agreement must be in a public
instrument IF real property is contributed
regardless of amount. OTHERWISE, the pship
agreement is void
- A limited partnership is also not created by
mere agreement of the parties

- GR: Created by law
- E: GOCCs created under the Corporation

Re: Private Corporations

- GR: Created by operation of law
- E: PNB, a private corporation but which
was created by law because it was
previously a GOCC but has been privatized
Name Used
Any name as long as it is not similar or
Corporation must always include the words
confusingly similar to the name of another
existing partnership or corporation
Incorporation) as part of its corporate name,
whether fully spelled out or abbreviated.
- Corp. or Inc. need not be at the end, eg
Construction and Development Corporation of
Corporation of the Philippines
- and Company, Inc. is a corporation
- Use in Similar or Confusingly Similar Products:
case of Phillips, an international corp. whose
products include electronics. In Ph, Phillips
was used as a corporate name for conveyor
belts. THUS, the foreign corporation sued the
domestic Phillips. SC upheld the foreign corp.
even when it has no exclusive right over the
surname of Phillips.
- Same Line of Business Case of Sinclair
where there were two corporations: First was
Philippines, and then there was Sinclair that
changed its name to Industrial Refractories
Corporation of the Ph. SC upheld the formers

suit against the latters use of the name

because they are confusingly similar: a)
industrial is only a descriptive word, NOT a
proper name, and b) they are in the same
Always for profit. It is found in the definition of
May or may not be for profit
partnership itself.
Example of Non-Profit Corporations:
- Non-stock corporations
- Educational corporations because they
perform governmental functions
- Corporate Sole because they are for religious
- Eleemosynary corporations which are for
charity, eg Caritas Manila, Inc., ABS-CBN
Foundation, Inc., Bantay-Bata, Inc.
Number of Organizers
Minimum of 2.
GR: Min. 5, Max. 15
No maximum.
E: 1 Person only for Corporate Sole, who is the
head of the religious sect or denomination
Term of Existence
Partners may agree on any term
Cannot be for a term longer than 50 years
Extent of Liability
General partners are obliged to pay the
GR: Subscriber who is fully paid on his
obligations of the partnership even if they are
subscription cannot be obliged to contribute
fully paid on their subscription
more. Shareholder may not be obliged to
contribute more than his current participation.
E: Corporate veil is pierced
Sharing of Profits
Shared according to the agreement of the
Dividends are distributed pro-rata to the
Managed by all partners.
Managed by a Board of Directors or Trustees
Decisions are made by the partner/s having
except for corporations sole or close
controlling interests
Decisions are made by a majority of the board,
in a meeting with quorum, with every director
having only one vote regardless of shareholding
Causes of Dissolution
At will of any one of the partners
Cannot be dissolved at will.
1) Board Resolution (THUS at least two
2) Ratification by 2/3 of the outstanding shares
Amount of Capitalization
No minimum amount
P5000 minimum paid-up capital
Right of Succession
Does not exist in partnership
Expressly given to corporations
Both a person and a contract
Only a person, not a contract
Relationship to Property
Partners may validly claim they are co-owners
Shareholders cant claim to be co-owners of
of properties in the name of the partnership
corporate property


Commercial Law Review

Dean Eduardo Abella

Who may organize a corporation?

Organizers of a corporation are merely organizers; they become incorporators
only upon signing of the Articles of Incorporation (AOI).
Who is an incorporator?
The signatories to the documents of incorporation. When a person signs the
articles of incorporation, he automatically becomes a corporator. These
incorporators are not changed.
- Incorporators are also corporators. If an incorporator leaves the
corporation, he ceases to be a corporator (in case of divestment of
shares) BUT remains to be an incorporator. Once you are an
incorporator, you are always an incorporator.
- The terms incorporator and corporator are applicable to both
stock and non-stock corporations.
- In a stock corporation, they are called STOCKHOLDER or
- In a non-stock corporation, they are called MEMBER.
Who may be an incorporator?
- Why: A juridical person cannot sign the AOI
- AS OPPOSED TO A CORPORATOR, who can be a juridical
person because he does not sign the AOI.
* They are not necessarily required to be CITIZENS UNLESS a
special law requires a bigger participation of Filipino citizens

How to form a corporation (non/stock): File the AOI and other documents
required with SEC. (This can now be done online)
PRACTICAL MATTER: Dont make the documents of incorporation
1. Check first the availability of the corporate name. Check the
telephone directory for similarity in name. If none exists, reserve
the name with the SEC (30d for P40, 60d for P80) where the
proposed name is pre-approved by SEC. SEC issues a Name
Verification Slip. Never lose it! Payment of the reservation fee
is stamped thereon.
2. Accomplish the AOI (in letter size). The forms are available in
3. Submit the Treasurers Affidavit. It is not required that there be
authority to inspect the deposit and back certificate of deposit.
4. Include an Undertaking to Change the Corporate Name because
words can be spelled differently, and thus it must first be
determined whether there would be a similarity or confusing
similarity with existing names.
5. Registration Date Sheet form is available
Documents to be submitted to SEC:
1.) Name verification slip
2.) AOI
3.) Treasurers Affidavit
4.) Undertaking to change corporate name
5.) Registration Data Sheet
6.) By-laws (Optional, may be done at a later date)
What are the other requirements for Non-Stock Corporations
6. Modus Operandi, a short write-up on how it would be operating


There are two qualifications
1. It has authorized capital stock divided into shares.
2. It is authorized to declare dividends from its surplus profits.
A corporation that does not meet the two reqts., as when it has ACS but its
AOI prohibits the declaration of dividends.


Article means stipulation
It s a written agreement among the corporations organizers
It contains all the information required by law
It is the prescribed document to be filed with the SEC for the purpose of


Commercial Law Review

Dean Eduardo Abella


*Arts. 1-6 are the common provisions for non/stock


o Name must have Corporation or Incorporated, either fully spelled out
or abbreviated
o It must not be misleading or misdescriptive of the business of the corp.
o Only corporations under the supervision of the Monetary Board may add
Bank or Banking in its name
o Only corporations under the supervision of the Insurance Commissioner
may use Insurance in its corporate name
o Under the SEC Rules, the following words cannot be used as the first
word of a corporate name: Philippine, National, Republic, State. Their
exclusive use as such is reserved to the Ph Govt.
o It must not be similar or confusingly similar to the name of an existing
corporation or partnership
o A corporation must have only one primary purpose. The primary
purpose cannot be stated briefly.
o A corporation may have many secondary purposes, as long as they are
not incompatible with the primary purpose or with one another
Incompatible purpose if banking is primary purpose, it cannot be
engaged in the business of insurance as an insurer, BUT it can sell
insurance policies as bank assurances.


o The maximum term of a corporation is 50 years.
o The term is extendible before its expiration. A filing fee is due, in the
same amount as a formation of a new corporation which is based on the
o There is no limit as to the number of extensions.
GR: Term cannot be extended earlier than 5 years before it
E: Extended earlier for justifiable reasons. eg Corp. obtains a longterm loan of 10 years, but the term of the corp. expires in 7y. Thus,
it is allowed to extend 7 years before the expiration.
o The term may be shortened for the purpose of dissolution, BUT it
requires prior BIR clearance.


o Before, SEC allowed corps. to state only the city or municipality where
the corp. would be set up
o Now, the exact address of the corp. should be stated and detailed.


o FULL NAME OF INCORPORATORS: They must be 5-15 persons for
both non/stock corps.
o ADDRESS: Residential or Office, NOT PO Box
Q: What if 16 persons want to incorporate? Fifteen sign as incorporators
and one signs as a witness.

