-1-
conclusively prove that the transaction was, indeed,
Trust Receipts Law
1. S Corp. obtained letters of credit from M
Bank to cover its purchase of construction
materials. M Bank required HTY,
representative of S Corp. to sign 24 trust
receipts as security for the construction
materials and to hold those materials or
the proceeds of the sales in trust for M
Bank to the extent of the amount stated in
the trust receipts. S Corp. defaulted thus M
Bank filed a criminal action against HTY for
estafa. Can HTY be held liable for estafa
under the trust receipts law?
No. A trust receipt transaction is one where the
entrustee has the obligation to deliver to the
entruster the price of the sale, or if the
merchandise is not sold, to return the merchandise
to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first
refers to money received under the obligation
involving the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the second
refers to the merchandise received under the
obligation to “return” it (devolvera) to the owner.
When both parties enter into an agreement
knowing fully well that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not
a trust receipt transaction penalized under Sec. 13
of PD 115 in relation to Art. 315, par. 1(b) of the
RPC, as the only obligation actually agreed upon by
the parties would be the return of the proceeds of
the sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to pay
the bank the amount spent for the purchase of the
goods. In this case, the dealing between HTY and M
Bank was not a trust receipt transaction but one of
simple loan. HTY’s admission––that he signed the
trust receipts on behalf of S Corp., which failed to
pay the loan or turn over the proceeds of the sale
or the goods to M Bank upon demand––does not
Starr Weigand 2014
a trust receipts transaction. In contrast to the
nomenclature of the transaction, the parties really
intended a contract of loan. It has been ruled that
the fact that the entruster bank knew even before
the execution of the trust receipt agreements that
the construction materials covered were never
intended by the entrustee for resale or for the
manufacture of items to be sold is sufficient to
prove that the transaction was a simple loan and
not a trust receipts transaction. [Hur Tin Yang v.
People of the Philippines,G.R. No. 195117, August
14, 2013]
2. Spouses dela Cruz was in the business of
selling fertilizers and agricultural products,
for which they were granted a credit line by
PPI, and to secure it, trust receipts were
issued covering the goods to be paid for by
using the credit line. The trust receipts
contained the following: “In the event,
I/We cannot deliver/serve to the farmer-
participants all the inputs as enumerated
above within 60 days, then I/We agree that
the undelivered inputs will be charged to
my/our credit line, in which case, the
corresponding adjustment of price and
interests shall be made by PPI.” Is there a
trust receipt transaction?
No. The contract, its label notwithstanding, was not
a trust receipt transaction in legal contemplation or
within the purview of the Trust Receipts Law such
that its breach would render the Spouses criminally
liable for estafa. Under Section 4 of the Trust
Receipts Law, the sale of goods by a person in the
business of selling goods for profit who, at the
outset of the transaction, has, as against the buyer,
general property rights in such goods, or who sells
the goods to the buyer on credit, retaining title or
other interest as security for the payment of the
purchase price, does not constitute a trust receipt
transaction and is outside the purview and
coverage of the law. The sale of goods, documents
2013 & 2014 Q and A|Commercial Law

