BRB - Commercial Law

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LETTERS OF CREDIT
I. DEFINITION/CONCEPT
Q: What is a letter of credit?
ANS: A letter of credit is an instrument issued by a bank on behalf of one of its
customers, authorizing an individual or a firm to draw drafts on the bank or one of
its correspondents for its account under certain conditions of the credit (Villanueva,
Commercial Law Review).
II. NATURE OF LETTER OF CREDIT

Q: What is the nature of a letter of credit?
ANS: In a letter of credit, there are three distinct and independent contracts: (BSBBa-BaS)
a.
The contract of sale between the buyer and the seller,
b.
The contract of the buyer with the issuing bank, and
c.
The letter of credit proper in which the bank promises to pay the seller
pursuant to the terms and conditions stated therein.
III.PARTIES TO A LETTER OF CREDIT

Q: Who are the parties to a letter of credit?
ANS: There would at least be three (3) parties: (BBaS)
a.
The buyer, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the documents of title;
b.
The bank issuing the letter of credit, which undertakes to pay the
seller upon receipt of the draft and proper documents of title and to
surrender the documents to the buyer upon reimbursement; and
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c.
The seller, who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to
the issuing bank to recover payment.
A.RIGHTS AND OBLIGATIONS OF PARTIES

Q: What are the rights and obligations of parties?
ANS: The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of:
a.
Advising (notifying) bank may be utilized to convey to the seller the

existence of the credit; or
b.
Confirming bank which will lend credence to the letter of credit issued by a
lesser known issuing bank; or
c.
Paying bank, which undertakes to encash the drafts drawn by the exporter.
Q: Should the buyer go to the issuing bank to claim payment?

ANS: No. Instead of going to the place of the issuing bank to claim payment, the
buyer may approach another bank, termed the negotiating bank, to have the draft
discounted (Bank of America v. CA, G.R. No. 105395, December 10, 1993).
IV.BASIC PRINCIPLES OF LETTER OF CREDIT
A.DOCTRINE OF INDEPENDENCE
Q: What is the doctrine of Independence?
ANS: The independent nature of the letter of credit may be:
a. Independence in toto where the credit is independent from the justification
aspect and is a separate obligation from the underlying agreement like for
instance a typical standby; or
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b. Independence may be only as to the justification aspect like in a commercial
letter of credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the payment may
be enjoined if in the light of the purpose of the credit the payment of the
credit would constitute fraudulent abuse of the credit.
B.FRAUD EXCEPTION PRINCIPLE

Q: What is the fraud exception principle?
ANS: The untruthfulness of a certificate accompanying a demand for payment
under a standby credit may qualify as fraud sufficient to support an injunction
against payment.
Q: ABC Company filed a Petition for Rehabilitation with the Court. An Order
was issued by the Court, (1) staying enforcement of all claims, whether
money or otherwise against ABC Company, its guarantors and sureties not
solidarily liable with the company; and (2) prohibiting ABC Company from
making payments of its liabilities, outstanding as of the date of the filing of
the Petition. XYC Company is a holder of an irrevocable Standby Letter of
Credit which was previously procured by ABC Company in favor of XYC
Company to secure performance of certain obligations. In the light of the
Order issued by the Court. Can XYC Company still be able to draw on their
irrevocable Standby Letter of Credit when due? Explain your answer (2012
Bar)
ANS: Yes. Under the first concept of the Independence Principle of a letter of credit,
the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby. Thus, though
there was a suspension of payments of claims, the letter of credit is independent
and a separate obligation for the ABC Company.
C.DOCTRINE OF STRICT COMPLIANCE

Q: What is the doctrine of strict compliance?
ANS: Documents tendered by the seller/ beneficiary must strictly conform with the
terms of the Letter of Credit, i.e. they must include all the documents required by
the Letter of Credit (Feati Bank v. CA, GR No. 94209, April 30, 1991).
Q: Bravo Bank received from Cisco Bank by registered mail an irrevocable
letter of credit issued by Delta Bank for the account of Y Company in the
amount of US$10,000,000 to cover the sale of canned fruit juices. The
beneficiary of the letter of credit was X Corporation which later on partially
availed itself of the letter of credit by submitting to Bravo Bank all documents
relative to the shipment of the cans of fruit juices. Bravo Bank paid X
Corporation for its partial availment. Later, however, it refused further
availment because of suspicions of fraud being practiced upon it and,
instead, sued X Corporation to recover what it had paid the latter. How would
you rule if you were the judge to decide the controversy? (2003 Bar)
ANS: Bravo Bank, which is the paying bank, can defer its payment to X
Corporation, the seller. Under the second concept of the independence principle of
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a letters of credit, payment may be enjoined if in the light of the purpose of the
credit, he payment of credit would constitute as fraudulent abuse of credit.
Moreover, under the fraud exception principle, fraud is sufficient to support an
injunction against payment. However, Bravo Bank cannot sue the seller. Instead,
Bravo Bank should sue the buyer as the latter has the obligation to reimburse the
bank whatever it has paid to the seller.
TRUST RECEIPTS LAW

I. DEFINITION/CONCEPT OF A TRUST RECEIPT
TRANSACTION
Q: What is a trust receipt?
ANS: It is a written or printed document signed by the entrustee in favor of the
entruster whereby the latter releases the goods to the possession of the former
upon the entrustees promise to hold said goods in trust for the entruster, to sell or
dispose of the goods, and to return the proceeds thereof to the extent of the amount
owing to the entruster; or to return the goods, if unsold or not otherwise disposed
of. (Sec. 4, PD 115, Trust Receipts Law).
Q: What is the concept of a trust receipt?
ANS: It is a separate and independent security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds to finance
the importation/purchases and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported/purchased (Nacu v.
CA, GR No. L-108638, March 11, 1994).
A. LOAN/SECURITY FEATURE
Q: What is the nature of a trust receipt transaction?
ANS: The nature of a trust receipt can best be illustrated in a letter of credit-trust
receipt arrangement, where a bank extends to a borrower a loan covered by the
letter of credit, with the trust receipt as security of the loan. It has a dual feature,
namely, a loan feature and a security feature (Nacu v. CA, Ibid., Vintola v. IBAA, GR
No. 78671, March 25, 1988). The money from the loan will then be used by the
entrustee to purchase goods from a seller in a separate contract of sale.
B. OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A
TRUST RECEIPT
Q: Who are the parties to a trust receipt transaction?
ANS: The following are the parties to a trust receipt transaction:
a. Entruster - Lender/financier
b. Entrustee - Borrower/ buyer/ importer is the person to whom the goods are
delivered for sale or processing in trust, with the obligation to return the
proceeds of sale of the goods or the goods themselves to the entrustee
c. Seller of the Goods - Not strictly and actually a party to the trust receipt
transaction; but a party to the contract of sale with the buyer/importer
(entrustee).
Q: Who has ownership of the goods, documents and instruments under a
trust receipt?
ANS: The Entruster is person holding title over the goods, documents or
instruments subject of a trust receipt transaction; releases possession of the goods
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upon execution of trust receipt. He is not the owner of the goods, but merely a
holder of security interest.
If it is made to appear in the trust receipt as the owner of the goods purchased, it is
merely theoretical, an artificial expedient and more of fiction than fact (Vintola v.
IBAA, GR No. 78671, March 25, 1988; PNB v. Pineda, GR No. 46658, May 13,
1991).
NOTE: See, however, the contrary view of Prof. Catindig and the rulings in
Colinares v. CA (GR No. 90828, Sept. 5, 2000) and Prudential Bank v. IAC (GR No.
74886, December 8, 1992). Professors Sundiang and Aquino, however, adhere to
the view that the entruster merely has a security interest in the goods and that the
ownership of the entruster over the goods is by virtue of a legal fiction. The
Entrustee is the owner of the goods purchased. In fact, the law imposes on him
the risk of loss of the goods under the doctrine of Res perit domino.
II. RIGHTS OF THE ENTRUSTER

Q: What are the rights of an entruster?
ANS: The following are the rights of an entruster:
a. Entitled to the proceeds from the sale of goods, documents or instruments
b. Entitled to the return of goods, etc. in case of non-sale;
c. To enforce all other rights conferred on him under the TRL;
d. To cancel the trust, take possession of goods, and to sell the goods in a
public sale in case of default;
e. May purchase at the intended public sale (Sec. 7, PD 115).
A. VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF
THE ENTRUSTEE/INNOCENT PURCHASER FOR VALUE
Q: What is the extent of security interest of the entruster against third
persons?
ANS: As against innocent purchaser for value security interest of entruster is NOT
preferred (Sec. 11, PD 115). As against creditors of entrustee security interest of
the entruster is preferred (Sec. 12, PD 115).
III. OBLIGATIONS AND LIABILITY OF THE

ENTRUSTEE
A.
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF

GOODS, DOCUMENTS OR INSTRUMENTS
Q: What is the obligation of an entrustee when there has been a sale or
disposition of goods, documents or instruments?
ANS: The following are the obligations of the entrustee:
a. Hold the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt
b. Receive the proceeds in trust for the entruster and turn over the same
to the entruster to the extent of the amount owing to the entruster or as
appears on the trust receipt
c. Insure the goods for their total value against loss from fire, theft,
pilferage or other casualties
d. Keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the entruster
(Sec. 9, PD 115).
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B.
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF

NON-SALE
Q: What is the obligation of an entrustee when there has been NO sale or
disposition of goods, documents or instruments?
ANS: The following are the obligations of the entrustee:
a. Return the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and
b. Observe all other terms and conditions of the trust receipt not contrary
to the provisions of this Decree (Sec. 9, PD 115).
C. LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR INSTRUMENTS
Q: Who bears the risk of loss of the goods, documents or instruments?
ANS: The risk of loss shall be borne by the entrustee. Loss of goods, documents or
instruments which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence of the entrustee,
shall not extinguish his obligation to the entruster for the value thereof (Sec. 10, PD
115).
D. PENAL SANCTION IF OFFENDER IS A CORPORATION
Q: What is the penal sanction if the offender is a corporation?
ANS: If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense (Sec. 13, PD 115).
IV. REMEDIES AVAILABLE

Q: What are the remedies available to the entruster against the entrustee?
ANS: If the entrustee did not comply with his obligations, he shall have the following
liability:
a.
Criminal liability for ESTAFA under both the TRL and the RPC;
b.
Liable for DAMAGES under Art. 33 of the NCC, without need of

proving intent to defraud because it is malum prohibitum
(Prudential v. IAC, Ibid).
Q: What are the remedies available to the entrustee if he has been criminally
charged even though he complied with his obligations?
ANS: The following are the remedies of the entrustee:
a.
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If the entrustee complied with his obligations before there

has been a criminal charge no criminal liability.
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b.
If the entrustee complied with his obligations after there

has been a criminal charge but before conviction
extinguishment of criminal liability.
Q: PB & Co., Inc., a manufacturer of steel and steel products, imported certain
raw materials for use by it in the manufacture of its products. The importation
was effected through a trust receipt arrangement with AB Banking
corporation. When it applied for the issuance by AB Banking Corporation of a
letter of credit, PB & Co., Inc., did not make any representation to the bank
that itwould be selling what it had imported. It failed to pay the bank. When
demand was made upon it to account for the importation, to return the
articles, or to turn-over the proceeds of the sale thereof to the bank, PB & Co.,
Inc.,also failed. The bank sued PB & Co.s President who was the signatory of
the trust receipt for estafa. The President put up the defense that he could not
be made liable because there was no deceit resulting in the violation of the
trust receipt. He also submitted that there was no violation of the trust receipt
because the raw materials were not sold but used by the corporation in the
manufacture of its products. Would those defenses be sustainable? Why?
(2003 Bar)
ANS: No, the defenses are not sustainable. The lack of deceit should not be
sustained because the mere failure to account for the importation, or return the
articles constitutes the abuse of confidence in the crime of estafa. The fact that the
goods arent sold but are used in the manufacture of its products is immaterial
because a violation of the trust receipts law happened when it failed to account for
the goods or return them to the Bank upon demand (Answers to Bar Examination
Questions by the UP Law Complex and Philippine Association of Law Schools).
V. WAREHOUSEMANS LIEN
(This topic is not found in the Trust Receipts Law. Warehousemans Lien is under
Act No. 2137 or the Warehouse Receipts Law. The said law is now excluded from
the 2013 Commercial Law Syllabus)
Q: What is the extent of a Warehousemans Lien?

ANS: The following are the extent of a Warehousemans Lien:
a. All lawful charges for storage and preservation of the goods;
b. All lawful claims for money advanced; and
c. All reasonable charges and expenses for notice and advertisement of the
sale, and the sale of goods (Sec. 27).
Note: In case of a NEGOTIABLE receipt, the charges that are present at the
time of the issuance of the receipt MUST BE STATED in the receipt with the
amounts thereof specified; otherwise, the warehouseman shall have no lien
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thereon, EXCEPT only for charges for storage of those goods subsequent to
the date of the receipt (Sec 30).
Q: How do you enforce a Warehousemans Lien?
ANS: The following are the different enforcements of a Warehousemans Lien:
a. By refusing to deliver the goods until his lien is satisfied (Sec. 31); or
b. By causing extrajudicial sale of the property and applying the proceeds to
the value of the lien (Secs. 33 & 34);
NOTE: Effects of sale of goods:
i.
The warehouseman is not liable for non-delivery even if the receipt given for the
goods were negotiated (Sec. 36);
ii. Where the sale was made without the publication required and before the time
provided by law, such sale is void and the purchaser of the goods acquires no
title in them (Eastern Paper Mills Co., Inc. v. Republic Warehousing Corp., GR
No. 85497, February 24, 1989).
c. By the other means allowed by law to a creditor against his debtor (Sec.
32); OR such other remedies allowed by law for the enforcement of a lien
against personal property (Sec. 35).
Q: What are the properties subject to the Warehousemans Lien?
ANS: The following properties are subject to the Warehousemans Lien:
a. Against the goods of the depositor who is liable to the warehouseman as
debtor whenever such goods are deposited; and
b. Against goods of other persons stored by the depositor who is liable to the
warehouseman as debtor with authority to make a valid pledge.
Q: When is a Warehousemans Lien lost?
ANS: The Warehousemans Lien is lost in the following instances:
a. By surrendering possession thereof; or
b. By refusing to deliver the goods when a demand is made with which he is
bound to comply (Sec. 29).
Q: What is the nature of a Warehousemans Lien?
ANS: The warehousemans lien is possessory in nature (PNB v. Se, Jr., GR No
119231, April 18, 1996). Involuntary parting with possession of goods ordinarily
does not result in loss of his lien by a warehouseman (93 C.J.S. 59).
Q: What is the effect of the release by Warehouseman of his Lien?
ANS: A warehouseman who has released his lien by the surrender of the goods
may not thereafter claim a lien on other goods of the same depositor for unpaid
charges on the goods surrendered if the goods were delivered to him under
different bailments (covered by separate receipts). However, the loss of the
warehousemans lien does not necessarily mean the extinguishment of the
depositors obligation to pay the warehousing fees and charges which subsists to
be a personal liability.
NEGOTIABLE INSTRUMENTS LAW

I. FORMS AND INTERPRETATION
Q: Define Negotiable Instrument.
ANS: It is a written contract for the payment of money which complies with the
requirements of Sec. 1 of the Negotiable Instruments Law (NIL), which by its form
and on its face, is intended as a substitute for money and passes from hand to
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hand as money, so as to give the holder in due course (HDC) the right to hold the
instrument free from personal defenses available to prior parties (Reviewer on
Commercial Law, Jose R. Sundiang and Timoteo B. Aquino, 2006 ed).
Q: What are the requisites for negotiability?
ANS: The requisites are the following: (WU-POA)
a. Must be in Writing and signed by the maker or drawer;
b. Must contain an Unconditional promise or order to pay a sum certain in
money;
c. Must be Payable on demand, or at a fixed or determinable future time;
d. Must be payable to Order or to bearer; and
e. When the instrument is Addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty (Sec. 1, NIL).
Q: What are the kinds of negotiable instruments?
ANS: The kinds of negotiable instruments are the following:
a. Promissory Note (PN) - An unconditional promise, in writing, made by
one person to another, signed by the maker engaging to pay, on
demand or at a fixed or determinable future time, a sum certain in
money, to order or to bearer (Sec. 184 NIL).
b. Bill of Exchange (BE) - An unconditional order, in writing, addressed by
one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay, on demand or at a fixed or
determinable future time, a sum certain in money, to order or to bearer
(Sec. 126, NIL).
c. Check - A bill of exchange drawn on a bank payable on demand (Sec.
185, NIL). It is also the most common form of bill of exchange.
d. Other Negotiable Instruments:
i.
Certificate of deposit issued by banks, payable to the depositor or his
order, or to bearer;
ii.
Trade acceptance;
iii.
Bonds, which are in the nature of promissory notes;
iv.
Drafts, which are bills of exchange drawn by one bank upon
another;
v.
Debenture
Q: Give examples of non-negotiable instruments.
ANS: The following are non-negotiable instruments:
a. Treasury Warrant being payable out of a particular fund of the national
treasury (Metrobank v. CA, GR No. 88866, February 18, 1991).
b. Postal money orders Under postal regulations, the bureau of posts can
refuse to pay on numerous grounds, thus the order is not unconditional;
c. Letter of Credit being payable to a specified person.
d. Trust Receipt being payable to the entrustor, conditioned upon the resale
of the goods.
e. Negotiable Document of Title, Bill of Lading and Warehouse Receipt being
payable in goods rather than money.
II.COMPLETION AND DELIVERY

Q: What is the effect of insertion of date?
ANS: The effects are the following:
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a.
Where the instrument or an acceptance or any indorsement thereon is

dated, such date is deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement, as the case may
be (Section 11, NIL).
b.
The instrument is not invalid for the reason only that it is ante-dated or
post-dated, provided this is not done for an illegal or fraudulent
purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery. (Section 12, NIL)
c.
Where an instrument expressed to be payable at a fixed period after

date is issued undated, or where the acceptance of an instrument
payable at a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the instrument shall
be payable accordingly. The insertion of a wrong date does not avoid
the instrument in the hands of a subsequent holder in due course; but
as to him, the date so inserted is to be regarded as the true
date (Section 13, NIL).
Q. When may blanks be filled?

ANS: Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person making the
signature in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. In order,
however, that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within a reasonable time. But if
any such instrument, after completion, is negotiated to a holder in due course, it is
valid and effectual for all purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority given and within a reasonable
time (Section 14, NIL).
Q: What is the effect if the instrument is incomplete and undelivered?

ANS: Where an incomplete instrument has not been delivered, it will not, if
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completed and negotiated without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed thereon before
delivery (Section 15, NIL).
Q: What is the effect if the instrument is complete but undelivered?

ANS: Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder in due course,
the delivery, in order to be effectual, must be made either by or under the authority
of the party making, drawing, accepting, or indorsing, as the case may be; and, in
such case, the delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the instrument.
But where the instrument is in the hands of a holder in due course, a valid delivery
thereof by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved. (Section 16, NIL).
Q: Jun was about to leave for a business trip. As his usual practice, he signed
several blank checks. He instructed Ruth, his secretary, to fill them as
payment for his obligations. Ruth filled one check with her name as payee,
placed P30,000.00 thereon, endorsed and delivered it to Marie. She accepted
the check in good faith as payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and apologized to Jun. Immediately
he directed the drawee bank to dishonor the check. When Marie encashed the
check, it was dishonored. (2006 Bar)
a.
Is Jun liable to Marie?

ANS: Yes. This covers the delivery of an incomplete instrument, under Section
14 of the Negotiable Instruments Law, which provides that there was prima facie
authority on the part of Ruth to fill-up any of the material particulars thereof.
Having done so, and when it is first completed before it is negotiated to a holder
in due course like Marie, it is valid for all purposes, and Marie may enforce it
within a reasonable time, as if it had been filled up strictly in accordance with the
authority given.
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b.
Supposing the check was stolen while in Ruth's possession and a thief
filled the blank check, endorsed and delivered it to Marie in payment for
the goods he purchased from her, is Jun liable to Marie if the check is
dishonored?
ANS: No. Even though Marie is a holder in due course, this is an incomplete and
undelivered instrument, covered by Section 15 of the Negotiable Instruments
Law. Where an incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid contract in the hands of
any holder, as against any person, including Jun, whose signature was placed
thereon before delivery. Such defense is a real defense even against a holder in
due course, available to a party like Jun whose signature appeared prior to
delivery (Answers to Bar Examination Questions by the UP Law Complex and
Philippine Association of Law Schools).
III.SIGNATURE
Q: What is the liability of a person signing in trade name?
ANS: No person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one who signs in a
trade or assumed name will be liable to the same extent as if he had signed in his
own name (Section 18, NIL).
Q: What is the liability of a person signing as an agent?
ANS: The signature of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and the authority of
the agent may be established as in other cases of agency (Section 19, NIL).
NOTE: Where the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized; but the mere addition of
words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability (Section 20,
NIL).
Q: What is the effect of indorsement by a minor or a corporation?
ANS: The indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from want of capacity,
the corporation or infant may incur no liability thereon (Section 22, NIL).
Q: What is the effect of a forged signature?
ANS: When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority (Section 23, NIL).
Q: Who are the persons precluded from setting up the defense of forgery?
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ANS: The persons precluded from setting up the defense of forgery are the
following:
a. Persons who warrant or admit the genuineness of the signature in
question. Warrantors of genuineness include:
i. Indorsers
ii. Persons negotiating by mere delivery; and (3) acceptors.
b. Those who by their acts, silence, or negligence, are estopped from
c. Setting up the defense of forgery.
NOTE: These include acts or omission that amounts to ratification, express or
implied. BUT a person precluded from raising the defense of forgery may still
recover damages under the Civil Code provisions on quasi-delicts.
Q: What is the 24-Hour Clearing Rule?
ANS: When the drawee bank fails to return a forged check or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is absolved
from liability (Republic Bank vs. CA, GR No. 42725, April 22, 1991).
Q: What is the Cut Off Rule?
ANS: Parties PRIOR to the forged signature are cut-off from the parties AFTER the
forgery in the sense that prior parties cannot be held liable and can raise the
defense of forgery. The holder can only enforce the instrument against parties who
became such after the forgery.
Q: What is the exception to the cut-off rule?
ANS: The cut-off rule does not apply when the prior parties are precluded from
setting up the defense of forgery either because of their warranties, representation
or negligence (Gempesaw v. CA, 218 SCRA 682).
Illustration:
C forged then indorsed to D
M ---- A ---- B ---- C ---- D ---- E ---- H
a.
A and B can raise the defense of forgery for being parties prior to the forgery
as against C, D, E and H unless precluded from setting up the forgery.
b. H can enforce the instrument only against C, the forger, D, E, and M, the
maker unless precluded from setting up the forgery.
NOTE: The liability of maker is absolute if the instrument involved is a payable to
BEARER.
Q: State the rules on forgery.
ANS: The following are the rules on forgery:
PROMISSORY NOTES
Order Instrument
Bearer Instrument
Makers signature forged
Maker is not liable.
Maker is not liable because he never
became a party to the instrument.
Indorsers subsequent to forgery are
liable because of their warranties.
[Type text]
Indorsers may be made liable to

those persons who obtain title
[Type text]
through their indorsements.
Party who made the forgery is liable.
Payees signature forged
Maker and payee not liable.
Maker is liable.
Indorsers subsequent to forgery are Indorsement is not necessary to title
liable.
and the maker engages to pay holder.
Indorsers signature forged
Maker, payee and indorser whose
Maker is liable. (indorsement is not
signature was forged is not liable.
necessary to title and the maker
engages to pay the holder).
Indorser whose signature was forged
liable because of their warranties.
not liable.
BILLS OF EXCHANGE
Order Instrument
Bearer Instrument
Drawers signature forged
Drawer is not liable because he was
Drawer is not liable.
never a party to the instrument.
Drawee is liable if it paid.
Drawee is liable if it paid (no recourse
to drawer) because he admitted the Drawee cannot recover from the
genuiness of the drawers signature.
collecting bank because it is bound
to know the drawers signature since
Drawee cannot recover from the the latter is its depositor.
collecting bank because there is no
privity between the collecting bank The drawee may recover from the
and the drawer. The latter does not drawer when the latters negligence
give any warranty regarding the is the proximate cause of the loss or
signature of the drawer (Associated contributed thereto (Gempesaw v.
Bank v. CA, 208 SCRA 465).
CA, Ibid.)
Indorsers subsequent to forgery liable
(such as collecting bank or last
endorser).
Party who made the forgery is liable
Payees signature forged
Drawer is liable (his indorsement is
not necessary to pass title).
Drawer, drawee and payee not liable.
Cut-off Rule applies

liable (such as collecting bank).
Drawee is liable (No privity between

drawer
and
payee
because
indorsement of payee is not
necessary) (Ang Tek Lian case, GR
L-2516, September 25, 1950)
Payee is not liable.
Collecting bank is liable because of
warranty.
But it may recover form the person
[Type text]
[Type text]
who forged the indorsement on the
check and deposited or encashed the
same (Jai-Alai Corp. v. Bank of PI,
GR No. L-29432, August 6, 1975).
Indorsers signature forged
Drawer, payee and indorser whose
Drawer is liable (indorsement not
signature was forged not liable. (Cut
necessary to title).
off rule does NOT apply)
Drawee is liable if it paid.
Drawee is liable.
Indorser whose signature was forged
Indorsers subsequent to forgery are is liable because indorsement is not
liable (such as collecting bank).
necessary to title.
Q: CX maintained a checking account with UBANK, Makati Branch. One of his

checks in a stub of fifty was missing. Later, he discovered that Ms. DY forged
his signature and succeeded to encash P15,000 from another branch of the
bank. DY was able to encash the check when ET, a friend, guaranteed due
execution, saying that she was a holder in due course. Can CX recover the
money from the bank? (2004 Bar)
ANS: Yes, CX can recover from the bank. Under Section 23 of the Negotiable
Instruments Law, forgery is a real defense. The forged check is wholly inoperative
in relation to CX. CX cannot be held liable thereon by anyone, not even by a holder
in due course. Under a forged signature of the drawer, there is no valid instrument
that would give rise to a contract which can be the basis or source of liability on the
part of the drawer. The drawee bank has no right or authority to touch the drawer's
funds deposited with the drawee bank (Answers to Bar Examination Questions by
the UP Law Complex and Philippine Association of Law Schools).
IV.CONSIDERATION
Q: What constitutes consideration under the negotiable instruments law?
ANS: Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have
become a party thereto for value (Sec. 24 NIL).
It includes:
a. An antecedent or pre-existing debt;
b. Value previously given (Sec. 25, NIL);
c. Lien arising from contract or by operation of law but the holder is
deemed a holder for value to the extent of his lien (Sec. 27, NIL);
d. That at the time of its negotiation to him, he has had no notice of
any infirmity in the instrument or defect in the title of the person
negotiating it (Sec. 52, NIL).
NOTE: Consideration is not relevant to the negotiability of an instrument but is
significant on the question of whether or not one is a holder in due course. Value
[Type text]
[Type text]
is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time (Sec. 25, NIL). Where value has at any time
been given for the instrument, the holder is deemed a holder for value in respect to
all parties who become such prior to that time (Sec. 26, NIL).
Where the holder has a lien on the instrument arising either from contract or by
implication of law, he is deemed a holder for value to the extent of his lien (Sec. 27,
NIL). Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a defense
pro tanto, whether the failure is an ascertained and liquidated amount or
otherwise (Sec. 28, NIL).
V.ACCOMMODATION PARTY (AM)

Q: Who is an accommodation party?
ANS: An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person.
Q: What are the requisites of an accommodation party?
ANS: The requisites of an accommodation party are the following:
a. He must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser;
b. He must not receive value therefor; and
c. He must sign for the purpose of lending his name or credit (Sec. 29, NIL).
NOTE: Without receiving value therefor, means without receiving
value by virtue of the instrument (Clark v. Sellner, GR 16477,
November 22, 1921).
Q: What constitutes as an accommodation?
ANS: It is a legal arrangement under which a person, called the accommodation
party, lends his name and credit to another called the accommodated party, without
any consideration.
Q: What is the liability of an accommodation party?
ANS: An accommodation party is liable on the instrument to a holder for value
notwithstanding such holder, at the time of the taking of the instrument, knew him to
be only an accommodation party. Hence, as regards, an accommodation party, the
4th condition, i.e. lack of notice of infirmity in the instrument or defect in the title of
the persons negotiating it, has NO application (Stelco Marketing Corp. v. Court of
Appeals, GR No. 96160, June 17, 1992).
Q: Dagul has a business arrangement with Facundo. The latter would lend
money to another, through Dagul, whose name would appear in the
promissory note as the lender. Dagul would then immediately indorse the
note to Facundo. Is Dagul an accommodation party? Explain. (2005 Bar)
ANS: Yes. Dagul is an accommodation party because in the case at bar, he is
essentially, a person who signs as maker without receiving any consideration, signs
as an accommodation party merely for the purpose of lending the credit of his
name. And as an accommodation party he cannot set up lack of consideration
against any holder, even as to one who is not a holder in due course. (Answers to
[Type text]
[Type text]
Bar Examination Questions by the UP Law Complex and Philippine Association of
Law Schools).
Q: What is the liability of an accommodated party?
ANS: When the accommodation party makes payment to the holder of the notes,
they have the right to sue the accommodated party for reimbursement since the
relation between them is in effect of a principal and sureties, the accommodation
parties being the sureties.
VI.NEGOTIATION
Q: What constitutes negotiation?
ANS: The transfer of the instrument from one person to another so as to constitute
the transferee a holder thereof constitutes negotiation (Sec.30, NIL).
a. Negotiation
i. By indorsement completed by delivery (in case of order instrument);
ii. By mere delivery. (in case of bearer instrument)
b. By operation of law - The full title to a bill may pass without
assignment, indorsement, or delivery, i.e. by operation of law.
Q: What are the instances when title to a bill may as without indorsement or
delivery?
ANS: The following are the instances (Ba-De-De)
a. By the death of holder, where the title vests in his personal
representatives;
b. By the bankruptcy of the holder, where the title vests in his assignee or
trustee;
c. Upon the death of a joint payee or indorsee, in which case the title
vests in the surviving payee or indorsee in general (Commercial Laws
of the Philippines, Vol. 1, Agbayani, 1992 ed).
Q: What are the kinds of indorsement?
ANS: The kinds of indorsement are the following:
a. Special Specifies the person to whom or to whose order, the
instrument is to be payable (Sec. 34, NIL).
b. Blank Specifies no person to whom or to whose order the
instrument is to be payable.
c. Absolute One by which the indorser binds himself to pay:
i. Upon no other condition than failure of prior parties to do so; and
ii. Upon due notice to him of such failure
d. Conditional Right of the indorsee is made to depend on the
happening of a contingent event. Party required to pay may
disregard the conditions (Sec. 39, NIL).
e. Restrictive An indorsement is restrictive, when it either:
i. Prohibits further negotiation of the instrument; or
ii. Constitutes the indorsee as the agent of the indorser (e.g. indorsement for
deposit); or
iii. Vests the title in the indorsee in trust for or to the use of some other persons.
NOTE: Mere absence of words implying power to negotiate does not make
an indorsement restrictive (Sec. 36, NIL). The omission of words of
negotiability in the indorsement does not affect the negotiability of the
instrument BUT such omission in the body thereof will render the
instrument non-negotiable.
[Type text]
[Type text]
f.
Qualified Constitutes the indorser a mere assignor of the title to

the instrument (Sec. 38, NIL).
NOTE: It is made by adding to the indorser's signature words like "sans
recourse, without recourse", "indorser not holder", "at the indorser's own
risk", other terms of similar import.
Without Recourse means without resort to a person secondarily liable
after the default of the person primarily liable
g. Joint Indorsement payable to the order of 2 or more persons
(Sec. 41, NIL).
NOTE: As a general rule, where the instrument is payable to two or more
payees ALL must indorse in orderthat the instrument may be validly
negotiated.
Exceptions:
i. Where the payees or indorsees indorsing has the
authority to indorse for the others, and
ii. Where the payees or indorsees are partners (Sec. 41,
NIL).
h. Irregular A person who, not otherwise a party to an instrument,
places thereon his signature in blank before delivery(Sec. 64, NIL).
Q: What are the effects of restrictive indorsement?
ANS: Restrictive Indorsement confers upon the indorsee the right to: (PAT)
a. Receive payment of the instrument;
b. Bring any action thereon that the indorser could bring;
c. Transfer his rights as such indorsee, where the form of the
d. indorsement authorizes him to do so (Sec. 37, NIL)
VII.RIGHTS OF THE HOLDER

Q: Who is a holder?
ANS: A holder is a payee or indorsee of a bill or note who is in possession of it or
the bearer thereof entitled to receive the sum for which it calls (Sec. 191, par. 7,
NIL).
Q: What are the classes of holders?
ANS: The classes of holders are the following:
a. Holders In Due Course one who has taken the instrument under the
conditions of Sec. 52 and holds the instrument free from personal defenses
available to prior parties;
b. Simple Holders Or Holders Not In Due Course One who became a holder
without any, some or all of the requisites under Sec. 52. He holds the
instrument subject to the same defenses as if it were non-negotiable.
c. Holders For Value Where value has at anytime been given for the
instrument, the holder is deemed a holder for value in respect to all parties
who become such prior to that time. (Sec.26, NIL)
Q: Who is a holder in due course? (HDC)
ANS: A holder in due course is a holder who has taken the instrument under the
following conditions: (COVI)
a. That the instrument is complete
and regular upon its face;
NOTE: An instrument is incomplete when it is wanting in any material particular
proper to be inserted in a negotiable instrument (Sec. 14,NIL).
[Type text]
[Type text]
b.
That he has become a holder of it before it was overdue and without

notice that it had been previously dishonored, if such were the case;
NOTE: A holder who takes an overdue instrument is put on inquiry although he is
not actually aware of any existing defense of a prior party. A person taking an
overdue instrument should certainly question why the instrument is still in
circulation even if it is overdue (Notes and Cases on Banks, Negotiable
Instruments and Other Commercial Documents, Timoteo Aquino, 2006ed).
c. That he has taken it in good faith and for value;
NOTE: Although good faith on the part of the holder is presumed, such
presumption is destroyed if the payee or the indorsee acquired possession of the
instrument under circumstances that should have put him to inquiry as to the title
of the holder who negotiated the instrument. (De Ocampo v. Gatchalian, et al.,
GR No. L-15126, November 30, 1961).
Good faith refers to the indorsee or transferee, not to the indorser or transferor
of the instrument.
d.
That at the time of its negotiation to him, he has had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it
(Sec. 52, NIL).
NOTE: Notice to holder covers only situations where the holder had actual or
chargeable knowledge of the infirmity or defects or must have acted in bad faith
(Sec.56, NIL). Defects in the title results from the acquisition or the negotiation
of the instrument.
In the acquisition thereof, the title of a person becomes defective when he
obtains the instrument or any signature thereto by (1) fraud; (2) force, duress or
fear; (3) other unlawful means; (4) for an illegal consideration.
In the negotiation thereof, the title becomes defective when he negotiates it in (5)
breach of faith; or under (6) such circumstances that amount to fraud(Sec. 55,
NIL).
Q: AB issued a promissory note for P1,000 payable to CD or his order on
September 15, 2002. CD indorsed the note in blank and delivered the same to
EF. GH stole the note from EF and on September 14, 2002 presented it to AB
for payment. When asked by AB, GH said CD gave him the note in payment for
two cavans of rice. AB therefore paid GH P1,00 on the same date. On
September 15, 2002, EF discovered that the note of AB was not in his
possession and he went to AB. It was then that EF found out that AB had
already made payment on the note. Can EF still claim payment from AB? (2002
Bar)
ANS: No. EF cannot claim payment from AB. EF is not a holder of the promissory
note. To make the presentment for payment, it is necessary to exhibit the instrument,
which EF cannot do because he is not in possession thereof. (Answers to Bar
Examination Questions by the UP Law Complex and Philippine Association of Law
Schools).
Q: What is the effect of acquiring notice of infirmity before payment of full
amount of consideration?
ANS: Transferee will be deemed a holder in due course only to the extent of the
amount therefor paid by him (Sec. 54, NIL).
Q: What are the defenses against the holder?
[Type text]
[Type text]
ANS: The right of the holder to enforce payment of a negotiable instrument may be
defeated by the defenses that may be raised by the person primarily or secondarily
liable.
Real Defenses
Personal Defenses
Nature
Those that attach to the instrument
Those which are available only against
itself and are available against all
a person not a holder in due course or
holders, whether in due course or
a subsequent holder who stands in
not, but only by the parties entitled
privity with him. (a.k.a. equitable
to raise them. (a.k.a absolute
defenses)
defenses)
Status of contract
Void
Voidable
Availability against HDC
Available against HDC
Not available against HDC
Defenses
Key: PAID-WIFI-MUD-FEM
Key: CUBIC-RAIN-WIFI-MICU
1. Prescription
1. Non- delivery of complete
2. Material Alteration (Sec.124);
instrument (Sec. 16);
3. Illegality if declared void for 2. Ultra vires acts of corporations
any purpose;
where the corporation has the
4. Duress amounting to forgery;
power to issue negotiable paper
5. Want of authority of agent;
but the issuance was not
6. Non-Delivery of Incomplete
authorized for the particular
Instrument (Sec. 15);
purpose for which it was issued;
7. Forgery (Sec. 23);
3. Negotiation in breach of faith (Sec.
8. Insanity where the insane
55);
person
has
a
guardian 4. Insertion of wrong date in an
appointed by the court;
instrument (Sec. 13);
9. Minority (available only to the 5. Conditional Delivery of Complete
minor);
instrument;
10. Ultra Vires Act of Corporation;
6. Filling up blank beyond reasonable
11. Discharge in Insolvency;
time (Sec. 14);
12. Fraud in Factum or Esse 7. Absence or failure of consideration,
Contractus
or
Fraud
in
whether partial or total (Sec. 28);
Execution;
8. Illegal consideration (Sec. 55);
13. Execution
of
instrument 9. Filling up blank not within authority
between public enemies;
(Sec. 14);
14. Marriage in the case of a wife;
10. Want of authority of agent where
he has apparent authority;
Note: An instrument subject to real 11. Fraud in Inducement;
defense cannot be enforced against 12. Acquisition by force, duress or fear
the person to whom the defense is
(Sec. 55);
available but it can be enforced 13. Intoxication;
against those whom such defense is 14. Mistake;
not available such as under Sec. 23. 15. Insanity where there is no notice of
insanity on the part of the one
contracting with the insane person;
16. Negotiation under circumstances
that amount to fraud (Sec. 55);
17. Acquisition of the instrument by
unlawful means (Sec. 55).
[Type text]
[Type text]
Q: What are the effects of certain defenses?

ANS: The following are the effects of certain defenses:
a. Minority
NOTE: Negotiation by a minor passes title to the instrument (Sec. 22).
Furthermore, under secs. 60, 61 and 62, the maker, drawer and acceptor, by
making, drawing and accepting the instrument, admits the capacity of the
payee to indorse. But the minor is not liable and the defense is personal to
him. Thus, other parties who are capacitated cannot invoke such defense.
However, the minor shall be liable under the following exceptions: (1) the
minor actively misrepresents his age and it appears that he is physically of
such age (estoppel); (2) the minor kept the fruits or benefits; and (3) the minor
spent the money in good faith (Art. 1427, NCC).
b. Fraud
i.
Fraud in Factum (Real Defense)
In case of FRAUD IN FACTUM, the person who signs the instrument lacks
knowledge of the character or essential terms of the instrument. But the
defense is not available if the party involved had reasonable opportunity to
obtain such knowledge.
An essential element is that the maker or indorser must have exercised
ordinary diligence and in no manner contributed negligently to the
imposition.
ii. Fraud in Inducement (Personal Defense)
The person who signs the instrument intends to sign the same as a NI but
was induced by fraud.
c. Incomplete but Delivered NI (Sec. 14, NIL)
i.
Prima Facie Authority to Complete the Instrument
Requisites:
(a) Want of a material particular in the instrument; NOTE: Material particular
includes the matters stated in Sec. 125 of the NIL.
(b) Possession thereof by a person;
(c) That such person had authority to fill up the bank:
c.1 Strictly in accordance with the authority given; and
c.2 Within a reasonable time.
ii. Prima Facie Authority to Fill It Up For Any Amount
Requisites:
(a) Signature on a blank paper;
(b) Person signing in blank delivers it to another;
(c) Delivery was for the purpose of converting it into a negotiable
instrument.
NOTE: If the holder of the instrument, after it was filled up, is a holder in due
course, the holder may enforce the instrument as if it has been filled up
strictly in accordance with the authority given and within a reasonable time
(Notes and Cases on Banks, Negotiable Instruments and other Commercial
Documents, Aquino, 2006 ed).
d. Incomplete and Undelivered NI (Sec. 15, NIL)
Two steps in the execution of a negotiable instrument:
i.
The act of writing the instrument completely and in accordance
with Sec.1; and
[Type text]
[Type text]
ii.
The delivery of the instrument with the intention of giving effect

thereto.
NOTE: If completed and negotiated without authority, not a valid contract

against a person who has signed before delivery of the contract even in the
hands of holders in due course but subsequent indorsers are liable. This is a
REAL defense which belongs to the drawer (or parties, if any, prior to the
delivery of the instrument to the payee) against any holder.
Reason: The law does not make any distinction between a holder in due
course and one who is not a holder in due course.
Where an INCOMPLETE and UNDELIVERED instrument is in the hands of a
holder in due course, there is a PRIMA FACIE presumption of delivery which
the maker may rebut by proof of non-delivery.
e. Complete but Undelivered NI (Sec. 16, NIL)
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
f. Absence or Failure of Consideration (Sec. 28, NIL)
Personal defense to the prejudice of a party and available against any person
not holder in due course.
Partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise (Sec. 29).
g. Prescription
Refers to extinctive prescription and may be raised even against a holder in
due course. Under the Civil Code, the prescriptive period of an action based
on a written contract is 10 years from accrual of cause of action.
h. Material Alteration
It is a partial real defense because a holder in due course can enforce it
according to its original tenor.
An alteration is said to be material if it alters the effect of the instrument. In
other words, a material alteration is one which changes the items which are
required to be stated under Sec. 1 of the Negotiable Instruments Law (PNB v.
CA GR L-26001, October 29, 1968).
i.
Forgery
Counterfeiting or fraudulent alteration of any writing, which may consist of:
i. Signing of anothers name with intent to defraud; or
ii. Alteration of an instrument in the name, amount, name of payee, etc. with
intent to defraud.
Effects:
a). When a signature is forged or made without the authority of the
person, the signature (not the instrument itself and the genuine
signatures) is wholly inoperative.
b). NO right to retain the instrument, or to give discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired.
Exception: Unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or
want of authority (Sec. 23, NIL).
XIII.LIABILITIES OF PARTIES
Q: When do the liabilities of the parties attach?
[Type text]
[Type text]
ANS: The primary and secondary liabilities of the parties attach in the following
instances:
a. Primary Liability - AS TO THE MAKER, the unconditional promise attaches
the moment the maker makes the instrument. While AS TO THE
ACCEPTOR, the acceptors assent to the unconditional order attaches the
moment he accepts the instrument. No further act is necessary in order for
the liability to accrue. What is necessary only is for the holder to enforce
such liability by presenting it for payment.
b. Secondary Liability a. Indorser; and b. Drawer
Their liability cannot be immediately enforced. There are necessary steps which
should be taken in order to charge these persons.
Q: What are the liabilities of the maker?
ANS: The liabilities are the following:
a. Engages to pay according to the tenor of
the instrument
b. Admits the existence of the payee and his
capacity to indorse.
NOTE: The liability of the maker is primary and unconditional; therefore he
cannot shift his liability to any person without the payees consent
Q: What are the liabilities of the drawer?
a. There is a contractual relation between the drawer and the
drawee.
b. A drawer may not unilaterally discharge himself from liability on
checks issued by him as security and not for value and negotiated
to a holder in due course by the mere expediency of withdrawing
his funds from the drawee bank (State Investment House Inc. v
CA, GR No. 101163, January 11, 1993).
c. When the holder deposits his check with the collecting bank, the
nature of relationship created is one of agency, that is, the bank is
to collect from the drawee of the check the corresponding
proceeds. Thus, the privity of contract is between the holderdepositor and the the collecting bank. There is no prIvity of
contract between the drawer and the collecting bank.
d. The drawer is secondarily liable to (1) the holder, or (2) to the
indorser who is compelled to pay.
e. Sec. 61 allows the drawer to negative or limit his liability by
express stipulation.
Q: What are the liabilities of an acceptor?

a.
b.
c.
Engages to pay according to the tenor of his acceptance

Admits the existence of the drawer, the genuineness of his signature and his
capacity and authority to draw the instrument; and
Admits the existence of the pay and his capacity to indorse
NOTE: The warranty established by Sec. 62 is in favor of holders of the
instrument after acceptance and when the drawee bank cashes or pays
[Type text]
[Type text]
the check, the cycle of negotiation is terminated; it is illogical thereafter to
speak of subsequent holders who can invoke the warranty provided in
Sec. 62 against the drawee (PNB v. National City Bank of New York, et
al., GR No. 43596, October 31, 1956).
Q: Who is a general indorser?

ANS: A general indorser is one who indorses the instrument without any
qualification. He is secondarily liable to the holder or any subsequent indorser who
may be compelled to pay the instrument on account of Sec. 66. By indorsing the
instrument, the indorser enters into a contract with certain fixed and definite terms,
which may not be varied or contradicted by parole evidence
Q: Who is an irregular indorser?

ANS: Although the law does not state that all irregular indorsers are
accommodation parties, they are usually accommodation parties (Sec. 64, NIL.). To
be considered as an irregular indorser:
a.
b.
c.
A person must not be a party to the instrument;

He must have signed the instrument in blank; and
He must have signed before delivery.
NOTE: The party is called an irregular or an anomalous indorser because he
indorses in an unusual, singular or peculiar manner. His name appears where we
would naturally expect another name.
Q: What is the liability of an irregular indorser?
ANS: An irregular indorser is liable as a general indorser because he indorses
without qualification.
Q: What are the warranties of a maker?
ANS: The maker warrants that:
a. He will pay according to the tenor of the promissory note;
b. The payee exists; and
c. The payee has capacity to endorse
Q: What are the warranties of an acceptor?
ANS: An acceptor warrants that
a. The existence of the drawer;
b. Genuineness of drawers signature;
c. Capacity and authority of drawer to draw the instrument;
d. Existence of payee and his then capacity to indorse.
Q: What are the warranties of one who negotiates by delivery and qualified
indorser?
[Type text]
[Type text]
ANS: Every person negotiating by delivery or by a qualified indorsement
(completed by delivery) warrants:
a. That the instrument is genuine and in
all respects what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to
contract;
d. That he has no knowledge of any fact
which would impair the validity of the
instrument or render it valueless.
NOTE: But when the negotiation is by delivery only, the warranty extends in favor of
no holder other than the immediate transferee. The provisions of subdivision (c) of
this section do not apply to a person negotiating public or corporation securities
other than bills and note (Sec. 65, NIL).
Q: What are the liabilities of a general indorser?
ANS: Every indorser who indorses without qualification, warrants to all subsequent
holders in due course:
a. The matters and things mentioned in subdivisions (a), (b), and (c) of Sec. 65;
and
b. That the instrument is, at the time of his indorsement, valid and subsisting;
NOTE: And, in addition, he engages that, on due presentment, it shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
Q: A issued a promissory note payable to B or bearer. A delivered the note to
B. B indorsed the note to C. C placed the note in his drawer, which was stolen
by the janitor X. X indorsed the note to D by forging Cs signature. D indorsed
the note to E who in turn delivered the note to F, a holder in due course,
without indorsement. Discuss the individual liabilities to F of A, B and C.
(2001 Bar)
ANS: A is liable to F. As the maker of the promissory note, A is directly or primarily
liable to F, who is a holder in due course. Despite the presence of the special
indorsements on the note, these do not detract from the fact that a bearer
instrument, like the promissory note in question, is always negotiable by mere
delivery, until it is indorsed restrictively For Deposit Only.
B, as a general indorser, is liable to F secondarily, and warrants that the instrument
is genuine and in all respects what it purports to be; that he has good title to it; that
all prior parties had capacity to contract; that he has no knowledge of any fact
which would impair the validity of the instrument or render it valueless; that at the
time of his indorsement, the instrument is valid and subsisting; and that on due
presentment, it shall be accepted or paid, or both, according to its tenor, and that if
it be dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay.
[Type text]
[Type text]
C is not liable to F since the latter cannot trace his title to the former. The signature
of C in the supposed indorsement by him to D was forged by X. C can raise the
defense of forgery since it was his signature that was forged.
ALTERNATIVE ANSWER: As a general endorser, B is secondarily liable to F. C is
liable to F since it is due to the negligence of C in placing the note in his drawer that
enabled X to steal the same and forge the signature of C relative to the
indorsement in favor of D. As between C and F who are both innocent parties, it is
C whose negligence is the proximate cause of the loss. Hence C should suffer the
loss (Answers to Bar Examination Questions by the UP Law Complex and
XIV.PRESENTMENT FOR PAYMENT

Q: What constitutes presentment for payment?
ANS: The production of a BE to the drawee for his acceptance, or to the drawee or
acceptor for payment or the production of a
PN to the party liable for the payment of the same (Sec. 70, NIL).
It consists of:
a.
b.
c.
Personal demand for payment at the proper place; and

Readiness to exhibit the instrument, if required, and
To receive payment and to surrender the instrument if the debtor is willing to pay.
NOTE: Presentment for payment is not necessary in order to charge the person
primarily liable but it is necessary in order to charge the drawer and indorser,
except as otherwise provided.
Q: What is the purpose of presentment?
ANS: Presentment for payment is NOT necessary in order to charge the person
primarily liable but it is necessary in order to charge the drawer and indorser,
except as otherwise provided.
Q: To whom must presentment for payment be made?

ANS: The instrument must be exhibited to the person from whom payment is
demanded, and when it is paid, must be delivered up to the party paying it (Section
74, NIL).
The following are the rules to be observed on presentment:

a.
Presentment where instrument payable at bank. Where the instrument

is payable at a bank, presentment for payment must be made during
[Type text]
[Type text]
banking hours, unless the person to make payment has no funds there
to meet it at any time during the day, in which case presentment at any
hour before the bank is closed on that day is sufficient (Sec. 75. NIL).
b.
Presentment where principal debtor is dead. Where the person

primarily liable on the instrument is dead and no place of payment is
specified, presentment for payment must be made to his personal
representative, if such there be, and if, with the exercise of reasonable
diligence, he can be found (Sec. 76, NIL).
c.
Presentment to persons liable as partners. Where the persons primarily

liable on the instrument are liable as partners and no place of payment
is specified, presentment for payment may be made to any one of
them, even though there has been a dissolution of the firm (Sec. 77,
NIL).
d.
Presentment to joint debtors. Where there are several persons, not

partners, primarily liable on the instrument and no place of payment is
specified, presentment must be made to them all (Sec. 78, NIL).
Q: When is presentment not required to charge the drawer?

ANS: Presentment for payment is not required in order to charge the drawer where
he has no right to expect or require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL) such as in case of a check where payment has been
stopped.
Q: When is presentment not required in order to charge an indorser?

ANS: Presentment is not required when the instrument was made or accepted for
his accommodation and he has no reason to expect that the instrument will be paid
if presented (Sec. 80, NIL).
NOTE: Only the drawer and the indorser referred to in these sections are not
discharged but all other parties secondarily liable are relieved of their liability.
Q: When is DELAY in making presentment or of giving notice excused?
ANS: Delay is excused in the following instances:
a. When caused by circumstances beyond the control of the holder; and
b. Not imputable to his default, misconduct, or negligence (Sec. 81, NIL).
[Type text]
[Type text]
Q: When is instrument dishonored by non-payment?