ARTICLE 6 has two parts: a) Number of Directors, and b) Full Names,

Nationality, and Address of the Incorporating Directors
Stock: 5-15 Members
Non-Stock: At least 5
*The number can be even or odd. In practice, the number is often
odd but it is not a guarantee against deadlocks.
Stock, they should have subscribed to one share.
Non-stock, they must be a member.
ARTICLE 7 has two parts as well: a) AMOUNT OF ACS, NUMBER OF
o AUTHORIZED CAPITAL STOCK, or the maximum amount that can be
capitalized, is always expressed in pesos. eg ACS is P1M, divided into
1M shares, each share having a value of P1
o There is no minimum paid-up capital.
o What are SHARES: Units of participation, representing the breakdown
of the ACS to determine the extent of the contribution
o What is PAR VALUE: Value assigned to every share. eg P10M ACS to
1M shares THUS P10 par value
o What is the MINIMUM PAR VALUE: 1 centavo, because it is the least
denomination of Ph currency
o Is there a MINIMUM PAID UP CAPITAL: Unless laws or regulations
require a minimum amount of paid-up capital, incorporators can agree
on any amount
o What is a STOCK SPLIT: When par value is divided into two shares
with lower par value


Commercial Law Review

Dean Eduardo Abella

eg Original par value of SMC shares was P10 each. In the 1980s,
the par value of P10 was split into P5 each. It has no effect on the
investor because he has the same amount of shares.
Rationale: In the stock market, you buy shares by lots (ODD LOT if
you buy less than a lot) for a minimum price. By splitting the shares
into shares with smaller values, then small investors are
accommodated by splitting the shares into more affordable shares.
eg Lot of 1000 shares would have a lesser price.
o What is a REVERSE STOCK SPLIT: Ayala Corp., the oldest Ph
corporation aside from UST, has an original par value of P1.
Subsequently, they combined 50 shares into 1 share. It also has no
effect on the holdings because the value of the shares is the same. Its
purpose is only for convenience.
o Is subscription required in ACS: Yes, At least 25% of the ACS must
be subscribed and 25% of such subscription must be paid-up
NOTE: Shares may have NO-PAR VALUE they are issued for value
of at least P5. All subscriptions to no-par value shares must always be
paid in full. Payment for no-par value shares is always capital
contribution; it cannot be used for the payment of dividends. Certain
corporations cant issue no-par value shares. Examples are banks,
insurance companies, trust companies, public utilities, building and loan
o VALUE OF EVERY SUBSCRIPTION: Total of all subscription must be
25% of the ACS.
It includes the non-incorporators
It is not limited to natural persons. Thus, they may be partnerships
or corporations, e.g. subsidiary and sister companies
There is no limit as to the number of subscribers


o Total amount individually paid on the subscription must be at least 25%
of the total amount subscribed.
o It is not required that every subscriber pay at least 25%




o In non-stock corporations, amount given is not paid-up but contributions
or donations.
o The contributors or donors must receive nothing in exchange of their

What about the By-Laws?

By-laws may be filed with AOI, if not so filed it must be filed within 30 days
from issuance of certificate of registration.
If the by-laws are filed with the AOI, it must be signed by all incorporators.
If filed later, it need only be signed by a majority of the incorporators.

What happens after the filing of the documents

Documents are filed with SEC
Application is assigned to an examiner
SEC issues a CERTIFICATE OF REGISTRATION, which is akin to a
natural persons birth certificate.
It is upon such issuance that a corporation acquires juridical
personality and becomes a person. Corporation can now enter into
contracts, acquire property, sue and be sued. BUT the effectivity
retroacts to the date of filing.
eg Docs are filed on 1 Feb. The order to issue a certificate of reg. was
made on 13 Feb but the Cert. of Reg. was only received subsequently.
When does the corp. acquire juridical personality? On 1 Feb. or on the
filing of documents, in practice, and NOT the actual preparation of the


Commercial Law Review

Dean Eduardo Abella


The properties of the corporation belong to the corporation.
The SHs cannot claim that they are part-owners, as opposed to a
partnership where the partners are co-owners of the properties of the pship.
The corporation can borrow money and incur other liabilities.
What if the corporation becomes bankrupt? Can the creditors sue the
GR: No, the corporation has a distinct personality from the SHs and its
liabilities are not the liabilities of its SHs. BUT, the stockholder who did not
fully pay his subscription can be obliged to remit his subscription payment
because unpaid subscription are assets of the corporation and booked as
the obligations of the corporation are enforced against the director, officer, or
stockholder. Under this doctrine, the separate personality of the corp. is
disregarded and its liabilities are made that of the officer, director, or SH. It
has no basis in law but in jurisprudence.

For Rule 2, there must be evidence that the decisions were made
by the controlling SH alone.
eg. Case of Concept Builders, Inc. A manufacturing corporation
(principal) was organized for the production of pipes. It organized a
subsidiary, CBI, for a construction business. The principal then
incurred liabilities to its laborers, who sued the principal and obtained
a favorable decision. The principal corporation had no properties and
thus the laborers levied on the properties of CBI. According to the
SC, CBI is only a subsidiary of the judgment debtor. The fact alone
that the principal and subsidiarys BOD comprise of the same
persons does not justify the piercing of corp. entity. The fact alone
that all but one of the officers of both is the same does not justify
the piercing of corp. entity. The fact alone that both share the same
office does not justify the piercing of corp. entity. BUT when these
circumstances are taken together, then it appears that CBI is a
mere instrumentality of the principal as it has no mind of its own.
Piercing must be the last resort and only when there is clear and
convincing evidence.

What are the rules regarding the doctrine of piercing the corp. veil
1. Mere ownership of the controlling interest of a stockholder does not
necessarily oblige him to pay the debts of the insolvent corp.
2. The separate personality of the corporation may be disregarded if
there is clear and convincing evidence that the corp. is only an alter
ego of the controlling stockholder.
3. The separate personality of the corporation may be disregarded if
there is clear and convincing evidence that the corporation was
purposely organized for fraud or tax evasion or to defeat public
4. The separate personality of the corporation may be disregarded if
there is clear and convincing evidence that of two corporations, one is
a mere instrumentality of the other.
How to reconcile numbers 1 and 2: Evidence required for either is

For Rule 1, there must be evidence that the controlling SH did

not decide alone, but the decision must have been that of the


Commercial Law Review

Dean Eduardo Abella


What are the BY-LAWS

These are the set of house rules and regulations.