or instruments by a person in the business of selling
goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the
buyer, general property rights in such goods,
documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest
as security for the payment of the purchase price,
does not constitute a trust receipt transaction and
is outside the purview and coverage of this Decree.
When both parties enter into an agreement
knowing that the return of the goods subject of the
trust receipt is not possible even without any fault
on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115;
the only obligation actually agreed upon by the
parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the
bank the amount spent for the purchase of the
goods. [Spouses Dela Cruz v. Planters Products, Inc.,
GR No. 158649, February 18, 2013]
Starr Weigand 2014
-2-
Negotiable Instruments Law
1. W was accused of estafa for using a bum
check to defraud another person. The
check he issued was payable to cash. Can
he be held liable for estafa?
No. The check delivered was made payable to cash.
Under the Negotiable Instruments Law, this type of
check was payable to the bearer and could be
negotiated by mere delivery without the need of an
indorsement. This rendered it highly probable that
W had issued the check not to the person allegedly
defrauded, but to somebody else, who then
negotiated it to another. Relevantly, the person
allegedly defrauded confirmed that he did not
himself see or meet W at the time of the
transaction and thereafter, and expressly stated
that the person who signed for and received the
goods in exchange for the check was someone else.
It bears stressing that the accused, to be guilty of
estafa as charged, must have used the check in
order to defraud the complainant. What the law
punishes is the fraud or deceit, not the mere
issuance of the worthless check. W could not be
held guilty of estafa simply because he had issued
the check used to defraud a person. The proof of
guilt must still clearly show that it had been W as
the drawer who had defrauded a person by means
of the check. [People of the Philippines v. Gilbert
Reyes Wagas, G.R. No. 157943, September 4, 2013]
2. A postdated check with the date October 9,
2003 was issued, drawn against an account
of S with BPI, presented for deposit with
ABank, on October 10, 2002. Upon
presentment, the check was sent to the
PCHC. It was cleared by BPI and its amount
was debited from the account of S, and
credited to the account of the payee. The
account of S was closed, but he asked for
the return of the amount of the check,
which BPI agreed to. When BPI sent a
2013 & 2014 Q and A|Commercial Law
 -3-
photocopy of the check to ABank saying it was defendant’s failure to exercise such ordinary
was postdated, ABank refused to accept it. care, having the last clear chance to avoid loss or
After the check was sent back and forth injury, which was the proximate cause of the
between the two banks, ABank filed a occurrence of such loss or injury. If only BPI
complaint saying BPI should solely bear the exercised ordinary care in the clearing process, it
loss. Is ABank correct? could have easily noticed the glaring defect upon
seeing the date written on the face of the check
No. ABank and BPI should both bear the loss by "Oct. 9, 2003". BPI could have then promptly
allocating the damage on a 60-40 ratio. In light of returned the check and with the check thus
the contributory negligence of BPI, it should bear dishonored, ABank would have not credited the
40% of the loss, but ABank should bear 60%. amount thereof to the payee’s account. Thus,
"Contributory negligence is conduct on the part of notwithstanding the antecedent negligence of the
the injured party, contributing as a legal cause to ABank in accepting the post-dated check for
the harm he has suffered, which falls below the deposit, it can seek reimbursement from BPI in the
standard to which he is required to conform for his amount credited to the payee’s account covering
own protection." Admittedly, ABank’s acceptance the check. [Allied Banking Corporation v. Bank of
of the subject check for deposit despite the one the Philippine Islands, GR No. 188363, 27 February
year postdate written on its face was a clear 2013]
violation of established banking regulations and
practices. In such instances, payment should be
refused by the drawee bank and returned through
the PCHC within the 24-hour reglementary period.
Abank’s failure to comply with this basic policy
regarding post-dated checks was "a telling sign of
its lack of due diligence in handling checks coursed
through it." It bears stressing that "the diligence
required of banks is more than that of a Roman
paterfamilias or a good father of a family. The
highest degree of diligence is expected,"
considering the nature of the banking business that
is imbued with public interest. While it is true that
respondent's liability for its negligent clearing of the
check is greater, petitioner cannot take lightly its
own violation of the long-standing rule against
encashment of post-dated checks and the injurious
consequences of allowing such checks into the
clearing system.

The antecedent negligence of the plaintiff does not

preclude him from recovering damages caused by
the supervening negligence of the defendant, who
had the last fair chance to prevent the impending
harm by the exercise of due diligence. Moreover, in
situations where the doctrine has been applied, it

Starr Weigand 2014 2013 & 2014 Q and A|Commercial Law


Corporation Law
1. What are the current rules on principal
office address of corporations and
partnerships?
Previously, the SEC had allowed corporations and
partnerships to indicate in their principal office
address only the name of the city, town, or
municipality where they conduct business, and
considered “Metro Manila” as a principal office
address. Thereafter, on 16 February 2006, the SEC
issued Memorandum Circular No. 3, series of 2006,
directing corporations and partnerships whose
articles of incorporation or partnership still indicate
a general address as their principal office address,
such as a city, town or municipality, or “Metro
Manila”, to file, on or before 31 December 2014,
and amended articles of incorporation or
partnership, in order to specify their complete
addresses, such that it has a street number, street
name, barangay, city or municipality, and if
applicable, the name of the building, the number of
the building, and the name or number of the room
or unit.
To ease the burden imposed on corporations and
partnership by SEC Memorandum Circular No. 3, s.
2006, the following guidelines should be observed
in the amendment of their articles in case they
transfer or move to another location:
1. In the event that a corporation whose
principal office address as indicated in its
articles is already specific and complete, or
fully compliant with the Circulars, has
moved or moves to another location within
the same city or municipality, the
corporation is not required to amend its
articles. It must, however, declare its new or
current specific address in its General
Information Sheet (GIS) within 15 days from
transfer of its transfer. For this purpose,
Starr Weigand 2014
-4-
“Metro Manila” is no longer considered a
city or municipality.
2. A corporation, however, is not precluded
from filing an amended articles to indicate
its new location within the same city or
municipality of its former address.
3. In other cases, the corporation must file an
amended articles of incorporation to
indicate its new location in another city or
municipality.
4. In the case of a partnership, considering
that it has no obligation to file a GIS, it is
required to file an amended articles of
partnership every time it transfers to a new
location within the same or another city or
municipality.
5. Failure of a corporation to do the above will
make it liable for violation of Section 16 of
the Corporation Code and to the payment of
fines imposed by the SEC.
[SEC Memorandum Circular No. 16, series of
2013]
2. Can stockholders of a previously dissolved
corporation, whose shares are held in trust
by another new corporation, be considered
as individual subscribers of the latter
corporation?
Yes. A holder or stockholder includes a person
holding stocks in trust, and trustees holding
corporate stock are regarded for all legal purposes
as stockholders. However, the rights of a beneficial
owner will, of course, be recognized and protected
in equity in proper cases. In other words, even
where legal title to stock is vested in a certain
person, equity will treat him as a trustee holding it
for the real and beneficial owners, in proper cases.
Article 1455 of the Civil Code provides that when
any trustee uses trust funds for the purchase of
property and causes the conveyance to be made to
him or a third person, a trust is established by
operation of law in favor of the person to whom
2013 & 2014 Q and A|Commercial Law