ANS: The instrument is dishonored by non-payment when:
a. It is duly presented for payment and payment is
refused or cannot be obtained; or
b. Presentment is excused and the instrument is
overdue and unpaid (Sec. 83, NIL).
Q: What is the effect if the instrument is dishonored by non-payment?
ANS: There is an immediate right of recourse by the holder against persons
secondarily liable.
Q: PN is the holder of a negotiable promissory note within the meaning of the
Negotiable Instruments Law (Act 2031). The note was originally issued by RP
to XL as payee. XL indorsed the note to PN for goods bought by XL. The note
mentions the place of payment on the specified maturity date as the office of
the corporate secretary of PX Bank during banking hours. On maturity date,
RP was at the aforesaid office ready to pay the note but PN did not show up.
What PN later did was to sue XL for the face value of the note, plus interest
and costs. Will the suit prosper? Explain. (2000 Bar)
ANS: Yes. The suit will prosper as far as the face value of the note is concerned,
but not with respect to the interest due subsequent to the maturity of the note and
the costs of collection. RP was ready and willing to pay the note at the specified
place of payment on the specified maturity date, but PN did not show up. PN lost
his right to recover the interest due subsequent to the maturity of the note and the
costs of collection (Answers to Bar Examination Questions by the UP Law Complex
and Philippine Association of Law Schools).
X.NOTICE OF DISHONOR
Q: What constitutes notice of dishonor?
ANS: It is the notice given by holder or his agent to party or parties secondarily
liable that the instrument was dishonored by non-acceptance by the drawee of a bill
or by non-payment by the acceptor of a bill or by non-payment by the maker of a
note (Sec. 89, NIL).
Q: What are the requisites of notice of dishonor?
ANS: The requisites are the following:
a. Given by holder or his agent, or by any party who may be compelled by the
holder to pay (Sec. 90, NIL);
b. Given to secondary party or his agent (Sec. 97, NIL);
c. Given within the periods provided by law (Sec. 102, NIL); and
d. Given at the proper place (Secs. 103 and 104, NIL).
Q: Who are the parties to be notified?
ANS: Except as otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor must be given to
the drawer and to each indorser, and any drawer or indorser to whom such notice is
not given is discharged (Section 89, NIL).
Q: To whom shall the notice be given?
ANS: The notice shall be given:
[Type text]
[Type text]
a. In case of non-acceptance (bill) to persons secondarily liable, namely, the
drawer and indorsers as the case may be.
b. In case of non-payment (both bill and note) indorsers.
NOTE: Notice must be given to persons secondarily liable. Otherwise, such
parties are discharged. Notice may be given to the party himself or to his
agent.
Q: When is notice given?
ANS: It is given as soon as the instrument is dishonored (Sec. 102, NIL).
Q: Who may give notice of dishonor?
ANS: Notice may be given by the following:
a. The holder;
b. Another, on behalf of the holder; or
c. Any party to the instrument who may be compelled to pay it to the
holder, and who would have a right of reimbursement from the party to
whom notice is given (Sec. 90, NIL).
Q: What is the effect of giving notice?
ANS: The giving of notice has the following effects:
a. When given by or on behalf of a
holder, it inures to the benefit of:
i. All parties prior to the
holder, who have a right of
recourse against the party to
whom the notice is given;
and
ii. All holders subsequent to the holder giving notice (Sec.
92, NIL).
b. When given by or on behalf of a party
entitled to give notice, it inures to the
benefit of:
i. The holder; and
ii. All parties subsequent to the
party to whom notice is
given (Sec. 93, NIL).
Q: What is the form of notice?
ANS: The notice may be in writing or merely oral and may be given in any terms
which sufficiently identify the instrument, and indicate that it has been dishonored
by non-acceptance or non-payment. It may in all cases be given by delivering it
personally or through the mails (Sec. 96, NIL).
Q: When may notice be waived?
ANS: Notice of dishonor may be waived either before the time of giving notice has
arrived or after the omission to give due notice, and the waiver may be expressed
or implied (Sec. 109, NIL).
Q: When may notice be dispensed with?
ANS: Notice of dishonor is dispensed with when, after the exercise of reasonable
diligence, it cannot be given to or does not reach the parties sought to be charged
(Section 112, NIL).
[Type text]
[Type text]
Q: How is delay in giving notice excused?
ANS: Delay in giving notice of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder and not imputable to his default,
misconduct, or negligence. When the cause of delay ceases to operate, notice
must be given with reasonable diligence (Sec. 113, NIL).
Q: When is notice not required to be given to drawer?
ANS: Notice of dishonor is not required to be given to the drawer in either of the
following cases:
a. Where
the
drawer
and
drawee
are the
same
person;
b. When the drawee is fictitious person
or a person not having capacity to
contract;
c. When the drawer is the person to
whom the instrument is presented for
payment;
d. Where the drawer has no right to
expect or require that the drawee or
acceptor will honor the instrument;
e. Where
the
drawer
has
countermanded payment (Sec. 114,
NIL).
Q: When is notice not required to be given to indorser?
ANS: Notice of dishonor is not required to be given to an indorser in either of the
following cases:
a. When the drawee is a fictitious person or person not having capacity to
contract, and the indorser was aware of that fact at the time he indorsed
the instrument;
b. Where the indorser is the person to whom the instrument is presented for
payment;
c. Where the instrument was made or accepted for his accommodation
(Sec.115, NIL).
Q: What is the effect of omission to give notice of non-acceptance?
ANS: An omission to give notice of dishonor by non-acceptance does not prejudice
the rights of a holder in due course subsequent to the omission (Section 117, NIL).
XI.DISCHARGE OF NEGOTIABLE INSTRUMENT

Q: What constitutes discharge of a negotiable instrument?
ANS: It is the release of all parties, whether primary or secondary, from the
obligations arising thereunder. It renders the instrument without force and effect
and, consequently, it can no longer be negotiated (The Law on Negotiable
Instruments with Documents of Title, Hector de Leon, 2000 ed).
Instances:
[Type text]
[Type text]
a. By payment in due course by or on behalf of the principal debtor;
b. Payment by accommodated party;
c. Intentional cancellation by the holder;
d. By any act which will discharge a simple contract for the payment
of money;
e. When the principal debtor becomes the holder of the instrument at
or after maturity in his own right (Sec. 119, NIL).
Q: How are parties secondarily liable discharged?
ANS: The parties secondarily liable are discharged: (AID)
a. By any act which discharges the instrument;
b. By the intentional cancellation of his signature by the holder;
c. By the discharge of a prior party;
NOTE: The release of the principal debtor must be by the act of the holder
and not by operation of law.
Q: What are the rights of party who discharged instrument?
ANS: Where the instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former rights as regard all
prior parties, and he may strike out his own and all subsequent indorsements and
against negotiate the instrument, except:
a. Where
it
is
payabl
e
to
the
order
of
a
third
person
and
has
been
paid
by the
drawer
; and
b. Where it was made or accepted for
accommodation and has been paid
by the party accommodated
(Sec.121, NIL).
Q: What constitutes renunciation by holder?
ANS: Where the instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former rights as regard all
prior parties, and he may strike out his own and all subsequent indorsements and
against negotiate the instrument, except:(a) Where it is payable to the order of a
third person and has been paid by the drawer; and (b) Where it was made or
accepted for accommodation and has been paid by the party accommodated
(Section 121, NIL).
[Type text]
[Type text]
Renunciation is the act of surrendering a right or claim without recompense, but it
can be applied with equal propriety to the relinquishing of a demand upon an
agreement supported by a consideration (1 Agbayani 1992 ed). It must be with
written declaration to that effect and if oral, must be accompanied by surrender of
the instrument to the person primarily liable thereon.
Q: What are the requisites of renunciation?
a.
b.
c.
Absolute
and
unconditi
onal;
Made in favor of the person primarily
liable; and
Made at or after maturity
Q: What are the effects of renunciation?

a.
[Type text]
A
renunc
iation
in
favor
of
a
secon
dary
party
may
be
made
by the
holder
before,
at or
after
maturit
y
of
the
instru
ment.
The
effect
is
to
discha
rge
only
such
secon
dary
party
and all
parties
subse
[Type text]
b.
quent
to him
but the
instru
ment
itself
remain
in
force.
A renunciation in favor of the
principal debtor may be effected at
or after maturity. The effect is to
discharge the instrument and all
parties
thereto
provided
the
renunciation
is
made
unconditionally and absolutely.
NOTE: In either case, renunciation does not affect the rights of a holder in
due course without notice.
XII. MATERIAL ALTERATION

Q: What constitutes material alteration?
ANS: It is a partial real defense because a holder in due course can enforce it
according to its original tenor. An alteration is said to be material if it alters the effect
of the instrument. In other words, a material alteration is one which changes the
items which are required to be stated under Sec. 1 of the Negotiable Instruments
Law
Changes in the following constitute material alterations: (Sec. 125, NIL)
a. Date;
b. Sum payable, either for principal or
interest;
c. Time or place of payment;
d. Number or relations of the parties;
e. Medium or currency in which payment
is to be made;
f.
That which adds a place of payment
where no place of payment is
specified; and
g. Any other change or addition which
alters the effect of the instrument in
any respect.
Q: What are the effects of material alteration?
ANS: The following are the effects:
a. As to Alteration by a party Avoids
the instrument except as against the
party who (1) made, (2) authorized, or
(3) assented to the alteration and (4)
subsequent indorsers. However, if an
altered instrument is negotiated to a
holder in due course, he may enforce
[Type text]
[Type text]
b.
payment thereof according to its

ORIGINAL tenor regardless of
whether the alteration was innocent or
fraudulent.
As to Alteration by a stranger
(spoliation)- the effect is the same as
where the alteration is made by a
party in which case a holder in due
course can recover on the original
tenor of the instrument (Sec. 124,
NIL).
Q: a. A check for P50,000.00 was drawn against drawee bank and made
payable to XYZ Marketing or order. The check was deposited with payees
account at ABC Bank which then sent the check for clearing to drawee bank.
Drawee bank refused to honor the check on ground that the serial number
thereof had been altered. XYZ marketing sued drawee bank. Is it proper for
the drawee bank to dishonor the check for the reason that it had been
altered? Explain.
b. In instant suit, drawee bank contended that XYZ Marketing as payee could
not sue the drawee bank as there was no privity between then. Drawee
theorized that there was no basis to make it liable for the check. Is this
contention correct? Explain. (1999 Bar)
ANS:
a. No. The serial number is not a material particular of the check. Its alteration does
not constitute material alteration of the instrument. The serial number is not material
to the negotiability of the instrument.
b.Yes. As a general rule, the drawee is not liable under the check because there is
no privity of contract between XYZ Marketing, as payee, and ABC Bank as the
drawee bank. However, if the action taken by the bank is an abuse of right which
caused damage not only to the issuer of the check but also to the payee, the payee
has a cause of action under quasi-delict (Answers to Bar Examination Questions
by the UP Law Complex and Philippine Association of Law Schools).
XIII.ACCEPTANCE
Q: What constitutes acceptance and what is the form required?
ANS: The acceptance of a bill is the signification by the drawee of his assent to the
order of the drawer.
It must be in writing, signed by the drawee and must not express that the drawee
will perform his promise by any other means than the payment of money (Sec. 132,
NIL).
Q: When should acceptance be made?
ANS: The drawee is allowed twenty-four hours after presentment in which to decide
whether or not he will accept the bill; the acceptance, if given, dates as of the day of
presentation (Section 136, NIL).
Q: What are the rules governing acceptance?
ANS: The rules are the following:
a. Acceptance by separate instrument. Where an acceptance
is written on a paper other than the bill itself, it does not
[Type text]
[Type text]
bind the acceptor except in favor of a person to whom it is shown and who,
on the faith thereof, receives the bill for value (Sec. 134, NIL),
b. Promise to accept; when equivalent to acceptance. - An
unconditional promise in writing to accept a bill before it is drawn is
deemed an actual acceptance in favor of every person who, upon the faith
thereof, receives the bill for value (Sec. 135, NIL).
c. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the same, or
refuses within twenty-four hours after such delivery or within such other
period as the holder may allow, to return the bill accepted or non-accepted
to the holder, he will be deemed to have accepted the same (Sec. 137,
NIL).
d. Acceptance of incomplete bill. - A bill may be accepted
before it has been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after it has been dishonored by a
previous refusal to accept, or by non payment. But when a bill payable after
sight is dishonored by non-acceptance and the drawee subsequently
accepts it, the holder, in the absence of any different agreement, is entitled
to have the bill accepted as of the date of the first presentment (Sec. 138,
NIL).
e. Rights of parties as to qualified acceptance. - The holder may
refuse to take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored by nonacceptance. Where a qualified acceptance is taken, the drawer and
indorsers are discharged from liability on the bill unless they have
expressly or impliedly authorized the holder to take a qualified acceptance,
or subsequently assent thereto. When the drawer or an indorser receives
notice of a qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to have assented
thereto (Sec. 142, NIL).
XIV.PRESENTMENT FOR ACCEPTANCE

Q: Discuss the time and place of presentment.
ANS: A bill may be presented for acceptance on any day on which negotiable
instruments may be presented for payment under the provisions of Sections
seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday,
presentment for acceptance may be made before twelve o'clock noon on that day
(Section 146, NIL).
Where the holder of a bill drawn payable elsewhere than at the place of business or
the residence of the drawee has no time, with the exercise of reasonable diligence,
to present the bill for acceptance before presenting it for payment on the day that it
falls due, the delay caused by presenting the bill for acceptance before presenting it
for payment is excused and does not discharge the drawers and
indorsers. (Section 147, NIL)
Q: What is the manner of presentment?
ANS: Presentment for acceptance must be made by or on behalf of the holder at a
reasonable hour, on a business day and before the bill is overdue, to the drawee or
some person authorized to accept or refuse acceptance on his behalf; and
a. Where a bill is addressed to two or more draweeswho are not partners,
presentment must be made to them all unless one has authority to accept or refuse
acceptance for all, in which case presentment may be made to him only;
[Type text]
[Type text]
b. Where the drawee is dead, presentment may be made to his personal
representative;
c. Where the drawee has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors, presentment may be made to him or to his
trustee or assignee.
Q: When is presentment excused?
ANS: Presentment is excused:
a. Where the drawee is dead, or has absconded, or is a fictitious person or a
person not having capacity to contract by bill;
b. After exercise of reasonable diligence, presentment cannot be made;
c. Although presentment has been irregular, acceptance has been
refused on some other ground (Sec. 148, NIL).
Q: What is the effect of failure to make presentment?

ANS: Except as otherwise provided, the holder of a bill which is required by the
next preceding section to be presented for acceptance must either present it for
acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer
and all indorsers are discharged (Sec. 144, NIL).
Q: What is the effect of dishonor by non-acceptance?

ANS: When a bill is dishonored by non-acceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no presentment for
payment is necessary (Sec. 151, NIL).
XV.PROMISSORY NOTE
Q: What is a promissory note?

ANS: A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer. Where a note is drawn to the maker's own
order, it is not complete until indorsed by him. (Sec. 184, NIL)
Q: Who are the parties in a promissory note?
[Type text]
[Type text]
ANS: The parties are the following:
a.
b.
Maker
party
who
executes
the
written
promise
to pay;
Payee
party in
whose
favor the
promisso
ry note is
made
payable.
Q: What are the steps in a promissory note?

a.
[Type text]
Presentment
for payment
to the maker
unless
excused.
i. Whe
n
pres
ent
men
t for
pay
men
t is
excu
sed:
ii. After
exer
cise
of
reas
ona
ble
dilig
enc
e, it
can
not
be
[Type text]
mad
e;
iii. Dra
wee
is a
fictiti
ous
pers
on;
iv.Expr
ess
or
impli
ed
waiv
er
(Se
c.
82,
NIL)
.
b.If dishonored by non-payment, notice of dishonor should be given to the
persons secondarily liable unless excused.
When Notice of Dishonor is excused:
i.
When notice is waived;
ii. When dispensed with under Sec. 112;;
iii. As to drawer under Sec. 114;
iv. As to indorser, under Sec. 115;
v. Where due notice of dishonor by non-acceptance has been given;
vi. As to the holder in due course without notice.
Q: What are the instances when a bill of exchange may be treated as a
promissory note at the election of the holder? (Sec. 17e and Sec. 130, NIL)
ANS: The instances are the following: (FLANS)
a. The drawer and the drawee are the same person;
b. Drawee is a fictitious person;
c. Drawee does not have the capacity to contract (Sec. 130);
d. Where the bill is drawn on a person who is legally absent; and
e. Where the bill is ambiguous.(Sec.17e, NIL)
XVI.CHECKS
Q: What is a check?
ANS: A check is a bill of exchange drawn on a bank payable on demand (Sec. 185,
NIL).
Q: What are the types of check? (2005 Bar)
ANS: The types of check are the following:
[Type text]
[Type text]
a.
C
a
s
h
i
e
r
s
C
h
e
c
k
o
n
e
d
r
a
w
n
b
y
t
h
e
c
a
s
h
i
e
r
o
f
a
b
a
n
k
,
i
n
t
[Type text]
[Type text]
h
e
n
a
m
e
o
f
t
h
e
b
a
n
k
a
g
a
i
n
s
t
t
h
e
b
a
n
k
it
s
e
lf
p
a
y
a
b
l
e
t
o
a
t
[Type text]
[Type text]
h
i
r
d
p
e
r
s
o
n
.
I
t
i
s
a
p
r
i
m
a
r
y
o
b
li
g
a
ti
o
n
o
f
t
h
e
i
s
s
u
i
n
g
b
a
n
k
a
[Type text]
[Type text]
n
d
a
c
c
e
p
t
e
d
i
n
a
d
v
a
n
c
e
u
p
o
n
i
s
s
u
a
n
c
e
(
T
a
n
v
.
C
A
,
G
R
N
o
.
[Type text]
[Type text]
b.
1
0
8
5
5
5
,
D
e
c
e
m
b
e
r
2
0
,
1
9
9
4
)
.
M
a
n
a
g
e
r
s
C
h
e
c
k
a
c
h
e
c
k
d
r
a
w
n
b
[Type text]
[Type text]
y
t
h
e
m
a
n
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[Type text]
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[Type text]
[Type text]
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b.
c.
d.
e.
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s
e
.
Memorandum Check - a check given by a borrower to a lender for
the amount of a short loan, with the understanding that it is not to be
presented at the bank, but will be redeemed by the maker himself
when the loan falls due and which understanding is evidenced by
writing the word memorandum, memo or mem on the check.
Certified Check - an agreement whereby the bank against whom a
check is drawn undertakes to pay it at any future time when
presented for payment (Sec. 187, NIL).
Travelers Check - it is one upon which the holders signature must
appear twice; one to be affixed by him at the time it is issued and
the second, for counter-signature, to be affixed by him in the
presence of the payee before it is paid, otherwise, it is incomplete
(Commercial Law Review, Villanueva, 2004ed).
Crossed Check a check which in addition to the usual contents of
an ordinary check contains also the name of a certain banker or
business entity through whom it must be presented for payment.
Q: What are the kinds of crossed checks?

ANS: The following are kinds of crossed checks:
A. Crossed Specially - The name of a particular bank or company is
written or appears between the parallel lines in which case the
drawee-bank must pay the check only upon presentment by such
bank or company (Chan Wan vs. Tan Kim GR No. L-15380,
September 30, 1960) on penalty of being made to pay again by the
rightful owner should the first payment prove to have been
erroneous.
[Type text]
[Type text]
b.
Crossed Generally - only the words and Co. are written between
the parallel lines or when none at all is written at all between said
lines.
Q: What is Check Kiting?

ANS: It is the wrongful practice of taking advantage of the float, the time that
elapses between the deposit of the check in one bank and its collection at another.
Q: When should checks be presented for payment?

ANS: A check must be presented for payment within reasonable time after its issue
or the drawer will be discharged from liability thereon to the extent of the loss
caused by the delay (Sec. 186, NIL).
Q: What is the effect of delay in presenting the checks?
ANS: A check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the loss
caused by the delay (Sec. 186, NIL).
INSURANCE CODE
I. CONCEPT OF INSURANCE
Q: What is a contract of insurance?
ANS: It is an agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent
event (Sec.2, par.2, Insurance Code of the Philippines).
II.ELEMENTS OF THE CONTRACT

Q: What are the elements of a contract of insurance?
ANS: The elements are the following: (PARIS)
a. Insurable interest The insured has an insurable interest in the life or thing
insured, i.e. a pecuniary interest;
b. Risk of loss The happening of designated events, either unknown or
contingent, past or future, will subject such interest to some kind of loss,
whether in the form of injury, damage or liability;
c. Assumption of risk the insurer undertakes to assume the risk of loss;
d. Payment of Premium the consideration for the insurers promise to
undertake the risk of loss
e. Scheme to distribute the losses the assumption of risk is part of a general
scheme to distribute the loss among a large number of persons exposed to
similar risks.
[Type text]
[Type text]
NOTE: A contract of insurance must have all the essential elements of a
valid contract as enumerated in Art. 1318 of the New Civil Code
Q: Discuss the nature of an insurance contract. (VIC-CROP-CUP)
ANS: They are the following:
a. Consensual
it
is
perfected
by
the
meeting of
the minds
of
the
parties;
(Art. 1315,
NCC);
Cognition
Theory
applies; the
contract is
perfected
the moment
the offeror
learns
of
the
acceptance
of his offer
by the other
party
(Art.1319,
NCC)
b. Voluntary
the parties
may
incorporate
such terms
or
conditions
as
they
may deem
convenient,
provided
they are not
contrary to
law morals,
good
customs,
pubic order,
or
public
policy (Art.
1306,
NCC);
c. Aleatory
the liability
[Type text]
[Type text]
d.
e.
f.
[Type text]
of
the
insurer
is
dependent
on
the
happening
of an event,
which
is
uncertain,
or which is
to occur at
an
indetermina
te time (Art.
2010,
NCC).
Unilateral
imposes
legal duties
only on the
insurer who
promises to
indemnify
another in
case
of
loss;
executed
as to the
insured
after
payment of
premium,
and
executory
on the part
of
the
insurer until
payment for
a loss.
Conditional
it
is
subject to
conditions,
the
principal
one
of
which is the
happening
of the event
insured
against.
Contract of
Indemnity
Except life
[Type text]
g.
h.
i.
j.
[Type text]
and
accident
insurance
where the
result
is
death,
a
contract of
insurance
is
a
contract of
indemnity
whereby
the insurer
promises to
make good
only
the
loss of the
insured.
Personal
each party
having
in
view
the
character,
credit and
conduct of
the other.
Property
since
an
insurance
policy is a
contract, as
such, it is
property in
legal
contemplati
on.
Risk
Distributing
Device
insurance
serves
to
distribute
the risk of
economic
loss among
as many as
possible of
those who
are subject
to the same
kind of loss.
Onerous
there
is
[Type text]
k.
valuable
considerati
on
called
the
premium.
Uberrimae
Fidae
The
contract of
insurance
is one of
perfect
good faith.
III. CHARACTERISTICS/NATURE OF INSURANCE

CONTRACTS
Q: Discuss the five cardinal principles in insurance. (I-SIGA)
ANS: a. Insurable interest relation between the insured and the thing
insured, to such extent that its loss thru the risk insured against shall
directly damnify the insured;
b. Principle of utmost Good faith (uberrimae fides) Each party takes
into consideration the character, conduct and/or credit of the other and in
making the contract, each is enjoined by law to deal with the other in
utmost good faith. A violation of this duty gives the aggrieved party the
right to rescind the contract. Thus, both must not only perform their
obligations in good faith but they must also avoid material concealment or
misrepresentations. The caveat emptor rule is generally inapplicable.
c. Contract of Indemnity The insured who has insurable interest over a
property is only entitled to recover the amount of actual loss sustained and
the burden is upon him to establish the amount of such loss.
d. Contract of Adhesion (Fine Print Rule) The policy is presented to the
insured already in its printed form, so that he either takes it or leaves it. It
is for this reason that any ambiguity therein is resolved in favor of the
insured and against the insurer.
e. Principle of Subrogation It is the process of legal substitution where
the insurer steps into the shoes of the insured, when he paid the indemnity
for the injury or loss, and he avails of the latters rights against the
wrongdoer.
Q: BD has a bank deposit of half a million pesos. Since the limit of the
insurance coverage of the Philippine Deposit Insurance Corp (PDIC) (RA
3591) is only one tenth of BDs deposit, he would like some protection for the
excess by taking out an insurance against all risks or contingencies of loss
arising from any unsound or unsafe banking practices including unforeseen
adverse effects of the continuing crisis involving the banking and financial
sector in the Asian region. Does BD have an insurable interest within the
meaning of the Insurance Code of the Philippines (PD1460)? (2000 Bar)
ANS: Yes. BD has insurable interest in his bank deposit. In case of loss of said
deposit, more particularly to the extent of the amount in excess of the limit covered
by the PDIC Act, PBD will be damnified. He will suffer pecuniary loss of
P300,000.00, that is, his bank deposit of half a million pesos minus P200,000.00
[Type text]
[Type text]
which is the maximum amount recoverable from the PDIC. (Answers to Bar
Schools).
Q: JQ, owner of a condominium unit, insured the same against fire with the
XYZ Insurance Co., and made the loss payable to his brother, MLQ. In case of
loss by fire of the said condominium unit, who may recover on the fire
insurance policy? State the reason(s) for your answer. (2001 Bar)
ANS: JQ can recover on the fire insurance policy for the loss of said condominium
unit. He has the insurable interest as owner-insured. As beneficiary in the fire
insurance policy, MLQ cannot recover on the fire insurance policy. For the
beneficiary to recover on the fire or property insurance policy, it is required that he
must have insurable interest in the property insured. In this case, MLQ does not
have insurable interest in the condominium unit (Answers to Bar Examination
Questions by the UP Law Complex and Philippine Association of Law Schools)
IV. CLASSES OF INSURANCE

A. MARINE INSURANCE
Q: What is a marine insurance?
ANS: It is an insurance against risks connected with navigation, to which a
ship,
cargo, freightage, profits or other insurable interest in movable property, may be
exposed during a certain voyage or a fixed period of time (Sec. 99,
Insurance
Code).
Q: What are the rules on marine protection and indemnity insurance?

ANS: As to the measure of Indemnity:
a.
[Type text]
Valued
policy
The
parties
are
bound by
the
valuation
, if the
insured
had
some
interest
at
risk
and there
[Type text]
b.
is
no
fraud.
Open
policy
The
following
rules
shall
apply in
estimatin
g a loss:
i.value of the ship value at the beginning of the risk;

ii. value of the cargo actual cost when laden on board or market at the time
and place of lading
iii. value of freightage gross freightage exclusive of primage;
iv. cost of insurance in each case, to be added to the estimated value (Sec.
161, Insurance Code).
Q: Discuss the Special Marine Insurance Contracts and Clauses.
a. All-Risks Policy insurance against all causes of conceivable loss or
damage.
Except:
i. as otherwise excluded
in the policy; or
ii. due
to
fraud
or
intentional misconduct
on the part of the
insured (Choa Tiek
Seng vs. CA, GR No.
84507, 183 SCRA 223,
March 15, 1990).
b. Barratry Clause- a clause which provides that there can be no recovery on
the policy in case of any willful misconduct on the part of the master or
crew in pursuance of some unlawful or fraudulent purpose without
consent of owners, and to the prejudice of the owners interest (Roque vs.
IAC, Ibid).
c. Inchmaree Clause - a clause which makes the insurer liable for loss or
damage to the hull or machinery arising from the:
i. Negligence of the captain, engineers, etc.
ii. Explosions, breakage of shafts; and
iii. Latent defect of machinery or hull (Bar Review Materials in
Commercial Law, Jorge Miravite, 2007ed).
d. Sue and Labor Clause - A clause under which the insurer may become
liable to pay the insured, in addition to the loss actually suffered, such
expenses as he may have incurred in his efforts to protect the property
against a peril for which the insurer would have been liable (Sec. 163,
Insurance Code).
Q: Discuss the implied warranties in a contract of marine insurance.
ANS: The warranties are the following:
a. Seaworthiness of the ship at the inception of the insurance (Sec. 113,
Insurance Code);
[Type text]
[Type text]
b. Against improper deviation (Sec. 123, 124, 125, Insurance Code);
c. Against illegal venture;
d. Warranty of neutrality: The ship will carry the requisite documents of
nationality or neutrality of the ship or cargo where such nationality or
neutrality is expressly warranted (Sec. 120, Insurance Code); and
e. Presence of insurable interest.
Q: When is a ship or vessel seaworthiness?
ANS: A ship is "seaworthy when reasonably fit to perform the service, and to
encounter the ordinary perils of the voyage, contemplated by the parties to the
policy." (Sec. 114, Insurance Code)
Q: What is the obligation of the assured to keep its vessel seaworthy?
ANS: In every marine insurance policy the assured impliedly warrants to the
assurer that the vessel is seaworthy and such warranty is as much a term of the
contract as if expressly written on the face of the policy. It becomes the obligation of
the cargo owner to look for a reliable common carrier which keeps its vessels in
seaworthy condition. He may have no control over the vessel but he has full control
in the selection of the common carrier that will transport his goods. He also has full
discretion in the choice of assurer that will underwrite a particular venture (Roque v.
IAC, G.R. No. L-66935, November 11 1985).
Q: Is it an absolute rule that the insured must always prove that its vessel is
seaworthy?
ANS: No. Where the policy stipulates that the seaworthiness of the vessel as
between the assured and the assurer is admitted, the question of seaworthiness
cannot be raised by the assurer without showing concealment or misrepresentation
by the assured (PhilAm General Insurance v. CA, G.R. No. 116940, June 11, 1997).
Q: What constitutes total loss?
ANS: Total loss may be actual or constructive. Actual loss consists in:
a. Total destruction;
b. Irretrievable loss by sinking or by being broken up;
c. Damage rendering the thing valueless to the owner for the purpose
for which he held it; or
d. Other event which effectively deprives the owner of the
possession, at the port of destination, of the thing insured (Sec.
130, Insurance Code)
Constructive loss is one which gives to a person insured a right to abandon. It
consists in
a. Actual loss of more than of the value of the object;
b. Damage reducing, by more than , the value of the vessel and of
cargo; and
c. Expense of transshipment exceeds of value of cargo (Sec. 131, in
relation to Sec. 139, Insurance Code).
NOTE: In case of constructive total loss, insured may:
Abandon goods or vessel to the insurer and claim for whole insured value
(Sec. 139, Insurance Code), or
b. Without abandoning vessel, claim for partial actual loss (Sec. 155,
Insurance Code).
a.
[Type text]
[Type text]
Q: What constitutes partial loss?
ANS: It is a loss which is not total. (Sec. 128, Insurance Code)
Q: M/V Pearly Shells, a passenger and cargo vessel, was insured for
P40,000,000.00 against constructive total loss. Due to a typhoon, it sank near
Palawan. Luckily, there were no casualties, only injured passengers. The ship
owner sent a notice of abandonment of his interest over the vessel to the
insurance company which then hired professionals to afloat the vessel for
P900,000.00. When re-floated, the vessel needed repairs estimated at
P2,000,000.00. The insurance company refused to pay the claim of the ship
owner, stating that there was no constructive total loss. Was there
constructive total loss to entitle the ship owner to recover from the insurance
company? Explain. (2005 Bar)
ANS: No, there was no "constructive total loss" because the vessel was refloated
and the costs of refloating plus the needed repairs (P 2.9 Million) will not be more
than three-fourths of the value of the vessel. A constructive total loss is one which
gives to a person insured a right to abandon. (Sec, 131, Insurance Code) There
would have been a constructive total loss had the vessel MN Pearly Shells suffer
loss or needed refloating and repairs of more than the required three-fourths of its
value, i.e., more than P30.0 Million (Sec. 139, Insurance Code, cited in Oriental
Assurance v. Court of Appeals and Panama Saw Mill, G.R. No. 94052, August 9,
1991). However, the insurance company shall pay for the total costs of refloating
and needed repairs (P2.9 Million) (Answers to Bar Examination Questions by the
UP Law Complex and Philippine Association of Law Schools).
Q: What is abandonment and what are its requisites?
ANS: It is an act of the insured by which, after a constructive total loss, he declared
the relinquishment to the insurer of his interest in the thing insured (Sec. 138,
Insurance Code).
The requisites for validity are the following (PEN FACT):
a. There must be an actual relinquishment by the person insured of his
interest in the thing insured (Sec. 138, Insurance Code);
b. There must be a constructive total loss (Sec. 139, Insurance Code);
c. The abandonment must be neither partial nor conditional (Sec. 140,
Insurance Code);
d. It must be made within a reasonable time after receipt of reliable
information of the loss (Sec. 141, Insurance Code);
e. It must be factual (Sec. 142, Insurance Code);
f.
It must be made by giving notice thereof to the insurer which may be done
orally or in writing (Sec. 143, Insurance Code); and
g. The notice of abandonment must be explicit and must specify the
particular cause of the abandonment (Sec. 144, Insurance Code).
Q: What is an Average?
ANS: It is any extraordinary or accidental expense incurred during the voyage for
the preservation of the vessel, cargo, or both, and all damages to the vessel and
cargo from the time it is loaded and the voyage commenced until it ends and the
cargo unloaded.
Q: What is FPA Clause (Free from Particular Average)?
ANS: It is a clause agreed upon in a policy of marine insurance in which it is stated
that the insurer shall not be liable for a particular average, and such insurer shall be
[Type text]
[Type text]
free therefrom, but he shall continue to be liable for his proportion of all general
average losses assessed upon the thing insured (Sec. 136, Insurance Code).
B. FIRE INSURANCE
Q: What is fire insurance?
ANS: It is a contract by which the insurer for a consideration agrees to indemnify
the insured against loss of, or damage to, property by hostile fire, including loss by
lightning, windstorm, tornado or earthquake and other allied risks, when such risks
are covered by extension to fire insurance policies or under separate policies (Sec.
Q: Distinguish Hostile Fire from Friendly Fire.
ANS:
Hostile Fire
Friendly Fire
One that escapes and burns where One that burns in a place where
it is not supposed to be. It may also it was intended to burn and
refer to fire that started out as a ought to be.
friendly fire but escapes from its
original place or it becomes too
strong as it becomes out of control.
Insurer is liable
Insurer is not liable
Q: What are the risks covered by the fire insurance?
ANS: The risks covered are the following:
a. Direct losses
b. Indirect or Consequential losses:
i. Physical damages
ii. Loss of Earnings
iii. Extra Expenses
Q: What is the measure of indemnity in a fire insurance?
ANS: The measures of indemnity are the following:
a. Open policy only the expense necessary to replace the thing lost or injured in
the condition it was at the time of the injury
b.
Valued policy the parties are bound by the valuation, in the absence of fraud
or mistake
Q: What are the requisites for an insurer to rescind the contract on the
ground of alteration?
a. The use or condition of the thing is specifically limited or stipulated in
the policy;
b. Such use or condition as limited by the policy is altered;
c. The alteration is made without the consent of the insurer;
d. The alteration is made by means within the control of the insured;
e. The alteration increases the risk (Sec. 168, Insurance Code); and
f. There must be a violation of a policy provision (Sec. 170, Insurance
Code).
Q: What is the Fall-of-Building Clause?
ANS: It is a clause in a fire insurance policy that if the building or any part thereof
falls, except as a result of fire, the policy shall immediately cease.
[Type text]
[Type text]
Q: What is the Option to Rebuild Clause?
ANS: It is a clause giving the insurer the option to reinstate or replace the property
damaged or destroyed or any part thereof, instead of paying the amount of the loss
or the damage.
C. CASUALTY INSURANCE
Q: What is a casualty insurance?
ANS: It is an insurance covering loss or liability arising from accident or mishap,
excluding those falling under other types of insurance such as fire or marine (Sec.
Q: What are the classifications of casualty insurance?
a. Accident or health insurance insurance against specified perils which
may affect the person and/or property of the insured. Examples: personal
accident, robbery/theft insurance
b. Third party liability insurance insurance against specified perils which
may give rise to liability on the part of the insured for claims for injuries to
or damage to property of others.
Q: What is the No Action Clause?
ANS: It is a requirement in a policy of liability insurance which provides that suit
and final judgment be first obtained against the insured; that only thereafter can the
person injured recover on the policy. A no action clause must yield to the
provisions of the Rules of Court regarding multiplicity of suits (Shafer vs. RTC, GR
No. 78848, November 14, 1988).
D. SURETYSHIP
Q: Define the contract of suretyship.
ANS: It is an agreement whereby a surety guarantees the performance by the
principal or obligor of an obligation or undertaking in favor of an obligee (Sec. 175,
Insurance Code). A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of the Code, only if made by a surety who or which, as
such, is doing an insurance business (SEC. 2, Insurance Code). It is considered an
insurance contract if it is executed by the surety as a vocation, and not incidentally
(Sec. 20, Insurance Code).
Q: What is the nature of liability of surety?
ANS: The nature of liability is:
a. Solidary;
b. Limited to the amount of the bond;
c. It is determined strictly by the terms of the contract of suretyship in
relation to the principal contract between the obligor and the oblige
E. LIFE INSURANCE
Q: What is a contract of life insurance?
ANS: It is an insurance on human lives and insurance appertaining thereto or
connected therewith which includes every contract or pledge for the payment of
endowments or annuities (Sec. 179, Insurance Code).
Q: What are the kinds of life insurance?
ANS: The kinds are as follows:
[Type text]
[Type text]
a.
b.
c.
d.
e.
f.
Ordinary Life, General Life or Old Line Policy insured pays a fixed premium
every year until he dies. Surrender value after 3 years.
Limited Payment Policy insured pays premium for a limited period. If he dies
within the period, his beneficiary is paid; if he outlives the period, he does not
get anything.
Endowment Policy insured pays premium for specified period. If he outlives
the period, the face value of the policy is paid to him; if not, his beneficiaries
receive the benefit.
Term Insurance insurer pays once only, and he is insured for a specified
period. If he dies within the period, his beneficiaries benefit. If he outlives the
period, no person benefits from the insurance.
Industrial Life life insurance entitling the insured to pay premiums weekly, or
where premiums are payable monthly or more often (but not less than weekly),
if the face value is P2,000 or less, and the words industrial policy printed
upon the policy.
Variable Contract policy or contract on either group/ individual basis issued by
an insurance company providing for benefits or other contractual payments or
values thereunder to vary so as to reflect investment results of any segregated
portfolio of investment (Bar Review Materials in Commercial Law, Miravite,
2007ed).
Q: What is the liability of the insurer in case the insured commits suicide?
ANS: The insurer is liable in the following cases:
a. If committed after two years from the date of the policys issue or its last
reinstatement;
b. If committed in a state of insanity regardless of the date of the commission
unless suicide is an excepted peril (Sec. 180-A, Insurance Code);
c. If committed after a shorter period provided in the policy.
NOTE: Any stipulation extending the 2-year period is null and void.
Q: What is the liability of the insurer in case the death was occasioned at the
hands of the law (e.g. by legal execution)?
ANS: It is one of the risks assumed by the insurer under a life insurance policy in
the absence of a valid policy exception (Vance, p.572 cited in The Insurance Code
of the Philippines, De Leon H. 2002ed).
Miravite also opines that the beneficiary of an insured who is executed for a crime
he committed cannot recover from the insurer for 2 reasons: (1) his death is caused
through his connivance, and (2) any stipulation to render the insurer liable under
these circumstances would be contrary to public policy (Bar Review Materials in
Commercial Law, Miravite, 2007ed).
Q: Who shall receive the life insurance proceeds if the beneficiary willfully
brought about the death of the insured?
ANS: As a general rule, the interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice or accessory in
willfully bringing about the death of the insured, in which event, the nearest relative
of the insured shall receive the proceeds of said insurance, if not otherwise
disqualified (Sec. 12, Insurance Code).
The exceptions are as follows:
a. Accidental killing;
b. Self-defense;
c. Insanity of the beneficiary at the time he killed the insured
[Type text]
[Type text]
Q: What is the Accidental Death Benefit Clause?
ANS: It gives the beneficiaries additional benefits if the death of the insured is
through accidental means.
Q: What is the cash surrender value as applied to a life insurance policy?
ANS: It is the amount the insured, in case of default, after the payment of at least 3
full annual premiums, is entitled to receive if he surrenders the policy and releases
his claims upon it.
F. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
Q: What is Compulsory Motor Vehicle Liability Insurance?
ANS: It is a species of compulsory insurance that provides for protection coverage
that will answer for legal liability for losses and damages for bodily injuries or
property damage that may be sustained by another arising from the use and
operation of motor vehicle by its owner.
Q: Who is a passenger?
ANS: A passenger is any fare-paying person being transported and conveyed in
and by a motor vehicle for transportation of passengers for compensation, including
persons expressly authorized by law or by the vehicles operator or his agents to
ride without fare (Sec. 373[b], Insurance Code).
Q: Who is a third party?

ANS: A third party is any person other than the passenger, excluding a member of
the household or a member of the family within the second degree of consanguinity
or affinity, of a motor vehicle owner or land transportation operator, or his employee
in respect of death or bodily injury arising out of and in the course of employment
(Sec. 373[c, Insurance Code]).
In accordance with Sec.377 of the IC, IMC No.4-2006, dated July 26, 2006 provides
for third party liability coverage of P100,000 with an additional P100,000 coverage
for passenger liability for public utility vehicle. This means that the maximum liability
per accident is now P100,000 (plus another P100,000 if a common carrier)
irrespective of the number of victims. The parties may however enter into an
insurance contract which provides for a bigger coverage.
The circular likewise provides a schedule of indemnity for death and bodily injuries.
Death indemnity is P70,000 while the indemnity for burial and funeral expenses is
P30,000.
[Type text]
[Type text]
Q: What is the No Fault Clause?

ANS: It is a clause that gives the victim (injured person or heirs of the deceased) an
option to file a claim for DEATH or INJURY without the necessity of proving fault or
negligence of any kind.
Q: What are the different special clauses?

a.
b.
c.
Authorized Driver Clause a clause which aims to indemnify the insured owner
against loss or damage to the car, but limits the use of the insured vehicle to the
insured himself or any person who drives on his order or with his permission
(Villacorta vs. Insurance Commissioner, GR No. 54171, 100 SCRA 467, October
28, 1980).
Theft Clause - a clause which includes theft as among the risks insured against.
Cooperation Clause - a clause which provides in essence that the insured shall
give all such information and assistance as the insurer may require, usually
requiring attendance at trials or hearings.
Q: Rick de la Cruz insured his passenger jeepney with Asiatic Insurers, Inc.
The policy provided that the authorized driver of the vehicle should have a
valid and existing drivers license. The passenger jeepney of Rick de la Cruz
which was at the time driven by Jay Cruz, figured in an accident resulting in
the death of a passenger. At the time of the accident, Jay Cruz was licensed
to drive but it was confiscated by an LTO agent who issued him a Traffic
Violation Report (TVR) just minutes before the accident. Could Asiatic
Insurers, Inc., be made liable under its policy? Why? (2003 Bar)
ANS: Asiatic Insurers, Inc., should be made liable under the policy. The fact that the
driver was merely holding a TVR does not violate the condition that the driver
should have a valid and existing drivers license. Besides, such a condition should
be disregarded because what is involved is a passenger jeepney, and what is
involved here is not own damage insurance but third party liability where the injured
party is a third party not privy to the contract of insurance (Answers to Bar
Schools).
Q: What is the effect of change of ownership?
ANS: Transfer of ownership does not suspend the policy provided that:
a. The insurance company shall agree to continue
such policy.
b. The change of ownership or of the engine shall
be indicated in an
endorsement by the insurer.
c. Signed duplicate of the endorsement filed with the LTO.
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V.INSURABLE INTEREST
Q: What is insurable interest?
ANS: Insurable interest is the relation between the insured and the event insured
against such that the occurrence of the event will cause substantial loss or harm of
some kind to the insured.
Q: Distinguish insurable interest in property and insurable interest in life.
ANS: The distinctions are the following:
DIFFERENCE
Insurable Interest in Property
Insurable Interest in Life
Extent
Insurable interest in life is unlimited
Insurable interest is limited to the
(save in life insurance effected by a
actual value of the interest thereon
creditor on the life of the debtor)
Existence of insurable interest
Must exist when the insurance
It is enough that interest exist at the
takes effect AND when the loss
time the policy takes effect and
occurs, but need not exist in the
need not exist at the time of the
meantime.
loss.
Basis of expectation
Expectation of the benefit derived
There must be legal basis
need not have legal basis
Insurable Interest
If the insured secured the policy,
the beneficiary need not have
The beneficiary must have an
insurable interest over the life of
insurable interest in the thing the insured; if secured by the
insured.
beneficiary, the latter must have
insurable interest in the life of the
insured.
Special Cases
Q: What are the special cases with respect to insurable interests?
ANS: The following are the special cases:
a. In case of a carrier or depository
A carrier or depository of any kind has an insurable interest in a thing held
by him as such, to the extent of his liability but not to exceed the value
thereof (Sec. 15, Insurance Code).
b. In case of a mortgaged property
The mortgagor and mortgagee each have an insurable interest in the
property mortgaged and this interest is separate and distinct from the other.
Therefore, insurance taken by one in his name only and in his favor alone
does not inure to the benefit of the other.
i. Mortgagor As owner, has an insurable interest therein to the extent
of its value, even though the mortgage debt equals such value.
Exception: Loan on Bottomry or Respondentia.
Reason: The nature of a bottomry loan is that the payment of the loan is
conditional, subject to the safe arrival of the vessel at the port of
destination. In the case of respondentia loan, the collateral is not the
vessel but the goods loaded thereon. Furthermore, Sec. 101 of the
Insurance Code provides that the the insurable interest of the owner of
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the ship hypothecated by bottomry is only the excess of its value over the
amount secured by bottomry
ii. Mortgagee His interest is only up to the extent of the debt. Such
interest continues until the mortgage debt is extinguished.
NOTE: In case of an insurance taken by the mortgagee alone and for his
benefit, the mortgagee, after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes by subrogation to the
insurer to the extent of the insurance money paid (Palileo vs. Cosio, GR
No. L-7667, November 28, 1955).
The lessor cannot validly be a beneficiary of a fire insurance policy taken
by a lessee over his merchandise, and the provision in the lease contract
providing for such automatic assignment is void for being contrary to law
and public policy (Cha vs. Court of Appeals, GR No. 124520, August 18,
1997).
A.IN LIFE/HEALTH
Q: Discuss the insurable interest of a person in life and health
ANS: Every person has an insurable interest in the life and health:
a. Of himself, of his spouse and of his children;
b. Of any person on whom he depends wholly or in part for education
or support, or in whom he has a pecuniary interest;
c. Of any person under a legal obligation to him for the payment of
money, or respecting property or services, of which death or illness
might delay or prevent the performance; and
d. Of any person upon whose life any estate or interest vested in him
depends. (Section 10, Insurance Code)
NOTE: Where the insured is also the cestui que vie (Insurance upon ones life), a
person has an insurable interest in his own life and health (Sec. 10[a], Insurance
Code). The insured can make it payable to anyone he chooses, regardless of
whether or not such beneficiary has an insurable interest in his (insureds) life.
Where the insured is not the cestui que vie but is the beneficiary (insurable
interest in the life of another)
NOTE: Where a person names himself beneficiary in a policy he takes on the life
of another, he must have insurable interest in the life of the latter.
Q: When must insurable interest in life or health exist?
ANS: As a general rule, insurable interest in life or health must exist when the
insurance takes effect, but need not exist thereafter or when the loss occurs (Sec.
Exceptions:
a. When taken by the creditor on the life of the debtor.
b. When the insurance is taken by the employer on the life of the employee.
B. IN PROPERTY
Q: What constitutes insurable interest in property?
ANS: Under Sec. 13, every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature that a contemplated
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peril might directly damnify the insured, is an insurable interest. Under Sec.14, an
insurable interest in property may consist in:
a. An existing interest;
b. An inchoate interest founded on an existing interest; or
c. An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
C. DOUBLE INSURANCE AND OVER-INSURANCE
Q: What is double insurance and what are its requisites?
ANS: Double insurance exists where the same person is insured by several
insurers separately, in respect to the same subject and interest (Sec. 93, Insurance
Code)
The requisites are (TIRIS):
a. Same insured person;
b.Same subject matter;
c. Same interest insured;
d. Same risk or peril insured against; and
e. 2 or more insurers insuring separately.
Q: What is over-insurance and how does it differ from double insurance?
ANS: Over-Insurance exists when the insured insures the same property for an
amount greater than the value of that property.
Over-Insurance
Double Insurance
Amount of insurance
When the amount of the insurance

is beyond the value of the insureds
insurable interest
There may be no over-insurance as

when the sum total of the amounts
of the policies issued does not
exceed the insurable interest of the
insured
Number of insurers
There may only be one insurer
involved
There are always several insurers
Q: What are the effects in case of loss?

ANS: The insurer is bound only to pay the extent of the real value of the property
lost. The insured is entitled to recover the amount of premium corresponding to the
excess in value of the property.
Q: What are the effects of over-insurance by double insurance?
a. The insured, unless the policy otherwise provides, may claim
payment from the insurers in such order as he may select, up to
the amount for which the insurers are severally liable under their
respective contracts;
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b.
c.
d.
e.
Where the policy under which the insured claims is a valued policy,
the insured must give credit as against the valuation for any sum
received by him under any other policy without regard to the actual
value of the subject matter insured;
Where the policy under which the insured claims is an unvalued
policy, he must give credit, as against the full insurable value, for
any sum received by him under any policy;
Where the insured receives any sum in excess of the valuation in
the case of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves;
Each insurer is bound, as between himself and the other insurers,
to contribute ratably to the loss in proportion to the amount for
which he is liable under his contract. (Sec. 94, Insurance Code)
Q: What is the nature of the liability of the several insurers in double

insurance? Explain. (2005 Bar)
ANS: The nature of the liability of the several insurers in double insurance is that
each insurer is bound to the contribute ratably to the loss in proportion to the
amount for which he is liable under his contract as provided for by Sec 94. The
ratable contribution of each insurer will be determined based on the following
formula: AMOUNT OF POLICY divided by TOTAL INSURANCE TAKEN multiplied
by LOSS = LIABILITY OF THE INSURER.
ALTERNATIVE ANSWER: Each insurer is bound, as between himself and other
insurers, to contribute ratably to the loss in proportion to the amount for which he is
liable under his contract (Sec. 94, Insurance Code) (Answers to Bar Examination
Questions by the UP Law Complex and Philippine Association of Law Schools).
Q: What is the Principle of Contribution or Contribution Clause?
ANS: It is required that each insurer contributes ratably to the loss or damage
considering that the several insurances cover the same subject matter and interest
against the same peril.
Q: Discuss the Additional or Other Insurance Clause
ANS: It is a condition in the policy requiring the insured to inform the insurer of any
other insurance coverage of the property insured. It is lawful and specifically
allowed under Sec. 75 which provides that (a) policy may declare that a violation of
a specified provision thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid it.
D. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY
Q: What is the measure of insurable interest in property?
ANS: The measure of insurable interest in property is the EXTENT to which the
insured might be damnified by loss or injury thereof (Sec. 17, Insurance Code).
Insurable interest in property does not necessarily imply a property interest in, or a
lien upon, or possession of, the subject matter of the insurance, and neither title nor
a beneficial interest is requisite to the existence thereof. It is sufficient that the
insured is so situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is insured. Anyone has
an insurable interest in property who derives a benefit from its existence or would
suffer loss from its destruction (Gaisano Cagayan, Inc. v. Insurance Company of
North America, GR No. 147839, June 8, 2006).
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Q: Distinguish Standard or Union Mortgage Clause from Open or Loss

Payable Mortgage Clause.
ANS: The distinctions are as follows:
Standard or Union Mortgage
Open or Loss Payable
Clause
Mortgage Clause
Subsequent acts of the mortgagor
CANNOT affect the rights of the
assignee.
Reason:It is as if the insurer made
a new and independent contract
with the mortgagee.
Acts of the mortgagor affect the

mortgagee.
Reason: Mortgagor does not
cease to be a party to the
contract (Secs. 8 and 9,
Insurance Code).
Q: What are the effects of loss payable clause?

a.
The contract is deemed to be upon the interest of the mortgagor; hence, he does
not cease to be a party to the contract;
b.
Any act of the mortgagor prior to the loss, which would otherwise avoid the
insurance affects the mortgagee even if the property is in the hands of the
mortgagee;
c.
Any act, which under the contract of insurance is to be performed by the
mortgagor, may be performed by the mortgagee with the same effect;
d. In case of loss, the mortgagee is entitled to the proceeds to the extent of his
credit;
e. Upon recovery by the mortgagee to the extent of his credit, the debt is
extinguished.
NOTE: The rule on subrogation by the insurer to the right of the mortgagee
does not apply in this case.
Reason: Premium payment has been paid by the mortgagor and not by the
mortgagee.
Q: What is a Mortgage Redemption Insurance?
ANS: It is a life insurance taken pursuant to a group mortgage redemption scheme
by the lender of money on the life of a mortgagor, who mortgages the house
constructed to the extent of the mortgage indebtedness, such that if the mortgagor
dies, the proceeds of his life insurance will be used to pay for his indebtedness and
the deceaseds heirs will thereby be relieved from paying the unpaid balance of the
loan (Great Pacific Life Assurance Corp. v. Court of Appeals, GR No. 113899, 316
SCRA 677, October 13, 1999).
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VI. PERFECTION OF THE CONTRACT OF

INSURANCE
Q: How is an insurance contract perfected?
ANS: An insurance contract is a consensual contract and is therefore perfected the
moment there is a meeting of minds with respect to the object and the cause or
consideration. Insurance contracts through correspondence follow the cognition
theory an acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge (Enriquez v. Sun Life Assurance Co.
of Canada, GR No. L-15774, 41 Phil. 269, November 29, 1920).
Q: What is the effect in case there is delay in acceptance?
ANS: An insurance contract cannot be deemed perfected of there is only an offer to
enter into an insurance contract in the form of an insurance application. Mere delay
by the insurer, although unreasonable, in acting upon the application raises no
implication of acceptance nor does it estop the insurer to deny the existence of the
contract. Implied acceptance of an offer can be established only f there are other
circumstances that will indicate such acceptance other than inaction or delay.
Q: Why is delivery of policy necessary?
ANS: A contract of insurance, like other contracts, must be assented to by both
parties either in person or by their agents. So long as an application for insurance
has not been either accepted or rejected, it is merely an offer or proposal to make a
contract. The contract, to be binding from the date of application, must have been a
completed contract, one that leaves nothing to be done, nothing to be completed,
nothing to be passed upon, or determined, before it shall take effect. There can be
no contract of insurance unless the minds of the parties have met in agreement.
(Perez vs. CA, 383 SCRA 613). The acceptance by letter shall not bind the person
making the offer except from the time it came to the knowledge of the latter
(Enriquez v. Sun Life Assurance Co. of Canada, GR No. L-15774, 41 Phil. 269,
November 29, 1920).
Q: What is the rule on premium payment?
ANS: As a general rule, no insurance policy issued or renewal is valid and binding
until actual payment of the premium. Any agreement to the contrary is void (Sec.
77, Insurance Code). This is known as the Cash and Carry Rule.
The exceptions are the following: (LACIE)
a. In case of life and industrial life whenever the grace period provision applies
b. Where there is an acknowledgment in the contract or policy of insurance
that the premium had already been paid (Sec. 78, Insurance Code).
c. If the parties have agreed to the payment of the premium in installments and
partial payment has been made at the time of the loss (Makati Tuscany
Condominium v. Court of Appeals, GR No. 95546, November 6, 1992).
d. Where a credit term was agreed upon (UCPB General Insurance, Inc. v.
Masagana Telemart, GR No. 13717, April 4, 2001).
e. Where the parties are barred by estoppel.
NOTE: Sec. 77 merely precludes the parties from stipulating that the policy is valid
even if the premiums are not paid (Makati Tuscany Condominium Corp.vs. CA, GR
No. 95546, November 6, 1992).
Q: What is the effect of acknowledgment of receipt of premium in policy?
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ANS: It is conclusive evidence of its payment, in so far as to make the policy
binding, notwithstanding any stipulation therein that it shall not be binding until the
premium is actually paid (Sec. 78). The conclusive presumption extends only to the
question on the binding effect of the policy. As far as the payment of the premium
itself is concerned, the acknowledgment is only a prima facie evidence of the fact of
such payment.
Q: Give examples of devices used to prevent the forfeiture of a life insurance
after the payment of the first premium.
ANS: The devices are the following:
a. Grace period after the payment of the first premium, the insured is entitled to
a grace period of thirty days within which to pay the succeeding premiums.
b. Cash Surrender Value the amount the insurer agrees to pay to the holder of
the policy if he surrenders it and releases his claim upon it.
c. Extended Insurance where the insurance originally contracted for is
continued for such period as the amount available therefor will pay when it
will terminate. In such a case, the insurance will be for the same amount as
the original policy but for a period shorter than the period in the original
contract.
d. Paid Up Insurance no more payments are required, and consists of
insurance for life in such an amount as the sum available therefore,
considered as a single and final premium, will purchase. It results to a
reduction of the original amount of insurance, but for the same period
originally stipulated.
e. Automatic Loan Clause a stipulation in the policy providing that upon default
in payment of premium, the same shall be paid from the loan value of the
policy until that value is consumed. In such a case, the policy is continued
in force as fully and effectively as though the premiums had been paid by
the insured from funds derived from other sources.
f. Reinstatement provision that the holder of the policy shall be entitled to
reinstatement of the contract at any time within three years from the date of
default in the payment of premium, unless the cash surrender value has
been paid, or the extension period expired, upon production of evidence of
insurability satisfactory to the company and the payment of all overdue
premiums and any indebtedness to the company upon said policy
(Reviewer on Insurance, Insolvency and Code of Commerce, Perez H.,
2000ed).
Q: Discuss the concept of reinstatement of a lapsed policy of life insurance.
ANS: It is a provision that the holder of the policy shall be entitled to reinstatement
of the contract at any time within three years from the date of default in the payment
of premium, unless the cash surrender value has been paid, or the extension period
expired, upon production of evidence of insurability satisfactory to the company and
the payment of all overdue premiums and any indebtedness to the company upon
said policy (Reviewer on Insurance, Insolvency and Code of Commerce, Perez H.,
2000ed).
Q: Discuss the effects on refund of premiums.
a.
i. Whole
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Entitlement of
insured to return of
premiums paid:
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(a) If the thing insured was never exposed to the risks insured
against (Sec. 79, Insurance Code);
(b) If contract is voidable due to fraud or misrepresentation of the
insurer or his agents (Sec. 81, Insurance Code);
(c) If contract is voidable because of the existence of facts of which
the insured was ignorant without his fault (Sec. 81, Insurance Code);
(d) When by any default of the insured other than actual fraud, the
insurer never incurred liability (Sec. 81, Insurance Code); and
(e) When rescission is granted due to the insurers breach of
contract (Sec. 74, Insurance Code).
b. Pro rata
i. When the insurance is for a definite period and the insured surrenders
his policy before the termination thereof;
Exceptions:
(a) policy not made for a definite period of time;
(b) short period rate is agreed upon;
(c) life insurance policy
ii. When there is over-insurance
(a) In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to the
property insured. Hence, the insurer
is not entitled to that portion of the
premium corresponding to the excess
of the insurance over the insurable
interest of the insured.
(b) In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which
the aggregate sum insured in all the
policies exceeds the insurable value
of the thing at risk (Sec. 82, Insurance
Code).
VII.RESCISSION OF CONTRACT OF INSURANCE

Q: What are the grounds for rescission of an insurance contract?
ANS: The grounds are the following: (FAB-BreC)
a. Concealment;
b. False representation;
c. Breach of material warranty;
d. Breach of a condition subsequent;
e. Alteration of the thing insured.
Q: When must the insurer exercise the right to rescind the contract in non-life
policy?
ANS: The insurer must exercise the right to rescind the contract BEFORE the
insured has filed an action to collect the amount of insurance.
NOTE: A defense to an action to recover insurance that the policy was
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obtained through false representation, fraud and deceit is NOT in the nature of an
action to rescind and therefore not barred by the provision.
Q: Discuss the concept of Incontestability Clause.
ANS: The defenses mentioned are available only during the first two years of a life
insurance policy, provided that after a policy of insurance made payable on the
death of the insured shall have been in force during the lifetime of the insured for a
period of 2 years from the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is rescindable by the reason of
fraudulent concealment or misrepresentation of the insured or his agent (Sec. 48,
Insurance Code).
Q: What is concealment?
ANS: A neglect to communicate that which a party knows and ought to
communicate, is called a concealment (Sec. 26, Insurance Code)
A concealment whether intentional or unintentional entitles the injured party to
rescind a contract of insurance.
The requisites of concealment are the following:
a. A party knows a fact (a material fact) which he neglects to communicate or
disclose to the other party;
b. Such party concealing is duty bound to disclose such fact to the other;
c. Such party concealing makes no warranty as to the fact concealed; and
d. The other party has no means of ascertaining the fact concealed.
NOTE: Test of Materiality: Determined not by the event, but solely by the probable
and reasonable influence of the facts upon the party to whom the communication is
due, in forming his estimate of the advantages of the proposed contract, or in
making his inquiries (Sec. 31, Insurance Code).
Q: What are the matters that need not be disclosed?
ANS: Neither party to a contract of insurance is bound to communicate information
of the following matters, EXCEPT in answer to inquiries of the other: (WOKEE)
a. Those
which the
other
knows;
b. Those
which, in
the
exercise
of
ordinary
care, the
other
ought to
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c.
d.
e.
know
and
of
which,
the
former
has
no
reason to
suppose
him
ignorant;
Those of
which the
other
waives
communi
cation;
Those
which
prove or
tend to
prove the
existence
of a risk
excluded
by
a
warranty,
and
which
are not
otherwis
e
material;
Those
which
relate to
a
risk
excepted
from the
policy
and
which
are not
otherwis
e
material
(Sec. 30,
Insuranc
e Code).
NOTE: Neither party is bound to communicate, even upon inquiry, information of

his own judgment.
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Q: What are the matters that must be disclosed even in the absence of
inquiry? (M-No means-No war)
ANS: The matters to be disclosed despite absence of an inquiry are:
a.
Those material to the contract (Sec. 31,34 3,
Insurance Code 5);
b. Those which the other has no means of ascertaining
(Sec. 30, 32, 33, Insurance Code);
c. Those as to which the party with the duty to
communicate makes no warranty (Secs. 67-76,
Insurance Code).
Q: What are the effects of concealment?
ANS: The effects of concealment are the following:
a.
If there is concealment under Sec. 27, the remedy of the insurer is rescission.
b. The party claiming the existence of concealment must prove that there was
knowledge of the fact concealed on the part of the party charged with
concealment.
c. Good faith is not a defense in concealment. Concealment, whether intentional or
unintentional entitles the injured party to rescind the contract of insurance (Sec.
d. The matter concealed need not be the cause of loss.
e. To be guilty of concealment, a party must have knowledge of the fact concealed
at the time of the effectivity of the policy.
f.
Failure to communicate information acquired AFTER the effectivity of the policy
will NOT be a ground to rescind the contract.
Q: When is there misrepresentation?
ANS: There is misrepresentation when the insured makes erroneous statements of
facts with the intent of inducing the insurer to enter into the insurance contract. The
requisites of misrepresentation are the following:
a. The insured stated a fact which is untrue.
b. Such fact was stated with knowledge that it is untrue and with intent to
deceive or which he states positively as true without knowing it to be true
and which has a tendency to mislead.
c. Such fact in either case is material to the risk.
Q: What are the kinds of representations?
A: The kinds of representation are the following:
a. Affirmative an affirmation of fact existing when the contract begins;
b.Promissory statement by the insured concerning what is to happen
during the term of the insurance.
c. Oral or Written
Q: What are the effects of misrepresentation?
a.
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The
injured
party
entitled
to
rescind
from the
TIME
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when the
represent
ation
becomes
false
(Sec. 45,
Insuranc
e Code).
b. When the insurer accepted the payment of premium with the knowledge of the
ground for rescission, there is a waiver of such right.
c. There is no waiver of the right of rescission if the insurer had no knowledge of
the ground therefor at the time of acceptance of premium payment (Stokes
vs. Malayan Insurance Co., Inc. GR No. L-34768, February 24, 1984).
Q: Enumerate the characteristics of misrepresentation.
a. Not a part of the contract but merely a collateral inducement to it;
b. Oral or written;
c. Made at the time of, or before issuing the policy and not after;
d. Altered or withdrawn before the insurance is effected but not afterwards;
e. Refers to the date the contract goes into effect.
Q: What are warranties and what are the purposes?