When may the By-Laws be filed

It can be filed with the AOI and other incorporation documents, in which
case, it must be signed by all of the incorporators

If it is not filed with the AOI, then if must be filed within one month from
the issuance of the Cert. of Reg., and in which case, it may be signed by
at least the majority of the incorporators
What doe the By-laws contain
1. Meetings of stockholders or members
2. Directors
3. Officers
4. Stock Certificates for stock corporations
5. Corporate seal
6. Amendments of the AOI and BLs
*You can add others but these six are mandatory!


State the day of the meeting; it is usually scheduled after the

audited financial statements are prepared, and it is usually after
April 15 or the third Tuesday of April because a specific date may
fall on a weekend that is not favorable for attendance.

NOTICE is no longer needed as it is already provided in the BL,

BUT notice is still sent in practice.

AGENDA: The annual meeting is the most important as it is for

the purpose of the election of directors for the following year.

These are called by the president.
MANDATORY: WRITTEN NOTICE of the Date and Matters to be
taken up BECAUSE the SHs are not aware of the same. Law
requires a call. There must be a written notice at least 10 days
before the scheduled meeting.
Importance of Notice on Agenda: No other matter can be taken
up without the consent of all present
Meetings are held in the principal office or, if it is not big enough,
then elsewhere in the city or municipality of the principal office

eg Manila Bulletin holds its meetings in the grand ballroom of the

Manila Hotel. Most publicly-listed corporations have many SHs.
o In person
o By proxy. PROXY has two meanings, referring to both
the written authority (which need not be embodied in a
SPA) and the representative person. It is a contract of
agency, THUS, the proxy must have the capacity to
enter into a contract of agency.

Practical Note: Bring the proxy (written authority) with him. Go to the
corp. and present the written authority to the corp. secretary before
the meeting. The corsec will compare the signature thereon with the
signature of the SH in the corp.s specimen card to verify its
Are proxies revocable? YES, proxies may be revoked, expressly or
impliedly, at ANYTIME, UNLESS the proxy is issued pursuant to a
contract (eg Loan secured by shares)
EXPRESS REVOCATION: When the SH himself attends the meeting
after informing the proxy.
IMPLIED REVOCATION: When the SH, without telling the proxy,
attends the meeting himself
What is the TERM OF PROXY:
- Proxies are valid just for one meeting, as stated in the proxy itself.
- If proxies are issued for a PERIOD, the period must not exceed five
years, renewable upon expiration for another five years.

STOCK CORPORATIONS, How Many Constitutes a Quorum:

SHs representing the majority of the outstanding shares of
o Importance: In every meeting there must be a quorum at
the start of the meeting. If there is no quorum at the
start of the meeting, it must adjourn. If stockholders or
members leave in the middle, there is no problem as
quorum is reckoned at the start of the meeting.
o What is QUORUM: Presence of stockholders in person
or by proxy representing the majority of the outstanding
shares. In a stock corp., it is the majority of the
outstanding shares that matter.


Commercial Law Review

Dean Eduardo Abella


Quorum is determined at the start of the

All shares issued by the corporation, excluding treasury
What are TREASURY SHARES: Shares already issued
but later reacquired by the corp. in its own name.
What is the difference between SUBSCRIBED,
ISSUED, and OUTSTANDING: eg Corp. has P1M ACS.
Shares subscribed are 250k. The subscribed shares of
250k are considered as ISSUED upon subscription,
and, they are considered as OUTSTANDING once
issued as they are already out of the corp.

NON-STOCK CORPORATIONS, How Many Constitutes a

Quorum: Presence in person or by proxy of at least a majority of
the number of members
o What is the difference in quorum between a stock and
non-stock corp.? As a general rule, it is the majority of
members. BUT, consider the number of members that
would be added in the future. For practical purposes,
define the quorum in the by-laws. It can be majority
of the members or just twenty members or any
number of members present.
o What is the difference between proxy in a stock and
non-stock corp.? In a non-stock corp., proxies are
allowed UNLESS the by-laws do not allow the same.


corporations, a Voting Trust Agreement may be entered into. In
a VTA, the stockholder entrusts his votes to a voting trustee. The
term is for a maximum of 5 years.

Subscribed Issued Outstanding



What if the same corp. from the previous example

needs to raise additional capital? It issues 300k new
shares from its P1M ACS. The total shares subscribed
and fully paid is now 550k (250k earlier subscribed +
300 newly subscribed).
What if the BOD of the same corp. decides to issue
stock dividends of 20%? What would be the basis of the
20%? The corp. would issue 20% of 550k (or 110
shares) because dividends are distributed pro rata,
according to participation.
Upon distribution of the stock dividends, how many
would be the subscribed shares? The subscribed
shares would still be 550k. The 110 shares distributed
as stock dividends are not subscribed because they
are not paid for. Stock dividends are not subscribed
they are merely issued.
How many shares are issued and outstanding? There
would be 660 issued and outstanding shares. The stock
dividends are included in the issued shares.
How many shares are unissued? Out of the OCS of
660 shares, there would be 340 unissued shares.
What if 20k treasury shares are returned to the corp.,
how many OCS are there? It would be 640k (660k less
20k treasury shares). BUT in terms of the number of
subscribed shares, there would be no difference
because once shares are subscribed, they remain as
subscribed. Treasury shares are already subscribed or
issued, and thus they do not revert back to being
unissued or unsubscribed shares.

What is then the quorum? 320+1 (Half of 640 + 1)

1. Available in both stock and non-stock
2. Private instrument is sufficient
3. Filed with the Corporate Secretary
4. No delivery of stock certificate to the


Voting Trust Agreement

Available only in stock corporations
It must be in a public instrument
Filed also with the SEC
VTA entrusts stock certificates to
trustee who in exchange delivers to
the stockholder voting trust certificates


Commercial Law Review

Dean Eduardo Abella



Who can be a director? A director must have all the qualifications provided in
law and by-laws and none of the disqualifications provided in the law and BLs.
1. He must own at least one share (stock) or be a member (non-stock)

What is meant by ownership: Subscription is sufficient. He need

not have paid for it yet, UNLESS the BLs require payment.

What kind of share must he own? It can be a common or

preferred share, BUT in practice, preferred shares are not
allowed because such are deprived of the right to elect directors
and be elected as directors.
2. Bank directors must comply with the fit and proper rule, where special
law may provide for other qualifications.


The number of directors must be in multiples of five.

The term must expire one after the other.

If the director whose term expires is reelected, his new term would be five
Death, Resignation, Incapacity, or Removal
INCAPACITY: There are two ways. The expensive way is to call a
special SHs meeting. The inexpensive way is for the directors
themselves to fill the vacancy IF the remaining directors still constitute
a quorum.


1. He must not have been sentenced to final judgment for a crime
punishable by imprisonment exceeding six years.
2. He must not have committed a violation of the Corporation Code
within five years prior to being elected as a director.
3. He must not be disqualified under the BLs. eg Case of Gokongwei v.
San Miguel Corp. where Gokongwei sought to be elected as director
BUT he was already the director of a competing company

When can there be REMOVAL OF A DIRECTOR?