ANS: Warranties are statements or promises by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or non-fulfillment of which
in any respect, and without reference to whether the insurer was in fact prejudiced
by such untruth or non-fulfillment render the policy voidable by the insurer. The
purpose is to eliminate potentially increasing hazards which may either be due to
the acts of the insured or to the change of the condition of the property.
Q: What are the effects of breach of warranty?

a. Material
General Rule: Violation of material warranty or of a material provision of a
policy will entitle the other party to rescind the contract (Sec. 74, Insurance
Code).
Exceptions:
i. Loss occurs before the time arrives for the performance of the
warranty;
ii. The performance becomes unlawful at the place of the contract; and
iii. Performance becomes impossible (Sec. 73, Insurance Code).
b. Immaterial (ex. Other insurance clause)
General Rule: It will not avoid the policy.
Exception: When the policy expressly provides or declares that a
violation thereof will avoid it (Sec. 75, Insurance Code).
VIII. CLAIMS SETTLEMENT AND SUBROGATION

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Q: In case of an unreasonable delay/denial in the payment of the insureds

claim by the insurer, what can the insured recover?
ANS: The insured can recover:
a. Attorneys fees;
b. Expenses incurred by reason of the unreasonable withholding;
c. Interest at double the legal interest rate fixed by the monetary board;
and
d. Amount of the claim (Zenith Insurance Corp. vs. CA, GR No. 85296,
185 SCRA 398, May 14, 1990; Sec. 244).
Q: What are the purposes of notice and proof of loss?
ANS: The purposes are the following:
a.
b.
c.
To give
the
insurer
informati
on
by
which he
may
determin
e
the
extent of
his
liability;
To afford the insurer a means of detecting any fraud that may have been
practiced upon him;
To operate as a check upon extravagant claims.
In fire insurance
In other types of insurance
Required
Not required
Effect of failure to furnish
Failure to give notice will defeat the

right of the insured to recover.
Failure to give notice will not

exonerate the insurer, unless there
is a stipulation in the policy
requiring the insured to do so.
Q: Discuss the guidelines on claims settlement.

ANS: a. Life Insurance (Sec. 242, Insurance Code)
The proceeds shall be paid immediately upon the maturity of the policy if
there is such a maturity date.
If the policy matures by the death of the insured, within sixty (60) days
after presentation of the claim and filing of the proof of the death of the
insured.
b. Property Insurance (Sec. 243, Insurance Code)
Proceeds shall be paid within thirty (30) days after proof of loss is
received by the insurer and ascertainment of the loss or damage is
made either by agreement or by arbitration.
If no ascertainment is made within 60 days after receipt of proof of
loss, the loss shall be pain within 90 days after such receipt.
Q: What constitute unfair claim settlement practices?
[Type text]
[Type text]
ANS: Any of the following acts by an insurance company, if committed without just
cause and performed with such frequency as to indicate a general business
practice, shall constitute unfair claim settlement practices:
a. Knowingl
y
misrepre
senting
to
claimants
pertinent
facts or
policy
provision
s relating
to
coverage
at issue;
b. Failing to acknowledge with reasonable promptness pertinent
communications with respect to claims arising under its policies;
c. Failing to adopt and implement reasonable standards for the prompt
investigation of claims arising under its policies;
d. Not attempting in good faith to effectuate prompt, fair and equitable
settlement of claims submitted in which liability has become reasonably
clear; or
e. Compelling policyholders to institute suits to recover amounts due under its
policies by offering without justifiable reason substantially less than the
amounts ultimately recovered in suits brought by them.
NOTE: If it is found, after notice and an opportunity to be heard, that an insurance

company has violated this section, each instance of non-compliance with paragraph
(1) may be treated as a separate violation of this section and shall be considered
sufficient cause for the suspension or revocation of the company's certificate of
authority (Section 241, Insurance Code).
Q: What are the rules on prescription of actions?

ANS: The parties to a contract of insurance may validly agree that an action on the
policy should be brought within a limited period of time, provided such period is
NOT less than 1 year from the time the cause of action accrues. If the period
agreed upon is less than 1 year from the time the cause of action accrues, such
agreement is void. (Sec. 63, Insurance Code)
a. The stipulated prescriptive period shall begin to run from the date of the
insurers rejection of the claim filed by the insured or beneficiary and not from the
time of the loss.
[Type text]
[Type text]
b. In case the claim was denied by the insurer but the insured filed a petition
for reconsideration, the prescriptive period should be counted from the date
the claim was denied at the first instance and not from the denial of the
reconsideration (Sun Life Office, Ltd. v. Court of Appeals, GR No. 89741,
195 SCRA 193, March 13, 1991).
NOTE: If there is no stipulation or the stipulation is void, the insured may bring the
action within 10 years in case the contract is written.
In CMVLI, the written notice of claim must be filed within 6 months from the date of
the accident; otherwise, the claim is deemed waived even if the same is brought
within one year from its rejection (Vda. De Gabriel v. CA, GR No. 103883,264
SCRA 137, November 14, 1996).
The suit for damages, either with the proper court or with the Insurance
Commissioner, should be filed within 1 year from the date of the denial of the claim
by the insurer; otherwise, claimants right of action shall prescribe (Sec. 384,
Insurance Code).
Q: What Is Subrogation?
ANS: It is the process of legal substitution where the insurer steps into the shoes of
the insured, when he paid the indemnity for the injury or loss, and he avails of the
latters rights against the wrongdoer.
NOTE: If the amount paid by the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury (Article 2207 NCC).
The principle of subrogation is a normal incident of indemnity insurance as a legal
effect of payment; it inures to the insurer without any formal assignment or any
express stipulation to that effect in the policy. Said right is not dependent upon nor
does it grow out of any private contract. Payment to the insured makes the insurer
a subrogee in equity (Malayan Insurance Co., Inc. vs. CA, GR No. L-36413,
September 26, 1988).
Q: Discuss the rules on Subrogation.
ANS: The rules are as follows:
a.
b.
Applicabl
e only to
property
insuranc
e.
The insurer can only recover from the
third person what the insured could
have recovered.
Subrogation is NOT Applicable:

Where the insured by his own act RELEASES the wrongdoer or third party
liable for the loss or damage;
b. Where the insurer PAYS the insured the value of the loss without notifying
the carrier who has in good faith settled the Insureds claim for loss;
a.
[Type text]
[Type text]
c.
Where the insurer PAYS the insured for a loss or risk not covered by the
policy (Pan Malayan Insurance Company vs. CA, GR No. 77397 184 SCRA
54, April 3, 1990);
In LIFE INSURANCE - for recovery of LOSS IN EXCESS of insurance
coverage;
TRANSPORTATION LAW
I. COMMON CARRIERS
Q: What is a common carrier?
ANS: Persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public (Art. 1732, NCC).
Q: X is a carrier of petroleum products. It delivers petroleum products from Y
supplier to a small community in Laguna. On July, 1, 2014, Xs truck exploded
and all the petroleum products of were lost. Y sued X contending that the
latter failed to exercise extraordinary diligence as required by a common
carrier. X answered that it is not a common carrier because it is only serving a
limited clientele. Is X a common carrier?
ANS: Yes. The fact that it has a limited clientele does not exclude it from the
definition of common carrier. One is engaged in the business of transporting
petroleum products for hire as a public employment. It undertakes to carry for all
persons indifferently, that is, to all persons who choose to employ its services and
transport the goods by land for compensation (First Philippine Industrial
Corporation vs. CA, G.R. No. 125948, December 29, 1997).
Q: X is a carrier of pharmaceutical products of W supplier. X undertook to
deliver the goods to the Philippines. However, upon arrival, the goods were
damaged. W sued X for damages as it did not exercise extraordinary
diligence. X defended that it is a private carrier as it is only undertaking a
single transaction.
ANS: Yes it is a private carrier. A distinction between a common carrier and a
private carrier lies in the character of the business, such that if the undertaking is a
SINGLE TRANSACTION, not a part of the general business or corporation,
although involving the carriage of goods for a fee, the person or corporation offering
such service is a PRIVATE CARRIER (Planters Products Inc. v. CA, G.R. No.
101503, September 15, 1993).
A. DILIGENCE REQUIRED OF COMMON CARRIERS
Q: What is the diligence required of common carriers?
ANS: Common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them, according to all the
circumstances of each case (Art. 1733, NCC).
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Q: Generally, what is extraordinary diligence?

ANS: Extraordinary Diligence is the rendition of service with the greatest skill and
utmost foresight (Davao Stevedore Co. v. Fernandez, 54 O.G. No. 5, 1957).
Q: What is extraordinary diligence in the carriage of goods?

ANS: The extraordinary diligence in the vigilance over the goods tendered for
shipment requires the common carrier to know and to follow the required precaution
for avoiding damage to, or destruction of the goods entrusted to it for sale, carriage
and delivery. It requires common carriers to render service with the greatest skill
and foresight and "to use all reasonable means to ascertain the nature and
characteristic of goods tendered for shipment, and to exercise due care in the
handling and stowage, including such methods as their nature requires." (Calvo v.
UCPB, G.R. No. 148496, March 19, 2002)
Q: What is extraordinary diligence in the carriage of passenger?

ANS: A common carrier is bound to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons,
with a due regard for all the circumstances (Art. 1755, NCC).
B. LIABILITIES OF COMMON CARRIERS

Q: What are the principles governing the liabilities of common carrier?
ANS: The principles governing the liability of a common carrier:
a.
[Type text]
The
liability of
a carrier
is
contractu
al
and
arises
upon
[Type text]
breach of
its
obligatio
n. There
is breach
if it fails
to exert
extraordi
nary
diligence
accordin
g to all
circumst
ances of
each
case;
b.
A carrier is obliged to carry its

passenger with the utmost diligence
of a very cautious person, having due
regard for all the circumstances;
c.
A carrier is presumed to be at fault or

to have acted negligently in case of
death of, or injury to, passengers, it
being its duty to prove that it
exercised extraordinary diligence; and
d.
The carrier is not an insurer against

all risks of travel. (Isaac v. A.L.
Ammen Transportation, G.R. No. L9671, August 23, 1957)
Q: What are the obligations of a common carrier in the carriage of goods?

ANS: The following are the obligations of a common carrier in the carriage of
goods:
a.
b.
Duty to deliver the goods; and
[Type text]
Duty to accept the

goods;
[Type text]
c.
Duty to exercise extraordinary diligence.
Q: What are the obligations of a common carrier in the carriage of

passengers?
ANS: The following are the obligations of a common carrier in the carriage of
passengers:
a.
b.
Duty to observe
utmost diligence to
passengers; and
Duty to take care of the passengers baggage.
II. VIGILANCE OVER GOODS

Q: What is the responsibility of a common carrier with respect to carriage of
goods?
ANS: Common carriers are responsible for the loss, destruction, or deterioration of
the goods, unless the same is due to any of the following causes only: (FPS-CO)
a.
Flood, storm, earthquake, lightning, or other natural disaster or
calamity;
b.
Act of the public enemy in war, whether international or civil;
c.
Act of omission of the shipper or owner of the goods;
d.
The character of the goods or defects in the packing or in the containers;
e.
Order or act of competent public authority. (Art. 1734, NCC)
[Type text]
[Type text]
NOTE: In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common carriers
are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence as required in Art. 1733 (Art. 1735,
NCC).
Q: What is the Oft-Repeated Rule regarding a carriers liability for delay?

ANS: In the absence of a special contract, a carrier is not an insurer against delay
in the transportation of goods (Saludo Jr. v. CA, G.R. No. 95536, March 23, 1992).
Q: What are the effects of delay in carriage of goods?

ANS: The following are the effects of delay:
a. Excusable delay in carriage merely suspends and generally does
not terminate the contract of carriage. When the cause is
removed, the master must proceed with the voyage and make delivery.
b. The carrier shall be made liable when vessel or vehicle is
unreasonably delayed.
c. Carrier remains duty bound to exercise extraordinary diligence.
d. Natural disaster shall not free the carrier from responsibility
(Art.1740, NCC).
e. If delay is without just cause, the contract limiting the common
carriers liability cannot be availed of in case of loss or
deterioration of the goods (Art.1747, NCC).
[Type text]
[Type text]
A. EXEMPTING CAUSES
Requirement of absence of negligence

Q: When can a common carrier raise the defense of fortuitous event to
escape liability?
ANS: The following requisites must be present before fortuitous events can be
properly invoked as a defense by a carrier: (InImFA)
[Type text]
a.
The
cause of
the
unforese
en and
unexpect
ed
occurren
ce, or of
the
failure of
the
debtor to
comply
with his
obligatio
n
must
be
independ
ent of the
human
will;
b.
b. It must
be
impossib
le
to
foresee
the event
which
constitut
es
the
caso
[Type text]
fortuito
or if it
can
be
foreseen,
it
must
be
impossibl
e
to
avoid;
[Type text]
c.
The
occurren
ce must
be such
as
to
render it
impossibl
e for the
debtor to
fulfill his
obligatio
n on a
normal
manner;
and
d.
The
obligor
(debtor)
must be
free from
any
participat
ion in or
the
aggravati
on of the
injury
resulting
to
the
creditor
(Servand
o
v.
Philippin
e Steam
Navigati
[Type text]
on, G.R.
No.
L36481-2,
October
23,
1982).
Absence of delay
Q: What is the effect of absence of delay?
ANS: According to Art. 1747 of the NCC, if delay is without just cause, the contract
limiting the common carriers liability cannot be availed of in case of loss or
deterioration of the goods. Thus, if there is an absence of delay, the contract limiting
the liability of the common carrier can be invoked.
Q: What is the effect of negligently incurring delay?

ANS: If the common carrier negligently incurs in delay in transporting the goods, a
natural disaster shall not free such carrier from responsibility (Art. 1740, NCC).
Q: What happens when there is delay on account of strikes or riots?

ANS: An agreement limiting the common carrier's liability for delay on account of
strikes or riots is valid (Art. 1748, NCC).
Due diligence to prevent or lessen the loss

Q: Should the common carrier still exercise due diligence to prevent or
lessen loss even if there is a fortuitous event?
ANS: Yes. The common carrier must exercise due diligence to prevent or minimize
loss before, during and after the occurrence of flood, storm or other natural disaster
in order that the common carrier may be exempted from liability for the loss,
[Type text]
[Type text]
destruction, or deterioration of the goods. The same duty is incumbent upon the
common carrier in case of an act of the public enemy. (Art. 1739, NCC)
Q: Should the common carrier still exercise due diligence to prevent or

lessen loss even if the loss of the goods is caused by the character of the
goods?
ANS: Yes. Even if the loss, destruction, or deterioration of the goods should be
caused by the character of the goods, or the faulty nature of the packing or of the
containers, the common carrier must exercise due diligence to forestall or lessen
the loss. (Art. 1742, NCC)
B. CONTRIBUTORY NEGLIGENCE
Q: What is the effect of contributory negligence of the shipper or owner of the
goods?
ANS: If the shipper or owner merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof being the negligence of the
common carrier, the latter shall be liable in damages, which however, shall be
equitably reduced. (Art. 1741, NCC)
However, the carrier may be able to prove that the only cause of the loss of the
goods is any of the following acts of the shipper:
a.
Failure
of
the
shipper to disclose
the nature of the
goods;
b.
Improper marking or direction as to destination; and
c.
Improper loading when he assumed such responsibility (Francisco, pp. 7781).
[Type text]
[Type text]
C. DURATION OF LIABILITY
Delivery of goods to common carrier

Q: When does extraordinary diligence starts in carriage of goods?
ANS: In carriage of goods, the duty starts from the time the goods are
unconditionally placed in the possession of, and received by the carrier for
transportation, until the same are delivered actually or constructively by the carrier
to the consignee or to the person who has the right to receive them. (Art. 1736,
NCC)
Actual or constructive delivery

Q: When is there delivery of goods to the carrier?
ANS: The goods are deemed delivered to the carrier when the goods are ready for
and have been placed in the exclusive possession, custody and control of the
carrier for the purpose of their immediate transportation and the carrier has
accepted them. When such delivery has thus been accepted by the carrier, the
liability of the carrier commences eo instant (Saludo v. CA, G.R. No. 95536, March
23, 1992).
Q: When does the common carrier deliver the goods to the consignee?
ANS: There is delivery when there has been actual or constructive delivery of the
cargoes to the (1) consignee or (2) to the person who has a right to receive them
(Macam v. CA, G.R. No. 125524, August 25, 1999).
Q: When does the common carrier constructively deliver the goods to the
consignee?
ANS: When there has been a notice of the arrival and the consignee fails to claim
the goods after the lapse of a reasonable period, there will be constructive delivery.
[Type text]
[Type text]
Temporary unloading or storage

Q: Does the duty of the common carrier cease upon temporary unloading or
storage?
ANS: No. The common carrier's duty to observe extraordinary diligence over the
goods remains in full force and effect even when they are temporarily unloaded or
stored in transit, unless the shipper or owner has made use of the right of
stoppage in transitu. (Art. 1737, NCC).
Q: Does the duty of the common carrier cease upon storage of the goods in a
warehouse of the carrier at the place of destination?
ANS: No. The extraordinary liability of the common carrier continues to be
operative even during the time the goods are stored in a warehouse of the carrier at
the place of destination, until the consignee has been advised of the arrival of the
goods and has had reasonable opportunity thereafter to remove them or otherwise
dispose of them (Art. 1738, NCC).
D. STIPULATION FOR LIMITATION OF LIABILITY

Q: When is a stipulation limiting the liability of the common carrier
considered valid?
ANS: A stipulation between the common carrier and the shipper or owner limiting
the liability of the former for the loss, destruction, or deterioration of the goods to a
degree less than extraordinary diligence shall be valid, provided it be: (WSR)
a.
b.
Supported by a valuable consideration other than the service rendered

by the common carrier; and
c.
In writing, signed
by the shipper or
owner;
Reasonable, just and not contrary to public policy.
[Type text]
[Type text]
Void stipulations
Q: What are the void stipulations limiting the liability of the common carrier?
ANS: Any of the following or similar stipulations shall be considered unreasonable,
unjust and contrary to public policy: (DROL-LeEG)
[Type text]
1.
That the goods are transported at the risk

of the owner or shipper;
2.
That the common carrier will not be liable

for any loss, destruction, or deterioration
of the goods;
3.
That the common carrier need not

observe any diligence in the custody of
the goods;
4.
That the common carrier shall exercise a

degree of diligence less than that of a
good father of a family, or of a man of
ordinary prudence in the vigilance over
the movables transported;
5.
That the common carrier shall not be

responsible for the acts or omission of his
or its employees;
6.
That the common carrier's liability for acts

committed by thieves, or of robbers who
do not act with grave or irresistible threat,
violence or force, is dispensed with or
diminished;
7.
That the common carrier is not

responsible for the loss, destruction, or
deterioration of goods on account of the
defective condition of the car, vehicle,
ship, airplane or other equipment used in
the contract of carriage (Art. 1745, NCC).
[Type text]
Limitation of liability to fixed amount
Q: When does a stipulation limiting the liability of the common carrier to a
fixed amount valid?
ANS: A contract fixing the sum that may be recovered by the owner or shipper for
the loss, destruction, or deterioration of the goods is valid, if it is reasonable and
just under the circumstances, and has been fairly and freely agreed upon. (Art.
1750, NCC).
Q: Suppose the common carrier has no competitor along the line or route,
shall this be considered in determining the reasonability of limitation of
liability?
ANS: Yes. The fact that the common carrier has no competitor along the line or
route, or a part thereof, to which the contract refers shall be taken into
consideration on the question of whether or not a stipulation limiting the common
carrier's liability is reasonable, just and in consonance with public policy (Art. 1751,
NCC).
Q: Does the limitation on the liability of the common carrier remove the
disputable presumption of negligence on its part?
ANS: No. Even when there is an agreement limiting the liability of the common
carrier in the vigilance over the goods, the common carrier is disputably presumed
to have been negligent in case of their loss, destruction or deterioration (Art. 1752,
NCC).
Q: What happens when the common carrier refused to carry the goods of the
shipper?
ANS: The agreement limiting the common carrier's liability may be annulled by the
shipper or owner if the common carrier refused to carry the goods unless the former
agreed to such stipulation. (Art. 1746, NCC)
[Type text]
[Type text]
Limitation of liability in absence of declaration of greater value
Q: Is it valid for the common carrier to limit its liability to the value of the
goods appearing in the bill of lading?
ANS: Yes. A stipulation that the common carrier's liability is limited to the value of
the goods appearing in the bill of lading, UNLESS the shipper or owner declares a
greater value, is binding (Art. 1749, NCC).
E. LIABILITY FOR BAGGAGE OF PASSENGERS
Checked-in baggage
Q: What is the responsibility of the common carrier with respect to checkedin baggage?
ANS: The provisions of Articles 1733 to 1753 shall apply to the passenger's
baggage which is not in his personal custody or in that of his employee (Art. 1754,
NCC). Thus, the checked-in baggage shall be treated as goods subject to carriage.
Baggage in possession of passengers

Q: What is the responsibility of the common carrier with respect to baggage
in the possession of passengers?
ANS: As to other baggage, the rules in Articles 1998 and 2000 to 2003 concerning
the responsibility of hotel-keepers shall be applicable. (Art 1754, NCC). Thus, handcarried baggage is not considered as goods but as necessary deposit.
In the Custody of the
In the Custody of the
Passengers (Hand-Carried)
Common Carrier (Checked-in)
[Type text]
[Type text]
Applicable rules
Arts. 1998 and 2000-2003 of the
Arts. 1733-1753 of
Civil Code
the Civil Code
Legal nature of the baggage
Necessary deposit
Considered as goods
Required diligence by the common carrier
Diligence of a depositary (ordinary

diligence)
Extraordinary diligence
III. SAFETY OF PASSENGERS

Q: What is the responsibility of a common carrier with respect to carriage of
passengers?
ANS: A common carrier is bound to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons,
with a due regard for all the circumstance (Art. 1755, NCC).
NOTE: This can also be considered as the definition of extraordinary diligence in
carriage of passenger.
Q: What is the presumption of negligence of common carriers in the carriage
of passengers?
ANS: In case of death of or injuries to passengers, common carriers are presumed
to have been at fault or to have acted negligently, unless they prove that they
observed extraordinary diligence as prescribed in Art. 1733 and 1755 (Art. 1756,
NCC).
A. VOID STIPULATIONS
Q: What is a void stipulation in the carriage of passengers?
[Type text]
[Type text]
ANS: The responsibility of a common carrier for the safety of passengers as
required in Art. 1733 and 1755 cannot be dispensed with or lessened by stipulation,
by the posting of notices, by statements on tickets, or otherwise. (Art. 1757, NCC).
Q: Can a common carrier limit its liability in passengers carried gratuitously?
ANS: When a passenger is carried gratuitously, a stipulation limiting the common
carrier's liability for negligence is valid, but not for wilful acts or gross negligence.
(Art. 1758, NCC). The reduction of fare does not justify any limitation of the
common carrier's liability.
B. DURATION OF LIABILITY
Waiting for carrier or boarding of carrier
Q: When does the duty in the carriage of passenger begins?
ANS: The duty exists from the moment the person who purchased the ticket or
token presents himself at the proper place and in a proper manner to be
transported, having the bona fide intention to use the facilities of the carrier (Jesusa
Vda de Nueca, et al. v. The Manila Railroad Company, CA-No. 31731, 1968).
Arrival at destination
Q: Does the duty in the carriage of passenger continue even after reaching
the destination?
ANS: Yes.
destination,
opportunity
prepare for
1989).
The duty continues until the passenger has, after reaching his
safely alighted from the carriers conveyance or has had a reasonable
to leave the carriers premises and to look after his baggage and
his departure (Aboitiz Shipping v. CA, G.R. No. 84458, November 6,
Q: Does the duty in the carriage of passenger already exist when the
passenger is in the premises of the carrier?
ANS: Yes. The duty of a common carrier to provide safety to its passengers so
obligates it is not only during the course of the trip, but for so long as the
passengers are within its premises and where they ought to be in pursuance to the
contract of carriage (LRTA v. Navidad, GR No. 145804, February 6, 2002).
C. LIABILITY FOR ACTS OF OTHERS
Employees
Q: Are common carriers liable for the negligence or wilful acts of their
employees?
ANS: Yes. Common carriers are liable for the death of or injuries to passengers
through the negligence or wilful acts of the former's employees, ALTHOUGH such
employees may have acted beyond the scope of their authority or in violation of the
orders of the common carriers.
[Type text]
[Type text]
Q: What is the recourse of the common carrier which paid damages due to
the negligence or wilful acts of its employees?
ANS: The carriers only recourse is to recover what it has paid from its negligent
employee (Philtranco v. CA, GR No. 120553 June 17, 1997).
Q: Can common carriers raise as a defense diligence of a good father of a
family in the selection and supervision of employees?
ANS: No. This liability of the common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in the selection and
supervision of their employees (Art. 1759, NCC).
Q: Can a common carrier limit its liability by posting notices or statements on
the tickets?
ANS: No. The common carrier's responsibility prescribed in the preceding article
cannot be eliminated or limited by stipulation, by the posting of notices, by
statements on the tickets or otherwise (Art 1760, NCC).
Other passengers and strangers
Q: Are common carriers responsible for the wilful acts or negligence of other
passengers or strangers?
ANS: Yes. A common carrier is responsible for injuries suffered by a passenger on
account of the wilful acts or negligence of other passengers or of strangers, IF the
common carrier's employees through the exercise of the diligence of a good father
of a family could have prevented or stopped the act or omission (Art. 1763, NCC).
For Acts of Other Passengers or
Strangers
For Acts of its Employees
Required diligence
Extraordinary diligence
Ordinary diligence
Nature of liability
Tort; however, the employee must be

on duty at the time of the act
(Maranan v. Perez, No. L-22272, 26
June 1967).
Not absolute; limited by Art. 1763 of

the Civil Code
D. EXTENT OF LIABILITY FOR DAMAGES

Q: Can the ACT that breaches the contract be also considered a tort or quasidelict?
ANS: Yes. Although the relation of passenger and carrier is contractual both in
origin and nature, nevertheless, the act that breaks the contract may also be a tort
(Air France v. Carrascoso, No L-21428 September 28, 1966).
Q: What is the extent of the liability of the carrier and the driver?
ANS: The carrier and driver are solidarily liable as joint tortfeasors (Art. 2180,
NCC).
Q: X rode the bus of Y driven by Z. During the course of the trip, the bus
collided with the jeep of A, driven by B. X suffered injuries. Against whom
should X file a complaint for damages?
ANS: Either or both of the carriers. In the case of injury to a passenger due to the
negligence of the driver of the bus on which the passenger was riding on and of the
driver of another vehicle, the drivers as well as the owners of the two vehicles are
[Type text]
[Type text]
jointly and severally liable for damages. It should not make any difference that the
liability of the bus owner springs from a contract while that of the driver springs from
quasi-delict (Tiu v. Arriesgado, GR No. L-138060 September 1, 2004).
Q: If the carrier is made liable for the injuries suffered by passenger due to
the negligence of its driver, what is its recourse?
ANS: Since the employers (owner) liability is primary, direct and solidary, its only
recourse is to recover what it has paid from its negligent employee (driver)
(Philtranco v. CA, GR No. 120553 June 17, 1997).
Q: Does contributory negligence of the passenger bar his recovery of
damages from the carrier?
ANS: No. The contributory negligence of the passenger does not bar recovery of
damages for his death or injuries, if the proximate cause thereof is the negligence
of the common carrier, but the amount of damages shall be equitably reduced. (Art.
1762, NCC)
IV. BILL OF LADING

Q: What is a bill of lading?
ANS: A bill of lading is a written acknowledgment of receipt of goods and
agreement to transport them to a specific place to a person named or to his order
(Interprovincial Autobus v. Collector, G.R. No. L-6741, January 31, 1956).
A. THREE-FOLD CHARACTER
Q: What is the three-fold character of a bill of lading?
ANS: A Bill of Lading operates as a: (RCE)
1. Receipt for the goods shipped;
2. Contract, by which three parties namely the shipper, the carrier and the
consignee undertake specific responsibilities and assume stipulated
obligations; (Keng Hua Paper Products Co., Inc. v. CA G.R. No. 116863
February 12, 1998). NOTE: In case however of charter of the entire vessel,
the bill of lading issued by the master to the charterer, as shipper, is in fact
and in legal contemplation merely a receipt and a document of title, not a
contract, for the contract is the charter party (Home Insurance Co., v.
American Steamship Agencies Inc., G.R. No. L-25599, April 4, 1968).
3. Evidence of the contract between the parties since its contents shall decide
all disputes which may arise in regard to their execution and fulfillment (Art.
353 Code of Commerce) (Perez, Transportation Laws and Public Service
Act, p. 73).
B. DELIVERY OF GOODS
Period for delivery
Q: What is the period of delivery?
ANS: It depends whether (1) there has been a stipulation in the contract or bill of
lading or (2) there has been no stipulation.
Q: What happens when the period of delivery is stated in the contract or bill
of lading?
ANS: Carrier is bound to fulfill the contract and is liable for any delay; no matter
from what cause it may have arisen. RATIO: It is presumed that the carrier might
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have provided a contingency for such delay (Saludo, Jr. v.CA, GR No. 95536, 23
March 1992).
Q: What is the period of delivery when there has been NO stipulation in the
contract or bill of lading?
ANS: Within a reasonable time which shall depend on the expected date of arrival
in the bill of lading or on the nature of goods. Carrier is bound to forward them in
the 1st shipment of the same or similar goods which he may make to the point of
delivery (Art. 358 Code of Commerce).
Q: Who is a consignee?
ANS: Consignee may be a shipper or any 3 rd person, natural or juridical, to whom
the goods are to be delivered or made (Aquino & Hernando, Notes and Cases on
the Law on Transportation and Public Utilities, 2004 ed.).
Q: When is the consignee bound by the agreement between the shipper and
the carrier?
ANS: The bill of lading is oftentimes drawn up by the shipper/consignor and the
carrier without the intervention of the consignee. However, the latter can be bound
by the stipulations of the bill of lading when:
1. There is a relation of agency between the shipper or consignor and the
consignee; OR
2. When the consignee demands fulfillment of the stipulation of the bill of
lading which was drawn up in its favor (MOF Company v. Shing Yang
Brokerage, G.R. No. 172822, December 18, 2009).
Q: When does a consignee deemed to have accepted the stipulations in the
bill of lading?
ANS: Once the bill of lading is received by the consignee who does not object to
any terms or stipulations contained therein, it constitutes as an acceptance of the
contract and of all of its terms and conditions, of which the acceptor has actual or
constructive notice (Keng Hua Paper Products Co., Inc. v. Court of Appeals, G.R.
No. 116863 February 12, 1998).
Delivery without surrender of bill of lading
Q: What is the liability of the legitimate holder of the bill of lading if he fails
to present it to the captain of the vessel?
ANS: The legitimate holder of a bill of lading who fails to present it to the captain
of the vessel before the unloading obliging the latter thereby to unload it and place
it in deposit, shall be responsible for the expenses of warehousing and other
expenses arising therefrom (Art. 711, Code of Commerce).
Refusal of consignee to take delivery
Q: What is the effect of the refusal of the consignee to take delivery?
ANS: If there has been notice of the arrival and the consignee fails to claim the
goods after the lapse of a reasonable period, there will be constructive delivery. If
the consignee still fails to take delivery, from that point on, the contract between
the carrier and the consignee will no longer be a contract of carriage but a contract
of deposit.[Jimenez Transcripts (Transportation and Public Service Law) Page 2 of
25]
C. PERIOD FOR FILING CLAIMS
Q: What is the period for filing claims by the consignee against the carrier?
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ANS: It depends whether (1) the Code of Commerce or (2) the Carriage of Goods
by Sea Act is applicable.
Q: When is the Code of Commerce applicable?
ANS: The Code of Commerce is applicable on the following carriage:
a. Domestic/inter-island/coastwise transportation
b. Land, water, air transportation
Q: When is the Carriage of Goods by Sea Act applicable?
ANS: The COGSA is applicable on the following carriage:
a. International/overseas/foreign (from foreign country to Phil.)
b. Water/maritime transportation
*see further discussion on the topic COGSA
Q: What is the period for filing claims by the consignee against the carrier?
ANS: Under the Code of Commerce, it depends whether the damage is apparent
or not:
1. Apparent damage - If the damage can be ascertained from the outside
part of such package, in which case the claim shall be admitted only at
the time of receipt. (Art. 366, Code of Commerce)
2. Latent damage - within the twenty-four hours following the receipt of the
merchandise, the claim against the carrier for damage or average be
found therein upon opening the packages, may be made, PROVIDED
that the indications of the damage or average which gives rise to the
claim cannot be ascertained from the outside part of such packages.
Q: What is the effect of failure to file claims within the period prescribed?
ANS: Under the Code of Commerce, after the periods mentioned have elapsed, or
the transportation charges have been paid, no claim shall be admitted against the
carrier with regard to the condition in which the goods transported were delivered.
(Art. 366, Code of Commerce).
Q: Under the Code of Commerce, is the filing of a claim considered as a
condition precedent in bringing a suit against the carrier under Code of
Commerce?
ANS: Under the Code of Commerce, filing a claim is a condition precedent for the
consignee to bring a suit against the carrier.
D. PERIOD FOR FILING ACTIONS
Q: What is the prescriptive period in bringing a suit against the carrier?
ANS: Under the Code of Commerce, the provisions of the Civil Code shall apply. If
there is a bill of lading, it shall be a 10 year prescriptive period. If there is NO bill of
lading, it shall be a 6 year prescriptive period.
Q: Does extrajudicial demand toll the prescriptive period in bringing a suit
against the carrier?
ANS: Under the Code of Commerce, yes. However, it must be a written
extrajudicial demand (Art. 1155, NCC).
Q: Can the parties stipulate to shorter prescriptive period under the Code of
Commerce?
ANS: Under the Code of Commerce, the parties could do so, as the provisions of
the Civil Code shall apply.
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V. MARITIME COMMERCE
Q: What is Maritime or Admiralty Law?

ANS: Maritime or Admiralty Law is the system of laws which particularly relates to
the affairs and business of the sea, to ships, their crews and navigation, and to
maritime conveyance of persons and property (Aquino & Hernando, citing
Francisco, Notes and Cases on the Law on Transportation and Public Utilities
p.254).
A. CHARTER PARTIES
Q: What is a charter party?
ANS: A "charter-party" is defined as a contract by which an entire ship, or some
principal part thereof, is let by the shipowner to another person (called the
charterer) for a specified time or use. Charter parties are of two types: (a) contract
of affreightment or (b) a charter by demise or bareboat charter.
Q: What is a bareboat or demise charter?

ANS: In a bareboat or demise charter, the shipowner leases to the charterer the
whole vessel, transferring to the latter the entire command, possession and
consequent control over the vessels navigation, including the master and the crew,
who thereby becomes the charterers servants. (PPI v. CA, G.R. No. 101503,
September 15, 1993).
Q: What are the implications of a bareboat charter?

ANS: The charterer becomes the owner pro hac vice. Thus, the charterer is liable
for damages arising from negligence. The master of the vessel becomes the agent
of the charterer and the character of a common carrier is converted into a private
carrier. The charterer is also liable for the expenses of the voyage including the
wages of the seamen. The shipowner is not liable for any loss that may occur
during the voyage.
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Q: What is a contract of affreightment?

ANS: A contract of affreightment is whereby the owner of the vessel leases part or
all of its space to haul goods for others (PPI v. CA, Ibid.).
Q: What are the kinds of contract of affreightment?

ANS: The following are the kinds of contract of affreigtment:
a. Time charter vessel is chartered for a fixed period of time or duration of
voyage.
b. Voyage or trip charter the vessel is leased for one or series of voyages
usually for purposes of transporting goods for charterer.
Q: What are the implications of a contract of affreightment?

ANS: The charterer hires the vessel only and the master and crew remain in the
employ of the shipowner. The shipowner remains the owner of the vessel. Thus,
the shipowner shall be liable for the expenses of the voyage and also for any loss
or injury during the voyage;
B. LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS

Q: What are the liabilities of a shipowner or ship agent?
ANS: The following are the liabilities of a shipowner or ship agent:
a.
b.
c.
d.
e.
f.
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If
the
vessel is
chartered
wholly,
not
to
accept
cargo
from
others;
To observe represented capacity;

To unload cargo clandestinely placed
To substitute another vessel if load is less than 3/5 of capacity;
To leave the port if the charterer does not bring the cargo within
the lay days and extra lay days allowed;
To place in a vessel in a condition to navigate;
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g.
To bring cargo to nearest neutral port in case of war or blockade

(Arts. 669-678, Code of Commerce).
Q: What are the liabilities of a charterer?

ANS: The following are the liabilities of a charterer:
a. To pay the agreed charter price;
b. To pay freightage on unboarded cargo;
c. To pay losses to others for loading uncontracted cargo and illicit
cargo;
d. To wait if the vessel needs repair;
e. To pay expenses for deviation (Arts. 679-687, Code of
Commerce).
Liability for acts of Captain
Q: What is the liability of the ship agent with respect to the acts of the
captain?
ANS: The agent shall be civilly liable for the indemnities in favor of third persons
which arise from the conduct of the captain in the care of the goods which the
vessel carried, but he may exempt himself therefrom by abandoning the vessel with
all her equipments and the freight he may have earned during the trip (Art. 587,
Code of Commerce).
Q: What is the liability of the part owners of the vessel with respect to the
acts of the captain?
ANS: The part owners of a vessel shall be civilly liable, in the proportion of their
contribution to the common fund, for the results of the acts of the captain referred to
in Art. 587. Each part owner may exempt himself from this liability by the
abandonment, before a notary, of the part of the vessel belonging to him (Art. 590,
Code of Commerce).
Q: What is the limited liability of the shipowner or ship agent?
ANS: No vessel, no liability. The liability of shipowner and ship agent is limited to
the amount of interest in said vessel such that where vessel is entirely lost, the
obligation is extinguished (Luzon Stevedoring v. Escano, 156 SCRA 169). Thus, if
the vessel, equipment or freightage were completely lost or destroyed, the
shipowner shall not anymore be liable.
Q: What is the extent of the interest of the shipowner or ship agent with
respect to the limited liability?
ANS: The interest of thee shipowner and ship agent extends to:
a. The vessel itself;
b. Equipment;
c. Freightage; and
d. Insurance proceeds (Chua v. IAC, No. L-74811 September 30, 1988)
Exceptions to limited liability
Q: What are the exceptions from the limited liability rule?
ANS: The following are the exceptions to the limited liability rule: (WCIEN)
a. Claims under Workmens Compensation (Abueg v. San Diego, 77
Phil 730);
b. Injury or damage due to shipowner or to the concurring negligence of
the shipowner and the captain;
c. The vessel is insured (Vasquez v. CA, L-42926 September 13,
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1985).
d. Expenses for repair and provisioning of the ship before its loss
(Timoteo B. Aquino & Ramon Paul L. Hernando, Notes and Cases on
the Law on Transportation and Public Utilities, 2004 ed, p. 431);
e. In case there is no total loss and the vessel is not abandoned;
C. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE
General Average
Q: What is an average?
ANS: An average is an extraordinary or accidental expense incurred during the
voyage in order to preserve the cargo, vessel or both, and all damages or
deterioration suffered by the vessel from departure to the port of destination, and to
the cargo from the port of loading to the port of consignment (Art. 806 Code of
Commerce). It can either be a General or Particular Average.
Q: What is a general average?
ANS: A general average is when damages or expenses deliberately caused in
order to save the vessel, its cargo or both from real and known risk. (Art. 811,
Code of Commerce) Where both vessel and cargo are saved, it is general average.
The person whose property has been saved must contribute to reimburse the
damage caused or expense incurred if the situation constitutes general average.
Q: What are the implications of having a General Average?
ANS: All the persons having an interest in the vessel and the cargo therein at the
time of the occurrence of the average shall contribute to satisfy this average. (Art.
812) Thus, those whose cargoes were saved must contribute to the general
average in proportion to the value of the owners property saved. The insurers (Art.
859) and lenders on bottomry and respondentia shall likewise contribute (Art. 732).
Q: What is a particular average?
ANS: Particular averages are damages or expenses caused to the vessel or cargo
that did not inure to the common benefit, and borne by respective owners. (Art.
809, Code of Commerce). If only the vessel or only the cargo is saved, it is
particular average.
Q: What are the implications of having a Particular Average?
ANS: The owner of the goods which gave rise to the expense or suffered the
damage shall bear this average. (Art. 810, Code of Commerce) Thus, the owner of
the goods whose cargoes were lost or destroyed due to the particular average shall
bear the expense of their own. They shall not receive any reimbursement from the
other owners of goods whose cargoes were not affected by the particular average.
Q: What are the requisites of a General Average?
ANS: The following are the requisites of a general average: (CDSP)
a. Common danger
a. That both the ship and the cargo, after has been loaded, are subject to
the same danger, whether during the voyage, or in the port of loading or
unloading.
b. That the danger arises from the accidents of the sea, dispositions of the
authority or faults of men, provided that the circumstances producing the
peril should be ascertained and imminent or may rationally be said to be
certain and imminent (Timoteo B. Aquino & Ramon Paul L. Hernando,
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Notes and cases on the Law on Transportation and Public Utilities 2004
ed, p. 602).
b.
Deliberate Sacrifice
General Rule: Sacrifice is made through the jettison of the cargo or part of
the ship is thrown overboard during the voyage
Exceptions:
a. Where the sinking of a vessel is necessary to extinguish a fire in a port,
roadsteads, creek or bay
b. Where cargo is transferred to lighten the ship on account of a storm to
facilitate entry into a port (Arts. 816, 817 & 818, Code Of Commerce)
c.
Success
Purpose: To be able to demand general contribution (Timoteo B. Aquino &
Ramon Paul L. Hernando, Notes and Cases on the Law on Transportation
and Public Utilities, 2004 ed, p.605)
d.
Proper formalities and legal steps
i.
Procedure for recovery:
ii. Assembly and deliberation
iii. Resolution of the captain
iv. Entry of the resolution in the logbook
v. Detailed minutes
vi. Delivery of the minutes to the maritime judicial authority of the first port,
within 24 hours from arrival,
vii. Ratification by captain under oath. (Arts. 813 & 814, Code of
Commerce)
Q: Are expenses incurred to refloat a vessel, which accidently ran aground,
considered as general average?
ANS: No. Expenses incurred to refloat a vessel, which accidentally ran aground, in
order to continue its voyage, do not constitute general average. Not only is there
absence of a marine peril, common safety factor, and deliberateness. It is the safety
of the property, and not the voyage, which constitutes the true foundation of general
average (A. Magsaysay, Inc. v. Agan, G.R. No. L-6393, January 31, 1955).
Collisions
Q: What is a collision?
ANS: Strictly speaking, collision refers to the contact of two moving vessels. If one
vessel is moving while the other is stationary, the same is more appropriately called
allision. Nevertheless, for purposes of applying the provisions of the Code, collision
includes collision per se and allision (Aquino and Hernando, Notes and Cases on
the Law on Transportation and Public Utilities, 2004 ed.).
Q: What are the different zones of time in collision of vessels?
ANS: The following are the different zones of times:
1. First zone all time up to the moment when risk of collision begins.
No rule is as yet applicable for none is necessary.
2. Second zone time between moment when risk of collision begins and moment
it becomes a practical certainty.
It is in this period where conduct of the vessels is primordial. It is in this
zone that vessels must strictly observe nautical rules, unless a departure
therefrom becomes necessary to avoid imminent danger.
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3.
Third zone time when collision is certain and time of impact.

An error in this zone would no longer be legally consequential.
Q: What is an Error in Extremis?
ANS: An Error in Extremis is a sudden movement made by a faultless vessel during
the third zone of collision with another vessel which is at fault during the 2nd zone.
Even if such sudden movement is wrong, no responsibility will fall on said faultless
vessel (Urrutia and Co. v. Baco River Plantation Co., GR No. 7675 March 25,
1913).
Q: What are the cases covered by Collision and Allision?

ANS: The following are the cases covered by Collision and Allision:
1. One vessel at fault
Vessel at fault is liable for damage caused to innocent vessel as well as
damages suffered by the owners of cargo of both vessels (Art. 826, Code
of Commerce).
2. Both vessels at fault
Each vessel must bear its own loss, but the shippers of both vessels may
go against the shipowners who will be solidarily liable. (Art. 827 Code of
Commerce)
3. Vessel at fault not known
Each vessel must bear its own loss, but the shippers of both vessels may
go against the shipowners who will be solidarily liable. (Art. 828 Code of
Commerce)
NOTE: Doctrine of Inscrutable Fault In case of collision where it cannot be
determined which between the two vessels was at fault, both vessels bear
their respective damage, but both should be solidarily liable for damage to
the cargo of both vessels.
4.
Third vessel at fault

The third vessel will be liable for losses and damages (Art. 831 Code of
Commerce).
5. Fortuitous event/force majeure
No liability. Each bears its own loss (Art. 830, Code of Commerce) subject
to NCC requirement on fortuitous event to exercise due diligence before,
during and thereafter and provided that there is no delay.
D. CARRIAGE OF GOOD BY SEA ACT
Application
Q: When is the Carriage of Goods by Sea Act applicable?
ANS: The COGSA is applicable when the following are present:
a. Water/maritime transportation;
b. For the carriage of goods; and
c. Overseas/international/foreign (from foreign port to Philippine
port).
Notice of Loss or Damage
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Q: What is the period for filing claims by the consignee against the carrier
under the COGSA?
ANS: Similar to the Code of Commerce, it also depends whether the loss or
damage is apparent or not:
1. Apparent damage - if the loss is apparent, notice of loss or damage and
the general nature of such loss or damage is given in writing to the carrier
or his agent (1) at the port of discharge or (2) at the time of the removal of
the goods into the custody of the person entitled to delivery thereof under
the contract of carriage.
2. Latent damage - if the loss or damage is not apparent (or latent), the
notice must be given within three (3) days of the delivery (Sec. 3 (6),
COGSA).
Q: What is the effect of failure to file claims within the period prescribed
under the COGSA?
ANS: The removal of goods (without filing a claim) by the carrier shall be prima
facie evidence of the delivery by the carrier of the goods as described in the bill of
lading (Sec. 3 (6), COGSA).
Q: Under COGSA, is the filing of a claim considered as a condition precedent
in bringing a suit against the carrier?
ANS: The filing a claim is not a condition precedent in order to bring a suit against
the carrier. If a notice of loss or damage, either apparent or concealed, is not given
as provided for in this section, that fact shall not affect or prejudice the right of the
shipper to bring suit within one (1) year after the delivery of the goods or the date
when the goods should have been delivered. In the case of any actual or
apprehended loss or damage, the carrier and the receiver shall give all reasonable
facilities to each other for inspecting and tallying the goods. (Sec. 3 (6), COGSA)
Q: Does delivery of the good to the arrastre-operator commences the running
of the prescriptive period under COGSA?
ANS: Yes. The prescriptive period shall run from delivery to the arrastre-operator
and not to the consignee (Union Carbide (Phil) Inc. v. Manila Railroad Co., GR No.
27798 June 15, 1977).
Period of Prescription
Q: What is the prescriptive period in bringing a suit against the carrier under
the COGSA?
ANS: The prescriptive period is one year from (1) date of delivery or (2) date when
goods should have been delivered (Sec. 3 (6), COGSA).
Q: Does extrajudicial demand toll the prescriptive period in bringing a suit
against the carrier under COGSA?
ANS: No, the extrajudicial demand does not toll the prescriptive period. (Dole Phil.
v. Maritime Co. No. L-61352 February 27, 1997). The one-year period shall run
from delivery of the last package.
Q: Can the parties stipulate to shorter prescriptive period under the COGSA?
ANS: Yes. The 1-year period cannot be shortened (Dole Philippines v. Maritime Co,
No. L-61352 February 27, 1997).
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Q: What are the acts that suspend the one-year prescriptive period?
ANS: The following suspend the prescriptive period:
a. The express agreement of the parties (Universal
Shipping Lines, Inc. v. IAC, 188 SCRA 170 1990).
b. The filing of an action in court until it is dismissed
(Stevens & Co. v. Nordeutscher Lloyd, 6 SCRA
180, [1962]).
Limitation of liability
Q: What is the limitation on the liability of the carrier with respect of
unseaworthiness?
ANS: Neither the carrier nor the ship shall be liable for loss or damage arising or
resulting from unseaworthiness unless caused by want of due diligence on the part
of the carrier to make the ship seaworthy and to secure that the ship is properly
manned, equipped, and supplied, and to make the holds, refrigerating and cooling
chambers, and all other parts of the ship in which goods are carried fit and safe for
their reception, carriage, and preservation, in accordance with the provisions of par.
(1) of Sec. (3).
Q: Who has the burden of proof with respect to due diligence when a loss or
damage resulted from unseaworthiness?
ANS: Whenever loss or damage has resulted from unseaworthiness, the burden of
proving the exercise of due diligence shall be on the carrier or other person
claiming exemption under this section (Sec. 4, COGSA)
Q: Under what instances is the carrier not liable for the loss or damage of
goods under COGSA?
ANS: Neither the carrier nor the ship shall be responsible for loss or damage
arising or resulting from
1. Act, neglect, or default of the master, mariner, pilot, or the servants of the
carrier in the navigation or in the management of the ship;
2. Fire, unless caused by the actual fault or privity of the carrier;
3. Perils, dangers, and accidents of the sea or other navigable water;
4. Act of God;
5. Act of war;
6. Act of public enemies;
7. Arrest or restraint of princes, rulers, or people, or seizure under legal
process;
8. Quarantine restrictions;
9. Act or omission of the shipper or owner of the goods, his agent or
representative;
10. Strikes or lockouts or stoppage or restraint of labor from whatever cause,
whether partial or general: Provided, that nothing herein contained shall be
construed to relieve a carrier from responsibility for the carrier's own acts;
11. Riots and civil commotions;
12. Saving or attempting to save life or property at sea;
13. Wastage in bulk or weight or any other loss or damage arising from inherent
defect, quality, or vice of the goods;
14. Insufficiency or packing;
15. Insufficiency or inadequacy of marks;
16. Latent defects not discoverable by due diligence; and
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17. Any other cause arising without the actual fault and privity of the carrier and
without the fault or neglect of the agents or servants of the carrier, but the
burden of proof shall be on the person claiming the benefit of this exception
to show that neither the actual fault or privity of the carrier nor the fault or
neglect of the agents or servants of the carrier contributed to the loss or
damage (Sec. 4, COGSA).
Q: What is the limitation on the liability of the shipper under COGSA?
ANS: The shipper shall not be responsible for loss or damage sustained by the
carrier or the ship arising or resulting from any cause without the act, or neglect of
the shipper, his agents, or his servants (Sec. 4, COGSA).
Q: How are attempts to save life or property at sea treated under COGSA?
ANS: Any deviation in saving or attempting to save life or property at sea, or
any reasonable deviation shall not be deemed to be an infringement or breach or
this Act or of the contract of carriage, and carrier shall not be liable for any loss or
damage resulting therefrom: Provided, however, that if the deviation is for the
purpose of loading or unloading cargo or passengers it shall, prima facie, be
regarded as unreasonable (Sec. 4, COGSA).
Q: Under COGSA, what is the value of limited liability of the carrier?
ANS: Neither the carrier nor the ship shall in any event be or become liable for any
loss or damage to or in connection with the transportation of goods in an amount
exceeding $500 per package of lawful money of the United States, or in case of
goods not shipped in packages, per customary freight unit, or the equivalent of that
sum in other currency, unless the nature and value of such goods have been
declared by the shipper before shipment and inserted in the bill of lading. This
declaration, if embodied in the bill of lading, shall be prima facie evidence, but shall
not be conclusive on the carrier (Sec. 4, COGSA).
Q: Under COGSA, can another maximum value of limited liability of the carrier
be fixed by the parties?
ANS: Yes. By agreement between the carrier, master or agent of the carrier, and
the shipper another maximum amount than that mentioned in this paragraph may
be fixed: Provided, that such maximum shall not be less than the figure above
named. In no event shall the carrier be liable for more than the amount of damage
actually sustained. Neither the carrier nor the ship shall be responsible in any event
for loss damage to or in connection with the transportation of the goods if the nature
or value thereof has been knowingly and fraudulently misstated by the shipper in
the bill of lading. (Sec. 4, COGSA)
Q: How are goods of inflammable, explosive or dangerous nature treated
under COGSA?
ANS: Goods of an inflammable, explosive, or dangerous nature to the shipment
whereof, the carrier, master or agent of the carrier, has not consented with
knowledge of their nature and character, may at any time before discharge be
landed at any place or destroyed or rendered innocuous by the carrier without
compensation.
If any such goods shipped with such knowledge and consent shall become a
danger to the ship or cargo, they may in like manner be landed at any place, or
destroyed or rendered innocuous by the carrier without liability on the part of the
carrier except to general average if any. (Sec. 4, COGSA)
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VI.THE WARSAW CONVENTION

Q: What is the Warsaw Convention?
ANS: The Warsaw Convention is an agreement among sovereign countries
concerning the regulation in a uniform manner of the conditions of international
transportation by air in respect of the documents used for such transportation and
of the liability of the carrier. It was signed on October 12, 1929 in Warsaw, Poland.
A. APPLICABILITY
Q: When is Warsaw Convention applied?
ANS: The Warsaw Convention shall be applied when the transportation:
a. International transportation;
b. Air transportation; and
c. Carriage of passengers, baggage or goods.
Q: What are the other instances when the Warsaw Convention should be
applied?
ANS: The WC shall also apply to fortuitous events affecting transportation by
aircraft performed by an air transportation enterprise. The Convention is likewise
applicable to air transportation by legal entities constituted under public law of the
High Contracting Parties.
B. LIMITATION OF LIABILITY (Art. 22, Alitalia v. IAC, Ibid.)
Liability to passengers
Q: What is the limitation on the liability of the carrier against passengers
under the Warsaw Convention?
ANS: General Rule is 250,000 francs per passenger. However, an exception is
when there has been an agreement to a higher limit
Liability for checked baggage
Q: What is the limitation on the liability of the carrier against checked-in
baggage under the Warsaw Convention?
ANS: General Rule is 250 francs per kilogram. However, an exception is in case of
special declaration of value and payment of a supplementary sum by consignor,
carrier is liable to pay not more than the declared sum unless it proves the sum is
greater than actual value.
Q: What is the limitation on the liability of the carrier against goods to be
shipped under the Warsaw Convention?
ANS: General Rule is $20 per kilogram. However, an exception is in case of special
declaration of value and payment of a supplementary sum by consignor, carrier is
liable to pay not more than the declared sum, unless, it proves the sum is greater
than actual value.
Liability for hand-carried baggage
Q: What is the limitation on the liability of the carrier against hand-carried
baggage under the Warsaw Convention?
ANS: 5,000 francs per passenger
C. WILLFUL MISCONDUCT
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Q: Can the carrier limit its liability if the damage was caused by the willful
misconduct by any agent of the carrier?
ANS: No. The Warsaw Convention denies to the carrier availment of the provisions
which exclude or limit his liability, if the damage is caused by his willful misconduct
or by such default on his part as, in accordance with the law of the court seized of
the case, is considered to be equivalent to willful misconduct or if the damage is
(similarly) caused by any agent of the carrier acting within the scope of his
employment (Sundiang and Aquino Reviewer, Quoting WC, as amended by the
Hague Protocol and Montreal Agreement, 2009 ed. , p452-453).
THE CORPORATION CODE
I. CORPORATION, DEFINED
A. DEFINITION
Q: What is a corporation?
ANS: A corporation is an artificial being created by operation of law having the right
of succession, and the powers, attributes and properties expressly authorized by
law or incident to its existence (Sec. 2, Corporation Code).
B. ATTRIBUTES
Q: What are the attributes of a corporation?
ANS: The attributes of the corporation are: (ACSP)
a. It is an artificial being with separate and distinct personality.
b. It is created by operation of law.
c. It enjoys the right of succession
d. It has the powers, attributes and properties expressly authorized by law or
incident to its existence.
II. CLASSIFICATION OF CORPORATIONS

Q: What is the classification of corporations under the Corporation Code?
ANS: The corporations are either classified as (1) stock corporation or (2) nonstock Corporation.
Q: What is a stock corporation?
ANS: A corporation which has capital stock divided into shares and is authorized to
distribute to holders of such shares, dividends or allotments of the surplus profits on
the basis of the shares held (Sec. 3, Corporation Code).
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Q: What is a non-stock corporation?
ANS: A non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees or officers (Sec. Corporation Code).
Q: What are the other classifications of corporations?
ANS: The following are other classifications:
a. As to organizers:
i.
Public by State only; or
ii. Private by private persons alone or with the State.
b. As to purpose:
i.
Public organized for the government of a portion of the State for the
general good and welfare.
ii. Private formed for some private purpose, benefit or end
(a) Government-owned or controlled corporation created by the government
or of which the government is the majority stockholder. (i.e., GSIS,
NAPOCOR, PNR, PNB)
(b) Quasi public corporation private corporations which have accepted from
the State the grant of franchise or contract involving the performance of
public duties but which are organized for profits (i.e., electric, water,
transportation companies).
c. As to governing law:
i.
Public Special Laws and Local Government Code; or
ii. Private Law on Private Corporations.
d. As to legal right to corporate existence:
i.
De jure corporation corporation created in strict or substantial
conformity with the mandatory statutory requirements for
incorporation and the right of which to exist as a corporation
cannot be successfully attacked or questioned by any party even
in a direct proceeding for that purpose by the state; or
ii. De facto corporation organized with a colorable compliance
with the requirements of a valid law and its existence cannot be
inquired collaterally but such inquiry may be made by the Solicitor
General in a quo warranto proceeding.
iii. Corporation by estoppel group of persons that assumes to act as a
corporation knowing it to be without authority to do so, and enters into a
transaction with a third person on the strength of such appearance. It
cannot be permitted to deny its existence in an action under said
transaction (Sec. 21, Corporation Code).It is neither de jure nor de facto.
iv. Corporation by prescription one which has exercised corporate powers
for an indefinite period without interference on the part of the sovereign
power, e.g. Roman Catholic Church.
e. As to laws of incorporation:
i.
Domestic corporation corporation formed, organized or existing
under Philippine laws; or
ii. Foreign corporation a corporation formed, organized or existing
under any laws other than those of the Philippines and whose
laws allow Filipino citizens and corporations to do business in its
own country or state.
f.
As to whether they are open to the public or not:
i.
Open one which is open to any person who may wish to
become a stockholder or member thereto; or
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ii.
i.
ii.
iii.
iv.
Close - those whose shares of stock are held by limited number

of persons like the family or other closely-knit group (Sec. 96,
Corporation Code).
g. As to relationship of management and control:
Holding corporation it is one which controls another as a subsidiary by the
power to elect management. It is one that holds stocks in other companies for
purposes of control rather than for mere investment.
Subsidiary corporation one which is so related to another corporation that the
majority of its directors can be elected either directly or indirectly by such other
corporation. It is always controlled; or
Affiliate one related to another by owning or being owned by common
management or by a long-term lease of its properties or other control device. It
may be the controlled or controlling corporation, or under common control; or
Parent and Subsidiary corporation when a corporation has a controlling
financial interest in one or more corporations, the one having control is the parent
corporation, and the others are the subsidiary corporations (Villanueva,
Philippine Corporate Law, 2010ed.).
h. As to number of persons who compose them:
i. Aggregate corporation a corporation consisting of more than one
person or member; or
ii. Corporation sole a corporation consisting of only one person or
member; Under Sec. 110 of the Corporation Code, for the purpose of
administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious denomination, sect or
church.
i.
As to whether they are for religious purposes or not:
i.
Ecclesiastical corporation one organized for religious purposes; or
ii. Lay corporation one organized for a purpose other than for religion.
j. As to whether they are for charitable purposes or not:
i.
Eleemosynary corporation one established for
or devoted to charitable purposes or those
supported by charity; or
ii. Civil corporation one established for business
or profit.
III. NATIONALITY OF CORPORATIONS

A. PLACE OF INCORPORATION TEST
Q: What is the place of incorporation test?
ANS: The place of incorporation test states that the nationality of state where the
corporation was incorporated shall be the nationality of the corporation.
B. CONTROL TEST
Q: What is the control test?
ANS: The control test states that the nationality of a corporation is determined by
the nationality of the controlling stockholders or members.
Q: What is the implication of control test?
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ANS: This test is applied in times of war. Also known as the WARTIME TEST.
C. GRANDFATHER RULE
Q: What is the grandfather rule?
ANS: The grandfather rule is the method by which the percentage of Filipino
equity in a corporation engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present in the situation, by
attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder (Villanueva, Philippine
Corporate Law, 2010ed.).
IV. CORPORATE JURIDICAL PERSONALITY

A. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
Q: What is the doctrine of separate juridical personality?
ANS: A corporation is a legal or juridical person with a personality separate and
apart from its individual stockholders or members and from any other legal entity to
which it may be connected (De Leon, Corporation Code of the Philippines,
2010ed.).
Liability for tort and crimes
Q: What is the liability of a corporation for torts?
ANS: A corporation is liable whenever a tortuous act is committed by an officer or
agent under the express direction or authority of the stockholders or members
acting as a body, or, generally, from the directors as the governing body (PNB v.
CA, GR NO. 27155, May 18, 1978).
Q: Can a corporation be held criminally liable?
ANS: No. Since a corporation is a mere legal fiction, it cannot be held liable for a
crime committed by its officers since it does not have the essential element of
malice, EXCEPT if by express provision of law (i.e. Anti-Dummy Law and AntiMoney Laundering Act), the corporation is held criminally liable; In such case the
responsible officers would be criminally liable (People v. Tan Boon Kong, GR NO.
32652, March 15, 1930).
Q: Who shall be held liable for the criminal acts done on behalf of a
corporation?
ANS: The officers of the corporation may be held liable. It is settled that an officer
of a corporation can be held criminally liable for acts or omissions done in behalf of
the corporation only where the law directly requires the corporation to do an act in a
given manner and the same law makes the person who fails to perform the act in
the prescribed manner criminally liable. Although the performance of an act is an
obligation directly imposed on a corporation, the responsible officer who performed
the act must of necessity be the one to assume criminal liability; otherwise this
liability as created by the law would be illusory, and the deterrent effect of the law,
negated (Sia v. People of the Philippines, No. L-30896, April 28, 1983).
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Recovery of damages
Q: Can a corporation recover moral damages in a suit?
ANS: As a general rule, a corporation is not entitled to moral damages because it
has no feelings, no emotions, no senses (ABS-CBN v. Court of Appeals, GR No.
128690, Jan. 21, 1999).
Q: Is there an instance when a corporation recovers moral damages?
ANS: When a corporation has a good reputation that is debased, resulting in its
humiliation in the business realm (Coastal Pacific Trading, Inc. v. Southern Rolling
Mills Co., Inc., 28 July 2006).
Q: Can a corporation file a criminal complaint of libel and claim for moral
damages even though it is a juridical person?
ANS: Yes, a juridical person such as a corporation can validly complain for libel or
any other form of defamation and claim for moral damages. The SC had
ratiocinated that Art. 2219 (7) does not qualify whether the plaintiff is a natural or a
juridical person (Filipinas Broadcasting v. Ago Medical Center-Bicol, et. al., GR No.
141994, Jan. 17, 2005).
B. DOCTRINE OF PIERCING THE CORPORATE VEIL
Q: What is the doctrine of piercing the corporate veil?
ANS: It is the doctrine that a corporation is a legal entity distinct from the persons
composing it. It is a theory introduced for purposes of convenience and to serve the
ends of justice. But when the veil of corporate fiction is used as a shield to defeat
public convenience, justify wrong, protect fraud, or defend a crime, this fiction shall
be disregarded and the individuals composing it will be treated identically (Cruz v.
Dalisay, A.M. R-181-P, July 31, 1987).
Grounds for application of doctrine

Q: When is the corporate veil pierced?
ANS: When the veil of corporate fiction is used as a shield to (1) defeat public
convenience, (2) justify wrong, (3) protect fraud, or (4) defend a crime, this fiction
shall be disregarded and the individuals composing it will be treated identically.
Q: What are the different cases of piercing the corporate veil?

ANS: (FAE)
a.
Fraud Cases- the veil of separate corporate personality may be lifted

when such personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a shield to confuse the
legitimate issues; or when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation. In such cases,
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b.
c.
the corporation will be considered as a mere association of persons. The

liability will directly attach to the stockholders or to the other corporation
(China Banking Corporation v. Dyne-Sem Electronics, GR No. 149237,
June 11, 2006).
Alter Ego Cases (or Conduit Cases) - the corporate entity is being used to
defeat public convenience, or a mere farce, since the corporation is
merely the alter ego, business conduit or instrumentality of a person or
another entity (Villanueva, Philippine Corporate Law, p.86).
Equity Cases - when piercing the corporate fiction is necessary to achieve
justice or equity; the dumping ground where no fraud or alter ego
circumstances can be culled to warrant piercing.
Q: What are the elements to be considered in fraud cases?

ANS: The following are the elements:
a. There must have been fraud or evil motive in the affected transaction and
the mere proof of control of the corporation by itself would not authorize
piercing.
b. The main action should seek for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or stockholders, or
vice-versa; and
c. The corporate entity has been used in the perpetration of the fraud or in
justification of wrong, or to escape personal liability.
Note: There is always an element of malice or evil motive in fraud cases.
Q: Can you give one instance when the Alter Ego Doctrine is applicable?
ANS: One of the instances when the Alter Ego Doctrine is invoked is when there is
parent company-subsidiary company relationship. However, the general rule is still
to the effect that if used for legitimate functions, a subsidiarys separate existence
shall be respected, and the liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective business (Aquino,
Philippine Corporate Law Compendium, 2011ed.). In this connection, the Supreme
Court enumerated the circumstances which are useful in the determination of
whether a subsidiary is but a mere instrumentality of the parent corporation.
a.
b.
c.
d.
Q: What are the probative factors considered in alter ego cases?

Stock ownership by one or common ownership of both corporations;
Identity of directors and officers;
The manner of keeping corporate books and records; and
Methods of conducting the business (Concept Builders, Inc. v. NLRC, GR No.
108734, May 29, 1996).
Q: What is the Instrumentality Rule?

ANS: When one corporation is so organized and controlled and its affairs are
conducted so that it is in fact a mere instrumentality or adjunct of the other, the
fiction of the corporate entity to the instrumentality may be disregarded.
Q: How does one pierce the veil of corporate fiction? (2004 Bar)
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ANS: Upon showing that grounds exist, the corporate fiction or veil may be lifted
through any of the following:
a. By disregarding the separate personality of the corporation;
b. By holding the corporate officer liable for the corporate obligation (see
Francisco v. Mejia, 362 SCRA 738);
c. By regarding the corporation as an association of persons or in case of
two corporations, treat them as one (see Development v. CA, 363
SCRA 307) and hold them liable as such;
d. It must be done with caution (see R & E v. Latag, 422 SCRA 698).
Test in determining applicability
Q: What are the tests to determine whether the corporate veil shall be
pierced?
ANS: The three tests are:
a.
b.
c.
Control, not mere majority or complete stock control, but complete dominion,
not only of finances but of policy and business in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will, or existence of its own;
Such control must have been used by the defendant to commit fraud or
wrong in contravention of plaintiffs legal rights; and
The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of (Concept Builders Inc. v. NLRC, GR No.
108734, May 29, 1996).
V. INCORPORATION AND ORGANIZATION
A. PROMOTER
Q: Who is a promoter?
ANS: A promoter is a person who, acting alone or with others, takes initiative in
founding and organizing the business or enterprise of the issuer and receives
consideration therefore (Sec. 3 (3.10), SRC).
Liability of promoter
Q: What are the liabilities of a promoter?
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ANS: To the Subscribers if money is already paid to the promoters by a
subscriber for shares in a projected corporation preliminary to organization and the
promoters fail to organize the corporation according to prospectus or other
agreement or abandon the enterprise before it has been carried into execution. This
case involves money paid on a consideration which has failed. An exception is
where the subscriber agrees that the amount paid on his subscription may be
applied on certain promotional or development expenses and it is so applied.
To each other - persons who attempt but fail to form a corporation and who carry on
business under the corporate name, occupy the position of partners inter se. But
such a relation should be implied only to do justice between the parties.
Liability of corporation for promoters contracts

Q: What is liability of a corporation to the promoter?
ANS: Contracts by the promoter for and in behalf of a proposed corporation
generally bind only him, subject to and to the extent of his representations, and not
the corporation, unless and until after these contracts are ratified, expressly or
impliedly, by its Board of Directors/Trustees (Cagayan Fishing Development Co.,
Inc. v. Sandiko, 65 Phil. 223, December 23, 1937). Thus, the corporation shall only
be liable to the promoter after it has incorporated.
B. NUMBER AND QUALIFICATIONS OF INCORPORATORS

Q: How many incorporators are required in order to establish a corporation?
ANS: Any number of natural persons not less than five (5) but not more than fifteen
(15) (Sec. 10, Corporation Code). However, there are exceptions with respect to
other kinds of corporations:
a. For non-stock corporations, the incorporators may be more than fifteen (15)
in number as may be fixed in their articles of incorporation or by-laws
(Sec. 92, Corporation Code).
b. For close corporations, The articles of incorporation must provide that all the
corporation's issued stock of all classes, exclusive of treasury shares,
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shall be held of record by not more than a specified number of persons,
not exceeding twenty (20) (Sec. 96, Corporation Code)
c. For education corporations, trustees of educational institutions organized as
non-stock corporations shall not be less than five (5) nor more than fifteen
(15) provided, however, that the number of trustees shall be in multiples of
five (5) (Sec. 108, Corporation Code).
Q: What are the qualifications of incorporators?

ANS: The following are the required qualifications:
a.
All of legal age
b.
A majority of whom are residents of the Philippines, may
c.
Each of the incorporators of a stock corporation must own or be a

subscriber to at least one (1) share of the capital stock of the corporation
C. CORPORATE NAME - LIMITATIONS ON USE OF CORPORATE NAME

Q: What is the limitation in the use of the corporate name?
ANS: No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name (Sec. 18, Corporation Code).
D. CORPORATE TERM
Q: What is the corporate term prescribed by the law?
ANS: A corporation shall exist for a period not exceeding fifty (50) years from the
date of incorporation unless sooner dissolved or unless said period is extended
Q: Can the corporate term be extended? What is the period of extension?
ANS: The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange Commission, i.e.
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there is influx of foreign investors who wanted to determine the stability of the
corporation (Sec. 11, Corporation Code).
E. MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS
Q: What is the required minimum authorized capital stock?
ANS: Stock corporations incorporated under this Code shall not be required to
have any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following section.
(Sec. 12, Corporation Code)
Q: Does Sec. 12 imply that there is absolutely no minimum authorized capital
stock provided in the Corporation Code?
ANS: No. It is subject to the provisions of Sec 13, which is the following section.
Q: What is the required minimum subscribed capital stock?
ANS: At least twenty-five percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the time of incorporation (Sec.
13, Corporation Code).
Q: What is the numerical value for the minimum authorized, subscribed and
paid-up capital stock?
ANS: The following are the numerical values:
a. Paid-up capital stock P5,000 (Sec. 13, Corporation Code);
b. Subscribed capital stock P5,000 as the word used in Sec. 13,
Corporation Code is at least 25%. Thus, it is valid to pay 100% of the
subscribed capital stock of P5,000.00; and
c. Authorized capital stock P5,000.00 as the word at least 25%. Is used
again. Thus, the implies that it is valid to subscribe to the whole 100% of
the authorized capital stock of P5,000.00.
F. ARTICLES OF INCORPORATION
Nature and Function

Q: Define the term Articles of Incorporation.
ANS: The Articles of Incorporation is the basic contract document in corporate law,
defining the charter of the corporation (Philippine Corporate Law, Villanueva,
2010ed, p. 174).
Q: What are the different contracts embodied in the articles of incorporation?
ANS: The following are the contracts involved:
a. The contractual relationship between the State and the corporation,
b. The stockholders and the State and
c. Between the corporation and its stockholders (Government of Philippine
Island v. Manila Railroad Company, G.R. No. L-30646, January 30,
1929).
Q: What are the different contract law doctrines that can be applied in
describing the nature of the articles of incorporation?
ANS: The articles of incorporation embodies the mutuality of contracts such that
there can only be an alteration or amendment of the articles if the stockholders and
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the State gave its consent. It also embodies the obligatory force of contracts
wherein the articles is a binding and treated as the law between the parties
(Philippine Corporate Law, Villanueva, 2010ed, p. 174).
Contents
Q: What are the contents of the Articles of Incorporation?
ANS: All corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special law:
(Name3-P2TNACI)
[Type text]
a.
The name of the

corporation;
b.
The
specific
purpose
or
purposes
for
which
the
corporation
is
being
incorporated.
Where
a
corporation has
more than one
stated purpose,
the articles of
incorporation
shall state which
is the primary
purpose
and
which is/are the
secondary
purpose
or
purposes:
Provided, That a
non-stock
corporation may
not include a
purpose which
would change or
contradict
its
nature as such;
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[Type text]
c.
The
place
where
the
principal office
of
the
corporation is to
be
located,
which must be
within
the
Philippines;
d.
The term for

which
the
corporation is to
exist;
e.
The
names,
nationalities and
residences
of
the
incorporators;
f.
The number of
directors
or
trustees, which
shall not be less
than five (5) nor
more
than
fifteen (15);
g.
The
names,
nationalities and
residences
of
persons
who
shall act as
directors
or
trustees until the
first
regular
directors
or
trustees are duly
elected
and
qualified
in
accordance with
this Code;
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h.
If it be a stock
corporation, the
amount of its
authorized
capital stock in
lawful money of
the Philippines,
the number of
shares
into
which
it
is
divided, and in
case the share
are par value
shares, the par
value of each,
the
names,
nationalities and
residences
of
the
original
subscribers, and
the
amount
subscribed and
paid by each on
his subscription,
and if some or
all of the shares
are without par
value, such fact
must be stated;
i.
If it be a nonstock
corporation, the
amount of its
capital,
the
names,
nationalities and
residences
of
the contributors
and the amount
contributed by
each; and
j.
Such
other
matters as are
not inconsistent
[Type text]
with law and
which
the
incorporators
may
deem
necessary and
convenient.
(Sec.
14,
Corporation
Code)
Q: What is the Treasurer Affidavit which should accompany the Articles of

Incorporation?
ANS: The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement of
the Treasurer elected by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has been subscribed, and
at least twenty-five (25%) of the total subscription has been fully paid to him in
actual cash and/or in property the fair valuation of which is equal to at least twentyfive (25%) percent of the said subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos (Sec. 14, Corporation Code).
Q: You have been asked to incorporate a new company to be called FSB

Savings & Mortgage Bank, Inc. List the documents that you must submit to
the Securities and Exchange Commission (SEC) to obtain a certificate of
incorporation for FSB Savings & Mortgage Bank, Inc. (Bar 2002)
ANS: The documents to be submitted to the Securities and Exchange Commission
(SEC) to incorporate a new company to be called FSB Savings & Mortgage Bank,
Inc., to obtain the certificate of incorporation for said company, are:
a.
Articles of Incorporation
b.
Treasurers Affidavit;
c.
Certificate of Authority from the Monetary Board of the BSP;
d.
Verification slip from the records of the SEC whether or not the proposed
name has already been adopted by another corporation, partnership or
association;
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[Type text]
e.
Letter undertaking to change the proposed name if already adopted by

another corporation, partnership or association;
f.
Bank certificate of deposit concerning the paid-up capital;
g.
Letter authorizing the SEC or Monetary Board or its duly authorized

representative to examine the bank records regarding the deposit of the
paid-up capital;
h.
Registration Sheet; (Bar Examination Question with suggested answers

from Answers to Bar Examination Questions by the UP Law Complex and
Amendment
Q: How are the Articles of Incorporation amended?
ANS: Unless otherwise prescribed by this Code or by special law, and for legitimate
purposes, any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a non-stock corporation
Q: What are the documents submitted to the SEC in case of an amendment to

the Articles of Incorporation?
ANS: The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such articles, as
amended shall be indicated by underscoring the change or changes made, and a
copy thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members, shall be
submitted to the SEC (Sec. 16, Corporation Code).
Q: When shall the amendment take effect?
[Type text]
[Type text]
ANS: The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not attributable
to the corporation (Sec. 16, Corporation Code).
Non-amendable items
Q: What are the non-amendable items in the Articles of Incorporation?
ANS: The following are the non-amendable items or the Fait Accompli items:
(Names3-TMW)
[Type text]
a.
Names
of
Incorpora
tors;
b.
Names
of
incorpora
ting
directors/
trustees;
c.
Names
of
the
original
subscrib
ers to the
capital
stock of
the
corporati
on and
their
subscrib
ed and
paid-up
capital;
d.
The
Treasure
r-in-trust
[Type text]
elected
by
the
original
subscrib
ers;
e.
Members
who
contribut
ed to the
initial
capital
stock of
a
nonstock
corporati
on;
f.
Witnesse
s and the
acknowle
dgement
thereof.
(SEC
Opinion
July 10,
1990)
G. REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION

Q: When shall corporate existence commence?
ANS: A private corporation formed or organized under this Code commences to
have corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law (Sec. 19, Corporation Code).
H. ADOPTION OF BY-LAWS
Nature and Function
Q: What are By-Laws?
[Type text]
[Type text]
ANS: By-Laws are rules of action adopted by a corporation for its internal
government and for the regulation of conduct, and prescribe the rights and duties of
its stockholders or members towards itself and among themselves in reference to
the management of its affairs.
Q: Can a corporation exist despite the lack of by-laws?
ANS: Yes. The mere fact of the existence of power in the corporation to adopt bylaws does not ordinarily and of necessity makes the exercise of such power
essential to its corporate life, or to the validity of any of its acts. There can be no
automatic corporate dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Sec. 46 of the Corporation Code (Loyola
Grand Villas Homeowners Assoc. v. CA, G.R. No. 117188, August 7, 1997).
Q: What is the effect of lack of by-laws?
ANS: At the very least, by its failure to submit its by-laws on time, the corporation
may be considered a de facto corporation whose right to exercise corporate powers
may not be inquired into collaterally in any private suit to which such corporations
may be a party. (Sawadjaan v. CA, G.R. No. 141735, June 8, 2005).
Q: When there is a conflict between the Articles of Incorporation and the ByLaws, which shall prevail?
ANS: Articles of Incorporation. By-laws are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes (Loyola
Grand Villas Homeowners Assoc. v. CA, supra.).
Q: What are required votes in order to adopt the by-laws?
ANS: It depends when the by-laws are adopted:
a. If it is adopted PRIOR to incorporation The by-laws must be signed and
approved by all the incorporators and filed with the SEC together with the
articles of incorporation.
b. If it is adopted and filed AFTER incorporation (which must be within 1
month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC) The affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at
least a majority of the members shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them (Sec. 46,
Corporation Code).
Q: Are by-laws required to be registered in the SEC?
ANS: A copy thereof duly certified to by a majority of the directors or trustees and
counter-signed by the secretary of the corporation shall be filed with the SEC which
shall be attached to the original articles of incorporation (Sec. 46, Corporation
Code).
Requisites of valid by-laws
Q: What are the requisites of a valid by-laws?
ANS: The following are the requisites:
a. Must not be contrary to law nor with the Corporation Code;
b. Must not be contrary to morals and public policy;
[Type text]
[Type text]
c. Must not impair obligations and contracts;
d. Must be general and uniform in their operation and not directed against particular
individuals;
e. Must be consistent with the charter or articles of incorporation; and
f. Must be reasonable, not arbitrary or oppressive.
Q: At the annual stockholders meeting of MS Corporation, the stockholders

unanimously passed a resolution authorizing the Board of Directors to amend
the corporate by-laws so as to disqualify any stockholder who is also a
director or stockholder of a competing business from being elected to the
Board of Directors of MS Corporation. The by-laws were accordingly
amended. GK, a stockholder of MS Corporation and a majority stockholder of
a competitor, sought election to the Board of Directors of MS Corporation. His
nomination was denied on the ground that he was ineligible to run for the
position. Seeking a nullification of the offending disqualification provision,
GK consults you about its validity under the Corporation Code of the Phils.
What would your legal advice be? (2000 Bar)
ANS: The disqualification provision is valid. An amendment in the by-laws which
renders ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is antagonistic to
the other corporation is valid. This is based upon the principle that where the
director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other (Gokongwei v. SEC, G.R. No. L-45911, April 11,
1979).
Binding effects
Q: What are the binding effects of the corporations by-laws?
ANS: The following are the effects of the by-laws:
a.
As to members and shareholders

i.
b.
They have the force of contract between the

members themselves.
ii. There is a conclusive presumption that they
know the provisions of the corporate by-laws by
the fact of their being such is charged with
notice of by-laws. If he remains actually
ignorant of the provision, he does so at his
peril. (Corporation Code of the Philippines, De
Leon, 2010ed)
As to Corporate Directors and its officers
[Type text]
[Type text]
c.
i. They are bound by and must comply with them unless and until they are
changed.
ii. Subordinate employees without actual knowledge of the by-laws are not
bound
As to third persons - They are not bound to know the by-laws unless they
have notice, actual or constructive (China Banking Corporation v. CA, GR
No. 117604, March 26, 1997).
Q: Are third persons absolutely not bound the corporations by-laws?

ANS: Generally, by-laws have no extra-corporate force and are not in the nature of
legislative enactments so far as third persons are concerned. However, a third party
with actual notice of by-laws may expressly exclude the by-laws so that his contract
will not be affected; otherwise, he is bound thereby (De Leon, Corporation Code of
the Philippines, 2010ed).
Amendments
Q: How are the by-laws amended?
ANS: By-laws are amended by the following:
a.
The majority of the board of directors or trustees and the owners of at least
a majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal any by-law or adopt new bylaws; or
b.
The owners of 2/3 of the outstanding capital stock or 2/3 of the members in
a non-stock corporation may delegate to the board of directors or trustees
the power to amend or repeal any by-laws or adopt new by-laws (Sec. 48,
Corporation Code).
Q: Can the power to amend the by-laws be delegated by the stockholders or

members to the board of directors or trustees?
ANS: Owners of 2/3 of the outstanding capital stock or 2/3 of the members in the
non-stock may delegate to the board of directors/trustee the power to amend or
repeal any by-laws or adopt new by-laws; Provided, the delegation shall be
considered as revoked whenever stockholders owning or representing a majority of
[Type text]
[Type text]
the members in non-stock, shall so vote at a regular or special meeting (Sec. 48,
Corporation Code).
VI. CORPORATE POWERS

Q: What are the kinds of corporate powers?
ANS: The following are the kinds of corporate powers:
a. Express those expressly authorized by the Corporation Code and other laws,
and its Articles of Incorporation or Charter.
b. Incidental those that are incidental to the existence of the corporation.
c. Implied those that can be inferred from or necessary for the exercise of the
express powers.
A. GENERAL POWERS, THEORY OF GENERAL CAPACITY
Q: What are the general powers of a corporation?
ANS: The following are the general powers of a corporation (PIMPS-DO-SCAB)
a. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and deal with real and personal property, securities and bonds
b. For stock corporations: issue and sell stocks to subscribers and treasury stocks;
for non-stock corporations: admit members
c. To enter into merger or consolidation
d. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees
e. To sue and be sued
f.
To make reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes, provided that no donation is given to any (i)
political party, (ii) candidate and (iii) partisan political activity
g. To exercise other powers essential or necessary to carry out its purposes.
h. Of succession
i.
To adopt and use of corporate seal
j.
To amend its Articles of Incorporation
k. To adopt its by-laws
B. SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
Power to extend or shorten corporate term
Q: How is the corporate term extended or shortened?
ANS: The following are the requirements to extend or shorten the corporate term:
a.
b.
c.
Approval by a majority vote of the board of directors/trustees.

Written notice of the proposed action and the time and place of meeting
shall be served to each stockholder or member either by mail or personal
service.
Ratification by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporations.
[Type text]
[Type text]
d.
A copy of the amended articles of incorporation shall be submitted to the

SEC for approval (Sec. 37, Corporation Code).
Q: What is the remedy of the other stockholders who do not want to extend or
shorten the term?
ANS: A dissenting stockholder may exercise his appraisal right (Sec. 37,
Corporation Code).
Power to increase or decrease capital stock or incur, create, or increase

bonded indebtedness
Q: What are the ways of increase or decrease authorized capital stock?
ANS: The following are the ways to increase or decrease authorized capital stock:
a. By increasing/ decreasing the number of shares and retaining the par value;
b. By increasing/ decreasing the par value of existing shares without increasing/
decreasing the number of shares;
c. By increasing/decreasing the number of shares and increasing/decreasing the
par value.
Q: What are the requirements for the increase or decrease of authorized

capital stock?
ANS: The following are the requirements:
a.
b.
c.
d.
e.
f.
g.
h.
Approval by the majority vote of the board of directors;

Ratification by the stockholders holding or representing at least 2/3 of the
outstanding capital stock at a meeting duly called for that purpose;
Prior written notice of the proposed increase or decrease of the capital stock
indicating the time and place of meeting addressed to each stockholder
must be made either by mail or personal service;
A certificate in duplicate signed by a majority of the directors of the
corporation, countersigned by the chairman and the secretary of the
stockholders meeting;
In case of increase in capital stock, 25% of such increased capital must be
subscribed and that at least 25% of the amount subscribed must be paid
either in cash or property;
In case of decrease in capital stock, the same must not prejudice the right of
the creditors;
Filing of the certificate with the SEC; and
Approval thereof by the SEC.
[Type text]
[Type text]
Note: The required 25% subscription shall be based on the additional amount
by which capital stock is increased and not on the total capital stock as
increased (Sec. 38, Corporation Code).
Q: What is Bonded Indebtedness?

ANS: A bonded indebtedness an obligation to pay a definite sum of money at a
future time at fixed rate of interest, whether secured or unsecured, evidenced by a
written debt instrument called a bond or debenture (Sec. 38, Corporation Code).
Q: What are the requirements for the increase, decrease or incur bonded
indebtedness?
ANS: Same with as the power to increase or decrease capital stock (Sec. 38,
Corporation Code).
Power to deny pre-emptive rights

Q: What is a pre-emptive right?
ANS: Pre-Emptive Right is the preferential right of shareholders to subscribe to all
issues or disposition of shares of any class in proportion to their present
shareholdings (Aquino, Philippine Corporate Law Compendium, 2011ed, p. 249).
Q: What is the purpose of the pre-emptive right?

ANS: To enable the shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus. It is aimed to maintain the
existing ration of the shareholders interest and voting power in the corporation
(SEC Opinion dated May 16, 1991).
Q: When can the corporation deny the pre-emptive right of its stockholders?
ANS: The following are the instances when pre-emptive right is not available
(PREP DeWN)
[Type text]
[Type text]
a.
b.
c.
d.
e.
f.
g.
Shares to be issued to comply with laws requiring stock offering or minimum

stock ownership by the public;
It does not apply to shares that are being reoffered by the corporation after
they were initially offered together with all the shares;
Shares issued in good faith in exchange for property needed for corporate
purposes;
Shares issued in payment of previously contracted debts;
In case the right is denied in the Articles of Incorporation;
Waiver of the right by the stockholder;
In case of non-stock corporations.
Power to sell or dispose of corporate assets

Q: What are requirements in order to sell or dispose corporate assets?
a.
Approval by the majority vote of the
board of directors;
b.
Ratification by the stockholders
holding or representing at least 2/3 of the outstanding capital stock at a meeting
duly called for that purpose;
c.
Prior written notice of the proposed
increase or decrease of the capital stock indicating the time and place of meeting
addressed to each stockholder must be made either by mail or personal service;
d. The sale of the assets shall be subject to the provisions of existing laws on
illegal combinations and monopolies and Bulk Sales Law; and
e. Any dissenting stockholder shall have the option to exercise his
appraisal right.
f. The vote of the majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized
by Sec. 40 in the case of non-stock corporations where there are no
members with voting rights (Sec. 40, Corporation Code).
Q: Is the SEC approval required before there can be a sale or disposition of

all or substantially all of the corporate assets?
ANS: SEC approval is NOT required because such power really affects the
business enterprise level of corporate set-up, an area left by the State to the
judgment of management, and does not in any way affect or alter the juridical entity
granted by the State (Villanueva, Philippine Corporate Law, 2010ed).
Q: When is a sale or disposition considered to cover substantially all the

corporate assets?
[Type text]
[Type text]
ANS: Sale or other disposition shall be deemed to cover substantially all the
corporate assets if:
a.
b.
The corporation would be rendered INCAPABLE of continuing the business;

or
Accomplishing the purpose for which it was incorporated.
Q: What are the instances when the sale or disposition of corporate assets
does not require the ratificatory vote from stockholders?
ANS: No ratificatory vote from stockholders/ members is needed in the following:
a.
b.
If it is necessary in the usual and regular course of business;

If the proceeds of the sale or other disposition of such property and assets
be appropriated for the conduct of the remaining business; or
c.
If the transaction does not cover all or substantially all of the assets (Sec.
Power to acquire own shares

Q: What are the instances when the corporation can acquire its own shares?
ANS: The following are the instances when the corporation can acquire its own
shares:
a.
b.
c.
d.
e.
f.
g.
To eliminate fractional shares out of stock dividends;

To collect or compromise indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale and to purchase delinquent
shares sold during said sale;
To pay dissenting or withdrawing stockholders;
To acquire treasury shares;
Redeemable shares regardless of existence of retained earnings;
To effect a decrease of capital stock; and
In close corporations, when there is a deadlock in the management of the
business
Q: What are the conditions before the corporation can acquire its own
shares?
ANS: The following are the conditions for the exercise of the power:
[Type text]
[Type text]
a.
b.
c.
d.
e.
That its capital is not impaired;

That it be for a legitimate and proper corporate purpose;
That there shall be unrestricted retained earnings;
That the corporation acts in good faith and without prejudice to the rights of
creditors and stockholders; and
That the conditions of corporate affairs warrant it.
Power to invest corporate funds in another corporation or business

Q: Does a corporation have the power to invest corporate funds in another
corporation?
ANS: Yes, the corporate funds may be invested in another corporation or for
purposes other than the primary purpose. The other purposes for which the funds
may be invested must be among those enumerated as secondary purposes and
must further comply with the requirements of Sec. 42. Investment of funds includes
not only investment of money but also investment of property of the corporation.
Lease of the property is included in the term investment of funds.
Q: What are the rules for the investment of corporate funds in another
corporation?
ANS: The SEC imposes the following rules:
a. That the property is not presently used by the company and the leasing is
not made on a regular basis;
b. That by leasing the property, it will make it productive instead of allowing
them to remain idle;
c. There is no express restrictions in the articles of incorporation or by-laws;
d. Leasing is not used as a scheme to prejudice corporate creditors or result in
the infringement of the Trust Fund Doctrine; and
e. Compliance with the requirements of Sec. 42 (Aquino, Philippine Corporate
Law Compendium, 2011 ed. p.236).
Q: What are the requirements to invest corporate funds in another
corporation under the Corporation Code?
a. Resolution by the majority of the board of directors or trustees;
b. Ratification by the stockholders representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of non-stock corporation;
c. The ratification must be made at a meeting duly called for the purposes; and
d. Prior written notice of the proposed investment and the time and place of the
meeting shall be made, addressed to each stockholder or member by mail or by
personal service (Sec. 42, Corporation Code).
Q: What is the remedy of the stockholders who do not agree with the
investment in another corporation?
ANS: Any dissenting stockholder shall have appraisal right because he will be
exposed to a line of business which is not being pursued when he invested in the
company (Sec. 42, Corporation Code).
Q: Can a corporation engage in a business not enumerated in its purpose
clause?
[Type text]
[Type text]
ANS: No. A corporation is not allowed to engage in a business distinct from those
enumerated in the articles of incorporation without amending the purpose clause of
said article. However, take note that if the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in AOI, no need
for stockholders approval.
Q: Do passive investments in another corporation require the ratification of
the stockholders?
ANS: No. Passive investment in shares is not covered by Sec. 42. The same may
be justified in the exercise of the general power to purchase securities in other
corporations as provided for under par. 7 of Sec. 36 of the Corporation Code. Thus,
a corporation with idle funds may invest in shares for the purpose of generating
income. (Aquino, Philippine Corporate Law Compendium, 2011 ed., p.368).
Power to declare dividends
Q: What are the requirements for the corporation to declare dividends?
a. Unrestricted retained earnings
b.
Resolution of the board
c.
If stock dividends are declared, there must be resolution of the board with
concurrence 2/3 of outstanding capital (Sec. 43, Corporation Code).
Q: What are Unrestricted Retained Earnings?

ANS: It is the amount of accumulated profits and gains realized out of normal
operations which is not appropriated by the Board for corporate expansion; not
covered by a restriction under a loan agreement; and not required to be retained
under special circumstances (SEC Memorandum Circular 11-09).
Q: What are dividends?
ANS: Dividends are corporate profits set aside, declared, and ordered to be paid by
the directors for distribution among shareholders at a fixed time (Wise Co. v. Meer,
G.R. No. 48231, June 30, 1947).
Q: What are the kinds of dividends?
ANS: The following are the kinds of dividends:
a. Cash Dividend- dividend payable in cash.
b. Property Dividend dividend distributed to the stockholders in the form of
property, real or personal.
c. Stock Dividend dividend payable in unissued or increased or additional
shares of the corporation instead of in cash or in property out of the
unrestricted retained earnings of the corporation.
Note: While shares of stocks may be issued to a non-stockholder, shares of
stock coming from stock dividends are payable only to stockholders and
not to strangers or non-stockholders because only shareholders are
entitled to dividends (Nielsen & co. v. Lepanto Consolidated Mining Co., 26
SCRA 540 [1968]).
d.
Optional Dividend dividend which gives the stockholder an option to

receive cash or stock dividend.
[Type text]
[Type text]
e.
f.
g.
h.
i.
j.
Composite Dividend It is dividend which is partly in cash and partly in

stocks.
Preferred or preferential dividend dividend which is payable to one class of
stockholders in priority to that to be paid to another class.
Cumulative dividend dividend which is contracted to be paid at a certain
rate at stated times and if net earnings at any dividend period are sufficient
to pay the contract dividend, it is to be made out of subsequent net earnings.
Scrip dividend dividend in the form of a writing or certificate issued to a
stockholder entitling him to the payment of money, stock or other benefit at
some future time inasmuch as the corporation at the time such dividends are
declared has profits not in cash or has no sufficient cash.
Bond dividend dividend distributed in bonds of the corporation to the
stockholders.
Liquidating dividends dividends which are actually distributions of the
assets of the corporation upon dissolution or winding up of the same.
Q: Can the corporation retain surplus profits without declaring dividends?

ANS: As a general rule, surplus profits in excess of 100% of their paid-up capital
stock cannot be retained by the corporation without declaration of dividends. To do
so would prejudice the shareholders to gain dividends based on the corporate
profits. However, there are several exceptions where the corporations retain surplus
profits: (SLEx)
a. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is a need for
special reserve for probable contingencies.
b. When the corporation is prohibited under any loan agreement with any
financial institution or creditor from declaring dividends without its/his
consent and such consent has not yet been secured.
c. When justified by definite corporate expansion projects approved by the
board of directors (Sec. 43, Corporation Code).
Power to enter into management contract
Q: What is a management contract?
ANS: Management Contract is any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating agreements or
otherwise (Sec. 44, Corporation Code).
Q: Can a corporation enter into a management with a natural person?
ANS: No. Sec. 44 refers only to a management contract with another corporation.
Hence, it does not apply to management contracts entered into by a corporation
with natural persons.
Q: What is the term of the management contract?
ANS: The period must not be longer than 5 years for any 1 term except those
contracts which relate to the exploration, development, exploitation or utilization of
natural resources that may be entered into for such periods as may be provided by
pertinent laws or regulations (Sec. 44, Corporation Code).
Q: What are the requirements of a management contract?
ANS: The requirements of a management contract are the following:
a. Approval by a majority of the quorum of the board of directors;
[Type text]
[Type text]
b.
c.
i.
ii.
Ratification by the stockholders owning at least majority of the outstanding

capital stock or the members of BOTH the managing and the managed
corporations, at a meeting duly called for the purpose;
Approval by the stockholders of the MANAGED corporation owning at least
2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of
the members in the case of a non-stock corporation:
Where a stockholder/s representing the same interest of BOTH the
managing and the managed corporations own or control more than 1/3 of
the total outstanding capital stock entitled to vote of the managing
corporation; OR
Where a majority of the members of the board of directors of the managing
corporation ALSO constitute a majority of the members of the board of
directors of the managed corporation (Sec. 44, Corporation Code).
Q: Can the management contract delegate the entire control over all officers
and business of a corporation to another?
ANS: A management contract cannot delegate entire supervision and control over
the officers and business of a corporation to another as this will contravene Sec. 23.
Ultra vires acts
Q: What is an ultra vires act?
ANS: An act committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the powers conferred
upon it by law (Republic v. Acoje Mining Co., Inc., GR NO. L- 18062, February 28,
1963).
Applicability of ultra vires doctrine
Q: What are the types of ultra vires acts?
ANS: The following are the types of Ultra Vires Act:
a.
b.
c.
Acts done BEYOND the powers of the corporation as provided in the law or
its articles of incorporation;
Acts or contracts entered into in behalf of a corporation by persons who have
NO corporate authority. However, this is technically ultra vires acts of officers
and not of the corporation; and
Acts or contracts, which are PER SE ILLEGAL as being contrary to law
(Villanueva, Philippine Corporate Law, 2010 ed.).
Q: What entities can commit an ultra vires act?

ANS: An ultra vires act may be that of:
a. The corporation;
b. The Board of Directors; and
c. The corporate officers.
Consequences of ultra vires acts
Q: What are the effects of an ultra vires act?
ANS: The following are the effects of an Ultra Vires Act On:
a. Executed contract courts will not set aside or interfere with such contracts;
[Type text]
[Type text]
b.
c.
d.
Executory contracts no enforcement even at the suit of either party (void and
unenforceable);
Part executed and part executory principle of no unjust enrichment at expense
of another shall apply; and
Executory contracts apparently authorized but ultra vires the principle of
estoppel shall apply.
Q: Is it possible that a power of a corporation included in the Articles of
Incorporation be considered as an ultra vires act?
ANS: Yes. Ultra vires (beyond powers) refers to an act outside or beyond
corporate powers, including those that may ostensibly be within such powers but
are, by general or special laws, either prohibited or
declared
illegal.
Thus,
though the Articles of Incorporation grants the corporation a certain power, such
cannot be exercised if it is prohibited or declared illegal by law (Yamane v. Lepanto,
G.R. No. 154993, October 25, 2005).
C. HOW EXERCISED
By the Shareholders
Q: How do the shareholders exercise the powers of the corporation?
ANS: All the specific powers of a corporation enumerated under the Corporation
Code requires the approval at least 2/3 of the total outstanding capital stock entitled
to vote, or by at least 2/3 of the members in the case of a non-stock corporation.
The shareholders have an interest in the assets of the corporation due to their
investments. Thus, they must be consulted thereto before a drastic corporate power
is exercise affecting its assets. This is also in line with the Trust Fund Doctrine.
Q: What is the remedy of the dissenting stockholders?
ANS: With respect to acts affecting the rights of stockholders, sale of all or
substantially all corporate assets or investment of corporate funds in another
corporation, the dissenting stockholders can exercise their appraisal right. (Sec. 81,
Corporation Code)
Q: What is the remedy of the stockholders who were not able to vote to
authorize the action of the board of directors?
ANS: Any stockholder who did not vote to authorize the action of the board of
directors may, within forty days after the date upon which such action was
authorized, object thereto in writing and demand payment for his shares. (Sec. 28,
Corporation Code)
Q: Is the approval of stockholders required before the Board of Directors
issue the unissued portion of the original authorized capital stock?
ANS: The power to issue shares of stocks in a corporation is lodged in the board of
directors and no stockholders meeting is required to consider it because additional
issuance of shares of stocks does not need approval of the stockholders. (Dee v.
SEC, G.R. No. L-60502, July 16, 1991)
By the Board of Directors
Q: What are the powers held by the Board of Directors?
ANS: Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted
and all property of such corporations by the board of directors or trustees (Sec. 23,
Corporation Code).
[Type text]
[Type text]
Q: What is the consequence when the Board of Directors does not act
according to its charter and law?
ANS: A corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Thus,
directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be questioned by
any objecting director or shareholder (Lopez Realty v. Fontecha, G.R. No. 76801,
August 11, 1995).
Q: Are the actions of the board of directors, during a meeting which did not
follow the requirements of its charter or the law, subject to ratification?
ANS: Yes. Jurisprudence tells us that an action of the board of directors during a
meeting, which was illegal for lack of notice, may be ratified either expressly, by the
action of the directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct (Lopez Realty v. Fontecha, Ibid).
By the Officers
Q: Can the corporation delegate its corporate powers to its officers?
ANS: Yes. A corporation, like a natural person who may authorize another to do
certain acts for and in his behalf, through its board of directors, may legally
delegate some of its functions and powers to its officers, committees or agents
appointed by it. (Luzviminda Visayan v. NLRC, G.R. No. 69999, April 30, 1991)
Q: What is the source of the authority of officers of the corporation?
ANS: Whatever authority the officers or agents of a corporation may have is
derived from the board of directors or other governing body, unless conferred by the
charter of the corporation. A corporate officer's power as an agent of the corporation
must therefore be sought from the statute, the charter, the by-laws, or in a
delegation of authority to such officer, from the acts of the board of directors,
formally expressed or implied from a habit or custom of doing business. (Vicente
vs. Geraldez, L-32473, 53 SCRA 210)
D. TRUST FUND DOCTRINE (TFD)
Q: What is the Trust Fund Doctrine?
ANS: The TFD states that the subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which the creditors have the right
to look up to satisfy their credits, and which the corporation may not dissipate. The
creditors may sue the stockholders directly for the latters unpaid subscription.
Q: What is the application of the Trust Fund Doctrine?
ANS: Application of the TFD:
a. Where the corporation has distributed its capital among the stockholders without
providing for the payment of creditors;
b. When there is payment of dividends without unrestricted retained earnings;
c. Where it had released the subscribers to the capital stock from their
subscriptions;
d. Where it has transferred the corporate property in fraud of its creditors; and
e. Where the corporation is insolvent.
Q: What are the exceptions to the Trust Fund Doctrine?
ANS: The Code allows distribution of corporate capital only in these instances:
a. Amendment of Articles of Incorporation to reduce authorized capital stock;
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b. Purchase of Redeemable shares by the corporation regardless of existence of
unrestricted retained earnings;
c. Dissolution and eventual liquidation of the corporation;
d. In close corporation, when there should be a deadlock and the SEC orders the
payment of the appraised value of the stockholders share (Sec. 104,
Corporation Code).
VII. BOARD OF DIRECTORS AND TRUSTEES

A. DOCTRINE OF CENTRALIZED MANAGEMENT
Q: Who exercises the corporate power?
ANS: The (1) corporate powers of the corporation shall be exercised, (2) all
business conducted and (3) all property of such corporation controlled and held by
the board of directors or trustee (Sec. 23, Corporation Code).
Q: What is the Doctrine of Centralized Management?
ANS: The doctrine, as embodied in Sec. 23 of the Corporation Code, mandates
that corporate powers shall be directly vested in the Board of Directors or Trustees,
rather than being delegated to the stockholders or members (Villanueva, Philippine
Corporate Law, 2010 edition, p293).
Q: What the rationale of the Doctrine of Centralized Management?
ANS: The concentration in the board of the powers of control of corporate business
and of appointment of corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous, scattered and unfamiliar
with the business of a corporation to conduct its business directly. And so the plan
of corporate organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business (Filipinas Port v. Go, G.R.
No. 161886, March 16, 2007).
Q: Can an individual director exercise corporate powers?
ANS: No. Just as a natural person may authorize another to do certain acts in its
behalf, so may the board validly delegate some of its functions to individual officer
or agents. Absent such valid delegation, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but not in the course of,
or connected with the performance of authorized duties of such director, is held not
binding on the corporation (AF Realty & Devt v. Dieselman Freight Services, GR
No.111448, January 16, 2002).
Q: Are there instances when corporate powers can be exercised other than
the Board of Directors?
ANS: Yes. The following are the instances:
a. In case of an Executive Committee duly authorized in the by-laws.
b. In case of a contracted manager which may be an individual, a partnership, or
another corporation.
c. In case the contracted manager is another corporation, the special rule in Sec.
44 applies.
d. In case of close corporations, the stockholders may directly manage the business
of the corporation instead, if the articles of incorporation so provide.
B. BUSINESS JUDGMENT RULE
Q: What is the business judgment rule?
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ANS: Courts cannot undertake to control the discretion of the board of directors
about administrative matters as to which they have the legitimate power of action,
and contracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere UNLESS such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights
of the minority (Gamboa v. Victoriano, GR No. 40620, May 5, 1979).
Q: Are the directors liable for a corporate act done pursuant to a valid
corporate objective but later on became unfavorable to the corporation?
ANS: No. Questions of policy or management are left solely to the honest decision
of officers and directors of a corporation and the courts are without authority to
substitute their judgment nor the judgment of the board of directors; the board is the
business manager of the corporation and so long as it acts in good faith its orders
are not reviewable by the Courts or the SEC. The directors are also not liable to the
stockholders in performing such acts (Montelibano v. Bacolod-Murcia Milling, 5
SCRA 36 [1962]).
C. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS
Q: What are the qualifications of a director?
ANS: The following are the qualifications:
a. For a stock corporation, ownership of at least one (1) share of the capital
stock of the corporation in his own name, and if he ceases to own at least
one share in his own name, he automatically ceases to be a director. For a
non-stock corporation, only members of the corporation can be elected to
the Board of Trustees.
b. In order to be eligible as a director, what is material is the legal title, not
beneficial ownership, of the stocks appearing on the books of the
corporation.
c. A person who does not own a stock at the time of his election or
appointment does not disqualify him as a director if he becomes a
shareholder before assuming the duties of his office.
d. A person who is not a stockholder cannot be a director, but he can be an ex
officio member without voting rights in the board (Grace Christian High
School v. CA, GR No. 111155, October 23, 1997).
e. A majority of the directors/trustees must be residents of the Philippines (Sec.
23).
f.
He must not have been convicted by final judgment of an offense punishable
by imprisonment for a period exceeding six (6) years, or a violation of the
Corporation Code committed within five (5) years prior to the date of his
election or appointment (Sec. 27).
g. Only natural persons can be elected directors/trustees.
h. In case of corporate stockholders or members, their representation in the
board can be achieved by making their individual representatives trustees of
the shares or membership to make them stockholders/members of record.
i.
Other qualifications as may be prescribed in special laws or regulations or in
the by-laws of the corporation.
j.
Must be of legal age.
Q: What is the term of office of directors?
ANS: The directors or trustees shall be elected for a term of one year but may
continue to serve until their successors are elected and qualified.
Q: What is the holdover principle?
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ANS: Upon failure of a quorum at any annual meeting the directorate naturally
holds over and continues to function until another directorate is chosen and
qualified. Unless the law or the charter of a corporation expressly provides that an
office shall become vacant at the expiration of the term of office for which the officer
was elected, the general rule is to allow the officer to holdover until his successor is
duly qualified (The Government of the Philippine Islands v. Filipino, G.R. No. L26649, July 13, 1927).
D. ELECTION OF DIRECTORS OR TRUSTEES
Q: What is the required number of the stockholders or members that must be
present during elections?
ANS:
If it is a stock corporation, owners of a majority of the outstanding capital stock, in
person or by their authorized representative as such by written proxy, must be
present at the election of the directors.
If it is a non-stock corporation, a majority of the members entitled to vote, in
person or by proxy, if allowed in its articles of incorporation or by-laws, must be
present in the election.
Q: What is the manner of voting in the election of directors or trustees?
ANS: If it is a stock corporation, cumulative voting is mandatory. Voting is a
matter of right granted by law to each stockholder with voting rights.
If it is a non-stock corporation, cumulative voting is generally not available unless
allowed by the articles of incorporation or by-laws, since each member is entitled
only to one vote. Members of non-stock corporations may cast as many votes as
there are trustees to be elected but may cast not more than one vote for one
candidate. This is the manner of voting in non-stock corporations unless otherwise
provided in the articles of incorporation. (Sec. 24, Corporation Code)
Cumulative voting
Q: What are the methods of voting?
ANS: The following are the methods of voting:
a. Straight Voting every stockholder may vote such number of shares for as many
persons as there are directors to be elected.
b. Cumulative Voting for One Candidate a stockholder is allowed to concentrate
his votes and give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal.
c. Cumulative Voting by Distribution by this method, a stockholder may cumulate
his shares by multiplying also the number of his shares by the number of
directors to be elected and distribute the same among as many candidates as he
shall see fit.
Q: What is the limitation on cumulative voting in stock corporations?
ANS: In electing directors by cumulative voting, the total number of votes cast by a
stockholder shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors to be elected.
Q: Can the stock corporation deprive its stockholders of the right to vote?
ANS: With respect to stock corporations, No. Cumulative voting being a statutory
right, a corporation is without power to deprive the stockholders of its use or even
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restrict the right to vote to only one way or method. A stockholder may or may not
exercise the right as he shall see fit (SEC Opinion, Oct. 20, 1964).
With respect to non-stock corporations, Yes. The right of the members of any
class or classes to vote may be limited, broadened or denied to the extent specified
in the articles of incorporation or the by-laws (Sec. 89, Corporation Code).
Q: What is the formula in determining the number of shares required to elect
a director?
ANS: The Cole Formula or the Classic Formula is as follows:
S1=
S x D1
D+ 1
+1
Where:
S1= Number of shares owned by some shareholders or group of shareholders
D1= Desired number of directors to be elected
S = Total number of shares voting at the meeting
D = Total number of directors to be elected at the meeting
Q: What are the rules on the Election of Directors/ Trustees:
ANS: The following are the rules:
a. At any meeting of stockholder or members called for the election of directors
or trustees, there must be present either in person or by representative
authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there is no capital stock, a majority of the
members entitled to vote.
b. The election must be by ballot if requested by any voting member or
stockholder.
c. A stockholder cannot be deprived in the articles of incorporation or in the bylaws of his statutory right to use any of the methods of voting in the election
of directors.
d. No delinquent stock shall be voted.
e. The candidates receiving the highest number of votes shall be declared
elected. A majority vote is not necessary. However, it is necessary that there
is a quorum. And in the absence thereof, election shall be considered
invalid.
f.
In case of failure to hold an election for any reason, meeting may be
adjourned from day to day but not indefinitely.
g. Notice must be given.
Q: Are non-voting shares absolutely prohibited from exercising voting rights?
ANS: No. Generally, where the articles of incorporation provides for classification of
shares pursuant to Sec. 6, non-voting shares are not entitled to vote except on the
following matters as provided for in the last par. of Sec. 6 known as the eight (8)
fundamental corporate acts. (AASIIMID)
a. Amendment of the articles of incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
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d.
e.
f.
g.
h.
Incurring, creating or increasing bonded indebtedness;

Increase or decrease of capital stock;
Merger or consolidation of the corporation with another corporation/s;
Investment of corporate funds in another corporation or business in
accordance with this Code; and
Dissolution of the corporation.
Q: What shares that are deprived of voting rights?