GR: A director may be removed by the stockholders or members,

with or without a valid reason.

E: A director representing the minority SHs may only be removed

for a valid cause.

Do directors receive compensation?

GR: Directors are not entitled to regular compensation

E: They may receive regular compensation IF...

o So provided in the by-laws or
o They pass a resolution giving themselves compensation
and the same is ratified by at least 2/3 of the
outstanding common shares.

Per diems: Law allows directors to receive reasonable per diems

for attendance in meetings of the board. REASONABLENESS
depends on the resources of the corporation.

Profit-sharing: Law allows directors to receive share in the net

profits of the corp. but it must not exceed 10% of the net profits
(of the previous year) prior to income tax.

Who is a director representing the minority SHs: Those voted by

cumulative voting.

What is the TERM OF DIRECTORS? It is as stated in the by-laws. If none is

provided, then it is one year, UNLESS he is elected only to fill a vacancy in
which case, he serves only for the unexpired term.

What is the nature of a directors removal: Any act of removing a

director is always an intra-corporate dispute.


It is available only in stock corporations

Its purpose is to enable the minority SHs to have representation

in the BOD

In stock corporations, one stock equals one vote. Said number

of votes is multiplied by the number of directors to be elected.
The product is the total number that a SH may vote. THUS, a SH
can give all his votes in favor of a candidate.
(Number of SS) (Number of Vacancies) = Total number of votes

In non-stock corporations, one membership equals one vote.

Said number is multiplied by the number of votes to be elected.
The product is the total number that a member may vote.

What is the FUNCTIONS OF THE BOD: BOD sets the policies of the
corporation, which is implemented by the officers.


Commercial Law Review

Dean Eduardo Abella

When do they meet: It depends on the BLs. In practice, most corps.

meet monthly (according to the Corporation Code). There are some
corps. whose investments are considered passive, and thus, the BOD
does not have to meet frequently.
What is the quorum: Quorum of BOD is the presence of the majority
of the number of directors without counting their stockholding, ie.
Count per head.
Can there be proxies in board meetings: The law does
not provide it, BUT done in practice.
When is quorum determined: At the start of the meeting.
How does the board decide: They pass a resolution, which requires
the majority vote of the directors present.
Who is a SELF-DEALING DIRECTOR: A director who enters into contracts
with the corporation where he is a director.
Is it allowed: YES as long as it is done under the following conditions:
1. His proposal was approved in a meeting of the board where there
was a quorum without counting his presence.
2. The proposal was approved by a majority of the quorum without
counting his vote.
3. The terms and conditions must be fair and reasonable.
Why the requirements? A director must not take advantage of whatever
information he may have acquired as a director.
Who are INTERLOCKING DIRECTORS: When two or more corporations
share a common director. There is nothing wrong with it.
If no one attends the annual meeting of the SHs (to vote for the BOD),
who manages the corporation? The BOD manages the corp. in a hold-over
capacity. Directors shall serve as such until their successors shall have been
elected and qualified.



Who are the OFFICERS OF A CORPORATION: President, Treasurer,

Secretary, and Officers mentioned in the by-laws or created by the BOD.
Who can be President
He must be one of the directors These are not required in others
He must be a stockholder
He cannot be the treasurer or secretary at the same time
Who can be Treasurer: No requirements. Need not be a director
Who can be Secretary: Must be a citizen and resident, but need not be a
director. He takes minutes of the meetings
Can a person hold two or more offices: YES, as long as the offices are
Who are INCOMPATIBLE OFFICERS: Treasurer cannot be the auditor.
The chief accountant cannot be the auditor.
Who is a STOCK TRANSFER AGENT: It is another corp. that records the
stock transactions of another corporation.
As stated in the by-laws
If none, it is co-terminous with the BOD that filled it up
At the pleasure of the BOD (as long as you are useful)
What is the COMPENSATION OF THE OFFICERS: Officers are entitled to
regular compensation as determined by the BOD. Though directors as such
are not entitled to compensation, they are entitled to compensation as officers
if they are also officers.
Where can one contest the REMOVAL OF AN OFFICER: A contest against
the validity of removal by the director or officer is an intra-corporate dispute,
that must be filed with the RTC of the principal office.
Can an officer enter into a contract with the corporation? YES, but he
must follow the same conditions as contracts between the director and corp.


Commercial Law Review

Dean Eduardo Abella



What is the IMPORTANCE OF STOCK CERTIFICATES: Once it is issued, it

is the best proof of full payment of ones subscription to the capital stock of the
When is it issued: Upon full payment of the subscription.
Note: A subscription contract is an indivisible contract. Thus, partial
payment is partial payment for all shares, and not full payment as to
some, and no payment as to the rest.
Who signs the stock certificates:
The secretary, who is in charge of the Stock Transfer Book
President or anyone authorized by the BOD or BL
*Stock certs. are not individually signed for publicly-listed corps.
a. File an AFFIDAVIT OF LOSS with the corp. sec.
b. Cause the publication of NOTICE OF LOSS once a week for
three weeks in a np of general circulation
c. Wait one year from last publication
d. File a BOND for the value of the shares if you want to claim
it earlier than one year, for such amount and in such form
satisfactory to the BOD
1. Publicly-listed corporations: Transferor must indorse the stock certificate
2. Not Publicly-listed corporations: Deed of Sale via stock brokers
parties themselves and involving shares listed in a stock


CORPORATE SEAL Its design, size, shape and configuration are

left with the BOD.

Q: What is the use of a corporate seal?

A: It is practically a paperweight, but real use is in making stock certificates.



What rules govern amendments: a) As provided in the by-laws, b) If none is

provided, then as provided by law.
What are the requirements for amending AOI under the law
Board resolution
Ratification by 2/3 of all outstanding shares, common and preferred,
or members
What are the requirements for amending BL under the law
Board resolution
Vote of the majority of OCS, common and preferred, or members


Copy the AOI or BL verbatim, underscore the amendments, and then put
in parentheses, the words as amended. The paper is letter size.
When filed, has to be accompanied by directors certificate. This
authenticates the amendment.
SEC then reviews the amended AOI or BL, and after approval, the SEC
issues a certificate of filing of amended BL or AOI.


a register where stock ownership is recorded. Corp. should register its stock
and transfer book within thirty days from issuance of certificate of registration.
There is a penalty for failure to register.
NOTE: Shares are personal property and thus, they may be mortgaged or


Commercial Law Review

Dean Eduardo Abella

What are PREFERRED SHARES: Shares which enjoy priority or preference
over common stocks
eg Preference in the distribution of dividends or assets. (Preference
in dividends normally includes preference in assets)



When new shares are issued to comply with the legal

requirement that the corporation go public, eg. Commercial bank
becoming a universal bank
When the shares are issued pursuant to a stock option plan
granted to officers and/or employees of the corp.

eg If a corporation is new, the shares are all common because the

corporation has no history of profitability yet. Thus, when do
corporations issue preferred shares? When it wants to raise money to
finance expansion programs sourced from the public.
What are PREFERRED REDEEMABLE SHARES: They are issued by the
corporation but the latter reserved the right to reacquire the same within a
certain period.
preferred shares which are redeemable within a certain period. If the
corporation does not redeem it, the stockholder may have his redeemable
shares converted into common shares.