ANS: The following are the shares that do not have voting rights?
a. No share may be deprived of voting rights except those classified as
preferred or redeemable shares unless otherwise provided by the
Corporation Code. (Sec. 6, Corporation Code);
b. Fractional shares of stock cannot be voted.
c. Treasury shares have no voting rights as long as they remain in the treasury.
d. Holders of stock declared delinquent by the board of directors for unpaid
subscription are not entitled to vote or to representation at any stockholders
meeting.
e. A transferee of stock cannot vote if his transfer is not registered in the stock
and transfer book of the corporation.
Q: Which court or administrative body has the jurisdiction over election
contests?
ANS: The RTC now has jurisdiction over election contest or those relating to any
controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of elections and
the qualifications of candidates, including the proclamation of winners, to the office
of director, trustee or other officer directly elected by the stockholders in a close
corporation or by members of a non-stock corporation where the articles of
incorporation or by-laws so provide (Sec. 2, Rule 6 of the Interim Rules of
Procedure for Intra-Corporate Controversies).
Quorum
Q: What is the quorum required when there is an election of directors or
trustee?
ANS: At all elections of directors or trustees, there must be present, either in
person or by representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority of
the members entitled to vote. (Sec. 24, Corporation Code)
*see further discussion on topic Meetings of Stockholders or Members
E. REMOVAL
Q: How are the directors or trustees removed by the stockholders or
members?
ANS: They are removed either by:
a. The removal should take place at a regular or special meeting duly called for the
purpose.
b. The director or trustee can only be removed by a vote of the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of the members
entitled to vote in case of non-stock corporations.
c. There must be a previous notice to stockholders or members of the corporation
of the intention to propose such removal at the meeting.
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d.
e.
f.
The removal without cause may NOT be used to deprive minority stockholders or
members of the right of representation to which they may be entitled under Sec.
24 of the Code.
There is no need to follow the procedure under Sec. 28 if the director is
disqualified. By operation of law, such director is disqualified to act as director
thereby creating vacancies in the Board. Mere declaration of the disqualification
as the cause of the vacancy is sufficient (SEC Opinion, February 3, 1992).
The special meeting of the stockholders or members of a corporation for the
purpose of removal must be called by the secretary on order of the president or
on the written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock or a majority of the members entitled to
vote (Sec. 28, Corporation Code).
Q: What is the remedy of the stockholders if the corporate secretary failed or
refused to call a special meeting to remove a director or trustee?
ANS: Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholders or members by any
stockholder or member of the corporation signing the demand (Sec. 28,
Corporation Code).
F. FILLING OF VACANCIES
Q: How is a vacancy of a director or trustee filled?
ANS: A vacancy in the office of director or trustee may be filled as follows:
a. By the stockholders or members:
i.
If the vacancy results from the removal by the
stockholders or members or the expiration of term;
ii. If the vacancy occurs OTHER than by removal or
by expiration of term, such as death, resignation,
abandonment, or disqualification, if the remaining
directors or trustees do NOT constitute a quorum
for the purpose of filling the vacancy;
iii. If the vacancy may be filled by the remaining
directors or trustees but the board refers the matter
to stockholders or members; or
iv. If the vacancy is created by reason of an increase
in the number of directors or trustees.
b. By the members of the Board if still constituting a quorum, at least a majority of
them are empowered to fill any vacancy occurring in the board OTHER than by
removal by the stockholders or members or by expiration of term.
Q: What is term of the director or trustee elected to fill the vacancy?
ANS: A director or trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office.
G. COMPENSATION
Q: Are directors entitled to compensation?
ANS: As general rule, directors in their capacity as such, are not entitled to receive
any compensation except for reasonable per diems. However, the following are the
exceptions to the general rule:
1. When their compensation is fixed in the by-laws;
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2. When granted by the vote of stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders meeting; (Sec. 30,
Corporation Code)
Q: What is the limitation to the compensation granted to directors?
ANS: The only limitation in the granting of compensation is that the amount to be
given shall NOT exceed 10% of the net income before income tax of the
corporation during the preceding year (Sec. 30, Corporation Code).
Q: What if the corporation did not have any net income during the preceding
taxable year. Are the directors still entitled to compensation?
ANS: No. The law is clear that directors shall only be given compensation when
there is a net income. This is to prevent the violation of the trust fund doctrine to the
prejudice of the corporate creditors.
H. FIDUCIARY DUTIES AND LIABILITY RULES
Q: What are the fiduciary duties of directors or trustees?
ANS: A director or trustee has threefold duties:
a. Duty of Obedience embodied in Sec. 25 which states that the directors or
trustees and officers to be elected shall perform the duties enjoined on them
by law and the by-laws of the corporation.
b. Duty of Diligence embodied in Sec. 31 which states that directors or
trustees who are guilty of gross negligence or bad faith in directing the
affairs of the corporation shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members
and other persons.
c. Duty of Loyalty The duty of loyalty is embodied in Sec. 31 (conflict of
interest), Sec. 32 (self-dealing directors), Sec. 33 (interlocking directors) and
Sec. 34 (usurpation of corporate business opportunity). It essentially states
that the director owes loyalty and allegiance to the corporation, a loyalty that
is undivided (Aquino, Philippine Corporate Law Compendium, 2011 ed.,
pp.288-290).
Q: Are directors and officers solidarily liable with the corporation?
ANS: The general rule is that obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. There are times,
however, when solidary liabilities may be incurred but only when exceptional
circumstances warrant such as in the following cases: (VAGWAS)
1. When directors and trustees or, in appropriate cases, the officers of a
corporation:
a. vote for or assent to patently unlawful acts of the corporation;
b. act in bad faith or with gross negligence in directing the
corporate affairs;
c. are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or
who, having knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action (Tupaz IV v. CA, G.R. No. 145578,
November 18, 2005).
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Q: When does a director or trustee commit disloyalty?

ANS: When a director or trustee attempts to acquire or acquires in violation of his
duty, any interest adverse to the corporation in respect of any matter which has
been reposed in him in confidence as to which equity imposes a liability upon him
to deal in his own behalf, he shall be liable as trustee for the corporation and must
account for all the profits which otherwise would have accrued to the corporation
Q: What is the penalty if the director or trustee committed disloyalty?
ANS: Directors or trustees who acquire any pecuniary or personal interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom (Sec. 31).
Q: Are directors and officers solidarily liable for the issuance of watered
down stocks?
ANS: Any director or officer of a corporation consenting to the issuance of watered
stocks or who, having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporate secretary, shall be solidarily liable
with the stockholder concerned to the corporation and its creditors for the difference
between the fair value received at the time of issuance of the stock and the par or
issued value of the same (Sec. 65, Corporation Code).
Q: What is the special fact doctrine?
ANS: Under the so-called "special facts" doctrine, while a director does not stand in
fiduciary relation to the stockholder, he is under legal obligation to make fair and full
disclosure of pertinent official information where special circumstances exists giving
rise to the obligation to disclose. The "special facts" rule has its origin in the
Philippines in the case of Strong v. Repide (213 U.S. 419 S. Ct. 521, 53 L. Ed.
[1909]). This case developed under a setting predominantly of Spanish influence
involving a "sociedad anonima" organized under the Spanish Code of Commerce,
but decided on the persuasion of both Spanish and American jurisprudence.
I. RESPONSIBILITY FOR CRIMES
Q: When is a corporation held criminally liable?
ANS: A corporation is criminally liable if by express provision of law (i.e. AntiDummy Law, Anti-Money Laundering Act and Trust Receipts Law); In such case the
responsible officers would be criminally liable (People v. Tan Boon Kong, GR NO.
32652, March 15, 1930).
Q: Are officers of the liable for the criminal acts done on behalf of the
corporation?
ANS: Yes. The officers of the corporation may be held liable. It is settled that an
officer of a corporation can be held criminally liable for acts or omissions done in
behalf of the corporation only where the law directly requires the corporation to do
an act in a given manner and the same law makes the person who fails to perform
the act in the prescribed manner criminally liable. (Sia v. People of the Philippines,
No. L-30896, April 28, 1983).
J. INSIDE INFORMATION
Q: What is inside information?
ANS: Information is material non-public if: (a) It has not been generally disclosed
to the public and would likely affect the market price of the security after being
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disseminated to the public and the lapse of a reasonable time for the market to
absorb the information; or (b) would be considered by a reasonable person
important under the circumstances in determining his course of action whether to
buy, sell or hold a security. (Sec. 27, SRC)
Q: Can directors or trustees deal with securities using inside information?
ANS: No. It shall be unlawful for an insider (director or trustee) to sell or buy a
security of the issuer, while in possession of material information with respect to the
issuer or the security that is not generally available to the public (Sec. 27, SRC).
*see more discussion on Inside Information in subject Securities Regulation
Code
K. CONTRACTS
By self-dealing directors with the corporation
Q: Who are self-dealing directors?
ANS: Self-dealing directors, trustees or officers are those who personally contract
with the corporation in which they are directors, trustees, or officers. (Sec. 32,
Corporation Code)
Q: What is the status of the contract entered into by a self-dealing director?
ANS: Such contracts are VOIDABLE, at the option of the corporation UNLESS:
a. The presence of such director/trustee in the board meeting approving the
contract was NOT necessary to constitute a quorum for such meeting;
b. The vote of such director/trustee in the board meeting approving the contract was
NOT necessary for the approval of the contract;
c. The contract is fair and reasonable under the circumstances;
d. In the case of an officer, the contract has been previously authorized by the
board of directors. (Sec. 32, Corporation Code)
Q: What if not all of the conditions cited above are present, is there an
instance that the contract is still valid?
ANS: Yes. Where any of the FIRST two conditions is absent, said contract may be
ratified by the vote of the stockholders representing at least 2/3 of the outstanding
capital stock or of at least 2/3 of the members in a meeting called for the purpose,
provided that full disclosure of the adverse interest of the director/ trustee involved
is made at such meeting and the contract is fair and reasonable under the
circumstances (Sec. 32, Corporation Code).
Between corporations with interlocking directors
Q: Who are Interlocking Directors?
ANS: One, some or all of the directors in one corporation is/are also a director in
another corporation (Sec. 33, Corporation Code).
Q: Is interlocking directorship prohibited by law?
ANS: Interlocking directorship by itself is not prohibited under the Corporation
Code. However, the by-laws may contain provisions that disallow interlocking
directorship. A contract between 2 or more corporations having interlocking
directors shall not be invalidated on that ground alone. These contracts are VALID,
provided that:
a. There is no fraud; and
b. The contract is fair and reasonable under the circumstances. (Sec. 33,
Corporation Code)
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Q: When is an interlocking director deemed to have substantial interest?

ANS: An interlocking director has substantial interest in one corporation if his equity
exceeds 20% of the outstanding capital stock. If the interest does not exceed 20%,
he is merely a nominal director. (Sec. 33, Corporation Code).
Q: Is a contract entered into by an interlocking director having a substantial
interest considered valid?
ANS: All the conditions prescribed in Sec. 32 on self-dealing directors must be
present with respect to the corporation in which he has nominal interest before it
can be valid.
Q: What if not all of the conditions cited in Sec. 32 are present, is the contract
still valid?
ANS: If either of the first two are absent (presence not necessary for quorum or
vote not necessary), the contract can be ratified by the vote of the stockholders
representing at least 2/3 of the Outstanding Capital Stock or by the vote of the
stockholders representing at least 2/3 of the members in a meeting called for the
purpose. Provided, That the following are present:
a. Full disclosure of the adverse interest of the director in the meeting;
b. The contract is fair and reasonable under the circumstances (Sec. 33,
Corporation Code).
L. EXECUTIVE COMMITTEE
Q: What is an executive committee?
ANS: An executive committee is a body created by the by-laws and composed of
not less than three (3) appointed members of the board which, subject to the
statutory limitations, has all the authority of the board to the extent provided in the
board resolution or by-laws (De Leon, The Corporation Code of the Philippines,
2006 ed.).
Q: How is an executive committee created?
ANS: The by-laws of a corporation may create an executive committee, composed
of not less than three members of the board, to be appointed by the board (Sec. 35,
Corporation Code).
Q: What is the authority of the executive committee?
ANS: The executive committee has all the authority of the board to the extent
provided for in the resolution of the board or in the by-laws. It may act by a majority
vote of all of its members on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote of the board
Q: Is the decision of the executive committee subject to appeal to the board
of directors?
ANS: Its decisions are not subject to appeal to the board. However, if the resolution
of the Executive Committee is invalid i.e. not one of the powers conferred to it, it
may be ratified by the board (SEC Opinion, July 29, 1995).
Q: Suppose the board of directors created a body called executive
committee and the corporate By-Laws is silent on the power to create an
executive committee. Is the said committee illegal?
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ANS: No. Notwithstanding the silence of corporate bylaws on the matter, it cannot
be held that the creation of the executive committee by the board of directors is
illegal or unlawful. One reason is the absence of a showing as to the true nature
and functions of said executive committee considering that the "executive
committee," referred to in Section 35 of the Corporation Code which is as powerful
as the board of directors and in effect acting for the board itself, should be
distinguished from other committees which are within the competency of the board
to create at anytime and whose actions require ratification and confirmation by the
board (Filipinas Port v. Go, supra.).
Q: What are the limitations on the power of an executive committee?
ANS: It cannot act on the following:
a. Approval of any action for which shareholders approval is also required;
b. Filling up of board vacancies;
c. Amendment, repeal of by-laws or adoption of new by-laws;
d. Amendment or repeal of any resolution of the Board which by its express
terms is not amendable or repealable; and
e. Distribution of cash dividends to shareholders.
M. MEETINGS
Q: What are the kinds of meetings of the board of directors or trustees?
ANS: Meetings of directors or trustees:
a. Regular - held by the board monthly, unless the by-laws provide
otherwise.
b. Special - held by the board at any time upon the call of the president or as
provided in the by-laws.
Regular or Special
When and Where
Q: When are the meetings of the board of directors or trustees held?
ANS: Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise while special meetings
of the board of directors or trustees may be held at any time upon the call of the
president or as provided in the by-laws.
Q: Where are the meetings of the board of directors or trustees held?
ANS: Meetings of directors or trustees may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.
Notice
Q: What is the notice required to hold a valid meeting of the board of
directors or trustees?
ANS: As to Meetings of Directors/Trustees:
a. General Rule: At least one (1) day prior to the scheduled meeting
(whether regular or special)
b.
Exception: Unless otherwise provided by the by-laws.
Who Presides
Q: Who calls the meetings of the board of directors or trustees?
ANS: The following calls the meeting:
[Type text]
[Type text]
a.
Officer designated in the by-laws
b.
Directors/Trustees
c.
Officer entrusted with the management of the corporation unless

otherwise provided by law (Sec. 54, Corporation Code)
Quorum
Q: How shall the quorum determined in the meeting of the board of directors
or trustees?
ANS: As a general rule regarding meetings of the Board of Directors, a majority of
the number of directors or trustees AS FIXED IN THE ARTICLES OF
INCORPORATION shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority of all the
members of the board. An exception would be if the articles of incorporation or the
by-laws provide for a greater majority (Sec. 25, Corporation Code).
Rule on abstentation
Q: What is the rule on the absence of a director or trustee in a board
meeting?
ANS: In case of abstention during a board meeting on a vote taken on any issue,
the general rule is that an abstention is counted in favor of the issue that won the
majority vote; since by their act of abstention, the abstaining directors are deemed
to abide by the rule of the majority. This manner of counting is based on what is
deemed to be a presumption as to the intent of the one abstaining, namely, to
acquiescence in the action of those who vote affirmatively (Lopez v. Ericta, G.R.
No. L-32991, June 29, 1972).
Q: Is the above-cited rule regarding abstentation considered as absolute?
ANS: No. Being merely prima facie, the presumption on abstentation voting would
not hold in the face of clear evidence to the contrary. It is pertinent, therefore, to
inquire into the facts and circumstances which attended the voting by the members
in order to determine whether or not such a construction would govern (Lopez v.
Ericta, Ibid).
VIII. STOCKHOLDERS AND MEMBERS

A. FUNDAMENTAL RIGHTS OF A STOCKHOLDER
Q: What are the fundamental rights of a stockholder?
ANS: The following are the rights and remedies of Stockholders (De Leon, The
Corporation Code of the Philippines Annotated, 2010ed.)
1. Rights As To Control And Management (MEA-C-VEA)
a. To attend and vote in person/ proxy at stockholders meetings (Sec. 50, 58);
b. To elect & remove directors (Sec. 24, 28);
c. To approve certain corporate acts (Sec. 52);
d. To compel the calling of meetings (Sec. 50);
e. To have the corporation voluntarily dissolved (Sec. 118, 119);
f.
To enter into a voting trust agreement (Sec. 59); and
[Type text]
[Type text]
2.
3.
a.
b.
c.
d.
e.
g. To adopt/ amend/ repeal the by-laws or adopt new by-laws (Sec. 46, 48).
Proprietary Rights (TRIP-Pre)
a. To transfer of stock in the corporate book (Sec. 63);
b. To receive dividends when declared (Sec. 43);
c. To issuance of certificate of stock/ other evidence of stock ownership (Sec.
63);
d. To participate in distribution of corporate assets upon dissolution (Sec. 118,
119); and
e. To pre-emption in the issue of shares (Sec. 39)
Remedial Rights (BIRD Fur)
To inspect corporate books (Sec. 74);
To recover stock unlawfully sold for delinquency (Sec. 69);
To demand payment in the exercise of appraisal right (Sec. 41, 81);
To be furnished recent financial statements/ reports of the corporations
operations (Sec. 75); and
To bring suits.
Doctrine of Equality of Shares
Q: What is the doctrine of equality of shares?
ANS: Where the articles of incorporation do not provide for any distinction of the
shares of stock, all shares issued by the corporation are presumed to be equal and
enjoy the same rights and privileges and are also subject to the same liabilities
(Sec. 6, par. 5, Corporation Code).
B. PARTICIPATION IN MANAGEMENT
Proxy
Q: What is a proxy?
ANS: A proxy can either be:
a. A written authorization given by one person to another so that the second
person can act for the first.
b. Also refer to the instrument which evidences the authority of the agent
Q: What is the right of the stockholders to vote by proxy?
ANS: Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by the stockholder or
member and filed before the scheduled meeting with the corporate secretary.
Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time.
Q: What are the requirements for a valid proxy?

ANS: The requirements for valid proxy are as follows: (VSW-F5)
a.
Unless otherwise provided in the proxy, it shall be valid only for the meeting
which it was intended.
[Type text]
[Type text]
b.
It shall be signed by the stockholder or member concerned;
c.
Proxies shall be in writing;
d.
It shall be filed before the scheduled meeting with the corporate secretary;
e.
No proxy shall be valid and effective for a period longer than 5 years at any
one time.
Q: What are the kinds of proxy?

ANS: The following are the kinds of proxy:
a.
b.
c.
d.
General Proxy confers a general discretionary power to attend

and vote at annual meeting as well as exercise all powers the
stockholder/member could do if personally present.
Limited Proxy restricts the authority to vote to specified matters
only and may direct the manner in which the vote shall be cast.
Specific Proxy - the authority granted is merely for a particular
meeting on a specific date.
Continuing Proxy - the authority given is to represent the
stockholders at any and all regular or special stockholders
meetings unless the stockholder revokes the same (Lopez, The
Corporation Code).
Q: Who can be a proxy?

ANS: Sec. 58 imposes no limitation as to who may be a proxy. A
stockholder/member may appoint any person he sees fit to represent him, and bylaws restricting his right in this respect are likewise void.
Q: Is there an instance when the right to vote by proxy is denied?

ANS: Yes. In non-stock corporations the right to vote by proxy, or even the right to
vote itself may be denied to members in the articles of incorporation or the by-laws
as long as the denial is not discriminatory.
Q: Why are proxy solicitations regulated by the Securities Regulation Code?
[Type text]
[Type text]
ANS: The proxies can exercise the right to vote embodies in a stock which is a
security. The proxies can affect the interests involving the securities and the
corporation. Thus, it is proper to regulate proxies by the SEC to prevent prejudice to
the investing public (Sec. 20, SRC).
Q: Between the SEC and RTC, which body has jurisdiction over
controversies regarding proxies?
ANS: The power to regulate proxies remains extant in the SEC and could very well
be exercised when stockholders vote on matters other than the election of
directors. If the controversy on proxy relates to the election of directors or officers,
then RTC has jurisdiction (GSIS v. SEC, G.R. No. 183905, April 16, 2009).
Voting Trust Agreement

Q: What is a voting trust agreement?
ANS: An agreement whereby a stockholder of a stock corporation confers upon a
trustee/s the right to vote and other rights pertaining to the shares for a period not
exceeding five (5) years at any time.
Q: What are the limitations to a voting trust agreement?

ANS: They are:
a.
b.
c.
d.
e.
f.
Cannot be entered into for a period exceeding 5 years at any one

time EXCEPT when it is a condition in a loan agreement, in which
case, said contract shall automatically expire upon full payment of
the loan.
The agreement must not be used for purposes of fraud.
It must be in writing and notarized and specify the terms and
conditions thereof.
A certified copy of the agreement must be filed with the corporation
and with the SEC.
The agreement shall be subject to examination by any stockholder
of the corporation.
Unless expressly renewed, all rights granted in the agreement
shall automatically expire at the end of the agreed period.
Cases when Stockholders action is required

By a Majority vote
Corporate Act
[Type text]
Salient Points
[Type text]
a.
Reasonable
per diems
may be given
b.
Fixing of compensation
of directors
(Sec.30, CC)
Majority of
OCS
c.
Adoption of By-laws
(Sec. 46, CC)
Election of Directors/
trustees (Sec. 24, CC)
Majority of
OCS/ members
Majority of
OCS /
members
By-laws
may
provide for
compensation
Limit: not
more than 10% of the net
income before income tax
a. Non-voting shares
can vote
a. Candidates with the

highest number of
votes get elected
b. Cumulative voting:
No. of shares x
No. of directors to be
elected
c. Non-voting shares
cannot vote
Fixing the issued Price

of No- Par value shares
(Sec. 62, last par. , CC)
By a Two-Thirds vote
Corporate Act
[Type text]
Majority of
OCS
a. Stockholders/Members
shall vote if the
BOD/BOT are not
authorized by the
Articles of Incorporation
and the by-laws to fix the
price
Salient Points
[Type text]
Denial of pre-emptive
right
(Sec. 39, CC)
Delegation of the
power to Amend, Repeal
or
Adopt New By-laws to
BOD
(Sec. 48, CC)
Removal of Directors/
Trustees (Sec. 28, CC)
2/3 of OCS
a. Only if the
AOI or amendment
thereto denies
pre-emptive right
b. Denial extends to
shares issued in good
faith in exchange
for property needed
for corporate purposes
or in payment of
previously contracted
debts
2/3 of OCS
a. Delegation can be
revoked by majority
OCS
b. Non-voting shares
cannot vote
2/3 of OCS /
members
a. Notice and statement

of purpose are necessary
b. Must be made in a
meeting called by the
secretary on Presidents
order or on written
demand of majority of
OCS
c. Non-voting shares cannot
vote
d. Removal without cause
cannot be used to
deprive minority
stockholders of their
right of representation
Ratification of act of
disloyal director
(Sec. 34, CC)
2/3 of OCS
By Cumulative Voting Corporate Acts which require Majority Vote of the BOD
and vote of Stockholders representing Majority of the OCS (FAM)
Corporate Act
Salient Points
Fixing the issued
Majority of
Majority of OCS, if
Price of No- Par quorum of
BOD
value shares (Sec. BOD, if
is not authorized
62, last par. , CC)
authorized
by the AOI
by AOI or
by-laws
[Type text]
[Type text]
Amendment
or
repeal
of By-laws or
Adoption of new
By-laws (Sec. 48,
CC)
Majority vote
Majority of OCS
Management
Contract
(Sec. 44, CC)
Majority vote
of BOD of
both managing
and
managed
corporation
Majority
of
OCS/members of
both managing
and
managed
corporation
and in some cases
2/3 of OCS/
members
Amendment may
be made by the
Board only after
due delegation by
the stockholders.
Non-voting shares
can vote
Corporate Acts Which Require Majority Vote Of The BOD And Vote Of
Stockholders Representing 2/3 Of The OCS (ADAM-LI 3ES)
Corporate Act
Amendment of
Articles
of
Incorporation
Majority vote
Vote or
written
assent of
2/3 of
OCS/
members
Dissolution
Corporation
(Sec. 118 and
119, CC)
Adoption of
plan or
distribution of
assets of
non-stock
corporation
(Sec. 95 [2] ,
CC)
Merger
or
Consolidation
(Sec. 77, CC)
Majority
of vote
2/3 of
OCS/
members
Majority
vote of
trustees
2/3 of
members
having
voting rights
Majority of
BOD
of
constituent
corporations
2/3 of
OCS/
Members
of
constituent
corporations
Sale,
Lease,
Exchange,
Majority vote
2/3 of
OCS/
members
[Type text]
Salient Points
a. Non-voting shares can vote
b. Appraisal right is available in
certain cases
c. Effective upon approval by
SEC, or date of filing if
not acted upon within six
months
d. Must be for a legitimate
purpose
a. See Sec. 117-122
b. Non-voting shares can vote

b. Appraisal right is available,
except when the plan is
abandoned
c. Any amendment to the plan
may be made provided
it is approved by majority vote
of the board and
2/3 of OCS/members
a. Majority of the board is
sufficient if the transaction
does not cover all or
[Type text]
Mortgage,
Pledge,
Dispose of all
or substantially
all of corporate
assets
(Sec.40, CC)
Increase
or
decrease of
capital stock
(Sec. 38, CC)
Majority vote
2/3 of
OCS/
members
Incur,
Create,
Increase
Bonded
Indebtedness
(Sec. 38, CC)
Majority Vote
2/3 of
OCS/
members
Investment
of
Corporate
Funds in
another
Corporation or
Business or for
any other
purpose
other than
primary
purpose
(Sec. 42, CC)
Majority vote
2/3 of
OCS/
members
C. PROPRIETARY RIGHTS
Right to dividends
[Type text]
substantially all of the assets

of the corporation
c. Appraisal right is available
d. Notice is required
e. If sale is abandoned,
directors action is
sufficient, no need for
ratification by stockholders
a. Meeting is required
c. No appraisal right
d. Notice requirement
e. Prior approval of the
SEC is necessary for it is only
from and after the approval by
the SEC and the issuance by
the SEC of a certificate of filing
that the capital stock shall
stand increased or decreased
1. Treasurers sworn
statement is necessary
2. No decrease of capital stock
if it will prejudice right of
creditors
a. Meeting is required
c. No appraisal right
d. Notice is required
e. Registration of bonds with
the SEC is necessary
b. Appraisal right available
c. Notice is required
d. Investment in the
secondary purpose is
covered
e. Stockholders ratification
is not necessary if the
investment is incidental to
primary purpose
[Type text]
Q: When is there a right to receive dividends?
ANS: The right to receive dividends from a corporation is manifestly justified only
on the theory that he is a STOCKHOLDER.
1. Cash Dividends As soon as cash dividends are declared the stockholders
have the right to their pro rata shares.
2. Stock Dividends The above rule does not apply to stock dividends as the
declaration of such dividends may be rescinded at any time before the
actual issuance of stock.
Q: In the absence of a rule to the contrary, how shall dividends be

distributed?
ANS: As a rule dividends among stockholders of the same class must always be
pro rata, equal and without discrimination and regardless of the time when the
shares were acquired.
Right of Appraisal
Q: What is the appraisal right?
ANS: The appraisal right is the right to demand payment of the fair value of his
shares, after dissenting from a proposed corporate action involving a fundamental
change in the corporation in the cases provided by law (Turner v. Lorenzo Shipping,
G.R. No. 157479, November 24, 2010)
Q: What are the instances where the appraisal right can be exercised?
ANS: The following are the instances of Appraisal Right (ASIMA)
a.
i.
An amendment to the articles that has the effect of

Changing or restricting the rights of shareholders; or
ii.
iii.
Of authorizing preferences over those of outstanding shares; or

Changing the term of corporate existence;
Note: The changing or restriction of rights of shareholders must be made
in good faith. (Sec. 81, Corporation Code)
Sale, encumbrance or other dispositions of all or substantially all of the
corporate property or assets; (Sec. 40, Corporation Code);
Investment of corporate funds in another corporation or in a purpose other
than the primary purpose (Sec. 42, Corporation Code);
Merger or consolidations (Sec. 81, Corporation Code);
In a close corporation, a stockholder may, for any reason, compel the
corporation to purchase his shares when the corporation has sufficient
b.
c.
d.
e.
[Type text]
[Type text]
assets in its books to cover its debts and liabilities exclusive of capital stock
Q: How is the right of appraisal exercised?

ANS: The appraisal right can be exercised as follows:
a.
b.
c.
The dissenting stockholder shall make a written demand on the corporation

within 30 days after the date on which the vote was taken for the payment of
the fair value of his shares;
If the proposed corporate action is implemented or effected, the corporation
shall pay such stockholder, upon surrender of the corresponding certificate
of stock within 10 days after demanding payment of his shares;
Upon payment of the agreed or awarded price, the stockholder shall transfer
his shares to the corporation.
Q: What are the conditions for the exercise of the appraisal right?
ANS: The following are the conditions for exercise of appraisal right:
a.
b.
c.
d.
e.
f.
Any of the instances set forth by law must be present.

Dissenting stockholder must have voted against the proposed action.
Demand for payment must be made within 30 days from the date vote is
taken thereon. Failure to make demand shall be deemed a waiver.
Price must be based on fair value as of day prior to date on which vote was
taken.
Submission by withdrawing stockholder of his shares to the corporation for
notation of being dissenting stockholder within 10 days from written demand.
Payment must be made only when the corporation has unrestricted retained
earnings in its books.
Q: What is the obligation of the dissenting stockholder upon the payment of

the corporation of his shares?
ANS: Stockholder must transfer his shares to the corporation upon payment by the
Q: What is the remedy of the dissenting stockholder if the corporation

refuses to recognize his appraisal right?
ANS: If the corporation unjustifiably refuses to pay the dissenting stockholder
despite the full compliance with all the requirements for a valid exercise of appraisal
[Type text]
[Type text]
right and despite the fact that the corporation has sufficient unrestricted retained
earnings, the aggrieved stockholder may file the appropriate action before the
proper Regional Trial Court to compel the corporation to allow him to exercise his
appraisal right (SEC Opinion, October 1, 2001).
Q: What is the effect of demand of the right of appraisal?

ANS: The following are the effects of the demand and the termination of the
appraisal right:
a.
b.
All rights accruing to such shares shall be suspended from the time of
demand for payment of the fair value of the shares until either the
abandonment of the corporate action.
The dissenting stockholder shall be entitled to receive payment of the fair
value of his shares as agreed upon between him and the corporation or as
determined by the appraisers chosen by them.
c.
If not paid within 30 days after the award, his voting and dividend rights shall
be immediately restored.
d.
Upon such payment, all his rights as stockholder are terminated, not merely
suspended. But if before he is paid the proposed corporate action is
abandoned, his rights and status as a stockholder shall thereupon be
permanently restored (Sec. 82, Corporation Code).
Q: Must there be unrestricted retained earnings before the corporation can be

obliged to pay the dissenting stockholder for the value of his stocks?
ANS: As a general rule, payment is made only if the corporation has unrestricted
retained earnings in its books to cover the same. An exception to the rule is with
respect to close corporation where the corporation shall pay the value of the shares
when there is a deadlock (Sec. 104, Corporation Code).
Q: When does the right to pay the stocks of the dissenting stockholder
ceases?
ANS: As a general rule, a dissenting stockholder who demands payment of his
shares is no longer allowed to withdraw from his decision. The following are the
exceptions: (C-DAN)
[Type text]
[Type text]
a.
b.
c.
d.
The corporation consents to the withdrawal;

The proposed corporate action is disapproved by the SEC where its approval is
necessary; and
The proposed corporate action is abandoned or rescinded by the corporation;
The Commission determines that such stockholder is not entitled to appraisal
right (Sec. 84, Corporation Code)
Q: How are the stocks of the dissenting stockholder valuated?
ANS: The fair value of the shares of the dissenting stockholder is determined as of
the day PRIOR to the date on which the vote was taken notwithstanding any
appreciation or depreciation in value of the shares in anticipation of such corporate
action.
Q: What is the effect of transfer of dissenting shares?
ANS: The transferee shall become a regular stockholder with the right to receive all
dividend distributions which would have accrued to such shares. The right of the
transferor as a dissenting stockholder shall be transferred to the transferee (Sec.
Q: Can the dissenting stockholder receive dividends upon exercise of
appraisal right?
ANS: No. The dissenting stockholders right to receive dividends is suspended
upon exercise of the appraisal right. To allow otherwise would be absurd as the
dissenting stockholders would benefit from the dividends produced by the same
corporate action which they principally opposed (Sec. 82, Corporation Code).
Right to Inspect
Q: What are the books required to be kept under the Corporation Code?
ANS: The following are the books to be required to be kept by the corporation;
a. Book of all business transactions;
b. Book of Minutes of all meetings of stockholders or members;
c. Book of Minutes of all meetings of directors or trustees; and
d. Stock and transfer book, in case of stock corporations. (Sec. 74,
Corporation Code)
Q: What are the corporate records required to be kept by the SEC?

ANS: The corporate records required by the SEC to be kept and/or registered are:
a. Books of Account;
b. List of Stockholders or Members; and
c. Financial Records (Sec. 74, Corporation Code).
Q: Who has the right to inspect the corporate books?
ANS: The following persons are given the right to inspect corporate books?
a. Any director, trustee, stockholder or member;
b. Voting trust certificate holder;
c. Stockholder of a sequestered company; and
d. Beneficial owner of shares (Sec. 74, Corporation Code).
Q: What are the requirements before the corporate records could be
inspected?
ANS: The following are the requirements
a. The records must be kept at the principal office of the corporation;
[Type text]
[Type text]
b. Any director, trustee, stockholder or member shall have the right to inspect
the records of all business transactions and the minutes of any meetings;
c. The stockholder may demand a copy of the excerpts of the records or
minutes; and
d. The refusal to allow such right to inspect and to demand such copy shall
subject the erring officer or agent to civil and criminal liabilities and if such
refusal is by virtue of a resolution or order of the board of directors or
trustees, the liability shall be imposed upon the directors or trustees who
voted therefor (Sec. 74, Corporation Code).
Q: What are the rights of the stockholders with respect to corporate books
and records?
ANS: The stockholders have the following rights:
a. Right of Inspection;
b. Right to demand a list of stockholders;
c. Right to Demand a detailed auditing of business expenditures;
d. To examine books of the corporations subsidiary;
e. Rights to financial Statements (Sec. 75, Corporation Code).
Q: What is the basis of the right to inspection?
ANS: The following are the bases:
a. The right of stockholders to inspect the books of the corporation rests on the fact
of beneficial ownership of the corporate property and assets through ownership
of shares;
b. The stockholders are entitled to inspect the books and records of a corporation in
order for them to investigate the conduct of the management, determine the
financial condition of the corporation, and generally take an account of the
stewardship of the officers and directors;
c. The evident purpose of the law in granting stockholders the right is to protect
small and minority stockholders from the power of the majority and from
mismanagement by its officers as well as to ascertain, establish and maintain
their rights and intelligently perform their corporate duties; and
d. The SECs power of supervision and control over all corporations. (Republic v.
Sandiganbayan, G.R. No. 88809, July 10, 1991)
Q: What is extent of the right to inspect corporate books?
ANS: The following are the rules governing the right to inspect:
a. The right to inspect the books and records of the corporation includes, as an
INCIDENT thereof, the right to make copies, abstracts and memoranda of
their contents (Wee v. Wee, G.R. No. 169345, August 25, 2010).
b. The right of inspection is PERSONAL but the inspection and examination
may be made by any proper representative or attorney-in-fact and either
with or without the attendance of the director, etc. (Philpotts v. Philippine
Manufacturing Company, G.R. No. L-15568, November 8, 1919).
c. Trade secrets are those which the corporation may undoubtedly keep secret
notwithstanding the right of inspection given to stockholders (Air Philippine
Corporation v. Pennswell, G.R. No. 172835, December 13, 2007).
Q: What is the limitation of the right to inspect corporate books?
ANS: The following are the limitations on the Right of Inspection:
a. The right must be exercised during reasonable hours on business days;
[Type text]
[Type text]
b.
c.
The person demanding the right has NOT improperly used any information
obtained through any previous examination of the books and records of the
corporation; and
The demand is made in good faith or for a legitimate purpose (Sec. 74,
Corporation Code).
Q: Can the stockholders of the parent company inspect the books of the
subsidiary corporations and vice versa?
ANS: The right of stockholders of the parent company to inspect corporate books
extends, in consonance with equity, good faith, and fair dealing, to a subsidiary
wholly-owned by the corporation. However, the stockholders of the subsidiary
cannot inspect the books of the parent company as the subsidiary does not have an
entire interest in the affairs and assets of the parent corporation (Gokongwei v.
SEC, supra.).
Q: What are the remedies of a stockholder who was denied of the right to
inspect corporate books?
ANS: The following are the remedies if inspection is denied:
a. Mandamus;
b. Damages;
c. Criminal Suit
Pre-emptive Right
Q: When can a stockholder exercise its pre-emptive right?
ANS: Whenever the capital stock of a corporation is increased and new shares of
stock are issued, the new issue must be offered first to the stockholders who are
such at the time the increase was made in proportion to their existing shareholdings
and on equal terms with other holders of the original stocks before subscriptions
are received from the general public. (Benito v. SEC, G.R. No. L-56655, July 25,
1983)
Q: Is the pre-emptive right available with respect to the issuance of unissued
stocks that form part of the original authorized capital stock?
ANS: No. The general rule is that pre-emptive right is recognized only with respect
to new issues of shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at its inception
offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are later re-offered, he
cannot therefore claim a dilution of interest. (Benito v. SEC, Ibid.)
Right to Vote
Q: What is the nature of the right to vote of a stockholder?
ANS: The right to vote is inherent and incidental to the ownership of corporate
stocks and as such is a property right and that only stock actually issued and
outstanding may be voted. (Tan v. Sycip, 499 SCRA 216, [2006]). The right to vote
represents the right of a stockholder to participate in the control and management
of the corporation that is exercised through his vote.
Q: Do treasury shares have voting rights?
ANS: It depends. Treasury share shall have no voting rights as long as such shares
remain in the Treasury. (Sec. 57, Corporation Code)
[Type text]
[Type text]
Right to Dividends
Q: Can the stockholders force the board of directors to declare dividends?
ANS: As a general rule, No. Declaration of dividends is discretionary upon the
board. Dividends are payable only when there are profits earned by the corporation
and as a general rule, even if there are existing profits, the Board of Directors has
the discretion to determine whether or not dividends are declared (Republic
Planters Bank v. Agana, G.R. No. 51765, March 3, 1997), SUBJECT to the rule on
non-retention of retained earnings in excess of 100% of paid-in-capital.
Q: Once the Board of Directors declared dividends, is payment of dividends
to a stockholder a matter of right?
ANS: No, with respect to stock dividends. Both Sec. 16 of the Corporation Law and
Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the
purpose. These provisions underscore the fact that payment of dividends to a
stockholder is not a matter of right but a matter of consensus. (Republic Planters
Bank v. Agana, Ibid.)
Q: When does the right to dividends accrue? Does it require the approval of
the SEC?
ANS: The right of the stockholder to be paid dividends accrues as soon as the
declaration is made. Neither the same board nor their successors can revoke the
declaration of a legally declared dividend without the stockholders consent. The
right to dividend accrues even if there is no SEC approval.
Right of first refusal
Q: What is the right of first refusal with respect to sale or disposition of
stocks?
ANS: The right of first refusal allows stockholders to purchase the shares of their
co-shareholder before they are offered to a third party. The agreement of coshareholders is mutual grant of right to each other (J.G. Summit Holdings v. CA,
G.R.No. 124293, January 31, 2005).
Q: When can a stockholder acquire a right of first refusal with respect to the
sale or disposition of stocks of other shareholders?
ANS: A right of first refusal with respect to sale or disposition of may be acquired by
the stockholder if it is provided in the Articles of Incorporation (Republic v.
Sandiganbayan, G.R. No. 128606, December 4, 2000) or in an agreement between
shareholders (J.G. Summit Holdings v. CA, Ibid.)
Q: X Corp. and Y Corp. decided to enter into a Joint Venture to create S Corp,
a landholding company. In the Joint Venture Agreement, X, a Filipino
corporation, shall own 60% of the shares while 40% shall belong to Y, a US
corporation. The agreement also stated that the shareholders have the right
of first refusal if the other shareholder alienates its share. X then manifested
that it will sell 10% of its shares to Z Corp., also a Filipino corporation. Y
exercised its right of first refusal to purchase the 10% share. Z objected
contending that the exercise of the right of first refusal would constitute a
violation on the prohibition of a foreign corporation to own domestic land as
S Corp. shall have more than 40% foreign equity. Is Y barred from exercising
its right of first refusal?
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ANS: No. The agreement of co-shareholders to mutually grant a right of first refusal
to each other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino corporations. If S Corp.
still owns land, the right of first refusal can be validly assigned to a qualified Filipino
entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not
amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent
intent. Alternatively, S Corp. may divest of its landholdings, in which case Y Corp.,
in exercising its right of first refusal, can exceed 40% of S Corp.s equity. The fact
that S Corp. owns land cannot deprive stockholders of their right of first refusal. No
law disqualifies a person from purchasing shares in a landholding corporation even
if the latter will exceed the allowed foreign equity, what the law disqualifies is the
corporation from owning land (J.G. Summit Holdings v. CA, Ibid.)
D. REMEDIAL RIGHTS
Individual suit
Q: What is an individual suit?
ANS: It is a suit instituted by a shareholder for his own behalf against the
corporation.
Representative suit
Q: What is a representative suit?
ANS: A suit filed by a shareholder in his behalf and in behalf likewise of other
stockholders similarly situated and with a common cause against the corporation.
Derivative suit
Q: What is a derivative suit?
ANS: One brought by one or more stockholders or members in the name and on
behalf of the corporation to redress wrongs committed against it or to protect or
vindicate corporate rights, whenever the officials of the corporation refuse to sue or
are the ones to be sued or hold control of the corporation (Western Institute v.
Salas, G.R. No. 113032, August 21, 1997).
Q: What are the requisites of a derivative suit?
a. Existing cause of action in favor of the corporation;
b. Stockholder/member must first make a demand upon the corporation or the
management to sue unless such a demand would be futile;
c. Stockholder/ member must be such at the time of the objectionable acts or
transactions unless the transactions are continuously injurious; and
d. Action must be brought in the name of the corporation which must be
alleged (Filipinas Port v. Go, supra.).
Q: May a person having only legal title over a shareholding, such as a trustee,
institute a derive suit?
ANS: No. The mere trustee of shares registered in his name cannot file a derivative
suit for he is not a stockholder in his own right (Bitong v. CA, Ibid).
Q: Is the stockholder a real party in interest in a derivative suit?
ANS: No. The stockholder is only a NOMINAL party in a derivative suit. The real
party in interest is the Corporation. The corporation should be made a party in order
to make the courts judgment binding upon it and thus bar future litigations of the
issue.
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Q: An action was filed by a minority stockholder involving a corporate matter.

Is the action considered as a derivative suit?
ANS: No. Not every suit filed in behalf of the corporation is a derivative suit. For a
derivative suit to prosper, it is required that the minority stockholder suing for and
on behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit. (Chua v. CA, G.R. No.
150793, November 19, 2004)
Q: X is a minority stockholder of CCC Corporation. Y is a member of the
Board of Directors of CCC Corporation and at the same time he is the
President. X believes that Y is mismanaging CCC Corporation hence, as a
stockholder and in behalf of the other stockholders, he wanted to sue Y.
Which statement is most accurate?
a. X can institute a derivative suit in behalf of himself as a stockholder.
b. A derivative suit must be instituted in behalf of the corporation.
c. Derivative suit is an exclusive remedy that X can institute.
d. Derivative suit is not the remedy in this situation (2012 Bar).
ANS: B. X, as a stockholder, can file a derivative suit. It is an indispensable
requisite that the suit filed by the minority stockholder must be instituted on behalf
of the corporation in order to be considered as a derivative suit (Chua v. CA, Ibid.).
E. OBLIGATION OF STOCKHOLDER
Q: What are the obligations of a stockholder?
ANS: The following are the obligations of the stockholder
a. Obligation to the corporation for unpaid subscription;
b. Obligation to the corporation for interest on unpaid subscription;
c. Obligation to creditors of the corporation on the unpaid subscription
d. Obligation for dividends unlawfully paid; and
F. MEETINGS
Regular or Special
Q: What are the kinds of corporate meetings?
ANS: Meetings of stockholders or members:
a. Regular held annually on a date fixed in the by-laws, or if not fixed, on
any date in April as determined by the board; held principally for the
purpose of electing another set of directors or trustees.
b. Special held at any time deemed necessary or as provided in the bylaws.
When and Where
Q: When and where are meetings of stockholders or members held?
ANS: The meetings of stockholders or members, whether regular or special, shall
be held in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation: Provided, That
Metro Manila shall, for purposes of this section, be considered a city or municipality.
Notice
Q: What is the notice required to hold a valid stockholders or members
meeting?
ANS: It depends on the kind of meeting:
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a.
Regular Meeting written notice must be sent to registered

stockholders or members at least 2 weeks before the meeting.
b.
Special Meeting written notice must be sent at least one (1)

week
Q: What are the requirements of a valid notice of a stockholders or members

meeting?
a. Must be issued by one who has authority to issue it.
b. Must be in writing
c. Must state date, time and place unless otherwise provided in By-laws.
d. Must state business to be transacted thereat
e. Must be sent at a certain time before scheduled
f.
Other requirements prescribed by law or corporate by-laws.
Q: Suppose the meeting was not held or called with proper notices to
stockholders. Is the meeting and all acts approved therein considered void?
ANS: Even if the meeting be improperly held or called, all proceedings and any
business transacted at such meeting shall be valid if within the powers or authority
of the corporation, and provided that all the stockholders or members of the
corporation are present or duly represented at the meeting (Sec. 51, Corporation
Code).
Who Calls the Meetings
Q: Who calls the meetings of stockholders or members?
ANS: The following can call the meeting:
a.
Officer designated in the by-laws
b.
Directors/Trustees
c.
Officer entrusted with the management of the corporation unless

otherwise provided by law
d.
Special meeting for the removal of directors or trustees may be called

by the secretary of the corporation or by a stockholder or member as
provided by Sec. 28.
Quorum
Q: What is a quorum?
ANS: A quorum is such number of the membership of a collective body as is
competent to transact its business or do any other corporate act.
Q: What constitutes as a quorum?
ANS: A quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations. (Sec. 52, Corporation Code)
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Q: Can the corporation increase the number of outstanding capital stock

required to constitute a quorum?
ANS: Yes. An increased number may be provided for in the Code or in the by-laws.
Q: Can the corporation decrease the number of outstanding capital stock
required to constitute a quorum?
ANS: No. The Corporation Code stated that the quorum shall be the majority of the
outstanding capital stock. It used the word shall and mandates that quorum must
not be lower than the majority of the outstanding capital stock.
Q: What if during the meeting, some stockholders walked out and the people
left are less than a majority, is the meeting still valid?
ANS: Once a quorum is called, and the meeting was called to order, even if some
people walked out and the people left are less than the majority, the proceedings
will be valid so long as there is a quorum when the meeting was called to order. A
minority group cannot prevent corporation by walking out (De Leon & De Leon, Jr.,
The Corporation Code of the Philippines Annotated, 2006 ed.)
Q: What shall be the basis in determining the quorum in the meeting of
stockholders or members?
ANS: For stock corporations, the quorum referred to in Sec. 52 of the Corporation
Code is based on the number of outstanding voting stocks. The majority of the
members representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles of incorporation,
constitute the quorum. For non-stock corporations, only those who are actual, living
members with voting rights shall be counted in determining the existence of a
quorum during members meetings (Tan v. Sycip, G.R. No. 153468, August 17,
2006).
Q: Suppose there is a lack of required votes during a meeting to pass upon a
certain corporate act, what shall be the effect?
ANS: Any matter or transaction must necessarily fail if the number of votes attained
is less than what is prescribed for the particular transaction. If an issue to be
resolved requires a majority for it to be passed and there is a deadlock, the issue or
proposition simply loses. There, is therefore, no need to break the deadlock.
However, the rule is different with respect to close corporations.
Q: Can directors or trustees validly act by proxy during a board meeting?
ANS: No. Directors or Trustees cannot validly act by proxy (Sec.25, last par.)
Minutes of meetings
Q: Are corporations required to keep the minutes of the meeting?
ANS: Every corporation shall keep and carefully preserve at its principal office a
record of all business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth in detail
the time and place of holding the meeting, how authorized, the notice given,
whether the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting (Sec. 74, Corporation
Code).
IX. CAPITAL AFFAIRS

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A. SUBSCRIPTION AGREEMENTS
Q: What is a subscription contract?
ANS: A subscription contract is defined as any contract for the acquisition of
unissued stocks in an existing corporation or a corporation still to be formed. (Sec.
60, Corporation Code; Jaka Investments v. CIR, GR No. 147629, July 28, 2010)
Q: What is the nature of a subscription contract?
ANS: The subscription contract is a CONSENSUAL contract that is perfected upon
the meeting of the minds of the parties. The name of the subscriber is recorded in
the stock and transfer book, and from that time, such subscriber becomes a
stockholder of record entitled to all the rights of a stockholder. Until the stocks are
fully paid, it continues to be a subsisting liability that is legally enforceable.
Q: Who are the parties of a subscription contract?
ANS: The parties in a subscription contract are the subscriber and the Corporation
itself, since the subject matter of the contract, i.e. shares of stocks to be
subscribed, is owned by the latter. Consequently, the subscribers are not real
parties in interest in a case for rescission of the subscription contract of another
subscriber because they are not parties thereto (Ong Yong v. Tiu, G.R. No. 144626,
April 6, 2003).
Q: How does a subscription of stocks differ from a purchase of stocks?
ANS: The subscription contract refers to the acquisition of UNISSUED stock of an
existing corporation or a corporation still to be formed. (Sec. 60, Corporation Code)
Thus, if the stocks acquired are stocks already issued, then it will be a purchase of
stocks.
B. CONSIDERATION OF STOCKS
Q: What are the valid considerations for the subscription contracts of stocks?
ANS: Valid Considerations In Subscription Agreements (CaPAL-PO)
a. Cash actually received;
b. Property, tangible or intangible, actually received AND necessary or
convenient for its use and lawful purposes;
c. Amounts transferred from unrestricted retained earnings to stated capital
d. Labor or services actually rendered to the corporation;
e. Previously incurred corporate indebtedness;
f.
Outstanding shares in exchange for stocks in the event of reclassification or
conversion. (Sec. 62, Corporation Code)
Q: Can shares of stock be issued in exchange for promissory notes or future
services?
ANS: No. Shares of stock are not allowed to be issued in exchange for promissory
notes or future services (Sec. 62, Corporation Code) Promissory notes are not
allowed since they are considered as notes receivable. The face value of the note
would appear as an addition to the assets in the corporations balance sheet
without the corresponding deduction on the capital stock. Consequently, creditor
would be led to believe that the entire paid-up capital stock has been paid in cash
when in fact it was not yet paid. This would violate the trust fund doctrine.
(Villanueva, Philippine Corporate Law, 2010 edition, p539)
Q: Are financial instruments valid considerations in a subscription contract?
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ANS: Yes. Financial instruments and receivables (as previously contracted debts),
shall be treated as property and may be legally accepted as valid consideration
subject to the following conditions:
a. Actually received by the corporation
b. Necessary or convenient for the corporations use and lawful purpose
c. At a fair valuation equal to the par value of the stock issued to be
approved by the SEC (SEC Opinion, January 25, 1995, XXIX SEC
Quarterly Bulleting 36 (No. 2, June 1995)
Q: What are the requisites for a property to be valid consideration?
ANS: The following are the requisites in order for a property to become a valid
consideration in a subscription contract:
a. The property is actually received by the corporation;
b. The property is necessary or convenient for its use and lawful purposes;
c. It must be subject to a fair valuation equal to the par or issued value of the stock
issued;
d. The valuation thereof shall initially be determined by the incorporators or the
board of directors; and
e. The valuation is subject to the approval by the SEC.
Note: Where the consideration is other than actual cash, OR consists of
intangible property, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the SEC.
Q: X was invited to be a director of Y Corporation, which is about to be
incorporated. X was issued 1 share of stock in exchange of the marketing
services he will render in favor of the corporation. Is X a valid director?
ANS: No. Sec. 23 of Corporation Code states that a director must own at least one
(1) share of stock. In this case, X does not own one (1) share of stock because
there has been a void consideration. The consideration was for marketing services
to be performed in the future. Shares of stock shall not be issued in exchange for
future services. (Sec. 62, Corporation Code)
Q: X, a director of Y corporation, was given a loan by Z. X told Z that in order
to repay his loan, he shall issued Z subscriptions of shares of stocks of Y
corporation. If Z agrees, is he considered a shareholder?
ANS: No because there was no valid consideration for the issuance of the shares
of stock. Only those previously incurred corporate indebtedness acknowledged by
the board are valid considerations in a subscription contract. (Aquino, Philippine
Corporate Law Compendium, 2011 ed., p.466)
C. SHARES OF STOCK
Q: What are shares of stocks?
ANS: Shares of stock in a corporation represent the interest of the shareholder in a
stock corporation. (Aquino, Philippine Corporate Law Compendium, 2011 ed.,
p.106)
Q: What kind of property are shares of stock?
ANS: Although shares of stock of a corporation represent equities which may
consist of real as well as personal properties therein, they are considered under
applicable law and jurisprudence as intangible personal properties. (CIR v. Anglo
California National Bank, G.R. No. L-12476, January 29, 1960)
Nature of Stock
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Q: What is the nature of shares of stock?
ANS: Shares of stock in a corporation constitute intangible personal property of the
stockholder, which he can contract with as in any other form of property, like
assignment by way of disposition, or pledge by way of encumbrance. (Philippine
Corporate Law, Villanueva, 2010 ed., p519)
Q: Are shares of stock considered as representation of interest of the
shareholder on the properties and assets of the corporations?
ANS: No. Although shares of stock represent aliquot parts of the corporations
capital, or the right to share in the proceeds when the remaining assets of the
corporation are distributed according to law and equity, the shareholder do not own
any part of the assets represented by the capital of the corporation; nor are the
stockholders entitled to the possession of any definite portion of the corporations
assets or properties. (Boyer-Roxas v. CA, G.R. No. 100866, July 14, 1992)
Subscription Agreements
Q: Can a shareholder rescind a subscription contract?
ANS: No. The rescission of the Pre-Subscription Agreement will effectively result in
the unauthorized distribution of capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code since
rescission is not one of the instances when distribution of capital assets and
property of the corporation is allowed. (Ong Yong v. Tiu, supra)
Q: Are subscription or purchase of stocks subject to the Statute of Frauds?
ANS: It depends whether it is a subscription or purchase of stocks. Shares of stock
are personal property of an intangible and incorporeal nature and are therefore
choses in action. Contracts for the sale of shares of stock are, consequently, within
the Statute. However, many cases hold that a subscription agreement relating to
shares not then in existence, is not a contract of sale, and therefore need not be in
writing. (A.K. Spielberger v. L. R. Nielson, G.R. No. L-47972, June 17, 1941)
Doctrine of Individuality of Subscription
Q: May a stock certificate be issued to the subscriber although he has not
paid the subscription fee in full?
ANS: No certificate of stock shall be issued to a subscriber until the full amount of
his subscription together with interest and expenses (in case of delinquent shares),
if any is due, has been paid. (Sec. 64, Corporation Code)
Consideration for Shares of Stock

Q: X, is a well-known movie actor. He wanted to become a shareholder of Y
corporation, a media company. In consideration for the subscription of
shares, he signed a movie star contract with Y corporation for an upcoming
movie production. Is X a shareholder?
ANS: No because the consideration for the subscription contract is invalid. Movie
star contracts cannot be accepted as payment for subscription inasmuch as the
services of movie starts are not yet considered as actually rendered as their
services would still be performed in the future. Only such services which have been
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actually rendered are acceptable subscription payment. (SEC Opinion dated
December 1, 1995)
Q: AA wanted to become a shareholder of BB Corporation. However, AA did
not have any cash to pay the subscription price. Instead, AA said that the
dividends that he will earn later from the stocks shall be used for payment of
the subscription price. Is the consideration valid?
ANS: No. The corporation cannot agree that the subscription price shall be paid
only through dividends that will be declared later. In effect, this stipulation obligates
the subscriber to pay nothing for the shares in contingency that dividends will not
be declared later. This is illegal and in fraud of credits. (National Exchange
Company v. Dexter, G.R. No. L-27872, February 25, 1928)
Watered Stock
Definition
Q: What is a watered stock?
ANS: A stock issued (1) for a consideration less than its par or issued value or (2)
for a consideration in any form other than cash, valued in excess of its fair value
Q: What are the kinds of watered stocks?
ANS: Watered stocks include:
a. Issued without consideration (bonus share).
b.
Issued as fully paid when the corporation has received a lesser

sum of money than its par or issued value (discount share).
c.
Issued for a consideration other than actual cash such as property

or services, the fair valuation of which is less than its par or issued
value.
d.
Issued as stock dividend when there are no sufficient retained

earnings to justify it.
Liability of directors for watered stocks

Q: Who are liable for the issuance of watered stock?
ANS: Any director or officer of a corporation (1) consenting to the issuance of
watered stocks or (2) having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate secretary (Sec. 65,
Corporation Code).
Q: What are liabilities of the directors or officers who issued the watered
stock?
ANS: They shall be solidarily liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value received at the
time of the issuance of the stock and the par or issued value of the same (Sec. 65,
Corporation Code).
Trust Fund Doctrine for liability for watered stocks
Q: Why is it prohibited to issue watered stocks?
ANS: The corporation has no power to receive a subscription upon such terms as
will operate as a fraud upon the other subscribers by subjecting the particular
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subscriber to lighter burdens, or by giving him greater rights and privileges, such as
watered stocks, as it will be a fraud upon creditors of the corporation by withdrawing
or decreasing the capital (National Exchange Company v. Dexter, supra).
Situs of the Shares of Stock
Q: Where is the situs of the shares of stock?
ANS: The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere. It is a
general rule that for purposes of execution, attachment and garnishment, it is not
the domicile of the owner of a certificate but the domicile of the corporation which is
decisive (Chua Guan v. Samahang Magsasaka, GR 42091, November 2, 1935).
Classes of Stock
Q: What are the classifications of stocks/shares of stocks?
ANS: The following are the different classifications of stock:
a. Common stock - the basic class of stock ordinarily and usually
issued without extraordinary rights and privileges, and are
considered voting stocks
b. Preferred stock - shares with a stated par value which entitle the
holder thereof to certain preferences over the holders of common
stock and may be non-voting stocks
c. Voting stock or non-voting stock - shares with or without the right
to vote.
d. Share-in-escrow - share subject to an agreement where the share
is deposited by the grantor with a third person to be kept by the
escrow agent until the performance of a certain condition or the
happening of a certain event (Cannon v. Handley, 12 Phil. 315).
e. Over-issued stock - stock issued in excess of the authorized
capital stock. Also known as spurious stock.
f.
Watered stock
g. Par value or no par value shares par value shares are those
stocks with a value fixed in the articles of incorporation and the
certificates of stock. If there is no value fixed in the articles of
incorporation and certificate of stock, then it is a no par value
share.
h. Convertible stock - a share that is changeable by the stockholder
from one class to another at a certain price and within a certain
period.
i.
Fractional stock - a share with a value of less than one full share.
j.
Founders stock
k. Redeemable stock
l.
Treasury stock
Q: Can common shares be deprived of voting rights?
ANS: No. Only preferred shares and redeemable shares may be removed of voting
rights (Sec. 6, Corporation Code).
Q: Can there be a preferred share with no par value?
ANS: No. Preferred shares may only be issued with a stated par value (Sec. 6,
Corporation Code)
Q: What is the purpose of preferred shares?
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ANS: The reason why there is an effort to extend such right is to make preferred
shares attractive to investors for they can remain as such and at the same time
enjoy certain advantages that are available to creditors (Philippine Corporate Law
Compendium, Aquino, 2011ed., p.108).
Q: Are both common and preferred stocks included in the determination of
the outstanding capital stock?
ANS: No. Only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights in the election of directors,
do not have any control over PLDT. (Gamboa v. Teves, G.R. No. 176579, June 28,
2011)
Q: Are non-voting shares completely prohibited from exercising voting
rights?
ANS: No. Under Sec. 6 of the Corporation Code, even non-voting shares may vote
on specific matters enumerated therein.
*see the full list on the topic of Elections of Directors or Trustees
Q: What are the limitations with respect to no par value shares?
ANS: The following are the limitations:
a. No par value shares cannot have an issued price of less than
P5.00;
b.
The entire consideration for its issuance constitutes capital so that

no part of it should be distributed as dividends;
c.
They cannot be issued as preferred stocks;
d.
They cannot be issued by banks, trust companies, insurance

companies, public utilities and building and loan association (BPITB);
e.
The articles of incorporation must state the fact that it issued no

par value shares as well as the number of said shares;
f.
Once issued, they are deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or
its creditors in respect thereto (Sec. 6, Corporation Code)
Q: What is a founders share?

ANS: It is a share classified as such in the articles of incorporation and issued to
organizers and promoters of a corporation in consideration of some supposed right
or property such as special preference in voting rights and dividend payments. BUT
if an exclusive right to vote and be voted for as director is granted, this privilege is
subject to approval by the SEC, and cannot exceed 5 years from the date of
approval (Sec. 7, Corporation Code).
Q: What is a redeemable share?
ANS: Shares of stocks issued by the corporation which said corporation can
purchase or take up from their holders as expressly provided for in the articles of
incorporation and certificate of stock representing said shares at a fixed date or at
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the option of the issuing corporation or the stockholder or both at a certain
redemption price. Redeemable shares may be non-voting shares. (Sec. 8,
Corporation Code).
Once the shares have been redeemed, they shall be retired shares which shall
form part of the capital and cannot be issued again unless otherwise provided in the
Articles of Incorporation.
Q: Which of the following statements are true?
1. Redeemable shares may be redeemed despite lack of
unrestricted retained earnings
2.
Redeemable shares may be redeemed despite the insolvency

of the corporation
ANS:
1.
True. Redeemable shares may be redeemed, regardless of the

existence of unrestricted retained earnings (Sec. 8, Corporation
Code).
2.
False. After redemption, the corporation should have assets in its

books to cover debts and liabilities inclusive of capital stock.
Redemption may not be made where the corporation is insolvent
or if such redemption shall cause insolvency. (Republic Planters
Bank v. Agana Sr., G.R. No. 51765, March 3, 1997)
Q: What are treasury shares?

ANS: Shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through
some other lawful means (Sec. 9, Corporation Code).
Q: Once the corporation has reacquired the treasury shares, are they
considered as retired shares?
ANS: Treasury shares are not retired shares. They do not revert to the unissued
shares of the corporation but are regarded as property acquired by the corporation
which may be reissued or resold at a price to be fixed by the Board of Directors
(SEC Rules Governing Redeemable and Treasury Shares, CCP No. 1-1982).
Q: Are treasury shares considered as voting stocks forming part of the
outstanding capital stock?
ANS: Treasury shares have no voting rights as long as they remain in treasury
(Sec. 57, Corporation Code). They are not included in the definition of outstanding
capital stock (Sec. 137, Corporation Code).
D. PAYMENT OF BALANCE OF SUBSCRIPTION
Q: Is a subscription contract valid even though the subscription fee was not
paid in full?
ANS: Yes. It is not required under the law that the whole fully paid. As long as a
part of the subscription fee is paid then the subscription is valid and binding.
Q: How can the corporation recover the payment of the balance of
subscription from the stockholders?
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ANS: There are two methods to enforcement payment of subscription price:
a. Delinquency sale (Sec. 68, Corporation Code)
b. Collection case through judicial action (Sec. 70, Corporation Code)
Call by Board of Directors
Q: What is a call by the board of directors?
ANS: A Call is the resolution or formal declaration of the board that the unpaid
subscriptions are due and payable.
Q: Must there always be a call for the corporation to declare unpaid
subscriptions as due and demandable?
ANS: No, it is not an absolute rule. If the subscription contract fixes the date for
payment, failure to pay on such date shall render the entire balance due and
payable with interest. Thirty days therefrom, if still unpaid, the shares become
delinquent, as of the due date, and subject to sale, unless the board declares
otherwise. In such instance, there is no need for a call.
If no date is fixed in the subscription contract, the board of directors can make the
call for payment, and specify the due date. (Sec. 67, Corporation Code)
Notice of requirement
Q: In case a call of the board of director is required, is a notice of call to the
stockholders mandatory?
ANS: The notice of call is mandatory. A mere demand is insufficient. The failure to
pay on such date shall render the entire balance due and payable with interest.
Thirty days (30) therefrom, if still unpaid, the shares become delinquent, as of the
date of call, and subject to sale, unless the board declares otherwise (Sec. 67,
Corporation Code).
Sale of delinquent shares
Q: What is a delinquency sale?
ANS: If the subscription contract fixes the date for payment or when there has been
a call by the board of directors and thirty (30) days therefrom, if still unpaid, the
shares become delinquent, as of the due date, and subject to sale, unless the
board declares otherwise. (Sec. 68, Corporation Code).
Effect of delinquency
Q: What are the effects of delinquency?
ANS: The following are the effects of delinquency:
a. It disqualifies the stockholder to be voted for or be entitled to vote
or to representation at any stockholders meeting;
b.
It disqualifies the stockholder to exercise any rights of a

stockholder except the right to dividends (note: cash dividends
shall first be applied to the unpaid balance while stock dividends
shall be withheld until the balance is fully paid), until and unless he
pays the amount due on his subscription with accrued interest and
the costs and expenses of advertisement, if any.
c.
The holders of delinquent shares shall not be entitled to notice of

the regular or special meeting of stockholders, nor shall the shares
be included in the determination of a quorum for shareholders
meetings.
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Call by resolution of the board of directors

Q: X, Y and Z are stockholders of Corporation S. They have unpaid
subscription fees amounting to P10M. On January 1, 2014, the board of
directors of Corporation S issued a call declaring that all unpaid
subscriptions are due and demandable. Can the corporation sell the unpaid
shares of X, Y and Z as delinquent shares?
ANS: No. The unpaid shareholders shares shall only be treated as delinquent
shares and sold by the corporation at a public auction to satisfy the unpaid
subscription fees after 30 days from the time of call. The mere fact only that there
was a call does not classify them as delinquent stocks. (Sec. 67, Corporation Code)
Notice of sale
Q: To whom should notice of sale delinquent stock be given?
ANS: After the board issued a resolution ordering the sale of delinquent stock,
notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general
circulation in the province or city where the principal office of the corporation is
located. (Sec. 68, Corporation Code)
Q: What is the purpose of notice of delinquency shares?
ANS: To give the holders of delinquent stocks the opportunity to pay the balance of
the before there has been an actual sale of the delinquent stocks.
Auction sale
Q: When is the auction sale made?
ANS: The delinquent stock shall be sold at the public auction to be held not less
than 30 days nor more than 60 days from the date the stocks become delinquent
Q: What are the rules in auction sale of delinquent shares?
ANS: The following are the rules:
a. The person participating in the delinquency sale who offers to pay the full amount
of the balance of the subscription together with the accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares.
b. If there is no bidder as mentioned above, the corporation may bid for the same,
and the total amount due shall be credited as paid in full in the books of the
corporation. Such shares shall be considered as treasury shares.
Q: In an auction sale for delinquent debts, is the corporation required to
accept the highest bidder?
ANS: No. The board is not bound to accept the highest bid unless the contrary
appears. Those who offer to pay the full amount of the balance of the subscription
shall be considered as valid bids by the corporation. (Sec. 67, Corporation Code)
E. CERTIFICATE OF STOCK
Q: What is a certificate of stock?
ANS: It is the paper representation or tangible evidence of the stock itself and of
the various interests therein. It is not essential to the ownership and/ or existence of
the share of stock. (Makati Sports Club v. Cheng, G.R. No. 178523, June 26, 2010
Nature of the certificate
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Q: What is the nature of a certificate of stock?
ANS: The certificate is not stock in the corporation but is merely evidence of the
holder's interest and status in the corporation, his ownership of the share
represented thereby, but is not in law the equivalent of such ownership. It
expresses the contract between the corporation and the stockholder, but is not
essential to the existence of a share in stock or the nation of the relation of
shareholder to the corporation (Tan v. SEC, G.R. No. 95696, March 3, 1992).
Q: Are certificates of stocks conclusive evidence on the ownership of

stocks?
ANS: No. The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine and is at
least prima facie evidence that it was legally issued in the absence of evidence to
the contrary. However, this presumption may be rebutted (Bitong v. CA, et al., GR
No. 123553, July 13, 1998).
Uncertificated Shares
Q: XX is a stockholder of YY Corporation, owning 100 shares. However, for
one reason or another, YY has not issued a certificate of stock to XX. Can XX
alienate his shares despite lack of the certificate of stock?
ANS: No, insofar as the corporation is concerned. Without stock a certificate, which
is the evidence of ownership of corporate stock, the assignment of corporate
shares is effective only between the parties to the transaction . The delivery of the
stock certificate, which represents the shares to be alienated, is essential for the
protection of both the corporation and its stockholders (Nava v. Peers Marketing,
G.R. No. L-28120, November 25, 1976).
Negotiability
Q: Are certificates of stocks considered as negotiable instruments?
ANS: No. It is well settled that the instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or defenses as the registered owner
or creditor may have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing estoppel (De Los
Santos v. McGrath, G.R. No. L-4818, February 28, 1955).
Q: Are certificates of stocks considered as quasi-negotiable instruments?
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ANS: Yes. Certificates of stocks are considered as "quasi-negotiable" instruments.
When the owner of these certificates signs the printed form of sale or assignment at
the back of every stock certificate without filling in the blanks provided for the name
of the transferee as well as for the name of the attorney-in-fact, the said owner, in
effect, confers on another all the indicia of ownership of the said stock certificates.
(Capco v. Macasaet, G.R. No. 90888 September 13, 1990). However, as stated
above, the transferee cannot have a better right against the registered owner of the
stocks.
Q: What is a street certificate?

ANS: When a stock certificate is endorsed in blank by the owner thereof, it
constitutes what is termed as "street certificate," so that upon its face, the holder is
entitled to demand its transfer into his name from the issuing corporation. Such
certificate is deemed quasi-negotiable, and as such the transferee thereof is
justified in believing that it belongs to the holder and transferor (Guy v. Guy, G.R.
No. 189486, September 5, 2012).
Q: Ned owns 100 shares of stock of WF Corporation. He was issued the

corresponding certificate. Ned signed the back of the stock certificate without
filling in the blanks provided for the name of the transferee. Subsequently,
Cersei stole the certificate and sold them to Jeff. It was unknown to Jeff that
the certificate was stolen. Can Jeff claim that he is the rightful owner of the
100 shares of stock?
ANS: No. Certificates of stock are not negotiable instruments; consequently, a
transferee under a forged assignment acquires no title which can be asserted
against the true owner, unless his own negligence has been such as to create an
estoppel against him. If the owner of the certificate has endorsed it in blank, and it
is stolen from him, no title is acquired by an innocent purchaser for value. The
great principle is that no one can be deprived of his property without his assent (De
Los Santos v. McGrath, Ibid).
Requirement for Valid Transfer of Stocks

Q: What are the requisites for a valid transfer of stock?
ANS: The following are the requisites for its validity:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner or his agent; and
c. To be valid to the corporation and third persons, the transfer must be duly
recorded in the books of the corporation (Rural Bank of Lipa v. CA, GR No.
124535, September 28, 2001).
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Q: What are the effects of an unregistered transfer of stock?

ANS: The following are the effects of unregistered transfer of shares
a. It is valid and binding as between the transferor and the transferee.
b. It is invalid as to the corporation EXCEPT when notice is given to the corporation
for purposes of registration.
c. It is invalid as against corporate creditors and the transferor is still liable to the
corporation.
d. It is invalid as to the attaching or executing creditors of the transferor, as well as
subsequent purchasers in good faith without notice of the transfer.
e. If there is no indorsement in favor of the transferee, the transferee may file an
action to compel the transferor to make such indorsement. However, the same
cannot be considered as an intra-corporate controversy because the transferee
is not yet a shareholder (Rivera, et al. v. Florendo, et al., GR No. L-57586,
October 8, 1996).
f.
Only absolute transfers need be registered. The pledge or mortgage itself need
not be recorded in the stock and transfer book, but a chattel mortgage must
comply with the Chattel Mortgage Law, and a pledge would require the shares to
be placed in the possession of the creditor/pledgee. The agreement must appear
in a public instrument to take effect against third persons (Chemphil v. CA, GR
Nos. 112438-39, December 12, 1995).
Q: Rob owns 100 shares of stock of WF Corporation. Later, he transferred his
shares to through a Deed of Assignment and an indorsed certificate of stock.
Jon went to the Corporate Secretary of WF. He demands (1) that the transfer
be recorded and (2) that the certificate of stock be issued under his name. Are
the demands of Jon proper?
ANS: No. Only the person in whose name the stock is registered, or the person
holding a power of attorney for that purpose from the registered owner of the stock
may demand the recording of a transfer of stock. It is only after recording of transfer
when the corporate secretary shall issue the certificate of stock to the transferee.
Jon did not have any Special Power of Attorney from Rob authorizing him to
register the transfer. (Ponce v. Alsons Cement, GR No. 139802, December 10,
2002).
Issuance
Q: What are the requisites for issuance of certificate of stock?
ANS: The following are the requisites for the issuance of a certificate of stock:
a. The certificate must be signed by the president or vice-president,
countersigned by the secretary or assistant secretary;
b. The certificate must be sealed with the seal of the corporation;
c. The certificate must be delivered;
d. The par value, as to par value shares or full subscription as to no
par value shares must first be fully paid;
e. The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the
stockholder (Bitong v. CA, et al., GR No. 123553, July 13, 1998).
Full Payment or Partial Payment
Q: What are the methods of payment of subscription fees?
ANS: In the absence of provisions in their by-laws to the contrary, a corporation
may apply payment made by, subscribers-stockholders, either:
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a.
b.
As full payment for the corresponding number of shares of stock, the par value of
each of which is covered by such payment; or
As payment pro-rata to each and all the entire number of shares subscribed for.
(Baltazar v. Lingayen Golf Electric, G.R. No. L-16236, June 30, 1965).
Note: The two alternatives cannot be availed of by the corporation at the same
time.
Q: What are the implications of the methods of payment of subscription fees

and issuance of certificates of stocks?
ANS:
a. Full payment If a corporation had chosen to apply payments by its stockholders
to a definite share of the capital stock and had fully paid stock certificates, its call
for payment of unpaid subscription and its declaration of delinquency shall only
affect the remaining shares for which has not been fully paid and only these have
been legally shorn of their voting rights by said declaration of delinquency
(Baltazar v. Lingayen Golf Electric, Ibid.).
Example: If there are 1000 shares of stock with par value of P1.00 each
and the shareholder paid P600, then the payment shall be applied to the
600 shares of stock and the remaining 400 shall be deemed unpaid.
b. Pro-rata The payments by the shareholders shall be applied not to a definite
share of capital stock but shall be distributed to the entire number of shares
subscribed for.
Example: If there are 1000 shares of stock with par value of P1.00 each
and the shareholder paid P600, then the payment shall be applied to the
whole 1000 shares of stock distributed pro-rata. The whole 1000 shares of
stock are deemed not fully paid.
Lost or destroyed certificates
Q: What is the procedure for the issuance of a new certificate of stock In lieu
of Lost, Stolen or Destroyed Ones
ANS:
a. Affidavit. The registered owner shall execute and file an affidavit regarding the
share and the circumstances regarding its loss;
b. Verification. The corporation shall verify the affidavit and other information and
evidence with the books of the corporation;
c. Publication. The corporation shall publish a notice in a newspaper of general
circulation published the place where the corporation has its principal office, once
a week for 3 consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed;
d. One Year Waiting Period. There shall be a waiting period of 1 year from the
date of the last publication during which a contest can be interposed;
e. Contest. If the contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of the new certificate of stock shall
be suspended until the final decision of the court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed; and
f.
Replacement. If there is no contest within the 1 year period, the corporation shall
then replace the certificate. The replacement of share can only be made before
the expiration of the 1 year period if a bond is posted (Sec. 73, Corporation
Code; Aquino, Philippine Corporate Law Compendium, 2011 ed.).
Q: Is the above procedure required when the certificate of stock was lost,
stolen or destroyed due to the fault or negligence of the corporation?
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ANS: No. The prescribed procedure does not apply to a case where the certificates
are in the companys possession when mislaid which thereby obligates the
corporation, not the stockholder, to suffer the consequences.
F. STOCK AND TRANSFER BOOK
Contents
Q: What are the contents of the stock and transfer book?
ANS: Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid on all stock
for which subscription has been made, and the date of payment of any installment;
a statement of every alienation, sale or transfer of stock made, the date thereof,
and by and to whom made; and such other entries as the by-laws may prescribe
Q: Where shall the stock and transfer book be kept?
ANS: The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at reasonable hours on
business days (Sec. 74, Corporation Code).
Who may make valid entries
Q: Who among the corporate officers can make a valid entry in the stock and
transfer book?
ANS: Only the CORPORATE SECRETARY. It is the Corporate Secretarys duty and
obligation to register valid transfers of stock and if said corporate officer refuses to
comply, the transferor-stockholder may rightfully bring suit to compel performance
Q: Between the Stock and Transfer Book and the General Information Sheet,
which is controlling?
ANS: In the absence of the certificate, the ownership of stocks may be shown by
the record thereof in the corporate books. But the mere inclusion of a person as a
shareholder in the General Information Sheet filed with the Commission is
insufficient proof that one is a shareholder in a corporation where there is no
certificate of stock in his name, nor any written document such as an assignment in
his favor, duly registered in the stock and transfer book of the corporation. As
between the GIS and the corporate books, the latter controls (Lao v. Lao, 567
SCRA 588 [2008]).
G. DISPOSITIONS AND ENCUMBRANCE OF SHARES
Allowable restrictions on the sale of shares
Q: What are the allowable restrictions on the sale of share?
ANS: The SEC has ruled that shares of stock in a corporation are personal
property and the owner thereof has an inherent right, as an incident of his
ownership, to transfer the same at will, and as such, the facility of transferring them
must not be hampered by imposing restrictions as would amount to restraint on free
alienation of property. However, as a matter of public policy, the SEC has allowed
reasonable restrictions on the transfer of shares in the AOI if the restrictions comply
with the provisions of Sec. 63 of the Corporation Code, namely, that the restriction
must appear in the AOI, by-laws and the certificate of stock, and that said
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restrictions shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated therein. (Philippine Corporate
Law, Villanueva, 2010 edition, p583)
Sale of partially paid shares
Q: What is the effect of a sale of shares which is only partially paid?
ANS: No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of corporation. Therefore, a corporation may
refuse to acknowledge and register a sale or assignment of shares which are not
fully paid, and may continue to hold the original subscriber liable on the payment of
the subscription. (Philippine Corporate Law, Villanueva, 2010 edition, p583)
Sale of a portion of shares not fully paid
Q: Suppose the subscribed shares have only been partially paid, what is the
effect if a portion of such partially paid shares are sold to another?
ANS: The SEC has opined that a stockholder who has not paid the full amount of
his subscription cannot transfer part of his subscription in view of the indivisible
nature of a subscription contract. The reason behind the principle is that it would be
applied as full payment for the corresponding number of shares which can only be
covered by such payment or as proportional payment to each and all of the entire
number of subscribed shares, and the difficulty in determining the unpaid balance to
be assumed by each transferee. (Philippine Corporate Law, Villanueva, 2010
edition, p584)
Sale of ALL shares not fully paid
Q: Suppose the subscribed shares have only been partially paid, what is the
effect if ALL of such partially paid shares are sold to another?
ANS: The SEC has opined that the entire subscription although not yet fully paid,
may be transferred to a single transferee, who as a result of the transfer must
assume the unpaid balance. Although the sale is binding between the parties, it
cannot be forced upon the corporation (Philippine Corporate Law, Villanueva, 2010
edition, p.584)
Sale of fully paid shares
Q: What is the effect of sale of fully paid shares?
ANS: No certificate of stock shall be issued to a subscriber until the full amount of
his subscription together with interest and expenses (in case of delinquent shares),
if any is due, has been paid. Thus, if there has been full payment, the shares can
be validly sold and shall be enforceable against the corporation (Sec. 64,
Corporation Code).
Requisites of a valid transfer
Q: What are the requisites for a valid transfer of shares?
ANS: In case of shares represented by a certificate, the transfer must strictly
comply with the following conditions:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner or his agent; and
c. To be valid to the corporation and third persons, the transfer must be duly
recorded in the books of the corporation (Rural Bank of Lipa v. CA, GR
No. 124535, September 28, 2001).
Involuntary dealings
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Q: Are involuntary dealings applicable to shares of stock?
ANS: The right of a stockholder to pledge, mortgage or otherwise encumber his
shares is recognized under Sec. 55 of the Corporation Code, which regulates the
manner of voting on pledged or mortgaged shares (Philippine Corporate Law,
Villanueva, 2010 edition, p.595). Thus, if a chattel mortgage is constituted and the
shares of stock are the security, the said shares of stock can be subject to a
foreclosure sale or other involuntary dealings.
X. DISSOLUTION AND LIQUIDATION

Q: What is dissolution?
ANS: Dissolution is the extinguishment of the corporate franchise and the
termination of corporate existence.
A. MODES OF DISSOLUTION
Voluntary
Q: What are the kinds of voluntary dissolution?
ANS: The following are the kind of voluntary dissolution:
a. Where no creditors are affected - Dissolution may be effected by majority
vote of the board of directors or trustees and by a resolution adopted by
the affirmative vote of the stockholders owning at least 2/3 of the
outstanding capital stock or of at least 2/3 of the members at a meeting
called for such purpose (Sec. 118, Corporation Code).
b. Where creditors are affected
i.
A petition shall be filed with the SEC;
ii. Signed by a majority of its board of directors or trustees or other
officers having management of its affairs;
iii. Verified by its president or secretary or one of its directors or
trustees;
iv. Shall set forth all claims and demands against it;
v. Resolved upon by the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock or by at
least 2/3 of the members at a meeting called for that purpose
c. Shortening of the corporate term by amending the Articles of Incorporation
- a voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term (Sec. 120, Corporation Code).
Q: When there is a voluntary liquidation were no creditors are affected,
publication is still required. Why?
ANS: The publication requirement is prescribed for the protection of unknown
creditors. There might be unknown creditors who could be prejudiced by dissolution
of the corporation.
Involuntary
Q: What are the kinds of involuntary dissolution?
ANS: The following are the kinds of involuntary dissolution:
a. By expiration of corporate term (Sec. 19, Corporation Code)
b. Failure to organize and commence business within 2 years from the date of
issuance of the Certificate of Incorporation (Sec. 121, Corporation Code).
However, the SEC has opined that the dissolution in this case is not automatic.
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c.
d.
The corporation continues to exist as such, notwithstanding its non-operational

status until the SEC orders its dissolution after notice and hearing.
Legislative Dissolution
SEC Dissolution, upon complaint and after notice and hearing, on the following
grounds:
i.The corporation was illegally organized;
ii. Continuous inactivity (subsequent to incorporation, organization and
commencement of business) for at least 5 years;
iii. Serious dissension in the corporation; or
iv. Commission by the corporation of illegal or ultra vires acts or violations
of the Code.
B. METHODS OF LIQUIDATION
Q: What is liquidation?
ANS: Liquidation is the process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate the payment of obligations to
creditors, and the remaining balance, if any, is to be distributed to the stockholders
or members.
Q: Does the corporation continue its corporate existence after dissolution?
ANS: A dissolved corporation continues to be a body corporate for 3 years from the
time it is dissolved for the purpose of liquidation or winding up its corporate affairs
Q: Who shall manage the liquidation of a corporation?
ANS: The following are allowed to manage the liquidation of the corporation
a. By the corporation itself - by the corporation itself through its board of directors/
trustees (Sec. 122, par. 1, Corporation Code).
b. Conveyance to a trustee within a 3-year period - by a trustee to whom the
corporate assets have been conveyed (Sec. 122, par. 2 Corporation Code).
c. By management committee or rehabilitation receiver - by a management
committee or rehabilitation receiver appointed by the SEC (Sec. 119, last par.
Corporation Code).
Q: After the 3-year period, can the corporation still continue its legal
existence?
ANS: Yes, provided that there is a trustee on behalf of the corporation. From and
after any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest (Sec. 122, Corporation Code). Thus, suits commenced before the
expiration of the 3-year period shall be continued by the trustee of the corporation
after the expiration of the said period. (Spouses Gelano v. CA, G.R. No. L-41537,
February 24, 1981).
XI. OTHER CORPORATIONS

A. CLOSE CORPORATIONS
Q: What is a close corporation?
ANS: A special kind of stock corporation whose articles of incorporation should
provide that:
a. the number of stockholders of record shall not exceed 20;
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b.
c.
d.
issued stocks are subject to transfer restrictions, with a right of

preemption in favor of the stockholders or the corporation; and
the corporation shall not be listed in the stock exchange or its stocks
should not be publicly offered; or
whose stocks, at least 2/3 of the voting stocks or voting rights of which
are not owned or controlled by another corporation which is not a close
Q: XX is a family corporation where Y owns 99.86% of the shares of stock.

However, it is not clear whether the other requirements of Sec. 96 are present.
Is XX a close corporation?
ANS: The mere ownership by a single stockholder or by another corporation of all
or capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personalities. So, too, a narrow distribution of ownership does
not, by itself, make a close corporation (San Juan Structural v. CA, G.R. No.
129459, September 29, 1998).
Characteristics of a close corporation
Q: What are the characteristics of a close corporation?
ANS: The following are the characteristics of a close corporation?
a. Stockholders may act as directors without need of election and therefore
are liable as directors;
b. Stockholders who are involved in the management of the corporation are
liable in the same manner as directors are;
c. Quorum may be greater than mere majority;
d. Transfers of stocks to others, which would increase the number of
stockholders to more than the maximum are invalid;
e. Corporate actuations may be binding even without a formal board
meeting, if the stockholder had knowledge or ratified the informal action of
the others;
f.
Preemptive right extends to all stock issues;
g. Deadlocks in board are settled by the SEC, on the written petition by any
stockholder; and
h. Stockholder may withdraw and avail of his right of appraisal.
Validity of restrictions on transfer of shares
Q: What are the conditions for the validity of restriction on the right to
transfer of shares in a close corporation?
ANS: The following are the conditions for the validity of restrictions on the right to
transfer shares:
a. Such restrictions must appear in the articles of incorporation and in the by-laws,
as well as in the certificate of stock; otherwise, they shall not be binding on any
purchaser thereof in good faith
b.
They shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring stockholders
with such reasonable terms, conditions or period stated therein (Sec. 98,
Corporation Code).
c.
Any transfer made should not result in exceeding the number of stockholders as
allowed by the Code (Sec. 99, Corporation Code).
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Q: What is the effect on the restriction after the expiration of period?
ANS: If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring stockholder
may sell his shares to any third person (Sec. 98, Corporation Code).
Issuance of transfer of stock in breach of qualifying conditions
Q: What are the different instances when there is an issuance or transfer of
stock in breach of qualifying conditions?
ANS: The following the instances:
a. If stock of a close corporation is issued or transferred to any person who
is not entitled under its the articles of incorporation to be a holder of its
stock, and if the certificate conspicuously shows the qualifications of
holders, such person is conclusively presumed to have notice of the fact
of his ineligibility to be a stockholder.
b. If the articles of incorporation states the number of persons, not
exceeding twenty (20) and if the certificate for such stock conspicuously
states such number, and if the issuance or transfer of stock to any person
would cause the stock to be held by more than such number of
persons, the person to whom such stock is issued or transferred is
conclusively presumed to have notice of this fact.
c. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates
the restriction (Sec. 99, Corporation Code).
Q: What is the consequence when there is an issuance or transfer of stock in
breach of qualifying conditions?
ANS: Whenever any person to whom stock of a close corporation has been issued
or transferred has, or is conclusively presumed under this section to have notice of
the violation on the restriction on the transfer of shares, the corporation may, at its
option, refuse to register the transfer of stock in the name of the transferee
When board meeting is unnecessary or improperly held
Q: In close corporations, what is the effect of lack of board meeting?
ANS: Unless otherwise provided by its By-Laws, any action by the directors of a
close corporation without a meeting shall be valid if:
a. Before or after such action is taken, written consent is signed by all the directors;
b. All the stockholders have actual or implied knowledge of the action and make no
prompt objection;
c. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders;
d. All the directors have express or implied knowledge of the action in question and
make no prompt objection thereto (Sec. 101, Corporation Code).
Pre-emptive right
Q: In close corporations, what is the extent of the pre-emptive right?
ANS: The pre-emptive right of stockholders in close corporations shall extend to all
stock to be issued, including reissuance of treasury shares, whether for money,
property or personal services, or in payment of corporate debts, unless the articles
of incorporation provide otherwise (Sec. 102, Corporation Code).
[Type text]
[Type text]
Amendment of Articles of Incorporation
Q: Can the articles of incorporation of a close corporation be amended in
order to make it an ordinary corporation?
ANS: Yes. Any amendment to the articles of incorporation which seeks to delete
any provision required by this Title or to reduce a quorum or voting requirement
shall not be valid unless approved by the affirmative vote of at least two-thirds (2/3)
of the outstanding capital stock, whether with or without voting rights, or of such
greater proportion of shares as may be specifically provided in the articles of
incorporation, at a meeting duly called for the purpose (Sec. 103, Corporation
Code).
Deadlocks
Q: What is a deadlock?
ANS: Deadlock is when the directors or stockholders are so divided respecting the
management of the business and affairs of the corporation that the votes required
for any corporate action cannot be obtained and as a result, business and affairs
can no longer be conducted to the advantage of the stockholders generally (Sec.
Q: What is the remedy in case of a deadlock?
ANS: The SEC, upon written petition by any stockholder, shall have the power to
arbitrate the dispute. In the exercise of such power, the SEC shall have authority to
a. Cancel or alter any provision in the articles of incorporation or by-laws;

b. Cancel, alter or enjoin any resolution of the corporation;
c. Direct or prohibit any act of the corporation;
d. Require the purchase at their fair value of shares of any stockholder either by
any stockholder or by the corporation regardless of the availability of unrestricted
retained earnings;
e. Appoint a provisional director;
f.
Dissolve the corporation; or
g. Grant such other relief as the circumstances may warrant.
B. NON-STOCK CORPORATION
Definition
Q: What is a non-stock corporation?
ANS: A non- stock corporation is one where no part of its income is distributable
as dividends to its members (Sec. 87, Corporation Code). Even if there is a
statement of capital stock, for as long as there is no distribution of retained earnings
to its members, the corporation is non-stock (Villanueva, Philippine Corporate Law,
2010ed.).
[Type text]
[Type text]
Q: Under the law, what are the requisites of a non-stock corporation?

a. It does NOT have capital stock divided into shares;
b. NO part of whose income is, during its existence, distributable as dividends to
its members, trustees, or officers; (Sec. 87, Corporation Code).
Purposes
Q: For what purposes may a non-stock corporation be formed?
ANS: A non-stock corporation may be formed on the following purpose: (CREPCFLS-SC-TIA-Like-Combi.)
a. Charitable,
b. Religious,
c. Educational,
d. Professional,
e. Cultural,
f.
Fraternal,
g. Literary,
h. Scientific,
i.
Social, Civic Service,
j.
Or similar purposes like trade, industry, agricultural and like
chambers, or any combination thereof.
Treatment of profits
Q: Can a non-stock corporation obtain profits?
ANS: Yes provided that any profit which it may obtain as an incident to its
operations shall, whenever necessary or proper, be used in furtherance of the
purpose or purposes for which it was organized (Sec. 87, Corporation Code).
Distribution of assets upon dissolution

Q: How shall the assets of a non-stock corporation distributed upon
dissolution?
ANS: The assets of a corporation shall be distributed in the following manner:
a. All liabilities and obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made therefore;
b. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;
c. Assets received by the corporation subject to limitations permitting their
use only for charitable, religious, benevolent, educational or similar
purposes, but not held upon a condition requiring return shall be
[Type text]
[Type text]
d.
e.
transferred to one or more corporations, societies or organizations

engaged in activities substantially similar to those of the dissolving
corporation
Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws,
In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as
may be specified in a plan of distribution (Sec. 94, Corporation Code).
Q: Can a non-stock corporation adopt a plan of distribution of its assets?

ANS: Yes. A plan providing for the distribution of assets, not inconsistent with the
provisions of this Title, may be adopted by a non-stock corporation in the process of
dissolution (Sec. 95, Corporation Code).
C. FOREIGN CORPORATIONS
Q: What is a foreign corporation?
ANS: A foreign corporation is one formed, organized or existing under any law
other than those of the Philippines and whose laws allow Filipino citizens and
corporation to do business in its own country or state (Sec. 123, Corporation Code).
The definition espouses the incorporation test and the reciprocity rule and is
significant for licensing purposes.
Bases of authority over foreign corporations
Consent
Q: Before a foreign corporation is allowed to have legal existence in a state,
must the consent of the state be secured?
ANS: Yes. The rule that requires reciprocity before a foreign corporation can be
recognized is a reflection of the basic rule that a foreign corporation is one which
owes its existence to the laws of another State and generally, it has no existence
within a State in which it is foreign.
Doctrine of Doing Business (Relate to definition under the Foreign
Investments Act, RA 7042)
Q: What is the doctrine of doing business?
ANS: Under the Foreign Investments Act, any act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization (Sec. 3d, Foreign Investment Act).
Q: According to Jurisprudence, what is the test of Doing or Transacting
Business in the Philippines?
ANS: Jurisprudence has adopted the twin characterization test involving the. A
substance and continuity test. A foreign corporation shall be considered as doing
business in the Philippines when:
a. Substance test - Whether the foreign corporation is maintaining or
continuing in the Philippines the body or substance of the business for
[Type text]
[Type text]
b.
which it was organized or whether it has substantially retired from it and

turned it over another; and
Continuity test - Whether there is continuity of commercial dealings and
arrangements, contemplating to some extent the performance of acts or
works or the exercise of some functions normally incident to and in
progressive prosecution of, the purpose and object of its organization
(Metholatum v. Mangaliman,G.R. No. L-47701, June 27, 1941)
Q What are the acts constituting as doing business?

ANS: The following are deemed acts constituting doing business:
a. Soliciting orders, service contracts, opening offices, whether called
liaison offices or branches;
b. Appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period or periods totaling 180 days or more;
c. Participating in the management, supervision or control of any
domestic business, firm or entity or corporation in the Philippines;
d. Any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or
of the purpose of the business organization (Sec. 3d, Foreign
Investment Act).
Q: What are the acts NOT constituting as doing business?
ANS: The following are such acts:
a. Mere investment as a shareholder in a domestic corporation
and/or the exercise of rights as such investor;
b. Appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its
own account;
c. Publication of a general advertisement through any print or
broadcast media;
d. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines;
e. Consignment by the foreign corporation of equipment with a local
company to be used in the processing of products for export;
f.
Collecting information in the Philippines; and
g. Performing services auxiliary to an existing isolated contract of
sale which are not on a continuing basis (Implementing Rules of
R.A. No. 7042).
Necessity of a license to do business
Q: Why is a license necessary for a foreign corporation doing business in the
Philippines?
ANS: The following are the reasons:
a. To place them under the jurisdiction of the courts;
b. To place them in the same footing as domestic corporations;
c. Protection for the public in dealing with said corporations
Requisites for issuance of a license
Q: What are the requisites for the issuance of a license?
[Type text]
[Type text]
ANS: A foreign corporation applying for a license to transact business in the
Philippines shall submit to the SEC the following:
a. A copy of its articles of incorporation and by-laws, certified in accordance
with law, and their translation to an official language of the Philippines, if
necessary.
b. An application for license under oath.
c. Attached to the application for license shall be a duly executed certificate
under oath by the authorized official, attesting to the fact that the laws of the
country allow Filipino citizens and corporations to do business therein.
d. The application shall be accompanied by a statement under oath of the
president of the corporation, showing that applicant is solvent and in sound
financial condition, and stating its assets and liabilities as of the date not
exceeding one (1) year immediately prior to the filing of the application.
e. Foreign banking, financial and insurance corporations shall, must also
comply with the provisions of existing laws applicable to them. In the case of
all other foreign corporations, no application for license to transact business
in the Philippines shall be accepted by the SEC without previous authority
from the appropriate government agency, whenever required by law (Sec.
Resident agent
Q: Who is a resident agent?
ANS: The following may be resident agents:
a. An individual, who must be of good moral character and of sound financial
standing, residing in the Philippines, OR
b.
A domestic corporation lawfully transacting business in the Philippines

designated in a written power of attorney by a foreign corporation authorized
to do business in the Philippines (Sec. 127, Corporation Code).
Q: What is the purpose of a resident agent?

ANS: Its purpose is to receive in behalf of the corporation notices, summons and
other legal processes in connection with actions against such corporation. A
resident agent cannot sign the certificate of non-forum shopping that is a
requirement for the filing of an initiatory pleading in court because while a resident
agent may be aware of actions filed against the principal, he may not be aware of
the actions initiated by the principal (Expert Travel & Tours Inc. v. CA, G.R. No.
152392, May 26, 2005).
Personality to sue
Q: May foreign corporations doing business in the Philippines without a
license sue in the courts?
ANS: No. Foreign corporations doing business in the Philippines without a license
must be held to be incapacitated to maintain the action a quo against private
respondent. The law does not allow foreign corporations or entities which conduct
regular business the access to courts without the fulfillment by such corporations of
the necessary requisites to be subjected to our government's regulation and
authority. By securing a license, the foreign entity would be giving assurance that it
will abide by the decisions of our courts, even if adverse to it (Eriks PTE v. CA, G.R.
No. 118843, February 6, 1997).
[Type text]
[Type text]
Q: Suppose a foreign corporation doing business in the Philippines without a
licensed sues before the court and the case was dismissed due to lack of
capacity. Does it constitute as res judicata? What is the remedy of the foreign
corporation?
ANS: Res judicata does not set in a case dismissed for lack of capacity to sue,
because there has been no determination on the merits. The remedy of the foreign
corporation is to subsequently acquire the required license and it will cure the lack
of capacity at the time of the execution of the contract (Home Insurance v. Eastern
Shipping Lines, G.R. No. L-34382, July 20, 1983).
Suability of Foreign Corporations
Q: Can foreign corporations doing business in the Philippines without a
licensed be sued before the courts?
ANS: Yes. Whether said business of the foreign corporation was being done legally
with the license of the Government or, perhaps illegally, without the benefit of any
such license, it shall be amenable to process and the jurisdiction of the local courts,
this for the protection of the citizens and accordingly judgment may be rendered
against said foreign corporation (General Corporation v. Union Insurance, G.R. No.
2684, September 14, 1950).
Instances when unlicensed Foreign Corporations may be allowed to sue
isolated transactions
Q: What are the instances when an unlicensed foreign corporation may be
allowed to sue?
ANS: The following are the instances:
a. To seek redress for an isolated business transaction;
b. To protect its corporate reputation, name, and goodwill;
c. To enforce a right not arising out of a business transaction, e.g. tort that occurred
in the Philippines;
d. When the parties have contractually stipulated that Philippines is the venue of
actions; and
e. When the party sued is barred by the principle of estoppel and/or principle of
unjust enrichment from questioning the capacity of the foreign corporation; and
f.
Recovery of misdelivered property.
Q: What is the doctrine of isolated business transaction?
ANS: The doctrine of isolated transactions states that foreign corporations, even
unlicensed ones, can sue or be sued on a transaction or series of transactions set
apart from their common business in the sense that there is no intention to engage
in a progressive pursuit of the purpose and object of business transaction (Eriks
Pte. Ltd v. CA, supra.).
Grounds for revocation of license
Q: What are the grounds for the revocation of a license?
ANS: The following are the grounds for the revocation of a license:
a. Failure to file annual reports required by the Code;
b. Failure to appoint and maintain a resident agent;
c. Failure to inform the SEC of the change of residence of the resident agent;
d. Failure to submit copy of amended articles of incorporation or by-laws or
articles of merger or consolidation;
e. A misrepresentation in material matters in reports;
f.
Failure to pay taxes, imposts and assessments;
g. Engage in business unauthorized by SEC;
[Type text]
[Type text]
h.
i.
Acting as dummy of a foreign corporation; and

Not licensed to do business in the Philippines (Sec. 134, Corporation Code).
XII. MERGER AND CONSOLIDATION

A. DEFINITION AND CONCEPT
Q: What is a merger?
ANS: A merger is the union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the combined
business.
Q: What is a consolidation?
ANS: A consolidation is the union of two or more existing corporations to form a
new corporation called the consolidated corporation.
B. CONSTITUENT V. CONSOLIDATED CORPORATION
Q: What is a constituent corporation?
ANS: Constituent corporations are the parties to the merger and consolidation.
Q: What is a consolidated corporation?
ANS: A consolidated corporation is a new corporation formed by virtue of a valid
consolidation.
Q: What is a surviving corporation?
ANS: A surviving corporation is the corporation which continues to exist after the
merger of the constituent corporations.
C. PLAN OF MERGER OR CONSOLIDATION
Q: What is a plan of merger or consolidation and what are its contents?
ANS: The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
process of the merger or consolidation and shall contain the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same
into effect;
3. A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation
as are deemed necessary or desirable. (Sec. 76, Corporation Code)
[Type text]
[Type text]
Q: After the filing of the plan of merger or consolidation to the SEC, may the
corporation still amend the plan of merger or consolidation?
ANS: Yes. The plan may still be amended before the same is filed with the SEC,
however, any amendment thereto must be approved by the majority vote of the
board members or trustees of the constituent corporations and affirmed by the vote
of 2/3 of the outstanding capital stockholders or members (Sec. 77, Corporation
Code).
D. ARTICLES OF MERGER OR CONSOLIDATION
Q: What is an article of merger or consolidation and what are its contents?
ANS: After the approval by the stockholders or members of the plan of merger or
consolidation, the articles of merger or articles of consolidation shall be executed by
each of the constituent corporations, to be signed by the president or vice-president
and certified by the secretary or assistant secretary of each corporation setting
forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and
against such plan, respectively (Sec. 78, Corporation Code).
Thus, the articles of merger or consolidation shall be charter of the surviving
corporation, in case of merger, or the consolidated corporation, in case of
consolidation.
E. PROCEDURE
Q: What is the procedure for the merger or consolidation of corporations?
ANS: The following is the procedure:
a. Approv
al
of
Plan
The
Board
of
each
corpor
ation
shall
draw
up
a
plan of
merger
or
consoli
dation;
[Type text]
[Type text]
[Type text]
b.
Submi
ssion
to
stockh
olders
or
memb
ers for
approv
al
The
plan of
merger
or
consoli
dation
shall
be
approv
ed by
vote of
stockh
olders
repres
enting
at
least
2/3 of
the
outsta
nding
capital
stock,
or
memb
ers in
case
of nonstock
corpor
ation
c.
Execut
ion of
formal
contra
ct
Article
s
of
Merger
or
Consol
idation
[Type text]
shall
be
execut
ed by
each
of the
constit
uent
corpor
ations,
signed
by the
Presid
ent or
VicePresid
ent
and
certifie
d
by
the
secret
ary or
assista
nt
secret
ary;
d.
[Type text]
Submi
ssion
to SEC
for
approv
al
Four
copies
of the
Article
s
of
merger
or
Consol
idation
shall
be
submit
ted to
the
SEC
for
approv
al; and
[Type text]
e.
Condu
ct
of
hearin
g
by
SEC
If,
upon
investi
gation,
the
SEC
has
reason
to
believe
that
the
propos
ed
merger
or
consoli
dation
is
contrar
y to or
inconsi
stent
with
the
provisi
ons of
this
Code
or
existin
g laws,
it shall
set a
hearin
g
(Sec.
76-79,
Corpor
ation
Code).
F. EFFECTIVITY
Q: When is the merger or consolidation deemed effective?
ANS: It depends:
a. If the SEC is satisfied that the merger or consolidation is not
inconsistent with the provisions of this Code and existing laws, it
[Type text]
[Type text]
shall issue a certificate of merger or consolidation, at which time
the merger or consolidation shall be effective.
b.
If, upon investigation, the SEC has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity to be
heard. The Commission shall thereafter proceed as provided in
this Code. (Sec. 79, Corporation Code)
G. LIMITATIONS
Q: What is the limitation with respect to the merger or consolidation of
corporations?
ANS: For a transaction to be regarded as a merger or consolidation within the
purview of this section, it must be undertaken for a bona fide business purposes
and not solely for the purpose of escaping the burden of taxation (RA 1921, an act
amending the NIRC)
H. EFFECTS
Q: When are the effects of merger or consolidation?
a. There is automatic assumption of the liabilities of the absorbed corporation
or constituent corporations which are dissolved.
b. The absorbed or constituent corporations are ipso facto dissolved by
operation of law without necessity of any further act or deed but there is no
winding up or liquidation of their assets for the surviving corporation
automatically acquires all the liabilities of the constituent corporation.
c. Permits the transfer of the assets to the purchaser and the distribution of the
consideration received in a single operation.
d. Involve exchanges of properties, a transfer of the assets of the constituent
corporations in exchange for securities in the new or surviving corporation
but neither involves winding up of the affairs of the constituent corporations.
e. Dissolution of the constituent corporations cannot be made to retroact to a
date prior to the ratification of the stockholders but the transfer of the assets
and liabilities of the constituent corporations could be made effective
retroactively as of the date the said board so resolved.
f.
Consent of the creditors not necessary (Sec. 80, Corporation Code).
SECURITIES REGULATION CODE (R.A. No.

8799)
I. STATE POLICY, PURPOSE
Q: What is the state policy or purpose of Securities Regulation Code (SRC)?
ANS: The following are the state policies or purposes:
1. To establish a socially conscious, free market that regulates itself,
2. To encourage the widest participation of ownership in enterprises
[Type text]
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3.
4.
5.
6.
7.
To enhance the democratization of wealth

To promote the development of the capital market
To protect investors
To ensure full and fair disclosure about securities; and
To minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create
distortions in the free market (Sec. 2, SRC).
II. SECURITIES REQUIRED TO BE REGISTERED

Q: What are securities?
ANS: Securities are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instruments, whether written or electronic in character (Sec. 3, SRC)
Q: What are the kinds of securities?
ANS: The following are kinds of securities:
1. Shares of stocks, bonds, debentures, notes,
evidence of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of interest or
participation in a profit-sharing agreement,
certificates of deposit for a future subscription
3. Fractional undivided interests in oil, gas, or
other mineral rights;
4. Derivatives like options and warrants
5. Certificates of assignments and participation,
trust certificates, voting trust certificates or
similar instruments;
6. Proprietary or non-proprietary membership
certificates in corporations;
7. Other instruments as may be in the future
determined by the SEC (Sec. 3, SRC).
Q: Is the list of securities stated in Sec. 3 exclusive?
ANS: No. The term securities embodies a flexible rather than static principle, one
that is capable of adaptation to meet the countless and variable schemes devised
by those who seek to use the money of others on the promise of profits (Gabionza
v. CA, G.R. No. 161057, 12 September 2008).
Q: What is an investment contract? (Bar 2010)
ANS: An investment contract means a contract, transaction or scheme whereby a
person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others. (Rule 3.1, IRR of SRC)
Q: Must securities be registered with the SEC?
ANS: Yes. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the
Commission. Prior to such sale, information on security shall be made available to
each prospective purchaser (Sec. 8, SRC).
Q: Why is it required to register securities before they can be sold or traded
with the public?
[Type text]
[Type text]
ANS: A primary means of protecting the investing public is the disclosure of the
important financial information through the registration of securities. This
information enables investors to make informed judgments about whether to
purchase a corporations securities (Securities Regulation Code, Dizon, 2011ed.
pp.69-70).
A. EXEMPT SECURITIES
Q: What are exempt securities?
ANS: The following are exempt securities:
1. Any security issued or guaranteed by the Government of the Philippines, or by any
political subdivision or agency thereof, or by any person controlled by and acting
as an instrumentality of said Government.
2. Any security issued or guaranteed by the government of any country within which
the Philippines maintains diplomatic relations, or by any state, province or
political subdivision or agency thereof on the basis of reciprocity.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the
proper adjudicatory body.
4. Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing
and Land Use Regulatory Board, or the Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
6. Any securities added by the SEC by rule or regulation after public hearing (Sec. 9,
SRC)
B. EXEMPT TRANSACTIONS
Q: What are exempt securities?
ANS:
1. Judicial sale by executor, administrator, guardian/receiver in insolvency or
bankruptcy.
2. Sale of pledged or mortgaged security to liquidate a bona fide debt.
3. Sale on isolated transactions by owner.
4. Distribution of stock dividends.
5. Sale of capital stock exclusively to stockholders where no commission is
paid.
6. The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, where the entire mortgage are sold to a single
purchaser at a single sale.
7. Issuance of security in exchange of any security from same issuer pursuant
to right of conversion.
8. Brokers transactions
9. Pre-incorporation subscription and subscription pursuant to an increase of
the ACS.
10. Exchange of securities by issuer with existing security holders exclusively
11. Sale to less than 20 persons during any 12- month period
12. Sale of securities to banks, registered investment house, insurance
companies, pension fund or retirement plan maintained by the government
or other persons authorized by the BSP to engage in trust functions. (Sec.
10, SRC)
III. PROCEDURE FOR REGISTRATION OF

SECURITIES
Q: What is the procedure for the registration of securities?
[Type text]
[Type text]
ANS: The following are the steps for registration:
1. Filing by the issuer in the main office of the Commission of:
a. Sworn registration statement with respect to such securities, in such form and
containing such
information and documents as the Commission shall
prescribe.
b. Prospectus required or permitted to be delivered
c. Information shall include the effect of the securities issue on ownership, on the
mix of ownership, esp. foreign and local ownership
d. Registration statement shall be signed by the issuers executive officer, its
principal operating officer, its principal financial officer, its comptroller, principal
accounting officer, its corporate secretary or persons performing similar
functions
e. Duly verified resolution of the board of directors of the issuer corporation.
2. Pay to the Commission a fee of not more than 1/10 of one per centum (1%)
of the maximum aggregate price at which such securities are proposed to be
offered. The Commission shall prescribe by rule diminishing fees in inverse
proportion to the value of the aggregate price of the offering.
3.
Notice of the filing of the registration statement shall be immediately

published by the issuer, at its own expense, in two (2) newspapers of
general circulation in the Philippines, once a week for two (2) consecutive
weeks.
4.
Within 45 days after the date of filing of the registration statement, or by

such later date to which the issuer has consented, the Commission shall
declare the registration statement effective or rejected,
5.
Commission shall enter an order declaring the registration statement

effective. The Commission may impose such terms and conditions as may
be necessary or appropriate for the protection of the investors.
6.
The issuer shall state under oath in every prospectus that all registration
requirements have been met and that all information are true and correct as
represented by the issuer or the one making the statement. Any untrue
statement of fact or omission to state a material fact required to be stated
therein or necessary to make the statement therein not misleading shall
constitute fraud.
IV. PROHIBITIONS ON FRAUD, MANIPULATION

AND INSIDER TRADING
A. MANIPULATION OF SECURITY PRICES
Q: What are the manipulative practices that are prohibited?
ANS: It shall be unlawful for any person acting for himself or through a dealer or
broker, directly or indirectly:
1. To create a false or misleading
appearance of active trading in any
listed security traded in an
Exchange or any other trading
market
[Type text]
[Type text]
a.
b.
c.
a. By
effecting
any
transaction in such
security
which
involves no change in
the
beneficial
ownership thereof;
b. By entering an order
or orders for the
purchase or sale of
such security with the
knowledge
that
a
simultaneous order or
orders of substantially
the same size, time
and price, for the sale
or purchase of any
such security, has or
will be entered by or
for the same or
different parties; or
c. By performing similar
act where there is no
change in beneficial
ownership.
2. To effect, alone or with others, a
series of transactions in securities
that:
Raises their price to induce the purchase of a security, whether of the
same or a different class of the same issuer or of a controlling,
controlled, or commonly controlled company by others;
Depresses their price to induce the sale of a security, whether of the
same or a different class, of the same issuer or of a controlling,
controlled, or commonly controlled company by others; or
Creates active trading to induce such a purchase or sale through
manipulative devices such as marking the close, painting the tape,
squeezing the float, hype and dump, boiler room operations and such
other similar devices.
3. To
circulate
or
disseminate
information that the price of any
security listed in an Exchange will
or is likely to rise or fall
4. To make false or misleading
statement with respect to any
material fact, which he knew or had
reasonable ground to believe was
so false or misleading
5. To effect, either alone or others,
any series of transactions for the
purchase and/or sale of any
security traded in an Exchange for
the purpose of pegging, fixing or
stabilizing the price of such
security, unless allowed by this
[Type text]
[Type text]
6.
Code or by rules of the

Commission.
No person shall use or employ, any
manipulative or deceptive device or
contrivance. Neither shall any short
sale be effected nor any stop-loss
order be executed in connection
with the purchase or sale of any
security except in accordance with
such rules and regulations as the
Commission may prescribe (Sec.
24, SRC).
B. SHORT SALES
Q: What are short sales?
ANS: A short sale is a contract for sale of shares of stock which the seller does not
own, or certificates which are not within his control, so as to be available for
delivery at the time when delivery must be made.
Q: What is the Mandatory Close Out Rules?
ANS: A contract involving a short sale which has not resulted in a delivery by the
Broker Dealer within the settlement period must be closed by the Broker Dealer by
purchasing for cash or guaranteed delivery securities of like kind and quantity on
the next business day after settlement date, unless such purchase cannot be
effected within said period for justifiable reasons in which case, notification in
writing shall be made with the Exchange and the Commission (Rule 24.2, IRR of
SRC)
Q: What is the limitation on short sales with respect to directors, officers or
principal stockholders?
ANS: No director, officer or principal stockholder of a corporation shall make a short
sale in securities of the corporation in which he is a director, officer or principal
stockholder (Rule 24.2, IRR of SRC).
C. FRAUDULENT TRANSACTIONS
Q: What are the fraudulent transactions prohibited under transactions of
securities?
ANS: It shall be unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:
1. Employ any device, scheme, or artifice to defraud;
2. Obtain money or property by means of any untrue statement of a material fact
of any omission to state a material fact necessary in order to make the
statements made not misleading;
3. Engage in any act, transaction, practice or course of business which operates
or would operate as a fraud or deceit upon any person (Sec. 26, SRC).
D. INSIDER TRADING
Q: Who is an insider?
ANS: An Insider means:
1. The issuer;
2. A director or officer (or any person performing similar
functions) of, or a person controlling the issuer;
[Type text]
[Type text]
3.
4.
5.
A person whose relationship or former relationship to the

issuer gives or gave him access to material information about
the issuer or the security that is not generally available to the
public;
A government employee, director, or officer of an exchange,
clearing agency and/or self-regulatory organization who has
access to material information about an issuer or a security
that is not generally available to the public; or
A person who learns such information by a communication
from any forgoing insiders (Sec. 3, SRC).
Q: What is insider trading?