What are PREEMPTIVE RIGHTS: Right of a stockholder to be given

preference or priority to subscribe to new issues of shares of a corp.
How it works: BOD sets aside part of the unissued shares for
subscription by SHs and others, but the present SHs are preferred.
Why grant preemptive rights: To enable present SHs to maintain the
present ratio of their holdings in the corp.
Are these rights personal: Yes, preemptive rights are personal
property arising from stockholders, but they are not strictly personal.
Are these rights waivable: YES.
Are these rights transferable: YES, either onerously or gratuitously.
Are these rights absolute: NO, because these are unavailable at
some times:
1. When so provided by the AOI or BLs, eg. Filinvest
2. When new shares are issued to pay for property which the
corporation needs and the owner wants to be paid in shares
3. When shares are for payment of previously contracted debts


Commercial Law Review

Dean Eduardo Abella

What are DIVIDENDS: These are earnings of the corporation.
Who can DECLARE DIVIDENDS: Only the BOD and only when they are
acting as such (and not as an executive committee), and only when there is
surplus profits.
When to declare dividends: Only when the corporation has surplus profits.
NOTE: According to the SC, no court can order the corporation to
declare dividends, which is an exercise of business judgment. No law
requires the declaration of dividends BUT the corp. should not retain
earnings in excess of 100% of its paid up capital.
SURPLUS v. EXCESS: Surplus is what is outside the hand when it
touches a boob. Excess is the other boob.

Re: Treasury Shares: These are issued by the corp. but later on
reacquired in its own name, as when its prices are down. It can
be used as property dividends BUT it must be ratified by 2/3 of
the outstanding common shares. It is not distributed as stock
dividends because stock dividends are distributed from the
unissued shares.
Stock Dividends Distribution requires Declaration by the BOD and
Ratification by 2/3 of the outstanding common stocks. Vote of the
preferred shares are not included because they are not affected.
*Why is ratification required: Common SHs will suffer a dilution of their

What are WATERED STOCKS: These are shares of stock that are issued by
the corporation, but for which shares, the corporation did not get the full fair

What are RETAINED EARNINGS: Those not declared.

What are RESTRICTED RETAINED EARNINGS: Part of the surplus
profits that is set aside for a definite purpose.

What are SURPLUS PROFITS: It is net profits after income tax, without any
impairment or diminution of paid-up capital.

What if there are unpaid creditors, who can they go after:

Recipient of the watered stocks
Directors who did not object to the issuance of the watered
o Includes those who abstained
o To validly object, the director must have filed a written
objection with the corporate secretary

What are PAID-UP or PAID-IN CAPITAL: Total amount paid by the

subscribers on their subscriptions. It is impaired or diminished by losses.
Appraisal Right
eg Paid-up capital is P500k. After 1y, there is a loss of P70k. Thus,
the net of PU is P430k. The following year, there is a loss of P20k,
bringing down the net of PU to P410k. The following year, there is
net profit of P110k. The paid-up capital is decreased by P90k (total
amount of losses) to restore it to the original amt of P500k using the
profits. The surplus would then just be P20k.
In what FORMS may dividends be declared
Cash Dividends paid in cash in the form of checks.
o What is required: Declaration by the BOD for payment or
distribution, which also fixes the date of distribution
Property Dividends paid by the properties of the corp., including the SS
of another corp.
o What is required: Declaration by the BOD, with the date fixed for
its distribution.

What is an APPRAISAL RIGHT: It is a stockholders right to demand payment

of the fair value of his shares under certain conditions:
1. There must be a board resolution authorizing:
a. Amendments of the AOI/BL that limits or restricts the existing
rights of a SH
b. Investments of the corporate funds in another corporation
c. Sales or dispositions of all or substantially all of the assets of
a corp.
d. Mergers or consolidations
2. The resolution must be ratified by the required number of votes, i.e. at
least 2/3 of the shares
3. The stockholder demanding payment shall have voted against the
a. He must be present in the meeting, in person or by proxy
b. He must not have abstained


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Dean Eduardo Abella


He must demand payment within thirty days from ratification

The corporation has sufficient surplus

What is the FAIR VALUE OF THE SHARES: It can either be the par value
(which remains constant), or book value or market value (which fluctuates).
(Charles: Average of market value and book value)
What is the BOOK VALUE:
Total Assets
Less: Total Liabilities
----------------------------------------Net Worth
Number of Shares
-----------------------------------------Book Value

How come there is need for surplus profits first

o GR: Surplus profit is needed because if there is none yet payments are
made, then it would be a violation of the TRUST FUND DOCTRINE.
o What is the TRUST FUND DOCTRINE: All subscriptions, paid
up and unpaid, constitute a trust fund for the benefit of the
creditors of the corporation. This is because the stockholder
promised to contribute resources, and which promise is legally
enforceable against him as a subscription receivable.
o eg. Corp. has P1000 worth of subscription. Such P1000 is the
asset of the corp. as much as it is the liability of the SH.
o E: There is no need for surplus profits if the corporation redeems
redeemable preferred shares.
o EE: Surplus profits is needed for redeemable shares if after the
redemption, the corporation can no longer carry out its purpose if the
shares are redeemed
Who owns the shares after payment to the SH: The corporation, as treasury

When do shares become treasury shares:
When the corporation eliminates fractional shares in dividends, as when
the shares have a value of less than one whole share
When the corporation bids for its own shares in delinquency sale

Do treasury shares have rights: NO, treasury shares have no voting rights or
right to receive dividends because the corporation itself cannot vote or receive
What is the NATURE OF TREASURY SHARES: These are assets of the
Is it good for a stockholder that a corporation has treasury shares: YES

When are shares delinquent: When the corporation calls for payment of the
unpaid subscription and the SH fails to pay
What are UNPAID SUBSCRIPTIONS: If the SH is unpaid on the
entire amount of subscription. There cannot be an unpaid amount on
the total number of shares BECAUSE subscriptions are indivisible.
What is a CALL: Demand for payment
1. Bring an action for specific performance to collect the unpaid amount
(which is an intra-corporate dispute)
2. Sell the delinquent shares in a public auction (in a delinquency sale). This
remedy is unique as the bid is only for the amount demanded by the
corporation for the least number of shares the bidder is willing to receive
for said amount
a. eg Value of delinquency shares is P100k covering 100 shares.
Bidder A bids P100k for 100 shares. Bidder B bids for P100k for
75 shares. Bidder C bids for P100k for 50 shares. Bidder C
wins. The difference between the value of the 50 shares won by
C and the value of the other 50 shares belongs to the delinquent
b. What if there is no bidder: The corp. may bid if it has sufficient
When there is a definite date, no demand needed for it to become
If down payment, balance is payable on call. Call is a demand, formal
demand to pay balance under the Corporation Code. If not paid, becomes


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Dean Eduardo Abella

Consequences of Delinquency
1.) Delinquent subscriber shall have no voting rights.
2.) Wont receive cash dividends, they are applied to unpaid subscription.
3.) If property or stock dividend, they are withheld.