ANS: The following constitute insider trading:
1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in
possession of material information with respect to the issuer or the security
that is not generally available to the public, unless:
a. The insider proves that the
information was not gained from
such relationship; or
b. If the other party selling to or
buying from the insider (or his
agent) is identified, the insider
proves:
i. That he disclosed
the information to
the other party, or
ii. That he had reason
to believe that the
other
party
otherwise is also in
possession of the
information.
2. It shall be unlawful for any insider to communicate material non-public
information about the issuer or the security to any person who, by virtue of the
communication, becomes an insider if the insider communicating the info has
reason to believe that such person will likely buy or sell a security of the issuer
while in possession of such information.
3. It shall be unlawful where a tender offer has commenced or is about to
commence for:
a. Any person (other than
the tender offeror) who
is in possession of
material
non-public
information relating to
such tender offer to buy
and sell securities;
b. Any tender offeror,
those acting on its
behalf, the issuer of the
securities sought or to
be sought by such
tender offer, and any
insider of such issuer to
[Type text]
[Type text]
communicate material
non-public information
relating to the tender
offer to any other
person where such
communication is likely
to result in a violation of
Subsection 27.4 (a)(i).
Q: When is information considered as material non-public?
ANS: Information is considered material non-public if:
a. It has not been generally
disclosed to the public and
would likely affect the market
price of the security after being
disseminated to the public and
the lapse of a reasonable time
for the market to absorb the
information; or
b. Would be considered by a
reasonable person important
under the circumstances in
determining his course of
action whether to buy, sell or
hold a security (Sec. 27, SRC)
Q: When an insider sells securities, what is the presumption?
ANS: A sale of a security made by an insider or such insiders spouse or relatives
by affinity or consanguinity within the second degree, legitimate or common-law,
shall be presumed to have been effected while in possession of material non-public
information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time
for the market to absorb such information. (Sec. 27, SRC)
Q: Is there an exception to the presumption that an insider sells securities
while holding material non-public information?
ANS: Yes. There is an exception upon a showing by the purchaser or seller that he
was not aware of the material non-public information at the time of the purchase or
sale (Sec. 27, SRC).
V. PROTECTION OF INVESTORS
A. TENDER OFFER RULE
Q: What is the tender offer?
ANS: The tender offer is a publicly announced intention by a person acting alone or
in concert with other persons to acquire equity securities of a public company (Rule
19.1, IRR of SRC)
Q: What is a public company under the SRC?
ANS: A public company can either be:
1. A corporation listed in an exchange; or
[Type text]
[Type text]
2.
A corporation with assets of at least fifty million pesos (50,000,000.00) and

having two hundred (200) or more stockholders holding at least one hundred
shares each (Sec. 19, SRC; Rule 3, IRR of SRC).
Q: What is the purpose of the tender offer rule?

ANS: A tender offer is an offer by the acquiring person to the stockholders of a
public company for them to tender their shares therein on the terms specified in the
offer. Tender offer is in place to protect minority shareholders against any scheme
that dilutes the share value of their investments. It gives the minority shareholders
the chance to exit the company under reasonable terms, giving them the
opportunity to sell their shares at the same price as those of the majority
shareholders. (Securities Regulation Code, Dizon, 2011ed. p.126)
Q: When is the tender offer rule mandatory? (2010 Bar)
ANS: The tender offer rule shall be mandatory in the following acquisitions:
1. Any person or group of persons acting in concert, who intends to acquire thirtyfive percent (35%) or more of equity shares in a public company pursuant to an
agreement made between or among the person and one or more sellers;
2. Any person or group of persons acting in concert, who intends to acquire thirtyfive percent (35%) or more of equity shares in a public company in one or more
transactions within a period of twelve (12) months; or
3. If any acquisition of even less than thirty-five percent (35%) would result in
ownership of over fifty one percent (51%) of the total outstanding equity
securities of a public company. (Rule 19, IRR of SRC)
Q: Union Mines, Inc. has total assets of P60 million with 210 stockholders
holding at least 100 shares each. The company has two principal
stockholders, ABC which owns 60% of the shares of stock, and XYZ which
owns 17%. ABC in turn is owned to the extent of 21.31% by Acme, Inc.;
29.69% by Golden Boy, Inc.; 9% by XYZ; and the rest by individual
stockholders. None of the parties is a publicly-listed company. XYZ now
proposes to buy Acmes and Golden Boys shares in ABC, which would give
it direct control of ABC and indirect control of Union Mines. Is the proposed
acquisition by XYZ subject to the mandatory tender offer rule? Why or why
not? (2010 Bar)
ANS: The acquisition is subject to the mandatory tender offer rule. First, Union
Mines is a public company because it has at least P50M assets with at least 200
stockholder holding at least 100 shares each which makes it subject to the tender
offer rule. Second, the coverage of the mandatory tender offer rule covers not only
direct acquisition but also indirect or any type of acquisition. Before the proposed
acquisition, X owns 17% of Union Mines and 9% of ABC, in turn ABC owns 60% of
Union Mines. Using the grandfather rule, 9% of 60% is 5.4%. Thus, X owns 22.4%
(17%+5.4%) of Union Mines. Due to the proposed acquisition, X will now
additionally own, based on the grandfather rule, 30% of the shares of Union Mines
([21.31%+29.69%]*60%). Hence, if the proposed acquisition pushes through, the
total ownership of X is 52.4% (22.4%+30%) of Union Mines. Under Rule 19, IRR of
SRC, this is subject to the Mandatory Tender Offer Rule.
Q: What is the difference between proxy solicitation and proxy validation?
ANS: Proxy solicitation involves the securing and submission of proxies, while
proxy validation concerns the validation of such secured and submitted proxies.
Proxy solicitation is a procedure that antecedes proxy validation (GSIS v. SEC,
supra).
[Type text]
[Type text]
B. RULES ON PROXY SOLICITATION

Q: What are the rules on proxy solicitation?
ANS: The following are the rules on proxy solicitation in connection with securities:
1. Proxies must be issued and proxy solicitation must be made in accordance
with rules and regulations to be issued by the Commission;
2. Must be in writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the corporate
secretary.
3. Valid only for the meeting for which it is intended, unless provided in the
proxy. No proxy shall be valid and effective for a period longer than five (5)
years at one time.
4. No broker or dealer shall give any proxy authorization, in respect of any
security carried for the account of a customer, to a person other than the
customer, without the express written authorization of such customer.
5. A broker or dealer who holds or acquires the proxy for at least 10% or such
percentage as the Commission may prescribe of the outstanding share of
the issuer, shall submit a report identifying the beneficial owner within ten
(10) days after such acquisition, to the issuer of the security, to the
Exchange where the security is traded and to the Commission.
C. DISCLOSURE RULE
Q: What is the disclosure rule?
ANS: All companies, listed or applying for listing, are required to divulge truthfully
and accurately, all material information about themselves and the securities they
sell for the protection of the investing public and under pain of administrative,
criminal and civil sanctions (PSE v. CA, G.R. No. 126549, 27 October 2007). Thus,
Sec. 8 of the law, which requires disclosure of all material information during
registration, embodies the disclosure rule.
Q: Aside from Sec. 8, what other provisions of the SRC embodies the Full
Material Disclosure Rule?
ANS: Sec. 30 and 36 of the RSA (now Sec. 27 and Sec. 23 respectively of the
SRC) were enacted to promote full disclosure in the securities market and prevent
unscrupulous individuals, who by their positions obtain non-public information, from
taking advantage of an uninformed public. No individual would invest in a market
which can be manipulated by a limited number of corporate insiders. Such reaction
would stifle, if not stunt, the growth of the securities market. To avert the occurrence
of such an event, Sec. 30 of the Revised Securities Act prevented the unfair use of
non-public information in securities transactions, while Sec. 36 allowed the SEC to
monitor the transactions entered by corporate officers/directors as regards the
securities of their companies (SEC v. Interport, G.R. No. 135808, October 6, 2008).
VI. CIVIL LIABILITY

Q: Under the SRC, when do civil liabilities arise?
ANS: Civil Liability arises:
1. On account of false registration statement (Sec. 56).
2. Sale of security in violation of registration requirements (Sec. 57).
3. Sale of security by mean of prospectus or communication with untrue
statement (Sec. 57).
4. For fraud in connection with securities transaction (Sec. 58).
5. For manipulation of security prices (Sec. 59).
[Type text]
[Type text]
6.
7.
With respect to commodity futures contracts and pre-need plans (Sec. 60).
On account of insider trading (Sec. 61).
Q: Under the SRC, is mere presence of negligence sufficient to hold a person

accountable for civil liabilities?
ANS: No. To constitute violation of the securities law, fraud or deceit, not mere
negligence, on the part of the offender must be established (SEC v. CA, G.R. No.
10643132, 21 July 1995).
BANKING LAWS
I. THE NEW CENTRAL BANK ACT (RA 7653)

A. STATE POLICIES
Q: What is the state policy under the New Central Bank Act (NCBA)?
ANS: The State shall maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this
policy, and considering its unique functions and responsibilities, the central
monetary authority established under this Act, while being a government-owned
corporation, shall enjoy fiscal and administrative autonomy (Sec. 1, NCBA).
B. CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP)
Q: What is the Central Monetary Authority of the Philippines?
ANS: The Bangko Sentral ng Pilipinas. There is hereby established an independent
central monetary authority which shall be a body corporate known as the Bangko
Sentral ng Pilipinas, herein referred to as the Bangko Sentral (Sec. 2, NCBA).
Q: Which body has the power of supervision and examination over banks?
ANS: The BSP. The states central monetary authority charged with the
responsibility of administering the monetary, banking and credit system of the
country and is granted the power of supervision and examination over bank and
non-bank financial institutions performing quasi-banking functions, including
savings and loan associations (Busuego v. CA, GR No. L-48955, June 30, 1987).
C. RESPONSIBILITY AND PRIMARY OBJECTIVE
Q: What are the responsibilities of the BSP?
ANS: The following are the responsibilities of the BSP:
1. Provide policy directions in the areas of money, banking, and
credit.
2. Supervise the operations of banks
3. Exercise such regulatory powers as provided in this Act and other
pertinent laws over the operations of finance companies and nonbank financial institutions performing quasi-banking functions and
institutions performing similar functions (Sec 3, NCBA).
D. MONETARY BOARD POWERS AND FUNCTIONS
Q: What are the corporate powers of the BSP?
ANS: The following are the powers of the BSP: (SCP-SPAL)
a.
[Type text]
To adopt, alter and use a corporate

Seal which shall be judicially noticed;
[Type text]
b.
To enter into Contracts;
c.
To lease, own, and sell or otherwise

dispose of its real and personal
Property;
d.
To Sue and be sued;
e.
To do and Perform such other

necessary or proper powers to carry
out purposes of NCBA (Sec. 5);
f.
To acquire and hold such Assets and

incur such liabilities in connection with
its operations or as are essential to
the proper conduct of operation;
g.
To compromise, condone, or release,

in whole or in part, any claim of, or
settled Liability to the BSP, regardless
of the amount involved, under such
terms and conditions as may be
prescribed by the MB.
Q: What are the functions of the BSP in order to exercise its power?
ANS: The following are the functions of the BSP:
a.
To issue rules and regulations necessary for the effective discharge of
responsibilities and exercise of powers vested upon the BSP and
Monetary Board;
b.
To direct the management, operations, and administration of the

Bangko Sentral, reorganize its personnel, and issue rules and
regulations for this purpose;
c.
To establish a human resource management system;
d.
To adopt an annual budget for and authorize such expenditures by the

Bangko Sentral as are in the interest of the effective administration
and operations of Bangko Sentral in accordance with applicable laws
and regulations; and
e.
To indemnify its members for expenses and costs incurred in

connection with any civil or criminal action, suit or proceedings to
[Type text]
[Type text]
which he is made a party by reason of the performance of his
functions, unless he is finally adjudged in such proceeding to be liable
for negligence or misconduct. (Sec. 15, NCBA)
E. HOW THE BSP HANDLES BANKS IN DISTRESS

Conservatorship
Q: What is conservatorship?
ANS: Conservatorship is a process to preserve the assets and restore the viability
of the financially precarious bank (Producers Bank v. NLRC, G.R. No. 100701,
March 28, 2001).
Q: When is there a conservatorship of bank or quasi-bank?
ANS: Whenever, on the basis of a report submitted by the appropriate supervising
or examining department, the Monetary Board finds that a bank or quasi-bank is:
a. In a state of continuing inability; or
b. Unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of
depositors and creditors.
A conservator appointed by the Monetary Board may take over without the need
of first declaring the bank insolvent (Sec. 29, NCBA).
Q: What are the steps undertaken in conservatorship?

ANS: The following are the steps to be taken:
1. The Monetary Board may appoint a conservator with
such powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities, and the
management thereof, reorganize the management,
collect all monies and debts due said institution, and
exercise all powers necessary to restore its viability. The
conservator shall report and be responsible to the
Monetary Board and shall have the power to overrule or
revoke the actions of the previous management and
board of directors of the bank or quasi-bank.
2. The Monetary Board shall terminate the conservatorship
when it is satisfied that the institution can continue to
operate on its own and the conservatorship is no longer
[Type text]
[Type text]
necessary. The conservatorship shall likewise be
terminated should the Monetary Board, on the basis of
the report of the conservator or of its own findings,
determine that the continuance in business of the
institution would involve probable loss to its depositors or
creditors, in which case the provisions of Sec. 30 shall
apply.
Closure
Q: What is the Close now, Hear later scheme?
ANS: In cases of existence of the grounds for receivership, the Monetary Board
may summarily and without need for prior hearing forbid the institution from doing
business in the Philippines and designate the PDIC as receiver (Sec. 30, NCBA)
Q: Is the Close now, Hear later scheme a valid practice?
ANS: Yes. There several reasons behind the law:
1. To prevent unwarranted dissipation of the banks assets and as a valid
exercise of police power to protect the depositors, creditors,
stockholders and general public. Due process does not necessarily
require prior hearing; a hearing or an opportunity to be heard may be
subsequent to the closure. (Central Bank v. CA, No. L-21146,
September 20, 1965, Rural Bank of San Miguel Inc. v. Monetary Board,
GR No. 150886, February 16, 2007); and,
2. To require previous hearing would not only be impractical but would
tend to defeat the very purpose of the law when it invested the
Monetary Board with such authority (Rural Bank of Lucena v. Arca, No.
L-21146, September 20, 1965).
Q: What is the remedy of the stockholders of a bank that was subject to
closure?
ANS: Actions of the MB taken under Sec. 29 or 30 shall be final and executory and
may not be restrained or set aside except on petition for certiorari by stockholders
owning a majority of the shares on the ground that the action taken was in excess
of jurisdiction or with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. Stockholders owning a majority of the shares are expected to be
more objective in determining whether the resolution is plainly arbitrary and issued
in bad faith (Sec. 30, NCBA; Central Bank v. CA, GR No. 76118, March 30, 1993).
Receivership
Q: What is a receivership?
ANS: When a bank is declared insolvent, it shall be placed under receivership. A
receiver then takes control and possession of its assets for the benefit of the banks
creditors. After the period of receivership, the Central Bank, through the Monetary
Board, determines whether to proceed with the liquidation and terminate its
existence or reorganization of the financially distressed bank and continue its
operation (Sps. Larrobis v. Philippine Veterans Bank, G.R. No. 135706, October 1,
2004).
Q: When is a bank or quasi-bank placed under receivership?
ANS: The bank or quasi-bank shall be placed under receivership whenever, upon
report of the head of the supervising or examining department, the Monetary Board
[Type text]
[Type text]
finds that a bank or quasi-bank:
1. Is unable to pay its liabilities as they become due in the ordinary course
of business: Provided, That this shall not include inability to pay caused
by extraordinary demands induced by financial panic in the banking
community;
2. Has insufficient realizable assets, as determined by the Bangko Sentral,
to meet its liabilities; or
3. Cannot continue in business without involving probable losses to its
depositors or creditors; or
4. Has willfully violated a cease and desist order under Sec. 37 that has
become final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior hearing forbid the
institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking
institution (Sec. 30, NCBA).
Q: What are the steps undertaken in a receivership?
ANS: The following steps shall be observed when a bank or quasi-bank is placed
under receivership:
Liquidation
[Type text]
1.
The receiver shall immediately gather and take

charge of all the assets and liabilities of the
institution, administer the same for the benefit of its
creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall
not, with the exception of administrative
expenditures, pay or commit any act that will involve
the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit
or place the funds of the institution in nonspeculative investments.
2.
The receiver shall determine as soon as possible,

but not later than ninety (90) days from take over,
whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may
be permitted to resume business with safety to its
depositors and creditors and the general public:
Provided, That any determination for the resumption
of business of the institution shall be subject to prior
approval of the Monetary Board.
3.
If the institution cannot be rehabilitated then

liquidation will take place (Sec. 30, NCBA).
[Type text]
Q: What are the grounds for liquidation?
ANS: The following are the grounds for liquidation:
1.
The condition of the bank is one of insolvency or that its continuance would
involve probable loss to its depositors and creditors.
2.
A determination by the MB that the bank cannot be rehabilitated.
Q: What are the steps undertaken in liquidation of a bank or quasi-bank?

ANS: If the receiver determines that the institution cannot be rehabilitated or
permitted to resume business, the Monetary Board shall notify in writing the board
of directors of its findings and direct the receiver to proceed with the liquidation of
the institution. The receiver shall:
[Type text]
1.
File ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In
case of quasi-banks, the liquidation plan shall be adopted by
the Monetary Board.
2.
Upon acquiring jurisdiction, the court shall, upon motion by

the receiver after due notice, adjudicate disputed claims
against the institution, assist the enforcement of individual
liabilities of the stockholders, directors and officers, and
decide on other issues as may be material to implement the
liquidation plan adopted. The receiver shall pay the cost of the
proceedings from the assets of the institution.
3.
Convert the assets of the institutions to money, dispose of the

same to creditors and other parties, for the purpose of paying
the debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code of
the Philippines and he may, in the name of the institution, and
with the assistance of counsel as he may retain, institute such
actions as may be necessary to collect and recover accounts
and assets of, or defend any action against, the institution.
4.
The assets of an institution under receivership or liquidation

shall be deemed in custodia legis in the hands of the receiver
and shall, from the moment the institution was placed under
such receivership or liquidation, be exempt from any order of
garnishment, levy, attachment, or execution (Sec. 30, NCBA).
[Type text]
F. HOW THE BSP HANDLES EXCHANGE CRISIS

Legal Tender power
Q: What is the Legal Tender power of the BSP?
ANS: All notes and coins issued by the Bangko Sentral are fully guaranteed by the
Republic and shall be legal tender in the Philippines for all debts, both public and
private (Sec. 52, NCBA).
Q: X has 10,000 pieces of 5-Peso coins. Is it considered legal tender?

ANS: No. BSP has provided the extent of legal tender with respect to coins:
1.
2.
1-Peso, 5-Peso and 10-Peso coins: In amounts

not exceeding P1,000.00;
25 centavo coin or less: In amounts not
exceeding P100.00 (Circular No. 537, 2006).
Rate of Exchange
Q: What government body determines the exchange rate policies of the
Philippines?
ANS: The Monetary Board shall determine the exchange rate policy of the country.
Q: What are the steps taken when the international stability of the peso is
threatened?
ANS: Whenever (1) the international reserve of the Bangko Sentral falls to a level
which the Monetary Board considers inadequate to meet prospective net demands
on the Bangko Sentral for foreign currencies, or whenever (2) the international
reserve appears to be in imminent danger of falling to such a level, or whenever (3)
the international reserve is falling as a result of payments or remittances abroad
which, in the opinion of the Monetary Board, are contrary to the national welfare,
the Monetary Board shall:
1. Take
such
remedial
measures as are appropriate
and within the powers
granted to the Monetary
Board and the Bangko
Sentral under the provisions
of this Act; and
2. Submit to the President of the
Philippines and to Congress
a detailed report which shall
include, as a minimum, a
description and analysis of:
a. The nature and causes of the existing or
imminent decline;
[Type text]
[Type text]
b. The remedial measures already taken or to
be taken by the Monetary Board;
c. The monetary, fiscal or administrative
measures further proposed; and
d. The character and extent of the cooperation
required from other government agencies for
the successful execution of the policies of the
Monetary Board. (Sec. 67, NCBA)
Q: What are the steps taken by the Monetary Board if the threat to the
international stability of the Philippine Peso is continuous or chronic?
ANS: If the resultant actions fail to check the deterioration of the reserve position of
the Bangko Sentral, or if the deterioration cannot be checked except by chronic
restrictions on exchange and trade transactions or by sacrifice of the domestic
objectives of a balanced and sustainable growth of the economy, the Monetary
Board shall propose to the President, with appropriate notice of the Congress, such
additional action as it deems necessary to restore equilibrium in the international
balance of payments of the Philippines (Sec. 67, NCBA).
II. LAW ON SECRECY OF BANK DEPOSITS (RA

1405, AS AMENDED)
A. PURPOSE
Q: What is the purpose of the Secrecy of Bank Deposits Law?
ANS: The following are its purpose:
1. To encourage people to deposit in banking institutions; and
2. To discourage private hoarding so that banks may lend such funds and
assist in the economic development of the country.
B. PROHIBITED ACTS
Q: What are the prohibited acts under RA 1405?
ANS: The following are prohibited:
1. Examination and inquiry or looking into all deposits, of whatever nature,
with the banks in the Philippines including investments in bonds issued by
the Government.
2. Any disclosure by any official or employee of any banking institution to any
unauthorized person of any information concerning the said deposits.
C. DEPOSITS COVERED
Q: Are all kinds of deposits covered by RA 1405?
ANS: All deposits of whatever nature with banks or banking institutions in the
Philippines, including investments in BONDS issued by the Government of the
Philippines, its political subdivisions and its instrumentalities (Sec 2, RA 1405).
Thus, only those deposits with banks in the Philippines are covered by the law.
Q: Are foreign currencies covered by RA 1405?
ANS: No. Foreign currencies are under the provisions of the R.A. 6426 or the
Foreign Currency Deposit Act.
D. EXCEPTIONS
Q: Are there exceptions to the secrecy of domestic bank deposits?
ANS: Yes. The following are the exceptions provided by the law:
1. Upon written permission of the depositor;
[Type text]
[Type text]
2.
3.
4.
In cases of impeachment;
Upon order of a competent court in cases of bribery or dereliction of
duty of public officials;
Upon the order of a competent court in cases where the money
deposited or invested is the subject matter of the litigation (Sec. 2, RA
1405).
Other laws also provide exceptions to the secrecy of bank deposits:

1. Anti-Graft and Corrupt Practices Act - Upon the order of a competent court or
tribunal in cases involving unexplained wealth under the Anti-Graft and Corrupt
Practices Act (R.A. No. 3019).
2. NIRC - The Commissioner of Internal Revenue may inquire into the bank deposits
of:
a.
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3.
[Type text]
AMLA - Inquiry or examination by the Anti-Money

Laundering Council (AMLC) upon order of any
competent court in cases of violation of the AntiMoney Laundering Law, if there is probable
cause that the deposits or investments are
related to an unlawful activity or a money
laundering offense, EXCEPT that no court order
shall be required in the following unlawful
activities:
[Type text]
a.
Kidnapping for ransom under Art. 267 RPC;
b.
Violations of the Comprehensive Dangerous Drugs Act of 2002 (Sec. 4, 5, 6,

8, 9, 10, 12, 13, 14, 15, and 16, RA No. 9165);
c.
Hijacking and other violations under RA 6235;
d.
Destructive arson and murder under RPC. Including those perpetrated by

terrorists against non-combatant persons and similar targets (Sec. 11, R.A.
No. 9160 as amended by Sec. 8 of RA 9194).
4.
Disclosure to the Treasurer of the Philippines of dormant deposits

for at least 10 years under the Unclaimed Balances Act (Sec. 2,
Act No. 3936).
E. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

Q: Can the creditor garnish the bank deposits of the debtor without violating
RA 1405?
ANS: Yes. The following are the rules:
1. Bank accounts may be garnished by the creditors of the depositor.
There is NO violation of the Law on Secrecy of Bank Deposits if the
accounts are garnished. It was not the intention of the legislature to
place bank deposits beyond the reach of execution to satisfy a final
judgment. Its purpose is merely to secure information as to the name of
the depositor and whether or not the defendant had a deposit in said
bank, only for purposes of garnishment. Any disclosure is purely
incidental to the execution process (China Banking Corporation v.
Ortega, GR No. L-34964, January 31, 1973).
2. Foreign currency cannot be garnished, except:
Salvacion v. Central Bank of the Philippines: Bartelli, a foreign transient,
deposited his dollars in a foreign currency account with China Bank. Bartelli
raped Salvacion. A criminal case for rape and a civil action for damages for
rape were filed. The SC said that the exemption from garnishment granted
to foreign currency deposits is inapplicable because of the peculiar
circumstances present in this case.
F. PENALTIES FOR VIOLATION
Q: What is the penalty for violations of RA 1405?
ANS: Imprisonment of not more than 5 years or a fine not more than P20,000 or
both, in the discretion of the court.
III. GENERAL BANKING ACT (RA 8791)

A. DEFINITION AND CLASSIFICATION OF BANKS
Q: What is a bank?
ANS: Banks refer to entities engaged in the lending of funds obtained in the form of
deposits (Sec. 3, RA 8791).
Q: What are the classifications of a bank?
ANS: The following are the classifications:
[Type text]
[Type text]
1.
2.
3.
4.
5.
6.
7.
Universal Banks
These are primarily governed by the GBL. Has the authority to exercise the
powers of a commercial bank and an investment house and invest in nonallied enterprises (Sec. 23, RA 8791), and have the highest capitalization
requirement.
Commercial Banks
Ordinary banks governed by the GBL which have a lower capitalization
requirement than universal banks and can neither exercise the powers of
an investment house nor invest in non-allied enterprises.
Thrift Banks
These are a) Savings and mortgage banks; b) Stock savings and loan
associations; c) Private development banks, which are primarily governed
by the Thrift Banks Act (R.A. 7906).
Rural Banks
Mandated to make needed credit available and readily accessible in the
rural areas on reasonable terms and which are primarily governed by the
Rural Banks Act of 1992(RA 7353).
Cooperative Banks
Those banks organized by, the majority shares of which is owned and
controlled by, cooperatives primarily to provide financial and credit services
to cooperatives. It shall include cooperative rural banks. These are
governed primarily by the Cooperative Code (RA 6938).
Islamic Banks
Banks whose business dealings and activities are subject to the basic
principles and rulings of Islamic Sharia, such as the Al Amanah Islamic
Investment Bank of the Philippines which was created by RA 6848.
Other Classification of Banks
As determined by the Monetary Board of the Bangko Sentral ng Pilipinas.
a. Philippine Veterans Bank (RA 3518)
b. Land Bank of the Philippines (RA 3844)
c. Development Bank of the Philippines (RA 85)
B. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

Q: What is a quasi-bank?
ANS: A Quasi-Bank refers to entities engaged in the borrowing of funds through the
issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes for purposes of re-lending or purchasing of receivables and other
obligations. (Sec.4, RA 8791)
Q: What are deposit substitutes?
ANS: Deposit substitutes are alternative forms of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations. These instruments may include,
but need not be limited to, bankers acceptances, promissory notes, participations,
certificates of assignment and similar instruments with recourse, and repurchase
agreements (Sec.22[Y], NIRC)
Q: What are the differences between banks and quasi-banks?
ANS: The following are the differences:
1. Banks deals with deposits while a quasi-bank deals with deposit
substitutes
[Type text]
[Type text]
2.
Banks must exercise the highest degree of diligence while a trust entity
must exercise diligence that a prudent man would exercise in the
conduct of an enterprise of a like character with similar aims. (Sec. 80,
RA 8791)
C. BANK POWERS AND LIABILITIES

Corporate Powers
Q: What are the corporate powers of a bank?
ANS: The following are its corporate powers:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated
in the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation.
Banking and incidental powers
Q: What are the banking and incidental powers of a bank?
ANS: The following are its powers:
1. Banking powers main powers; without any of these powers, the
entity is not a bank.
a. Power to accept deposits
b. Power to lend funds obtained in the form of deposits
2. Incidental powers subordinate powers, incurred casually and in
addition to main powers
1. To engage in trust operations
2. To act as financial agent and buy and sell securities
3. To act as agent for collection or for payments for the account
[Type text]
[Type text]
4.
5.
of others
To act as managing adviser, agent, consultant, administrator
of investment, management, or consultancy accounts
Rent out safety deposit box
D. DILIGENCE REQUIRED OF BANKS RELEVANT JURISPRUDENCE

Q: What is the diligence required from a bank?
ANS: The diligence required is very high, if not the highest, degree of diligence
(PCI Bank v. CA, GR No. 121413, January 29, 2001).
However, the highest degree of diligence applies only in the handling of deposits
(Reyes v. CA, GR No. 118492, August 15, 2001 ).
Q: Why is a bank required to exercise extraordinary diligence with respect to
deposits?
ANS: In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or of
millions. A blunder on the part of bank, such as the dishonor of a check without
good reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation. The banking business is affected
with public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship (Simex International Inc. v.
CA, G.R. No. 88013, March 19, 1990).
E. NATURE OF BANK FUNDS AND BANK DEPOSITS
Q: What is the nature of a bank deposit?
ANS: Bank deposits are simple loans (Art. 1980, Civil Code). Bank deposits are in
the nature of irregular deposits. They are really loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
and are to be covered by the law on loans.(Art. 1980 Civil Code; Serrano v. Central
Bank, February 1980)
Q: Since bank deposits are simple loans, what are the implications?
ANS: The following are the implications:
i. Not preferred credits
ii.
Art. 1287 of the civil code preventing compensation in

case one of the debts arises from a contract of deposit
does not apply
iii.
Bank acquires ownership over the money deposited
F. STIPULATION ON INTERESTS
Q: Can banks impose interests on bank deposits?
ANS: Yes. However, no interest shall be due unless it is stipulated in writing. (Art.
1956, Civil Code)
Q: Can interests of bank deposits be struck down?
ANS: Yes. If the interest is iniquitous or unconscionable, it becomes void for being
[Type text]
[Type text]
contrary to morals. (Medel v. Court of Appeals, 359 Phil 820)
G. GRANT OF LOANS AND SECURITY REQUIREMENTS
Ratio of net worth to total risk assets
Q: What is the ratio required between net worth and total assets with respect
to banks? What are the rules governing it?
ANS: The following are the ratio and rules governing net worth and total assets of
banks:
1. The minimum ratio prescribed by the Monetary Board which the
net worth of a bank must bear to its total risk assets which may
include contingent accounts.
2. Monetary Board may alter or suspend compliance with such ratio
whenever necessary for a maximum period of one year;
PROVIDED that, such ratio shall be applied uniformly to banks of
the same category (Sec. 34, GBL).
3. Effects of non-compliance with the prescribed minimum ratio:
a. Distribution of net profits may be limited or prohibited and MB
may require that the net profits be used to increase the capital
accounts of the bank until the minimum requirement has been
met; or
b. Acquisition of major assets and making of new investments
may be restricted or prohibited. EXCEPT purchases of readily
marketable evidence of indebtedness or obligations, the
servicing and repayment of which are guaranteed by the
Government, until the minimum required capital ratio has
been restored (Sec. 34, GBL).
4. In case of a bank merger or consolidation, or when a bank is under
rehabilitation under a program approved by BSP, the MB may
temporarily relieve the surviving bank, consolidated bank, or
constituent bank or corporations under rehabilitation from full
compliance with the required capital ratio (Sec. 34, GBL).
Single Borrowers Limit
Q: What is the Single Borrowers Limit Rule?
ANS: The Single Borrowers Limit (SBL) Rule state that the total amount of loans,
credit accommodations and guarantees extended by a bank to any person,
partnership, association, corporation or other entity shall at no time exceed 25% of
the net worth of such bank (as increased by BSP Circular 425). The basis for
determining compliance with the SBL is the total credit commitment of the bank to
the borrower (Sec. 35.1, GBL).
Q: What are the guidelines for the Single Borrowers Limit Rule?
ANS: The following are the guidelines:
1. Total credit commitment shall include outstanding loans and other credit
accommodations, deferred letters of credit less margin deposits and guarantees.
Except as specifically provided, total credit commitment shall be reckoned on
credit risk-weighted basis consistent with existing regulations. This is subject to
the following exceptions:
a. As the Monetary Board may otherwise prescribe for reasons of
national interest
b.
[Type text]
Deposits of rural banks with government-owned or controlled
[Type text]
financial institutions like the LBP, DBP and PNB.
2.
The total amount of loans, credit accommodations and guarantees prescribed in

(a) may be increased by an additional 10% of the net worth of such bank
provided 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 (Sec.35.2, GBL).
Restriction on bank exposure to DOSRI (Directors, Officers, Stockholders
and their Related Interests)
Q: What is the restriction on the borrowing of DOSRI from their bank?
ANS: No director or officer of any bank shall, directly or indirectly, borrow from such
bank nor shall be guarantor, endorser or surety for loans from such bank to others,
or in any manner be an obligor or incur any contractual liability to the bank,
EXCEPT with the written approval of the majority of all the directors of the bank,
excluding the director concerned. The written approval shall not be required for
loans, other credit accommodations and advances granted to officers under a fringe
benefit plan approved by the BangkoSentral (Sec. 36, GBL).
Q: What are the rules governing the restriction on the borrowing of DOSRI
from their bank?
ANS: The following are the rules governing the restriction:
1. Requisites for the DOSRI to be covered by the restriction(BSP
Circular No. 170; Art. 26, NCBA):
a. The borrower is director, officer, or any stockholder of a bank
and related interest;
b. He contracts a loan or any form of financial accommodation;
c. The loan or financial accommodation is from (1) his bank, or
(2) a bank that is a subsidiary of a bank holding company of
which both his bank and lending bank are subsidiaries, (3) a
bank in which a controlling proportion of the shares is owned
by the same interest that owns a controlling proportion of the
shares of his bank; and
d. The loan or financial accommodation of the DOS, singly or
with that of his related interest, is in excess of 5% of the
capital and surplus of the lending bank or in the maximum
amount permitted by law, whichever is lower.
2. Who are covered (BSP Circular No. 170):
a. Directors Directors of the lending bank;
b. Officers Either identified in the by-laws or are generally
known as such;
c. Stockholders those whose stockholdings, individually and/
or together with any of the following persons, amount to 2% or
more of the total subscribed capital stock of the bank:
a. His spouse or relative within the first degree of
affinity/consanguinity or relative by legal adoption,
partnership wherein any of the foregoing is a general
partner; and
b.
[Type text]
A co-owner, with the stockholder or the stockholders

spouse, or relative mentioned above, of property/ right/
interest mortgaged, pledged or assigned to secure the
[Type text]
3.
loan or credit accommodations, except when the

mortgage, pledge or assignment covers only said coowners undivided interest.
Related Interest (Circular No. 423 Series of 2004)
a. Spouse, relatives within first degree of consanguinity or
affinity, or relative by legal adoption of a DOS;
b.
c.
d.
e.
f.
Partnerships of which a DOS or his spouse or relative within

the first degree of consanguinity or affinity, or relative by legal
adoption is a general partner;
Co-owner, with the DOS or his spouse or relative within the
first degree of consanguinity or affinity, or relative by legal
adoption, of the property/interest/ right mortgaged, pledged,
assigned to secure the loans or other credit accommodations,
except when the mortgage, pledge or assignment covers only
said co-owners undivided interest;
Corporation, association, or firm of which a DO of the bank or
his spouse is also a director or officer of the same EXCEPT
where the securities of such corporation are listed and traded
in the big board or commercial and industrial board of
domestic stock exchanges and less than 50% of the voting
stock is owned by 1 person or by persons related to each
other within the first degree of consanguinity or affinity or
where the DOS sits as a representative of the bank in the
board of directors of such corporation.
Corporation, association or firm of which any or a group of
DOS of the lending bank and/ or their spouses or relatives
within the first degree of consanguinity or affinity or relative by
legal adoption, hold or own at least 20% of the subscribed
capital of such corporation, or of the equity of such
association or firm;
Corporation, association or firm wholly or majority-owned or
controlled by any related entity or a group of related entities in
items (2), (4), and (5).
Q: What are the other restrictions on DOSRI aside from borrowing from their
bank?
ANS: The following are the other restrictions:
1. Arms Length Rule - Dealings of a bank with any of its
DOSRI shall be upon terms not less favorable to the
bank than those offered to others (Sec. 36, GBL).
2. Aggregate Ceilings
i.
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees that
may be extended, directly or indirectly, by a bank to
its DOSRI, as well as investments of such bank in
enterprises owned or controlled by said DOSRI
(Sec. 36, GBL).
ii.
[Type text]
The Manual of Regulations for Banks provides that

the aggregate is 15% of the total loan portfolio of the
bank or 100% of the combined capital accounts,
whichever is lower.
[Type text]
3.
4.
Individual Ceilings
i.
The outstanding loans, credit accommodations and
guarantees extended to DOSRI shall be limited to
an amount equivalent to their respective
unencumbered deposits and book value of their
paid-in capital contribution in the bank.
Reportorial Requirement
i.
The resolution approving the loan shall be entered in
the records of the bank and a copy of the entry shall
be transmitted forthwith to the Supervising
Examination Sector of the BSP (Sec. 36, GBL).
LAW ON INTELLECTUAL PROPERTY

(EXCLUDING IMPLEMENTING RULES AND
REGULATIONS)
I.INTELLECTUAL POPERTY RIGHTS IN GENERAL
Q: What are intellectual property rights?
ANS: They refer to those property rights which result from the physical
manifestation of original thought (Ballantine's Law Dictionary). Thus, there are NO
property rights protected by law in mere ideas or mental conceptions. It is only
when creations of mind are put in tangible form that it becomes appropriate subject
for protection. (63A Am Jur 3d, Property, Section 5).
Intellectual Property Right includes:(CoRe-PIMP-LG)
a. Copyright;
b. Related rights or neighboring rights of copyright;
c. Patents;
d. Mark;
e. Geographic indications;
f. Industrial designs;
g. Layout designs (topographies) of integrated circuits;
h. Protection of Undisclosed information (Sec. 4).
Q: State the differences between copyright, trade mark and patent.
ANS: Copyright, trademark and patent may be distinguished as follows:
a. As to how it is defined
i. Copyright is that system of
legal protection an author
enjoys in the form of
expression of ideas (World
Intellectual
Property
Organization [WIPO]). It
may also be referred to as
the intangible, incorporeal
right granted by statute to
the author or originator of
certain literary or artistic
productions, whereby he is
invested, for a limited
[Type text]
[Type text]
b.
period,
with
the
sole
exclusive
privilege
of
multiplying copies of the
same and publishing and
selling them (Blacks Law
Dictionary).
ii. Patent may pertain to either
the grant of rights over an
invention, to sell, use and
make the same whether for
commerce or industry or
the instrument (sometimes
called
letters
patent)
containing the grant, giving
an inventor a monopoly on
the inventors invention for a
limited period.
iii. Trademark relates to visible
sign
capable
of
distinguishing the goods of
an enterprise (trademark) or
the services of an enterprise
(service mark), and includes
a stamped or marked
container of goods (Sec.
121.1).
As to purpose
For Copyright:
i. To
stimulate
artistic
creativity for the general
public good; and
ii. To promote the progress of
science and useful arts.
For Patents:
i.
Not
o
nl
y
to
re
w
ar
d
th
e
in
di
vi
d
u
[Type text]
[Type text]
al,
b
ut
th
e
a
dv
a
nc
e
m
e
nt
of
th
e
ar
ts
a
n
d
sc
ie
nc
es
;
ii.
To
a
d
d
to
th
e
su
m
of
us
ef
ul
kn
o
wl
e
d
g
e;
a
n
d
iii.
To
e
[Type text]
[Type text]
nc
o
ur
a
g
e
di
ss
e
mi
n
ati
o
n
of
inf
or
m
ati
o
n
co
nc
er
ni
n
g
di
sc
ov
er
ie
s
a
n
d
in
ve
nti
o
ns
.
For Trademark:
i. To indicate origin or ownership of articles to which they
are attached;
ii. To guarantee that those articles come up to a certain kind
of quality;
iii. To advertise articles they symbolize;
iv.To assure the public that they are producing genuine
article; and
v. To protect the manufacturer against substitution and sale
of an inferior and different article.
c. As to How Created or Acquired
[Type text]
[Type text]
Copyright is acquired from the moment of creation (fixation).
Patents are acquired by registration through a First-to-file system.
Trademark is acquires through Valid registration.
d. As to term of Protection
The duration for the protection of a COPYRIGHT may be summed as
follows:
i. Single creation: lifetime of
the creator and for 50 years
after his death
ii. Joint creation: lifetime of
the last surviving co-creator
and for 50 years after his
death
iii.
Anonymous
or
pseudonymous work: 50
years after the date of their
first
publication;
except
where, before the expiration
of said period, the authors
identity is revealed or is no
longer in doubt, the 1st two
mentioned rules shall apply;
or if unpublished, 50 years
from their making
iv. Work of applied art, an
artistic
creation
with
utilitarian
functions
or
incorporated in a useful
article, whether made by
hand or produced on an
industrial scale: 25 years
from the date of making
v.
Photographic
work,
audiovisual work produced
by
photography
or
analogous processes: 50
years from the publication of
the work, or if unpublished,
from making the same
vi. Newspaper article: Lifetime
of the author and 50 years
thereafter
The term of protection for Patents, on the other hand, is 20 years from
the filing date of the application (Sec. 54); and for Trademarks, 10 years
from the filing date of the application, provided the registrant shall file a
declaration of actual use within a year from the 5 th anniversary of
registration date (Sec. 145), and renewable for another 10 years (Sec.
146)
Q: What are technology transfer arrangements?
ANS: These are contracts or agreements involving the transfer of systematic
knowledge for the manufacture of a product, the application of a process, or
rendering of a service including management contracts; and the transfer,
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assignment or licensing of all forms of intellectual property rights, including
licensing of computer software except computer software developed for mass
market (Sec. 4.2, IPC).
II.PATENTS
Q: What are patentable inventions?
ANS: Patentable inventions relate to any technical solution of a problem in any field
of human activity, which is new, involves an inventive step, and is industrially
applicable. It may be or may relate to, a product, process, or an improvement of
any of the foregoing. (Sec. 21)
Q: What are non-patentable inventions?
ANS: Non-patentable inventions refer to those which are excluded from patent
protection, and include: DSM-PAC
a. Discoveri
es,
scientific
theories
and
mathema
tical
methods.
b. Schemes
,
rules
and
methods
of
performin
g mental
acts,
playing
games or
doing
business,
and
programs
for
computer
;
c. Methods
for
treatment
of
the
human or
animal
body by
surgery
or
therapy
and
diagnosti
c
[Type text]
[Type text]
d.
e.
f.
Q: Who owns the right to patent?
[Type text]
methods
practiced
on
the
human or
animal
body
(shall not
apply to
products
and
compositi
on
for
use
in
any
of
these
methods)
;
Plant
varieties
or animal
breeds or
essentiall
y
biological
process
for
the
productio
n
of
plants or
animals
(shall not
apply to
microorganism
s
and
nonbiological
and
microbiol
ogical
processe
s);
Aesthetic
creations
; and
Anything
which is
contrary
to public
order or
morality.
[Type text]
ANS: The right to patent belongs to the inventor, his heirs, or assigns. When two
(2) or more persons have made the invention separately, the right to a patent shall
belong to them jointly. (Sec. 28)
Q: Cheche invented a device that can convert rainwater into automobile fuel.
She asked Macon, a lawyer, to assist in getting her invention patented. Macon
suggested that they form a corporation with other friends and have the
corporation apply for the patent, 80% of the shares of stock thereof to be
subscribed by Cheche and 5% by Macon. The corporation was formed and
the patent application was filed. However, Cheche died 3 months later of a
heart attack. Franco, the estranged husband of Cheche, contested the
application of the corporation and filed his own patent application as the sole
surviving heir of Cheche. Decide the issue with reasons. (1990 Bar)
ANS: The estranged husband of Checke cannot successfully contest the
application. The right over inventions accrue from the moment of creation and as a
right it can lawfully be assigned. Once the title thereto is vested in the transferee,
the latter has the right to apply for its registration. The estranged husband of
Cheche, if not disqualified to inherit, merely would succeed to the interest of
Cheche (Bar Examination Question with suggested answers from Answers to Bar
Schools).
Q: Discuss the first-to-file rule.
ANS: If two (2) or more persons have made the invention separately and
independently of each other, the right to the patent shall belong to the person who
filed an application for such invention, or where two or more applications are filed
for the same invention, to the applicant who has the earliest filing date, or the
earliest priority date. (Sec. 29)
Q: Cezar works in a car manufacturing company owned by Joab. Cezar is
quite innovative and loves to tinker with things. With the materials and parts
of the car, he was able to invent a gas-saving device that will enable cars to
consume less gas. Francis, a co-worker, saw how Cezar created the device
and likewise, came up with a similar gadget, also using scrap materials and
spare parts of the company. Thereafter, Francis filed an application for
registration of his device with the Bureau of Patents. Eighteen months later,
Cezar filed his application for the registration of his device with the Bureau of
Patents.
a. Is the gas-saving device patentable? Explain.
b. Assuming that it is patentable, who is entitled to the patent? What,
if any, is the remedy of the losing party?
c. Supposing Joab got wind of the inventions of his employees and
also laid claim to the patents, asserting that Cezar and Francis
were using his materials and company time in making the devices,
will his claim prevail over those of his employees? Explain. (2005
Bar)
ANS: The following answers the questions respectively:
a.Yes, the gas-saving device is patentable because it provides a technical solution
to a problem in a field of human activity. It is new and involves an inventive step,
and certainly industrially applicable. It therefore fulfills the requisites mandated by
the intellectual Property Code for what is patentable.
b. Cezar is entitled to the patent because he was the real inventor. Francis, copying
from the work of Cezar, cannot claim the essential criteria of an inventor, who
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must possess essential elements of novelty, originality and precedence to be
entitled to protection. Nevertheless, under the "first to file rule," Francis
application would have to be given priority. Cezar, however, has within three
months from the decision, to have it cancelled as the rightful inventor; or within
one year from publication, to file an action to prove his priority to the invention,
which has been taken from him and fraudulently registered by Francis.
c. No, Joab's claim cannot prevail over those of his employees. In the first place,
Joab did not commission any of the two employees to invent the device, and its
invention did not fall within their regular duties. What prevails is the provision of
the Intellectual Property Code that holds that the invention belongs to the
employee, if the inventive activity is not a part of his regular duties, even if he
uses the time, facilities and materials of the employer (Bar Examination Question
with suggested answers from Answers to Bar Examination Questions by the UP
Law Complex and Philippine Association of Law Schools).
Q: Who owns the inventions created pursuant to commission?
ANS: The person who commissions the work shall own the patent, UNLESS
otherwise provided in the contract.
Q: What is the right to priority?
ANS: An application for patent filed by any person who has previously applied for
the same invention in another country, which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be considered as filed as of the date of
filing the foreign application.
Q. What are the grounds for cancellation of a patent?
ANS: Any interested person may, upon payment of the required fee, petition to
cancel the patent or any claim thereof, or parts of the claim, on any of the following
grounds:
a.
That what is claimed as the invention is
not new or patentable;
b.
That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any
person skilled in the art; or
c. That the patent is contrary to public order
or morality.
Q: What is the remedy of the true and actual inventor?
ANS: If a person, who was deprived of the patent without his consent or through
fraud is declared by final court order or decision to be the true and actual inventor,
the court shall order for his substitution as patentee, or at the option of the true
inventor, cancel the patent, and award actual and other damages in his favor if
warranted by the circumstances. (sec. 68)
Q: Enumerate the rights conferred by patent.
ANS: A patent shall confer on its owner the following exclusive rights:
e.
[Type text]
Where
the
subject
matter of
a patent
is
a
[Type text]
f.
[Type text]
PRODU
CT:
To
restrain,
prohibit
and
prevent
any
unauthori
zed
person or
entity
from
making,
using,
offering
for sale,
selling or
importing
that
product;
Where
the
subject
matter of
a patent
is
a
PROCES
S:
To
restrain,
prohibit
and
prevent
any
unauthori
zed
person or
entity
from
using the
process,
and from
manufact
uring,
dealing
in, using,
selling or
offering
for sale,
or
importing
any
product
obtained
[Type text]
directly
or
indirectly
from
such
process.
NOTE: Patent owners shall also have the right to assign or transfer by
succession the patent, and to conclude licensing contracts for the same.
(Sec. 71)
Q: What are the limitations of patent rights.
ANS: The following are the limitations:
a.
General Limitations (Sec. 72)
The owner of a patent has no right to prevent third parties from
performing, without his authorization, the following acts:
i. Using of a patented product which has been put on the market in the
Philippines by the owner of the product, or with his express consent;
ii. Exploitation of the patent if done privately and on a noncommercial scale or purpose;
iii. Act of making or using the patent if for the sole purpose of scientific
research and experiment
iv. In case of drugs and medicines, where the act includes testing, using,
making or selling the invention, including any data related thereto,
solely for the purpose of reasonably related to the development and
submission of information and issuance of approvals by government
regulatory agencies required under any Philippine or foreign law (Sec.
7 RA 9502);
v. Preparation for individual cases, in a pharmacy or by a medical
professional, a medicine in accordance with a medical prescription; and
vi. Use of the patented product if it occurs in vehicles in transit in the
country, provided that such invention is used EXCLUSIVELY for the
needs of the ship, vessel aircraft, or land vehicle and NOT USED for
the manufacturing of anything to be sold within the Philippines;
b. Use by Prior User (Sec. 73)
A person other than the applicant, who have started using in good faith
the invention in the Philippines, or undertaken serious preparations to use
the same, before the filing date or priority date of the application shall
have the right to continue the use thereof but his right may only be
transferred or assigned further with his enterprise or business.
c. Use by Government (Sec. 74)
The government or a third person authorized by it may use the patent
without authority of the patent owner if:
a. Public interest so requires;
b. The manner of exploitation by the owner of the patent is anticompetitive
c. In case of drugs and medicines, there is a
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national emergency or other circumstance of
extreme urgency requiring the use of the
invention.
d. In case of drugs and medicines, there is a public noncommercial use
of the patent by the patentee, without satisfactory reason
e. In case of drugs and medicines, the demand for the patented article in
the Philippines is not being met to an adequate extent and under
reasonable terms (Sec. 8 RA 9502).
Unless otherwise provided in the Code, item 3 shall be subject to the
following:
a. In situations c, d, and e, the right holder shall be notified as soon as
practicable;
b. The scope and duration of such use shall be limited to the purpose for
which it was authorized;
c. Use shall be non-exclusive;
d. The right holder shall be paid adequate remuneration in the
circumstances of each case
e. The existence of a national emergency or other circumstances of
extreme urgency in situation c shall be subject to the determination of
the President of the Philippines.
Q: What constitutes patent infringement?
ANS: This refers to the making, using, offering for sale, selling, or importing a
patented product or a product obtained directly or indirectly from a patented
process, or the use of a patented process without the authorization of the patentee
(Sec. 76.1).
Q: What are the tests in Patent Infringement?
ANS: The tests are the following:
a.
LITERAL INFRINGEMENT
Resort, in the first instance, must be had to the words of the claim. If the
accused matter clearly falls within the claim, infringement is made out and
that is the end of it. The claims of patent and the accused product must be
juxtaposed within the overall context of claims and specification (Godines
v. CA, GR 97343, September 13, 1993).
b. DOCTRINE OF EQUIVALENTS
If two devices do the same work in substantially the same way, the same
result, and produce substantially the same result, they are the same even
though they differ in name, form or shape (Godines v. CA, Ibid.).
The doctrine of equivalents thus requires satisfaction of the functionmeans-and-result test, the patentee having the burden to show that all
three components of such equivalency test are met (Ibid).
The doctrine of equivalents cannot be applied when the infringing
invention is clearly beyond what is written in the claim (Reviewer on
Commercial Law, Sundiang and Aquino, 2006ed).
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[Type text]
Q: What are the civil and criminal actions available in case of patent
infringement?
a.
Action
for
damages
plus
attorneys
fees and
other
expenses
for
litigation.
Any
patentee,
or
anyone
possessi
ng any
right, title
or
interest
in and to
the
patented
invention,
whose
rights
have
been
infringed,
may
bring a
civil
action
before a
court of
compete
nt
jurisdictio
n, to
recover
from the
infringer
such
damages
sustained
thereby,
plus
attorney's
fees and
other
expenses
[Type text]
[Type text]
of
litigation,
and to
secure
an
injunction
for the
protectio
n of his
rights.
(Sec.
76.2)
Limitations:
i. Recoverable damages are limited to acts of infringement committed
within 4 years before institution of action (Sec. 79);
ii. Damages cannot be recovered if the infringer did not know, or had no
reasonable grounds to know, of the patent (sec. 80).
iii. If the damages are inadequate or cannot be readily ascertained with
reasonable certainty, the court may award by way of damages a sum
equivalent to reasonable royalty. (Sec. 76.3)
iv. The court may, according to the circumstances of the case, award
damages in a sum above the amount found as actual damages
sustained: provided, that the award does not exceed three (3) times the
amount of such actual damages. (Sec. 76.4)
b.
[Type text]
Disposa
l
or
destructi
on. The
court
may, in
its
discretion
,
order
that the
infringing
goods,
materials
and
impleme
nts
predomin
antly
used in
the
infringem
ent
be
disposed
of
outside
[Type text]
the
channels
of
commerc
e
or
destroye
d, without
compens
ation.
(Sec.
76.5)
[Type text]
c.
Criminal
action for
repetition
of
infringem
ent
d.
If
infringem
ent
is
repeated
by
the
infringer
or
by
anyone
in
connivan
ce with
him after
finality of
the
judgment
of
the
court, the
offenders
shall,
without
prejudice
to
the
institution
of a civil
action for
damages
,
be
criminally
liable
therefore
and,
upon
convictio
n, shall
[Type text]
suffer
imprison
ment for
6 months
to
3
years
and/or a
fine
of
p100,000
to
p300,000
, at the
discretion
of
the
court.
(Sec.
84).
Limitation: Criminal action shall prescribe in three (3) years from date of
the commission of the crime.
Q: What is the prescriptive period for the recovery of claims?
ANS: No Action for Damages can be recovered for acts of infringement committed
more than four (4) years before the institution of the action for infringement (Sec.
79). The Criminal Action shall prescribe in three (3) years from the date of the
commission of the crime.
Q: What are the defenses in action for infringement?
ANS: In an action for infringement, the defendant, in addition to other defenses
available to him, may show the invalidity of the patent, or any claim thereof, on any
of the grounds on which a petition of cancellation can be brought (Sec. 81).
Q: Discuss the kinds of licensing.
ANS: The kinds of licensing are the following:
a.
Voluntary Licensing- It is the grant by the patent owner to a third
person of the right to exploit a patented invention.
b.
Compulsory Licensing It is the grant by the Director of Legal
Affairs of a license to exploit a patented invention even without the
agreement of the patent owner in favor of any person who has
shown his capability to exploit the invention under certain
circumstances.
Q: Discuss the rule on assignment and transmission of rights.
ANS: Inventions and any right, title, or interest in and to patents and inventions
covered thereby, may be assigned or transmitted by inheritance or bequest or may
be the subject of a license contract (Section 103.2).
III.TRADEMARKS
Q: Discuss the concepts of trade mark, collective mark and trade name.
ANS: Trade Mark refers to any visible sign capable of distinguishing the goods or
services of an enterprise and shall include a stamped or marked container of goods
(Section 121.1, IPC, and Elidad Kho v. Court of Appeals, GR No. 115758, March
[Type text]
[Type text]
11, 2002).
Collective Mark consists of visible sign, designated as such in the application for
registration and capable of distinguishing the origin or any other common
characteristics, including the quality of goods or services of different enterprises
which use the sign under the control of the registered owner of the collective mark.
Trade Name means the name or designation identifying or distinguishing an
enterprise; any individual name or surname, firm name, device or word used by
manufacturers, industrialists, merchants, and others to identify their businesses,
vocations or occupations (Converse Rubber Corp., v. Universal Rubber Products,
Inc., GR No. L-27425, L-30505, April 28, 1980).
Q: How are rights in a mark acquired?
ANS: The rights in a mark shall be acquired through registration made validly in
accordance with the provisions of this law (Sec. 122)
NOTE: Registration is necessary before one can file an action for infringement
(Reviewer on Commercial Law, Sundiang and Aquino, 2006ed).
Prior use in the Philippines is not required before registration. However, there must
be an actual use after registration because Sections 142.2 and 151[c] of the
Intellectual Property Code requires that the registrant shall file a declaration of
actual use of the mark with evidence within 3 years from the filing date of
application, otherwise, it would be cancelled.
For the requirement of "actual use in commerce in the Philippines" before one may
register a trademark, trade-name and service mark under the law pertains to the
territorial jurisdiction of the Philippines and is not only confined to a certain region,
province, city or barangay (McDonalds Corporation v. McJoy Fastfood Corporation,
GR No. 166115, February 2, 2007).
Q: How is ownership of a trade name acquired?
ANS: A name or designation may not be used as a trade name if by its nature or
the use to which such name or designation may be put, it is contrary to public order
or morals and if, in particular, it is liable to deceive trade circles or the public as to
the nature of the enterprise identified by that name (Sec. 165).
NOTE: Notwithstanding any laws or regulations providing for any obligation to
register trade names, such names shall be protected, even prior to or without
registration, against any unlawful act committed by third parties. In particular, any
subsequent use of the trade name by a third party, whether as a trade name or a
mark or collective mark, or any such use of a similar trade name or mark, likely to
mislead the public, shall be deemed unlawful.
Q: S Development Corporation sued Shangrila Corporation for using the S
logo and the tradename Shangrila. The former claims that it was the first to
register the logo and the tradename in the Philippines and that it had been
using the same in its restaurant business. Shangrila Corporation counters
that it is an affiliate of an international organization which has been using
such logo and tradename Shangrila for over 20 years. However, Shangrila
Corporation registered the tradename and logo in the Philippines only after
the suit was filed. Which of the two corporations has a better right to use the
logo and the tradename? Explain.
ANS: S Development Corporation has a better right to use the logo and the
tradename, since the protective benefits of the law are conferred by the fact of
[Type text]
[Type text]
registration and not by use. Although Shangrila Corporation's parent had used the
tradename and logo long before, the protection of the laws will be for S
Development Corporation because it was the first entity to register the intellectual
properties (2005 Bar Examination Question with suggested answers from Answers
to Bar Examination Questions by the UP Law Complex and Philippine Association
of Law Schools).
Q: Enumerate the non-registrable marks under Sec. 123.1.
ANS: A mark cannot be registered if it:
1. Consists of immoral, deceptive or
scandalous matter, or matter
which may disparage or falsely
suggest
a
connection
with
persons,
living
or
dead,
institutions, beliefs, or national
symbols, or bring them into
contempt or disrepute;
2. Consists of the flag or coat of
arms or other insignia of the
Philippines or any of its political
subdivisions, or of any foreign
nation, or any simulation thereof;
3. Consists of a name, portrait or
signature identifying a particular
living individual except by his
written consent, or the name,
signature, or portrait of a
deceased
President
of
the
Philippines, during the life of his
widow, if any, except by written
consent of the widow;
4. Is identical with a registered mark
belonging to a different proprietor
or a mark with an earlier filing or
priority date, in respect of:
a.
The same goods or services, or
b. Closely related goods or services,
or
c. If it nearly resembles such a mark
as to be likely to deceive or cause
confusion;
5. Is identical with, or confusingly
similar to, or constitutes a
translation of a mark which is
considered by the competent
authority of the Philippines to be
well-known internationally and in
the Philippines, whether or not it is
registered here, as being already
the mark of a person other than
the applicant for registration, and
used for identical or similar goods
or services.
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[Type text]
6.
7.
8.
9.
10.
11.
12.
13.
Is identical with, or confusingly

similar to, or constitutes a
translation of a mark considered
well-known in accordance with the
preceding paragraph, which is
registered in the Philippines with
respect to goods or services which
are not similar to those with
respect to which registration is
applied for: Provided, That use of
the mark in relation to those goods
or services would indicate a
connection between those goods
or services, and the owner of the
registered mark: Provided further,
That the interests of the owner of
the registered mark are likely to be
damaged by such use;
Is likely to mislead the public,
particularly as to the nature,
quality,
characteristics
or
geographical origin of the goods
or services;
Consists exclusively of signs that
are generic for the goods or
services that they seek to identify;
Consists exclusively of signs or of
indications that have become
customary or usual to designate
the goods or services in everyday
language or in bona fide and
established trade practice;
Consists exclusively of signs or of
indications that may serve in trade
to designate the kind, quality,
quantity, intended purpose, value,
geographical origin, time or
production of the goods or
rendering of the services, or other
characteristics of the goods or
services;
Consists of shapes that may be
necessitated by technical factors
or by the nature of the goods
themselves or factors that affect
their intrinsic value;
Consists of color alone, unless
defined by a given form; or
Is contrary to public order or
morality.
Q: Is prior use a requirement for trademarks?