What are MERGERS: It is the union of two or more corporations where one
survives and the other is dissolved.


Name of the corporation

Term In mergers, there is no difference in term from that of the
surviving corp.
Principal Office It can be changed in mergers or consolidations
Incorporators In mergers, they remain the same
Number of Directors
Authorized Capital Stock In mergers, amount and number of shares
may not be changed but the par value of the shares may be changed
Paid-up Capital Not changed
Valuation of Shares IMPT for purposes of exchange because the
shares of the dissolved corp. would be exchanged for the shares of
the surviving corp.

What are CONSOLIDATIONS: It is the union of two or more corporations

where all corporations are dissolved and a new one is created.
Why do corporations merge or consolidate:
To meet the minimum paid-up capital requirement of the govt. regulator,
eg banks and property insurers
For better profits, especially in industries with limited markets
For better business opportunities
For better corporate image
How do corporations merge or consolidate: Like courtship
eg Law requires a minimum paid up capital of P5B (banks). Bank A only has
P2B PU. Bank B only has P3B PU. Thus, Banks A and B can agree to merge
or consolidate. Either one can conduct due diligence on each other to find out
the worth of each others assets.
BOD of each of the corps. will pass a resolution for merger.
Each will present their respective resolutions to their respective SHs
for ratification (2/3 OCS)
Articles of Merger or Articles of Consolidation are passed and
submitted to the government regulator, eg Monetary Board or
Insurance Commissioner, which reviews it to determine whether it is
according to law. It then issues a formal indorsement. If the corps.
are not subject to a govt regulator, then the articles are filed directly
with SEC.
The merger or consolidation becomes effective upon approval by
SEC of the articles.

What is the CONTENT









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Dean Eduardo Abella

1. Expiration of the term
2. Cancellation of the Certificate of Registration of the Corporation by
SEC for the following reasons
a. Failure to file the by-laws within thirty days from the issuance
of the cert. of reg.
b. Failure to organize within two years from the issuance of the
cert. of reg.
c. Failure to carry out its primary purpose for at least five years
d. Failure to comply with the reportorial requirements of SEC
3. Order of Dissolution by the court upon finding that it is insolvent or
organized purposely to commit fraud

Liquidating dividend to the extent of return of capital, no tax, but any increase
is taxable.
Under the ROC, two years to file claim against estate. In case of dissolved
corporations, 3 years. Within this period corporate property is transferred to

GIS is filed within 30 days from date of annual meeting.
AFS within 30 days from filing with SEC.
Show cause letter in certain cases
Liabilities are paid from assets
What happens upon dissolution: WINDING UP OR LIQUIDATION
How long is the winding up process: Only god knows
How are the assets liquidated: The claims would be paid from the
residual assets.
o Stock: Distribute first to the preferred SHs with preference as
to assets. If the assets are insufficient, they are pro-rated
among the preferred SHs, and then to the common SHs.
o Foundation: Residual assets are normally escheated to the
govt as a condition by the BIR for its tax exemption.
o Non-Stock: Members share in the residual asset.
What are LIQUIDATING DIVIDENDS: What the SHs receive as their share in
the residual assets of the dissolving corporation.
What is the INCOME OF THE CORP.: Excess of the return of capital, and not
the mere return of capital.
What are DIVIDENDS: These are fruits, but not natural, industrial, or civil fruits
(under property) but classified as other fruits.


Commercial Law Review

Dean Eduardo Abella

What is a CORPORATION SOLE: It is a corporation organized by one
person, who is the head of a religious sect or denomination.
eg Catholic Church, Iglesia ni Kristo, Lutherans, Mormons. El Shaddai
is not a corporation sole because its preaching is the same as the
Catholic Church.
What is unique about it: There is no board of directors. THUS, to protect its
members, any disposition or encumbrance of real property requires judicial

What are ECs: It could be a stock or non-stock corp. Before, under the
Education Act of 1982, all must be organized as a non-stock corporation. But
such requirement did not apply to previous corporations because of vested
Stock Educational Corporations: FEU; Ph Womens University; CEU;
University of Pangasinan; NU; MAPUA; Univ. of Manila
Non-Stock ECs: Sectarian schools
What is unique about it: The law provides that:
- its BOD must be in multiples of five
- the term of the directors is five years, BUT the term of the first batch
is the agreed term that must be staggered and thus such terms
expire one after another

How do you know if a corporation is close: If the AOI provides that:
the number of shareholders should not exceed twenty, or
the shares should never be listed in any exchange, or
in case any shareholder would transfer his shares, then he must first
offer to transfer the same to the other shareholders under the same
terms and conditions that he would offer to non-shareholders. The
offer must have a term (and not an open term), eg 30d only to
acquire the shares of the SH.

Where must these conditions appear to bind the transferees: The limit on
the transferability of shares must appear in the AOI, the by-laws, and the
stock certificate. If restriction on transferability does not appear in stock
certificates but transferee was not informed of restriction, restriction does not
apply to him.
o If there is a deadlock, a Petition for Appointment of a Provisional
Director must be filed in court.
o Who is a PROVISIONAL DIRECTOR: He is appointed by the
court to sit in the BOD of a close corporation to resolved a
deadlock therein. The provisional director need not comply with
the qualifications of the BOD.
o Who may be appointed a provisional director: One who has
absolutely no interest in the corp. He must not own a share and
may not be a creditor.
o What is the term of the provisional director: As long as he is
Directly by the SHs themselves
o There is no need for an annual meeting because the most
important agenda thereof is the election of the BOD anyway
because none.
Domestic Corporation one organized on the Philippines regardless of
nationality of organizers
Foreign Corporation one organized in another country, even if organized by
Foreign Corporation may engage in business in the Philippines if it meets the
following requirements:
1.) Register with the SEC as a foreign corporation it must give certified
true copies of all incorporation documents in country of origin. If not in
English, with official translation in English.
2.) Inward remittance at the amount of prescribed capitalization.
3.) Appointment of a resident agent.
In case of bidding, must already be registered as a foreign corporation.


Commercial Law Review

Dean Eduardo Abella


What is the governing law: Securities Regulation Code
What are securities:
- These are promissory notes, bonds, and debentures
- It involves money
- They are broadly defined as instruments evidencing an investment in
a commercial enterprise, ie stock corporations
When are they used: When companies expand to address the higher demand
of its operations, they raise money by securing funds by reclassifying the
original or the organizers common shares as founders shares and issuing
common shares for new investors (which requires SEC approval).
Founders Shares: Exclusive right to be elected in the BOD for a
maximum period of five years from approval. After said period, they
become regular common shares and the AOI is amended.
Q: What if a corporation needs more working capital and is to be sourced from
the public: There are rules on the solicitation of investments
PUBLIC: More than 19 persons, natural or juridical
1. Before printing the brochures and other marketing documents, the
corporation should apply for the registration of its securities with the
2. There are two forms of investments in a commercial enterprise
a. By lending money
b. By becoming a part owner of an enterprise
What is a COMMERCIAL ENTERPRISE: One engaged in
commerce, or in buying and selling (stock corporations)
Are non-stock corporations covered by the securities law: It
is still pending determination.
Non-stock corporations
engage in limited commercial transactions and only for the
benefit of its members.

What is a BOND: It is a promissory note with a term exceed five

years, as when a corporation promises to pay on the PN at least until
after 5y
What are DEBENTURES: It is a bond secured by properties, as when
a corporation secured its investments with a real estate mortgage

Investment by being a part owner: Raising capital via stock ownership

Q: How does one make an investment, not as a loan but, as a co-investor: One
can invest in shares. It can be in preferred shares where there is a regular
return of income, or in redeemable and convertible preferred shares.
PREFERRED SHARES: Shares with the usual preferences on profits
and assets. eg Those guaranteed with a 10% per annum income or
dividends. (THUS, they are payable only if the corporation has
surplus profits).
corporation reserves the right to buy it back within a certain period.
added feature that if the corporation fails to redeem the shares, the
stockholder has the option to convert the preferred shares into
common shares
PREFERRED PARTICIPATING: Those which join the common
stockholders in receiving additional dividends. There are none in the
Q: If there are no profits this year and thus no dividend, what happens
if there are earnings next year: Shares could either be CUMULATIVE
CUMULATIVE PREFERRED SHARES: Those which receive what is
not received in prior years due to absence of surplus

Investment in form of a loan / Lending money: When a corporation borrows

money and signs a promissory note


received in the future. It must be expressly stipulated.

What is a PROMISSORY NOTE: It is a form of securities (where the

maker promises to pay back the amount borrowed), as when a
corporation borrows money and promises to pay it back

What is SUFFICIENT SURPLUS: eg Corporation has P50k dividends

payable, but it has P49,999. There is surplus but no one gets any
dividends because surplus is not sufficient.


Commercial Law Review

Dean Eduardo Abella

Q: What if investors come in as stockholders or part owners?

A: Issue certificates of stock

What is the PHILIPPINE STOCKS EXCHANGE: It is the Philippine stock


Q: If investments in form of stock, what shares?

A: Shares can be common or preferred, but preferred has variations. Ex
Redeemable, convertible, cumulative, non-cumulative, participating, nonparticipating.

Why are shares listed therein

- To raise capital, by making an Initial Public Offering
- To have a convenient facility for shareholders to buy and sell shares
of stock through the exchange or LISTING BY INTRODUCTION.
This is listing without the intent to raise capital

When redeemable, corporation reserves the right to buy back shares after a
certain period. Option is with the corporation. It cant be forced to buy back
shares. Redemption is a right and not a duty.

THUS, if you want to buy or sell shares, you can transact in a matter
of seconds. Where there is no market and you need eggs, you would
have to look for people who sell eggs.

Convertible preferred shares becomes common after a certain period.


Q: Can a corporation redeem if it has no surplus profits?

A: Yes, it is not in violation of the trust fund doctrine. However, the corporation
shouldnt redeem shares if as a consequence of redemption, it wont be able to
carry out its primary purpose.

EXCHANGE: In securities law, it is a corporation organized and

licensed by the SEC to put up and operate facilities for the purpose of
trading securities. It is barter or market or palengke in civil law.
Note: There used to be a PSE in Makati and in Manila. They
were merged.

Q: How do corporations entice the public: The corporation makes FINANCIAL

1. A commercial enterprise must first apply its securities for registration
with the SEC before it can cause the printing of its marketing
materials. It must file a REGISTRATION STATEMENT with SEC. It
is a document where the SEC requirements are attached.
a. Why: To protect the public from being defrauded by allowing
them to determine whether the corp. is in a sound condition
schedule or breakdown of the corporations receivables. Do
not take it on its face value.
2. The form of investment can either be a promissory note, bond,
debentures, certificate of preferred or common shares. Preferred
shares can be redeemable or convertible.
3. If the corporation intends to raise capital via stock ownership, it must
apply for listing of its shares in the Ph Stocks Exchange after
registering the securities with SEC. If investments are in the form of
shares or equity participation, after SEC registration, corporation
applies for listing with the PSE.

Note: Registration in the SEC is not a guarantee or assurance of listing in the

PSE. According to the SC (Puerto Azul Case), SEC cannot force PSE to list
shares. While SEC has supervision, it may not impose on the exchange.
Note: Not all securities are required to be registered in SEC.
1. Those issued by the Ph Govt or any of its political subdivisions
Why: Because the government will never defraud its citizens

Those issued by Foreign Govts with diplomatic ties with the Ph


Those issued by receivers in insolvency

Why: Because it undergoes judicial scrutiny


Those issued by corporations under the supervision of the BIR,

Insurance Commission, or HLURB
Note: Pre-need contracts are included in the jurisdiction of the IC


Those issued by banks other than its own shares of stock

Why: Because banks engage in daily transactions with the people. If
they are required to list securities, then it will never accept time


Commercial Law Review

Dean Eduardo Abella

PRE-NEED CONTRACTS: Contracts wherein a corporation, in consideration

of a promise of another to deliver an agreed amount in lump sum or in
installments, agrees to deliver an agreed amount or to render a particular
service upon the arrival of a period or the happening of an event; eg
educational plans, memorial plans (which includes internment fee plans)
Example: B anticipates the death and internment expenses of his
mother-in-law. Thus, he buys a burial lot at present. Is it a pre-need
contract? NO, even if it is in anticipation of a future need. There is no
particular service or delivery of money to be rendered by the
corporation. Here, the contract is a sale on installments.

What are EXEMPT TRANSACTIONS: May require prior registration, but may
apply for exemption. Its types are Certificated or Uncertificated
- When securities bought are sold as soon
as the prices go up
- These are paperless securities, where
ownership is evidenced by electronic
records only. Records are also kept by the
PSE, the broker, and the salesman, thus, it
is not entirely paperless
- The broker prepares a PURCHASE
CONFIRMATION, showing the number of
shares bought or sold, the price, and
purchased/sold, and the commission
- Easier to sell

- When securities are bought or sold to
build up stock ownership; it is a long-term
- Stock ownership is covered by
certificates of stock
- It takes longer to sell because certificated
stock ownership cannot be sold right away
as the broker must have these certificates
validated first (which takes 5 days)

Note: Only corporations can be licensed as brokers because

individuals and partnerships can die.
Who are DEALERS: Corporations licensed by the SEC to buy and
sell securities for its own account.

Acts for clients always
Earns commissions
Does not invest its own money

Acts for its own account, for itself
Males profits and suffers loss
Invests its own money

Who are SALESMEN: Persons representing stock brokers inside the trading
floor of the PSE and accepting orders for buying or selling from clients of the
broker. They also get a license, but a license is issued to salesmen is also
only for a specific broker
Note: All transactions in the PSE are conducted through the telephone
Note: The trading hours of the PSE is from 0930-1200, 1300-1530. It is
the time when you can buy or sell shares through the exchange
Note: Where do you find brokers? In their offices!
Note: All participants except investors are licensed. Licensing is annual.