ANS: The applicant or the registrant shall file a declaration of actual use of the
[Type text]
[Type text]
mark with evidence to that effect, as prescribed by the Regulations within three (3)
years from the filing date of the application. Otherwise, the application shall be
refused or the mark shall be removed from the Register by the Director (Sec.
124.2).
NOTE: Although prior use is not a requirement for application, actual use is a
requirement under the Sec 124.2 of the code after registration and failure to comply
with such may shall result to the removal of the mark from the register by the
Director.
Q: Discuss the tests to determine confusing similarity between marks.
ANS: The tests are the following:
a. DOMINANCY TEST - Infringement is
determined by the test of dominancy
rather than by differences or
variations in the details of one
trademark and of another. Similarity in
size, form and color, while relevant, is
not conclusive. If the competing
trademark contains the main or
essential or dominant features of
another, and confusion is likely to
result, infringement takes place (Asia
Brewery v. CA and San Miguel, GR
No. 103543, July 5, 1993).
The Dominancy Test focuses on the similarity of the main, essential,
dominant, or prevalent features of a mark. Exact duplication or imitation is
not necessary. This test is incorporated in the Intellectual Property Code
and is controlling.
b. HOLISTIC TEST - To determine whether a trademark has been infringed,
we must consider the mark as a whole and not as dissected. If the buyer is
deceived, it is attributable to the marks as a totality, not usually to any part
of it. The court therefore should be guided by its first impression, for the
buyer acts quickly and is governed by a casual glance, the value of which
may be dissipated as soon as the court assumed to analyze carefully the
respective features of the mark (Del Monte Corporation, et al. v. CA, 181
SCRA 410, 1990).
NOTE: The Holistic Test mandates that the entirety of the marks in
question must be considered in determining confusing similarity.
Q: What are well-known marks?
ANS: Well-known marks are those which a competent authority of the Philippines
has designated to be well-known internationally and in the Philippines. In
determining whether a mark is well-known, the knowledge of the relevant sector of
the public, rather than the public at large, including knowledge in the Philippines
which has been obtained as a result of the promotion of the mark, shall be pertinent
(Sec 123.1, IPC).
Q: What are the rights conferred by registration?
ANS: The owner of a registered mark shall have the exclusive right to prevent all
third parties not having the owners consent from using in the course of trade
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[Type text]
identical or similar signs or containers for goods or services which are identical or
similar to those in respect of which the trademark is registered where such use
would result in a likelihood of confusion. In case of the use, of an identical sign for
identical goods or services, a likelihood of confusion shall be presumed (Sec.
147.1). The exclusive right of the owner of a well-known mark defined in Subsection
123.1(e) which is registered in the Philippines, shall extend to goods and services
which are not similar to those in respect of which the mark is registered: Provided,
That use of that mark in relation to those goods or services would indicate a
connection between those goods or services and the owner of the registered mark:
Provided, further, That the interests of the owner of the registered mark are likely to
be damaged by such use (Sec. 147.2).
In case of registered marks, in GENERAL:
Exclusive right to prevent third persons from using identical or similar signs or
containers for identical or similar goods or services, where such use would result in
a likelihood of confusion
NOTE: In case of the use of an identical sign for identical goods or services, a
likelihood of confusion shall be PRESUMED.
Exception: In cases of importation of drugs and medicines allowed under sec. 72.1
and of off-patent drugs and medicines, provided that said drugs or medicines bear
the registered marks that have not been tampered, unlawfully modified, or infringed
upon.
In case of a registered well-known mark:
a. Exclusive
right to
prevent
third
persons
from
using
identical
or similar
signs
even for
dissimilar
or
unrelated
goods or
services,
provided
that the
use will
indicate
a
connecti
on
between
the
goods
and the
owner of
the mark
[Type text]
[Type text]
and that
the
interest
of
the
owner
would
likely be
damaged
.
Q: What is the effect of use by third parties of names, etc. similar to
registered mark?
ANS: Under Sec. 165.2. (b) In particular, any subsequent use of the trade name by
a third party, whether as a trade name or a mark or collective mark, or any such use
of a similar trade name or mark, likely to mislead the public, shall be deemed
unlawful.
Q: What is the doctrine/principle of Related Goods or Services.
ANS: There is infringement when there is use of similar marks on goods that are so
related that the public may be, or is actually deceived, and misled that the goods
come from the same maker or manufacturer (Esso Standard Eastern Inc. v. CA,
116 GRN 29971, August 31, 1982).
Q: What are the elements of infringement?
ANS: The elements are the following:
a. Registration of trademark in IPO; and
b. Trademark is reproduced, copied, counterfeited or colorably
imitated.
c. It is used in connection with the sale, or it is offering for sale or
advertising of goods, services or business or applied to labels,
signs, wrappers, etc intended to be used in connection with such
goods, services or business.
d. There is, in the use or application a likelihood of confusion.
e. Lack of consent on the part of the registered owner or their
assignee (The Law on Trademark, Infringement and Unfair
Competition, Agpalo, 2000ed).
f.
There shall be no infringement of trademarks or trade names of
imported or sold drugs and medicine as defined in Sec.72.1 of the
Act as well as imported or sold off- patent drugs and medicines
(Sec. 14 RA 9502)
Q: What is the concept of colorable imitation?
ANS: It means such similarity in form, content, words, sound, meaning, special
arrangement or general appearance of the mark or trade name with that of the
other mark or trade name in their overall presentation or in their essential,
substantive or distinctive parts as would likely mislead or confuse persons in the
ordinary course of purchasing the genuine article.
It denotes such a close 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, and to cause him to purchase
the one supposing it to be the other (Etepha A.G. v. Director of Patents and
Westmont Pharmaceuticals, Inc., GR No. L-20635, March 31, 1966).
[Type text]
[Type text]
Q: What are the remedies in case of infringement?
ANS: Any person who shall, without the consent of the owner of the registered
mark:
a. 155.1. Use in commerce any reproduction, counterfeit, copy, or
colorable imitation of a registered mark or the same container or a
dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including
other preparatory steps necessary to carry out the sale of any
goods or services on or in connection with which such use is likely
to cause confusion, or to cause mistake, or to deceive; or
b.
155.2. Reproduce, counterfeit, copy or colorably imitate a

registered mark or a dominant feature thereof and apply such
reproduction, counterfeit, copy or colorable imitation to labels,
signs, prints,packages, wrappers, receptacles or advertisements
intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or
services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive, shall be liable in a
civil action for infringement by the registrant for the remedies
hereinafter set forth: Provided, That the infringement takes place at
the moment any of the acts stated in Subsection 155.1. or this
subsection are committed regardless of whether there is actual
sale of goods or services using the infringing material. (Sec. 22,
RA No 166a)
NOTE: An action for infringement may be maintained without proof of anything

more than the right to the exclusive use of the registered mark or trade name and
that the defendant has violated it. No allegation or proof of fraud or intent to defraud
is necessary (Compania General de Tabacos v. Alhambra Cigar, Co., 33 Phil 485
(1916) cited by Agpalo Ruben. The Law on Trademark Infringement and Unfair
Competition 1st ed. Rex Bookstore; Manila, 200.p.172).
Q: May damages be recovered in case of infringement?
ANS: Yes. Under Sec.156.1, the owner of a registered mark may recover damages
from any person who infringes his rights, and the measure of the damages suffered
shall be either the reasonable profit which the complaining party would have made,
had the defendant not infringed his rights, or the profit which the defendant actually
made out of the infringement, or in the event such measure of damages cannot be
readily ascertained with reasonable certainty, then the court may award as
damages a reasonable percentage based upon the amount of gross sales of the
defendant or the value of the services in connection with which the mark or trade
name was used in the infringement of the rights of the complaining party (Sec. 23,
First Par., RA 166a).
Under Sec.156.2, on application of the complainant, the court may impound during
the pendency of the action, sales invoices and other documents evidencing sales.
Under Sec. 156.3, in cases where actual intent to mislead the public or to defraud
the complainant is shown, in the discretion of the court, the damages may be
doubled. (Sec. 23, First Par., RA 166)
Under Sec.156.4, the complainant, upon proper showing, may also be granted
injunction. (Sec. 23, Second Par., RA 166a)
[Type text]
[Type text]
Q: In action for damages, is notice required?
ANS: Yes. Under Sec. 158, in any suit for infringement, the owner of the registered
mark shall not be entitled to recover profits or damages unless the acts have been
committed with knowledge that such imitation is likely to cause confusion, or to
cause mistake, or to deceive. Such knowledge is presumed if the registrant gives
notice that his mark is registered by displaying with the mark the words "Registered
Mark" or the letter R within a circle or if the defendant had otherwise actual notice of
the registration. (Sec. 21, RA 166a)
Q: What constitutes unfair competition?
ANS: Under Sec. 168, a person who has identified in the mind of the public the
goods he manufactures or deals in, his business or services from those of others,
whether or not a registered mark is employed, has a property right in the goodwill of
the said goods, business or services so identified, which will be protected in the
same manner as other property rights.
From jurisprudence, unfair competition has been defined as the passing off (or
palming off) or attempting to pass off upon the public of the goods or business of
one person as the goods or business of another with the end and probable effect of
deceiving the public. The essential elements of unfair competition are
a. confusing similarity in the general
appearance of the goods; and
b. intent to deceive the public and
defraud a competitor (Coca-Cola
Bottlers, Inc.v. Quintin J. Gomez, G.R.
No. 154491, November 14, 2008).
In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:
a. Any
person,
who
is
selling
his goods
and gives
them the
general
appearan
ce
of
goods of
another
manufact
urer
or
dealer,
either as
to
the
goods
themselv
es or in
the
wrapping
of
the
packages
in which
they are
[Type text]
[Type text]
containe
d, or the
devices
or words
thereon,
or in any
other
feature of
their
appearan
ce, which
would be
likely to
influence
purchase
rs
to
believe
that the
goods
offered
are those
of
a
manufact
urer
or
dealer,
other
than the
actual
manufact
urer
or
dealer, or
who
otherwise
clothes
the
goods
with such
appearan
ce
as
shall
deceive
the public
and
defraud
another
of
his
legitimate
trade, or
any
subsequ
ent
vendor of
such
[Type text]
[Type text]
goods or
any
agent of
any
vendor
engaged
in selling
such
goods
with
a
like
purpose;
b. Any
person
who by
any
artifice,
or
device,
or
who
employs
any other
means
calculate
d
to
induce
the false
belief
that such
person is
offering
the
services
of
another
who has
identified
such
services
in
the
mind of
the
public; or
c. Any person who shall make any false
statement in the course of trade or
who shall commit any other act
contrary to good faith of a nature
calculated to discredit the goods,
business or services of another.
NOTE: The remedies provided by Sections 156, 157 and 161 shall apply mutatis
mutandis. (Sec. 29, RA 166a)
NOTE: It is the employment by a person of deception or any other means contrary
to good faith by which he passes off the goods manufactured by him or in which he
[Type text]
[Type text]
deals, or his business or services, for those of another person who has established
goodwill in the goods such person manufactures or deals in, or his business or
services, or who shall commit any acts calculated to produce said result, whether or
not registered mark is employed (Section 168.2).
Q: What is the test of unfair competition?
ANS: The true test is whether the acts of the defendant have the intent of deceiving
or are calculated to deceive the ordinary buyer making his purchases under the
ordinary conditions of the particular trade to which the controversy relates. One of
the essential requisites in an action to restrain unfair competition is proof of fraud;
the intent to deceive, actual or probable must be shown before the right to recover
can exist (Superior Commercial Enterprises, Inc. vs. Kunnan Enterprises Ltd. and
Sports Concept & Distributor, Inc., G.R. No. 169974, April 20, 2010).
Q: Discuss the rules on trade names and business names.
ANS: Under Sec. 165, the rules are the following:
a. A name or designation may not be used as a trade name if by its nature or
the use to which such name or designation may be put, it is contrary to
public order or morals and if, in particular, it is liable to deceive trade circles
or the public as to the nature of the enterprise identified by that name.
b. Notwithstanding any laws or regulations providing for any obligation to
register trade names, such names shall be protected, even prior to or
without registration, against any unlawful act committed by third parties. In
particular, any subsequent use of the trade name by a third party, whether
as a trade name or a mark or collective mark, or any such use of a similar
trade name or mark, likely to mislead the public, shall be deemed unlawful.
c. The remedies provided for in Sections 153 to 156 and Sections 166 and
167 shall apply mutatis mutandis.
d. Any change in the ownership of a trade name shall be made with the
transfer of the enterprise or part thereof identified by that name. The
provisions of Subsections 149.2 to 149.4 shall apply mutatis mutandis.
Q: Discuss the rules on collective marks.
ANS: Under Sec. 167, the rules are the following:
a.
[Type text]
Subject
to
Subsecti
ons
167.2
and
167.3,
Sections
122
to
164 and
166 shall
apply to
collective
marks,
except
that
reference
s therein
to "mark"
[Type text]
b.
c.
[Type text]
shall be
read
as "colle
ctive
mark."
An
applicatio
n
for
registrati
on of a
collective
mark
shall
designat
e
the
mark as
a
collective
mark and
shall be
accompa
nied by a
copy of
the
agreeme
nt, if any,
governin
g the use
of
the
collective
mark.(b)
The
registere
d owner
of
a
collective
mark
shall
notify the
Director
of
any
changes
made in
respect
of
the
agreeme
nt
referred
to
in
paragrap
h (a).
In
addition
[Type text]
to
the
grounds
provided
in
Section
149, the
Court
shall
cancel
the
registrati
on of a
collective
mark
if
the
person
requestin
g
the
cancellati
on
proves
that only
the
registere
d owner
uses the
mark, or
that
he
uses or
permits
its use in
contrave
ntion of
the
agreeme
nts
referred
to
in
Subsecti
on 166.2
or that he
uses or
permits
its use in
a manner
liable to
deceive
trade
circles or
the public
as to the
origin or
any other
[Type text]
[Type text]
d.
common
character
istics of
the
goods or
services
concerne
d.
The
registrati
on of a
collective
mark, or
an
applicatio
n therefor
shall not
be
the
subject of
a license
contract.
(Sec. 40,
R. A. No.
166a)
IV.COPYRIGHT
Q: What are the original works under the Law on Copyright?
ANS: They are the following: (BO2P3-CL2AIM-D2W)
1.
Books, pamphlets, articles and other writings
2. Periodicals and newspapers
Note: A pure news report no longer finds protection under the new law,
BUT a column or published comment will. When newspapers and
periodicals include works enjoying independent copyrights, the works so
included continue enjoying the rights for duration proper to them.
3.
Lectures, sermons, addresses, dissertations prepared
for oral delivery, whether or not reduced in writing or
other material form
4.
Letters
5.
Dramatic
or
dramatico-musical
compositions,
choreographic works or entertainment in dumb shows
6.
Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or
designs for works of art;
8. Original ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial
design, and other works of applied art;
9. Illustrations, maps, plans, sketches, charts and three
dimensional works relative to geography, topography,
architecture or science;
10. Drawings or plastic works of a scientific or technical
character;
[Type text]
[Type text]
11. Photographic works including works produced by a
process analogous to photography; lantern slides;
12. Audiovisual works and cinematographic works and works
produced by a process analogous to cinematography or
any process for making audiovisual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works (Sec.
172).
Q: What works are considered as derivative works?
1. Dramatizations, translations, adaptations, abridgments, arrangements, and
other alterations of literary or artistic works; and
2. Collections of literary, scholarly or artistic works, and compilations of data
and other materials which are original by reason of the selection or
coordination or arrangement of their contents (Sec. 173t).
Q: What are the non-copyrightable works?
ANS: The works which are not protected are the following: (PIN-DOG)
a. Idea, procedure, system, method or operation, concept, principle, discovery or
mere data as such, even if they are expressed, explained, illustrated or
embodied in a work (Sec. 175);
b. News of the day and other miscellaneous facts having the character of mere
items of press information (Sec. 175);
c. Any official text of a legislative, administrative or legal nature, as well as any
official translation thereof (Sec. 175);
d. Any work of the Government of the Philippines;
General Rule:Condition Imposed prior approval of then government agency
or office wherein the work is created shall be necessary for exploitation of
such work for profit. Such agency or office may, among other things,
impose as a condition the payment of royalties.
Exception: No prior approval or conditions shall be required for the use of
any purpose of statutes, rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations, pronounced, read or rendered in
courts of justice, before administrative agencies, in deliberative assemblies
and in meetings of public character (Sec. 176).
e. Pleadings;
f.
Decisions of courts and tribunals. They may therefore be freely used or
quoted.
Q: What are the rights of a copyright owner?
ANS: The rights conferred by copyright are the following: (CMD)
a.
b.
[Type text]
Copyrigh
t
or
Economi
c rights
(Sec.
177);
Moral
rights
(Sec.
193); and
[Type text]
c.
Right to
participat
e in the
gross
proceeds
of
the
sale
or
lease of
the
original
work or
droit de
suite
(Sec.
200).
Q: What constitute copyright or economic rights?

ANS: Such rights include the exclusive right to (CAP)
a. carry out
b. authorize
c. prevent the following acts:
i.
Reproduction of the work or substantial portion of the work;
ii. Dramatization, translation, adaptation, abridgment, arrangement
or other transformation of the work;
iii. First public distribution of the original and each copy of the work;
iv. Rental of the original or a copy of an audiovisual or
cinematographic work;
v. Public display of the original or a copy of the work;
vi. Public performance of the work; and
vii. Other communication to the public of the work (Sec. 177);
viii. Assignment of the copyright and/ or the material object in whole
or in part
NOTE: Economic rights allows the owner to derive financial reward from
the use of his works by others (WIPO, Understanding Copyright and
Related Rights, p.9).
Q: What constitute moral rights?
ANS: The following are the moral rights:
a. Right of Paternity To require that the authorship of the works be attributed
to him, in a prominent way on the copies, and with the public use of the
work;
b. To make any alterations of his work prior to, or to withhold it from
publication;
c. Right of Integrity To object to any distortion, mutilation or other modification
of, or other derogatory action in relation to, his work which would be
prejudicial to his honor or reputation; and
d. To restrain the use of his name with respect to any work not of his own
creation or in a distorted version of his work (Sec. 193).
NOTE: These rights are distinct from economic rights and remain with the
author even after he has transferred or assigned to another other rights of
copyright(WIPO, 215).
[Type text]
[Type text]
NOTE: Moral rights allow the author to take certain actions to preserve the
personal link between himself and the work (WIPO, Understanding
Copyright and Related Rights, p.9).
Q: What is Droit de Suit?
ANS: It is the inalienable right to receive to the extent of 5% of the gross proceeds
of the sale or lease of a work (Sec. 200).e. Rules on ownership of copyright.
The requisites are the following:
1. Sale or lease of the work;
2. Original work;
3. Painting or sculpture, or manuscript; and
4. Subsequent to the first disposition by the author
Term/ Duration: Lifetime of the author and for 50 years after his death.
Q: What are the works NOT covered by droit de suit?
1. Prints;
2. Etchings;
3. Engravings;
4. Works of applied art; and
5. Works wherein the author primarily derives gain from the proceeds of
reproductions (Sec. 201).
Q: Discuss the rules on ownership of copyright.
ANS: The rules are the following:
a. Rules On Authorship
Creator
Single Creator
To Whom it Belongs
Author of the work, his heirs or assigns.
If work consists of UNIDENTIFIABLE parts: coauthors jointly as co-owners, unless there is
agreement to the contrary.
Joint Creator
If work consists of IDENTIFIABLE parts: author of
each part owns the part that he has created.
If the creation is PART of his regular duties:
employer, unless there is agreement to the contrary
Employees Creation
If it is NOT: employee
Work itself: person commissioning
Commissioned Work
Copyright: creator, unless there is a written
stipulation to the contrary.
For exhibition purposes: producer
Cinematographic Works For all other purposes: producer, author of the
scenario, composer, film director, author of the work
Publishers are deemed representative of the author,
unless:
Anonymous and pseudonymous
a. The contrary appears;
works
b. Pseudonyms or adopted name leaves no doubt
as to the authors identity; or author discloses
his identity.
Contributor is deemed to have waived his right,
Collective Works
unless he expressly reserves it (Sec. 196).
[Type text]
[Type text]
Letters
Writer.
However, the court may authorize their publication
or dissemination if the public good or the interest of
justice so requires (Art.723, New Civil Code).
Q: BR and CT are noted artists whose paintings are highly prized by collectors.
Dr. DL commissioned them to paint a mural at the main lobby of his new
hospital for children. Both agreed to collaborate on the project for a total fee of
two million pesos to be equally divided between them. It was also agreed that
Dr. DL had to provide all the materials for the painting and pay for the wages of
technicians and laborers needed for the work on the project. Assume that the
project is completed and both BR and CT are fully paid the amount of P2M as
artists' fee by DL. Under the law on intellectual property, who will own the
mural? Who will own the copyright in the mural? Why? Explain. (2004 Bar)
ANS: Under Section 178.4 of the Intellectual Property Code, in case of commissioned
work, the creator (in the absence of a written stipulation to the contrary) owns the
copyright, but the work itself belongs to the person who commissioned its creation.
Accordingly, the mural belongs to DL. However, BR and CT own the copyright, since
there is no stipulation to the contrary (Bar Examination Question with suggested
answers from Answers to Bar Examination Questions by the UP Law Complex and
Q: What are the limitations on copyright?
ANS: They are the following: (GF-PARRI)
a.
General limitations
(Sec. 184);
i. Fair use (Sec. 185);

ii. In the case of a work of architecture, the right to control the reconstruction or
rehabilitation in the same style as the original of the building (Sec. 186);
iii. Private reproduction of published work in a single copy by a natural person for
research and private study (Sec. 187);
iv.Reprographic reproduction in a single copy by non-profit libraries, under
certain circumstances (Sec. 188);
v. Reproduction, under certain circumstances, of a computer program in one
back-up copy by the lawful owner of the program (Sec. 189);
vi.Importation for personal purposes under certain conditions (Sec. 190).
b. Acts that do not infringe copyright:
i. Recitation or performance of a work: (a) made accessible to the
public, (b) privately done, (c) free of charge, (d) strictly for a
charitable or religious institution;
ii. Making of quotations from a published work: (a) compatible with
fair use, (b) extent is justified by the purpose, (c) source and name
of the author, appearing on work, must be mentioned;
iii. Reproduction or communication to the public by mass media of
articles on current political, social, economic, scientific or religious
topic, lectures, addresses and other works, delivered in public: (a)
for information purposes, (b) not expressly reserved, and (c)
source is already indicated;
iv.Reproduction and communication to the public of literary, scientific
or artistic works as part of reports of current events by means of
[Type text]
[Type text]
photography, cinematography or broadcasting to the extent
necessary for the purpose;
v. Inclusion of a work in a publication, broadcast or other
communication to the public, sound recording or film if made by
way of illustration for teaching purposes compatible with fair use
and the source and the name of the author appearing on work,
must be mentioned;
vi.Recording made in schools, universities, or educational institutions
of a work included in a broadcast for the use of schools,
universities or educational institutions. Such recording must be
deleted with in a reasonable period; such recording may not be
made from audio-visual works which are part of the general
cinema, repertoire of feature films except of brief excerpts of the
work;
vii.
Making of ephemeral recordings; (a) by a broadcasting
organization, (b) by means of its work or facilities, (c) for use in its
own broadcast;
viii.
Use made of a work by or under the direction or control
of the government for public interest compatible with fair use;
ix.Public performance or the communication to the public of a work in
a place where no admission fee is charged by a club on institution
for charitable or educational purpose only and the aim is not profitmaking;
x. Public display of the original or a copy of the work not made by
means of a film, slide, television, image or otherwise on screen or
by means of any other device or process either the work has been
published, sold, given away, or transferred to another person by
the author or his successor in title; and
xi.Use made of a work for the purpose of any judicial proceedings or
for the giving of professional advice by a legal practitioner (Sec.
184).
Q: In a written legal opinion for a client on the difference between
apprenticeship and learnership, Liza quoted without permission a labor law
expert's comment appearing in his book entitled "Annotations on the Labor
Code." Can the labor law expert hold Liza liable for infringement of copyright
for quoting a portion of his book without his permission? (2006 Bar)
ANS: Liza cannot be held liable for infringement of copyright since under the
Intellectual Property Code, one of the limitations to the copyright is the making of
quotations from a published work for purpose of any judicial proceedings or for
giving of professorial advice by legal practitioner, provided that the source and
name of the author are identified (See Section 184.1[k] of the Intellectual Property
Code of the Philippines) (Bar Examination Question with suggested answers from
Answers to Bar Examination Questions by the UP Law Complex and Philippine
Association of Law Schools).
Q: What is the doctrine of fair use?
ANS: It is a privilege, of persons other than the owner of the copyright, to use the
copyrighted material in a reasonable manner without his consent, notwithstanding
the monopoly granted to the owner by the copyright. It does not constitute
infringement.
Examples:
a. Criticizing, commenting, and news reporting;
[Type text]
[Type text]
b.
c.
Using for instructional purposes, including

producing multiple copies for classroom use, for
scholarship, research and similar purposes
Decompilation the reproduction of the code
and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with
other computer programs (Sec. 185).
Q: What are the criteria to determine whether use is fair or not?

ANS: The criteria are the following:
a. Purpose and the character of the use;
b. Nature of the copyrighted work;
c. Amount and substantiality of the portions used;
d. Effect of the use upon the potential market of the copyrighted work (Sec. 185).
Q: What constitutes copyright infringement?
ANS: It is any violation of the owners exclusive rights conferred by law (Pandect of
Commercial Law and Jurisprudence, Justice Jose Vitug, 2006 ed).
Q: What are the remedies for Infringement?
ANS: The remedies are the following:
a. Judicial (Secs. 216-217)
i. Action for damages;
ii.
Criminal action;
Any person who at the time when copyright subsists in a work has in his
possession an article which he knows, or ought to know, to be an
infringing copy of his work for the purpose of:
a. Selling, letting for hire, or by way of trade offering or exposing for sale,
or hire, the article;
b. Distributing the article for purpose of trade, or for any other purpose to
an extent that will prejudice the rights of the copyright owner in the
work; or
c. Trade exhibit of the article in public, shall be guilty of an offense and
shall be liable on conviction to imprisonment and fine (Section 217.3).
i.
iii.
Injunction;
iv.
Court order for impounding or destruction of infringing

materials;
v.
Payment of moral and exemplary damages even in case

of acquittal by the accused;
vi.
Seizure and impounding of infringing materials for the

purpose of evidence
b. Administrative
Administrative action;
[Type text]
[Type text]
ii.
iii.
iv.
Cease and desist order;

Forfeiture of paraphernalia used in committing the offense;
Administrative fines
Q: Is authorship presumed?
ANS: The natural person whose name is indicated on a work in the usual manner
as the author shall, in the absence of proof to the contrary, be presumed to be the
author of the work. This is applicable even if the name is a pseudonym, where the
pseudonym leaves no doubt as to the identity of the author (Sec. 219.1). The
person or body corporate whose name appears on an audio-visual work in the
usual manner shall, in the absence of proof to the contrary, be presumed to be the
maker of said work (Sec. 219.2).
Q: When do the actions for infringement prescribe?
ANS: The actions prescribe in the following periods:
Action for damages
Criminal action
Petition for injunctive relief
Petition
for
the
impounding
and
destruction of infringing
material
4 years from the time the cause of action

arose (Sec. 226)
Subject to the general rules of prescription
of crimes
None
None
SPECIAL LAWS
I. ANTI-MONEY LAUNDERING LAW (RA 9160, AS
AMENDED BY RA 9194, RA 10167 and RA
10365)
A. POLICY OF THE LAW
Q: What is the policy of the law?
ANS: The following are the policies of the law:
1.To protect and preserve the integrity and confidentiality of bank accounts
and to ensure that the Philippines shall not be used as a money laundering
site for the proceeds of any unlawful activity.
2. To extend cooperation in transnational investigations and prosecutions of
persons involved in money laundering activities whenever committed.
(Sec. 2, RA 9160)
B. COVERED INSTITUTIONS
Q: What institutions are covered by AMLA?
ANS: The following are the covered institutions:
a. Banks, non-banks, quasi-banks, trust entities,
foreign exchange dealers, pawnshops, money
changers, remittance and transfer companies
and other similar entities and all other persons
and their subsidiaries and affiliates supervised
or regulated by the Bangko Sentral ng Pilipinas
(BSP);
[Type text]
[Type text]
b.
i.
Insurance companies, pre-need companies and

all other persons supervised or regulated by the
Insurance Commission (IC);
c. The following entities administering securities:

Securities dealers, brokers, salesmen, investment houses and
other similar persons managing securities or rendering services
as investment agent, advisor, or consultant,
ii.
Mutual funds, close-end investment companies, common trust

funds, and other similar persons, and
iii.
Other entities administering or otherwise dealing in currency,

commodities or financial derivatives based thereon, valuable
objects, cash substitutes and other similar monetary instruments
or property supervised or regulated by the (SEC);
d. Jewelry dealers in precious stones, who, as a
business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
e.
Company service providers which, as a

business, provide any of the following services
to third parties: (i) acting as a formation agent
of juridical persons; (ii) acting as (or arranging
for another person to act as) a director or
corporate secretary of a company, a partner of
a partnership, or a similar position in relation to
other juridical persons; (iii) providing a
registered office, business address or
accommodation,
correspondence
or
administrative address for a company, a
partnership or any other legal person or
arrangement; and (iv) acting as (or arranging
for another person to act as) a nominee
shareholder for another person; and
f.
Persons who provide any of the following

services:
managing of client money, securities or other
assets;
i.
[Type text]
ii.
management of bank, savings or securities

accounts;
iii.
organization of contributions for the creation,

operation or management of companies; and
[Type text]
iv.
creation, operation or management of juridical

persons or arrangements, and buying and
selling business entities. (Sec. 1, RA 10365)
Q: Are lawyers and accounts covered by AMLA?

ANS: No. The term covered persons shall exclude lawyers and accountants acting
as independent legal professionals in relation to information concerning their clients
or where disclosure of information would compromise client confidences or the
attorney-client relationship: Provided, That these lawyers and accountants are
authorized to practice in the Philippines and shall continue to be subject to the
provisions of their respective codes of conduct and/or professional responsibility or
any of its amendments. (Sec. 3, RA 10365)
C. OBLIGATION OF COVERED INSTITUTIONS
Q: What is the obligation of covered institutions?
ANS: Covered persons shall report to the AMLC all covered transactions and
suspicious transactions within five (5) working days from occurrence thereof, unless
the AMLC prescribes a different period not exceeding fifteen (15) working days.
(Sec. 7, RA 10365)
Q: Can covered persons communicate covered or suspicious transactions to

other entities?
ANS: No. When reporting covered or suspicious transactions to the AMLC, covered
persons and their officers and employees are prohibited from communicating,
directly or indirectly, in any manner or by any means, to any person or entity, the
media, the fact that a covered or suspicious transaction has been reported or is
about to be reported, the contents of the report, or any other information in relation
thereto. Neither may such reporting be published or aired in any manner or form by
the mass media, electronic mail, or other similar devices. In case of violation
thereof, the concerned officer and employee of the covered person and media shall
be held criminally liable. (Sec. 7, RA 10365)
D. COVERED TRANSACTIONS
Q: What are the covered transactions?

ANS: The following are the covered transactions:
[Type text]
[Type text]
a.
Any transaction in cash or other equivalent monetary

instrument involving a total amount in excess of Five
hundred thousand pesos (P500,000.00) within one (1)
banking day (Sec. 1, RA 10365);
b.
Jewelry dealers in precious stones, who, as a business,

trade in precious stones, for transactions in excess of One
million pesos (P1,000,000.00) (Sec. 1, RA 10365); and
c.
The Land Registration Authority and all its Registries of

Deeds to submit to the AMLC, reports on all real estate
transactions involving an amount in excess of Five hundred
thousand pesos (P500,000.00) within fifteen (15) days from
the date of registration of the transaction, in a form to be
prescribed by the AMLC (Sec. 6, RA 10365).
E. SUSPICIOUS TRANSACTIONS
Q: What are the suspicious transactions covered by AMLA?
ANS: Transactions with covered institutions, regardless of the amounts involved,
where any of the following circumstances exist:
a.
b.
c.
d.
e.
f.
g.
There is no underlying legal or trade obligation, purpose or economic

justification;
The client is not properly identified;
The amount involved is not commensurate with the business or financial
capacity of the client;
Taking into account all known circumstances, it may be perceived that the
clients transaction is structured in order to avoid being the subject of
reporting requirements under the Act;
Any circumstance relating to the transaction which is observed to deviate
from the profile of the client and/or the clients past transactions with the
covered institution;
The transaction is in any way related to an unlawful activity or offense
under this Act that is about to be, is being or has been committed; or
Any transaction that is similar or analogous to any of the foregoing. (Sec.
4, RA 10365)
F. WHEN IS MONEY LAUNDERING COMMITTED

Q: When is money laundering committed by a person?
ANS: Money laundering is committed by any person who, knowing that any
monetary instrument or property represents, involves, or relates to the proceeds of
any unlawful activity:
a. Transacts said monetary instrument or property;
b. Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or property;
[Type text]
[Type text]
c.
d.
e.
f.
g.
Conceals or disguises the true nature, source, location,

disposition, movement or ownership of or rights with
respect to said monetary instrument or property;
Attempts or conspires to commit money laundering
offenses referred to in paragraphs 1, 2 and 3;
Aids, abets, assists in or counsels the commission of the
money laundering offenses referred to in paragraphs (a),
(b) or (c) above; an
Performs or fails to perform any act as a result of which he
facilitates the offense of money laundering referred to in
paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered
person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to the
Anti-Money Laundering Council (AMLC), fails to do so
(Sec. 4, RA 10365).
G. UNLAWFUL ACTIVITIES OR PREDICATE CRIMES

Q: What are the unlawful activities or predicate crimes subject to AMLA?
ANS: Unlawful activity refers to any act or omission or series or combination
thereof involving or having direct relation to the following:
1. Kidnapping for ransom under Article 267 of Act No. 3815,
otherwise known as the Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of
Republic Act No. 9165, otherwise known as the
Comprehensive Dangerous Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No.
3019, as amended, otherwise known as the Anti-Graft and
Corrupt Practices Act;
4. Plunder under Republic Act No. 7080, as amended;
5. Robbery and extortion under Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised Penal Code, as amended;
6. Jueteng and Masiao punished as illegal gambling under
Presidential Decree No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as
amended and Presidential Decree No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code,
as amended;
9. Swindling under Article 315 and Other Forms of Swindling
under Article 316 of the Revised Penal Code, as amended;
10. Smuggling under Republic Act Nos. 455 and 1937;
11. Violations of Republic Act No. 8792, otherwise known as the
Electronic Commerce Act of 2000;
12. Hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised
Penal Code, as amended;
13. Terrorism and conspiracy to commit terrorism as defined and
penalized under Sections 3 and 4 of Republic Act No. 9372;
14. Financing of terrorism under Section 4 and offenses
punishable under Sections 5, 6, 7 and 8 of Republic Act No.
10168, otherwise known as the Terrorism Financing
Prevention and Suppression Act of 2012:
[Type text]
[Type text]
15. Bribery under Articles 210, 211 and 211-A of the Revised
Penal Code, as amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code, as amended;
16. Frauds and Illegal Exactions and Transactions under Articles
213, 214, 215 and 216 of the Revised Penal Code, as
amended;
17. Malversation of Public Funds and Property under Articles
217 and 222 of the Revised Penal Code, as amended;
18. Forgeries and Counterfeiting under Articles 163, 166, 167,
168, 169 and 176 of the Revised Penal Code, as amended;
19. Violations of Sections 4 to 6 of Republic Act No. 9208,
otherwise known as the Anti-Trafficking in Persons Act of
2003;
20. Violations of Sections 78 to 79 of Chapter IV, of Presidential
Decree No. 705, otherwise known as the Revised Forestry
Code of the Philippines, as amended;
21. Violations of Sections 86 to 106 of Chapter VI, of Republic
Act No. 8550, otherwise known as the Philippine Fisheries
Code of 1998;
22. Violations of Sections 101 to 107, and 110 of Republic Act
No. 7942, otherwise known as the Philippine Mining Act of
1995;
23. Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act
No. 9147, otherwise known as the Wildlife Resources
Conservation and Protection Act;
24. Violation of Section 7(b) of Republic Act No. 9072, otherwise
known as the National Caves and Cave Resources
Management Protection Act;
25. Violation of Republic Act No. 6539, otherwise known as the
Anti-Carnapping Act of 2002, as amended;
26. Violations of Sections 1, 3 and 5 of Presidential Decree No.
1866, as amended, otherwise known as the decree
Codifying the Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or Disposition of
Firearms, Ammunition or Explosives;
27. Violation of Presidential Decree No. 1612, otherwise known
as the Anti-Fencing Law;
28. Violation of Section 6 of Republic Act No. 8042, otherwise
known as the Migrant Workers and Overseas Filipinos Act of
1995, as amended by Republic Act No. 10022;
29. Violation of Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines;
known as the Anti-Photo and Video Voyeurism Act of 2009;
known as the Anti-Child Pornography Act of 2009;
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and
14 of Republic Act No. 7610, otherwise known as the Special
Protection of Children Against Abuse, Exploitation and
Discrimination;
33. Fraudulent practices and other violations under Republic Act
No. 8799, otherwise known as the Securities Regulation
Code of 2000; and
[Type text]
[Type text]
34. Felonies or offenses of a similar nature that are punishable
under the penal laws of other countries. (Sec. 2, RA 10365)
H. ANTI-MONEY LAUNDERING COUNCIL (AMLC)
Q: What is the Anti-Money Laundering Council?
ANS: The Anti-Money Laundering Council is created and shall be composed of the
Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the
Insurance Commission and the Chairman of the Securities and Exchange
Commission as members (Sec. 4, RA 9194).
I. FUNCTIONS
Q: What are functions of the Anti-Money Laundering Council?
ANS: The following are its functions:
a. To require and receive covered or suspicious transaction reports from
covered institutions;
b. To issue orders addressed to the appropriate Supervising Authority or the
covered institution to determine the true identity of the owner of any
monetary instrument or property subject of a covered transaction or
suspicious transaction report or request for assistance from a foreign
State, or believed by the Council, on the basis of substantial evidence, to
be, in whole or in part, wherever located, representing, involving, or
related to, directly or indirectly, in any manner or by any means, the
proceeds of an unlawful activity.
c. To institute civil forfeiture proceedings and all other remedial proceedings
through the Office of the Solicitor General;
d. To cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses;
e. To investigate suspicious transactions and covered transactions deemed
suspicious after an investigation by AMLC, money laundering activities,
and other violations of this Act;
f.
To apply before the Court of Appeals, ex parte, for the freezing of any
monetary instrument or property alleged to be laundered, proceeds from,
or instrumentalities used in or intended for use in any unlawful activity as
defined in Section 3(i); (Sec. 6, RA 10365)
g. To implement such measures as may be necessary and justified under
this Act to counteract money laundering;
h. To receive and take action in respect of, any request from foreign states
for assistance in their own anti-money laundering operations provided in
this Act;
i.
To develop educational programs on the pernicious effects of money
laundering, the methods and techniques used in money laundering, the
viable means of preventing money laundering and the effective ways of
prosecuting and punishing offenders;
j.
To enlist the assistance of any branch, department, bureau, office, agency
or instrumentality of the government, including government-owned and
-controlled corporations, in undertaking any and all anti-money laundering
operations, which may include the use of its personnel, facilities and
resources for the more resolute prevention, detection and investigation of
money laundering offenses and prosecution of offenders; and
k. To impose administrative sanctions for the violation of laws, rules,
regulations and orders and resolutions issued pursuant thereto (Sec. 5,
RA 9194)
[Type text]
[Type text]
l.
To require the Land Registration Authority and all its Registries of Deeds
to submit to the AMLC, reports on all real estate transactions involving an
amount in excess of Five hundred thousand pesos (P500,000.00) within
fifteen (15) days from the date of registration of the transaction, in a form
to be prescribed by the AMLC. The AMLC may also require the Land
Registration Authority and all its Registries of Deeds to submit copies of
relevant documents of all real estate transactions (Sec. 6, RA 10365).
J. FREEZING OF MONETARY INSTRUMENT OR PROPERTY

Q: Can the AMLC freeze the monetary instrument or property related unlawful
activity?
ANS: Yes. Upon a verified ex parte petition by the AMLC and after determination
that probable cause exists that any monetary instrument or property is in any way
related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals
may issue a freeze order which shall be effective immediately, and which shall not
exceed six (6) months depending upon the circumstances of the
case: Provided, That if there is no case filed against a person whose account has
been frozen within the period determined by the court, the freeze order shall be
deemed ipso facto lifted: Provided, further, That this new rule shall not apply to
pending cases in the courts. In any case, the court should act on the petition to
freeze within twenty-four (24) hours from filing of the petition. If the application is
filed a day before a nonworking day, then the computation of the twenty-four (24)
hour period shall exclude the nonworking days (Sec. 8, RA 10365).
Q: What is the remedy of the person whose monetary instrument or property
has been frozen?
ANS: A person whose account has been frozen may file a motion to lift the freeze
order and the court must resolve this motion before the expiration of the freeze
order. (Sec. 8, RA 10365)
Q: Can another court issue a TRO to restrain the Freeze order?
ANS: No court shall issue a temporary restraining order or a writ of injunction
against any freeze order, except the Supreme Court. (Sec. 8, RA 10365)
K. AUTHORITY TO INQUIRE INTO BANK DEPOSITS
Q: What is the authority of the AMLC to inquire into bank accounts?
ANS: Notwithstanding the provisions of RA 1405, RA 6426, RA 8791 and other
laws, the AMLC may inquire into or examine any particular deposit or investment,
including related accounts, with any banking institution or non-bank financial
institution upon order of any competent court based on an ex parte application in
cases of violations of this Act, when it has been established that there is probable
cause that the deposits or investments, including related accounts involved, are
related to an unlawful activity as defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof; (Sec. 2, RA 10167)
Q: Are there instances when the AMLC can inquire into bank accounts
without court order?
ANS: Yes. No court order shall be required in cases involving activities defined in
Section 3(1) (Kidnapping), (2) (Comprehensive Dangerous Drugs Act), and (12)
(High jacking and arson) hereof, and felonies or offenses of a nature similar to
those mentioned in Section 3(i)(1), (2), and (12), which are punishable under the
penal laws of other countries, and terrorism and conspiracy to commit terrorism as
defined and penalized under Republic Act No. 9372. (Sec. 2, RA 10167)
[Type text]
[Type text]
II. FOREIGN INVESTMENTS ACT

A. POLICY OF THE LAW
Q: What is the policy of the Foreign Investments Act?
ANS: The following are the policies of the law:
1.
To attract, promote and welcome productive

investments from foreign individuals,
partnerships,
corporations,
and
governments, including their political
subdivisions, in activities which significantly
contribute to national industrialization and
socioeconomic development to the extent
that foreign investment is allowed in such
activity by the Constitution and relevant
laws.
2.
To significantly expand livelihood and

employment opportunities for Filipinos;
enhance economic value of farm products;
promote the welfare of Filipino consumers;
expand the scope, quality and volume of
exports and their access to foreign markets;
and/or transfer relevant technologies in
agriculture, industry and support services. \
3.
To supplement to Filipino capital and

technology in those enterprises serving
mainly the domestic market. (Sec. 2, RA
7042)
Q: Is there a restriction on the extent of foreign ownership of export

enterprises?
ANS: As a general rule, there are no restrictions on extent of foreign ownership of
export enterprises. In domestic market enterprises, foreigners can invest as much
as one hundred percent (100%) equity except in areas included in the negative list.
Foreign owned firms catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation in their
businesses by taking in Filipino partners, electing Filipinos to the board of directors,
implementing transfer of technology to Filipinos, generating more employment for
the economy and enhancing skills of Filipino workers. (Sec. 2, RA 7042)
B. DEFINITION OF TERMS
F oreign Investment
Q: What is a foreign investment?
[Type text]
[Type text]
ANS: A foreign investment is an equity investment made by a non-Philippine
national in the form of foreign exchange and/or other assets actually transferred to
the Philippines and duly registered with the Central Bank which shall assess and
appraise the value of such assets other than foreign exchange (Sec. 3c, RA 7042).
Doing Business in the Philippines
Q: Under FIA, what constitute Doing Business?
ANS: Doing business includes soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization: Provided, however, That the phrase "doing
business: shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name
and for its own account (Sec. 3d, RA 7042).
Export Enterprise
Q: What is an export enterprise?
ANS: It is an enterprise which produces goods for sale, or renders services to the
domestic market entirely or if exporting a portion of its output fails to consistently
export at least sixty percent (60%) thereof; (Sec. 3e, RA 7042)
Domestic Market Enterprise
Q: What is a domestic market enterprise?
ANS: It is an enterprise serving mainly the domestic market (Sec. 2, RA 7042).
C. REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS
Q: What the registration requirement of investments of Non-Philippine
Nationals?
ANS: Without need of prior approval, a non-Philippine national and not otherwise
disqualified by law, may upon registration with the Securities and Exchange
Commission (SEC), or with the Bureau of Trade Regulation and Consumer
Protection (BTRCP) of the Department of Trade and Industry in the case of single
proprietorships, do business as defined in Sec. 3 (d) of this Act or invest in a
domestic enterprise up to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or limited to a
smaller percentage by existing law and/or limited to a smaller percentage by
existing law and/or under the provisions of this Act. Upon effectivity of this Act, SEC
shall effect registration of any enterprise applying under this Act within fifteen (15)
days upon submission of completed requirements. (Sec. 5, RA 7042)
D. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES
Q: What is the rule in foreign investments in export enterprises?
[Type text]
[Type text]
ANS: Foreign investment in export enterprises whose products and services do not
fall within Lists A and B of the Foreign Investment Negative List provided under
Sec. 8 hereof is allowed up to one hundred percent (100%) ownership. (Sec. 6, RA
7042)
Q: What is the requirement for non-Philippine export enterprises?
ANS: Export enterprises which are non-Philippine nationals shall register with BOI
and submit the reports that may be required to ensure continuing compliance of the
export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as
the case may be, of any export enterprise that fails to meet the export ratio
requirement. The SEC or BTRCP shall thereupon order the non-complying export
enterprise to reduce its sales to the domestic market to not more than forty percent
(40%) of its total production; failure to comply with such SEC or BTRCP order,
without justifiable reason, shall subject the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties provided in Sec. 14 hereof. (Sec. 6, RA
7042)
E. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES
Q: May non-Philippine nationals own 100% of domestic market enterprises?
ANS: Non-Philippine nationals may own up to one hundred percent (100%) of
domestic market enterprises unless foreign ownership therein is prohibited or
limited by existing law or the Foreign Investment Negative List under Sec. 8 hereof.
(Sec. 7, RA 7042)
F. FOREIGN INVESTMENT NEGATIVE LIST
Q: What are the negative lists under FIA?
ANS: FIA has three lists, List A, List B and List C.
1.
List A shall enumerate the areas of activities reserved to Philippine

nationals by mandate of the Constitution and specific laws.
2.
List B shall contain the areas of activities and enterprises pursuant to

law:
a.
[Type text]
Those which
are defenserelated
activities,
requiring prior
clearance and
authorization
from
Department of
National
Defense
(DND)
to
engage
in
such activity,
such as the
[Type text]
manufacture,
repair,
storage
and/or
distribution of
firearms,
ammunition,
lethal
weapons,
military
ordnance,
explosives,
pyrotechnics
and
similar
materials;
unless such
manufacturing
or
repair
activity
is
specifically
authorized,
with
a
substantial
export
component, to
a
nonPhilippine
national
by
the Secretary
of
National
Defense; or
b.
[Type text]
Those which
have
implications
on
public
health
and
morals, such
as
the
manufacture
and
distribution of
dangerous
drugs;
all
forms
of
gambling;
[Type text]
nightclubs,
bars,
beerhouses,
dance halls;
sauna
and
steam
bath
houses and
massage
clinics.
i.
Small and medium-sized domestic market enterprises with paid-in

equity capital less than the equivalent of five hundred thousand US
dollars (US$500,000) are reserved to Philippine nationals, unless
they involve advanced technology as determined by the Department
of Science and Technology. Export enterprises which utilize raw
materials from depleting natural resources, with paid-in equity capital
of less than the equivalent of five hundred thousand US dollars
(US$500,000) are likewise reserved to Philippine nationals.
ii. Amendments to List B may be made upon recommendation of the

Secretary of National Defense, or the Secretary of Health, or the
Secretary of Education, Culture and Sports, indorsed by the NEDA,
or upon recommendation motu propio of NEDA, approved by the
President, and promulgated by Presidential Proclamation.
3.
List C shall contain the areas of investment in which existing enterprises

already serve adequately the needs of the economy and the consumer
and do not require further foreign investments, as determined by NEDA
applying the criteria provided in Sec. 9 of this Act, approved by the
President and promulgated in a Presidential Proclamation. Amendments
to List B and C after promulgation and publication of the first Regular
Foreign Investment Negative List at the end of the transitory period shall
not be made more often than once every two (2) years (Sec. 8, RA
7042).
[Type text]

BRB - Commercial Law

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[Type text]

II. NATURE OF LETTER OF CREDIT

The contract of sale between the buyer and the seller,

The contract of the buyer with the issuing bank, and

III.PARTIES TO A LETTER OF CREDIT

A.RIGHTS AND OBLIGATIONS OF PARTIES

Advising (notifying) bank may be utilized to convey to the seller the

Q: Should the buyer go to the issuing bank to claim payment?

IV.BASIC PRINCIPLES OF LETTER OF CREDIT

B.FRAUD EXCEPTION PRINCIPLE

C.DOCTRINE OF STRICT COMPLIANCE

TRUST RECEIPTS LAW

II. RIGHTS OF THE ENTRUSTER

III. OBLIGATIONS AND LIABILITY OF THE

PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF

RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF

IV. REMEDIES AVAILABLE

Liable for DAMAGES under Art. 33 of the NCC, without need of

If the entrustee complied with his obligations before there

If the entrustee complied with his obligations after there

Q: What is the extent of a Warehousemans Lien?

NEGOTIABLE INSTRUMENTS LAW

II.COMPLETION AND DELIVERY

Where the instrument or an acceptance or any indorsement thereon is

Where an instrument expressed to be payable at a fixed period after

Q. When may blanks be filled?

Q: What is the effect if the instrument is incomplete and undelivered?

Q: What is the effect if the instrument is complete but undelivered?

Is Jun liable to Marie?

Indorsers may be made liable to

Indorsers subsequent to forgery are

Drawee is liable (No privity between

Q: CX maintained a checking account with UBANK, Makati Branch. One of his

V.ACCOMMODATION PARTY (AM)

Qualified Constitutes the indorser a mere assignor of the title to

VII.RIGHTS OF THE HOLDER

That he has become a holder of it before it was overdue and without

Q: What are the effects of certain defenses?

The delivery of the instrument with the intention of giving effect

NOTE: If completed and negotiated without authority, not a valid contract

Q: What are the liabilities of an acceptor?

Engages to pay according to the tenor of his acceptance

Q: Who is a general indorser?

Q: Who is an irregular indorser?

A person must not be a party to the instrument;

XIV.PRESENTMENT FOR PAYMENT

Personal demand for payment at the proper place; and

Q: To whom must presentment for payment be made?

The following are the rules to be observed on presentment:

Presentment where instrument payable at bank. Where the instrument

Presentment where principal debtor is dead. Where the person

Presentment to persons liable as partners. Where the persons primarily

Presentment to joint debtors. Where there are several persons, not

Q: When is presentment not required to charge the drawer?

Q: When is presentment not required in order to charge an indorser?

Q: When is instrument dishonored by non-payment?

XI.DISCHARGE OF NEGOTIABLE INSTRUMENT

Q: What are the effects of renunciation?

XII. MATERIAL ALTERATION

payment thereof according to its

XIV.PRESENTMENT FOR ACCEPTANCE

Q: What is the effect of failure to make presentment?

Q: What is the effect of dishonor by non-acceptance?

Q: What is a promissory note?