The salesman, who has a cubicle in the PSE, then makes a post of
the shares that a client wants to buy or sell, in the computer of the
PSE. Orders to buy are then matched with orders to sell. Once they
are matched, the orders are removed in the computer.

How to Trade Stocks


Engage the services of a broker

What is a BROKER: Corporations licensed by SEC to buy and sell
securities for their clients or on their behalf.

Q: If shares are listed in the PSE, can you still sell directly to the buyer or buy
directly from the seller? YES, OVER-THE-COUNTER TRANSACTIONS are
allowed! It is the buying or selling of shares listed in the PSE but made directly
between the parties and no longer coursed through the exchange.

How much commission do brokers receive: It depends but

the maximum is 2% of the volume. They are paid because
they do the legwork in the SEC and BIR.
acts through its agents or officers known as persons associated with
brokers. They are also licensed.

- The buyer does not have to pay the brokers commission and stock
transfer tax, and the seller only pays CGT (if there is gain) and DST.


Commercial Law Review

Dean Eduardo Abella

Note: Tax avoidance scheme is to sell shares worth

P100,000 today and then the rest tomorrow so that the tax
rate applicable is only 5%.
- Hassle-free because the broker does all the work
- Buyer might be buying shares covered by fictitious certificates of
stock. In the PSE, certificated stock ownership cannot be sold right
away because the broker must have these certificates validated first
(which takes 5 days). (THUS, uncertificated SS are easier to sell)
- Parties themselves do the legwork

There are 3 participants in a market:

1.) Producer
2.) Buyer
3.) Seller/Intermediary
What are the different financial markets?
1.) Money market
2.) Capital market
3.) Bond market
4.) Stock market
Money Market a source of funds, payment period not more than a year

What is MARGIN TRADING: Trading is buy and sell. It is an arrangement

with the broker where the investor has not much money and the broker
advances part of the purchase price in the form of a loan.
C: Broker does not use its own money, they use money of the client.
Eventually, buyer may ask broker to advance money. This is called
margin trading, the broker pays part of the purchase price.
What are SHORT SALES: It occurs when a person sells shares he does not
own while the prices are up, but he later on buys back such same shares when
the prices are down, so he can return and deliver such shares which he had
earlier sold. In other words, the seller sells shares he borrowed and does not
own, but later he has to buy the same shares. This is legal.
What are WASH SALES: These are illegal. It is a stock price manipulation.
eg Case of BW Resources, Corp. It is a bingo company, whose
shares has a par value of P1. Over the years, the market value of its
shares rose to P2. Through manipulation, its market value very
quickly became P107 each. The next day, it fell to P7. THUS, those
who bought the shares at P107 suffered loss of P100 per share. It is
because of this that he PSE became very strict!
PSE RULE: When there is an unusual increase or decrease in the
prices of shares, the PSE suspends the trading of the shares of
such corporation to investigate the cause of the increase or decrease.
There is unusual increase or decrease when the value of the shares
increases or decreases by 10% in a days transaction.

Capital Market payment period is over a year but less than 5 years
Bond Market payment period is more than 5 years
Stock Market Source of funds for equity participation
Money market placements are made through a bank. A bank finds funds
through time depositors (usually) and after getting their consent, the amount is
loaned to the borrower. The bank is a mere intermediary.
Licensing persons associated with broker may only use the license with a
particular broker. If you move between brokers, you must get a new license.

What is a TENDER-OFFER: When a person or group of persons representing

the same interests wants to acquire: (a) at least 15% of a listed company or (b)
at least 15% of a company that is not listed but with assets worth P50M or
more and with no less than 200 stockholders, each owning no less than 100
shares, (c) at least 30% of any of said companies, within a period of twelve
months, makes a formal offer with the SEC, stating the price they are willing to
pay and the terms of payment. Upon approval by the SEC, such person or
group of persons can make announcements in newspapers.
Securities Regulation Code: SEC. 19. Tender Offers. 19.1. (a) Any person or
group of persons acting in concert who intends to acquire at least fifteen per
cent (15%) of any class of any equity security of a listed corporation or of any
class of any equity security of a corporation with assets of at least Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more stockholders
with at least one hundred (100) shares each or who intends to acquire at least
thirty per cent (30%) of such equity over a period of twelve (12) months shall
make a tender offer to stockholders by filing with the Commission a declaration
to that effect; and furnish the issuer, a statement containing such of the


Commercial Law Review

Dean Eduardo Abella

information required in Section 17 of this Code as the Commission may

prescribe. Such person or group of persons shall publish all requests or
invitations for tender, or materials making a tender offer or requesting or
inviting letters of such a security. Copies of any additional material soliciting or
requesting such tender offers subsequent to the initial solicitation or request
shall contain such information as the Commission may prescribe, and shall be
filed with the Commission and sent to the issuer not later than the time copies
of such materials are first published or sent or given to security holders.

OPEN: The price paid for the very first transaction of the day

It then merges with the doorman corporation and in the merger, it is the
doorman corporation that survives.
Example: Case of Urban Development Bank and EI Bank. Urban
Bank was a universal bank whose shares are listed. UB, however,
could no longer comply with the increased paid up capital requirement
of the BSP and it thus downgraded to a commercial bank. The result
was a bank run and holiday; it never reopened until the EI Bank
wanted its own shares to be listed and thus acquired and merged with
UDB. UDB was the surviving corp. but its name was changed to
Export and Industry Bank.

CLOSE: The price paid for the last transaction of the day
LOW: The lowest price in between the trading hours

BLUE-SKY LAW any law relating to investments

HIGH: The highest price of the day

INSIDER Could be a stockholder, officer, director or employee who because

of relation with corporation has information not available to public which
information could influence the price of shares of the corporation. An insider
need not necessarily be a member of a corporation but one who derives
information from another.

VOLUME: All shares of the corporation traded for the day

What are CLASS A and CLASS B SHARES: Class B shares are more
expensive BUT they are exactly the same and identical shares. They are
classified to comply with the citizenship requirement of the Constitution and
only for the purpose of monitoring stock ownership.
eg MERALCO, which is engaged in public service, classified its
shares into Class A and B. Class A shares comprise 60% and are
allowed only for Filipinos. Class B shares comprise 40% and are sold
to aliens. Class B shares are more expensive because there are less
of it and thus the law of supply and demand.

NOTE: Original and exclusive jurisdiction over intracorporate controversies is

no longer with SEC but with the RTC having jurisdiction over the principal
place of business.

FINAL NOTE: 09178012694. Text Sir for questions and, most importantly,
when we pass the Bar


PUT: A contract which gives the holder the right to buy a specified number of
shares for a specified price for a particular (definite) period
CALL: A contract which gives the holder the right to sell a specified number of
shares for a specified price for a particular (definite) period
STRADDLE: Combination of both
What is BACKDOOR LISTING: It is a legal scheme where a corporation
which wants to avoid the hassle of listing instead acquires the controlling
interest a corporation (2/3 of OCS) whose shares are already listed in the PSE
but which corporation is no longer operating (DOORMAN CORPORATIONS).


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