the funds belong. Moreover, a trustee must not
make investments of funds in their own names but
always indicate that they are made in trust
capacities. Thus, the trustee merely acts for the
stockholders whose stocks are held in trust, with
the latter being the owners thereof. thus, they are
individual subscribers of shares of stock. [SEC OGC
Opinion No. 13-09, 2 September 2013]
3. F jr. filed an action against AT, a tabloid, for
publishing an article which was alleged to
be libelous. AT, not being incorporated,
argued that it cannot be sued since it is not
a juridical person. Can AT be sued?
AT can be sued for being a corporation by estoppel.
AT was a corporation by estoppel as the result of its
having represented itself to the reading public as a
corporation despite its not being incorporated. The
non-incorporation of AT with the Securities and
Exchange Commission was of no consequence, for,
otherwise, whoever of the public who would suffer
any damage from the publication of articles in the
pages of its tabloids would be left without recourse.
[Macasaet v. Francisco Co, Jr., G.R. No. 156759,
June 5, 2013]
4. Can previously incurred indebtedness be
used as payment for subscription of
shares?
Yes. Section 62 of the Corporation Code expressly
allows a previously incurred indebtedness to be
used as consideration for the issuance of stocks,
provided that the valuation of the indebtedness be
determined by the board of directors, subject to
approval of the SEC, in order to prevent watering of
stocks. Watering of stocks is a situation wherein the
consideration for subscription is not a fair valuation
equal to the par or issue value of the stock. The
amount of the indebtedness or liabilities to be
settled should be at least equal to the par value of
the shares of stock which the corporation intends
Starr Weigand 2014
-5-
to issue. However, there must first be an
indebtedness incurred in order that a liability may
be converted into subscription payment.
In this connection, the following requirements are
to be submitted to the SEC:
1. Detailed schedule of liabilities being offset,
showing all debts and credit to such liability
account, date, nature of account and
amount.
2. Deed of assignment executed by the
creditor(s] assigning the amount due to him
in payment for the unpaid subscription(s].
3. Company's book of accounts must be kept
up to date and be made available for
examination by the Commission to
determine that the liabilities represent valid
and legitimate claims against the company.
4. If the principal office of the corporation is
located in the province, a report by an
independent certified public accountant
must be submitted.
[SEC OGC Opinion No. 13-03, 17 April 2013; SEC
Opinion, 2 October 1992; SEC Opinion, 24 February
1988]
Such payment through previously incurred
indebtedness does not violate the stockholders’
preemptive rights, so long the terms are on equal
terms as with the owners of the original stocks. A
pre-emptive right under Section 39 of the
Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe to
all issues or disposition of shares of any class, in
proportion to their respective shareholdings, and
on equal terms with other holders of the original
stocks, before subscriptions are received from the
general public. Thus, if the payments by other
persons or entities are in the form of conversion of
the previously incurred indebtedness, while the
payments of the other stockholders for their
subscriptions shall be in cash, it is still considered to
be “on equal terms”. However, even when payment
of the debt is in terms required to be made by the
2013 & 2014 Q and A|Commercial Law

corporation in money or cash, a set-off of the debt
without going through this unnecessary formality is
equivalent to a payment for the stock in cash. [SEC
OGC Opinion No. 13-03, 17 April 2013]
5. What shall be done when properties
requiring ownership registration, such as
land, are used as paid-up capital of a
corporation?
Where payment is made in the form of land, the
corporation involved shall submit to the SEC proof
of the transfer of the certificate of ownership
thereon, in the name of the transferee corporation,
within 120 days from the date of approval of the
application filed therefor with the SEC. Such period
may be extended for justifiable reasons. For
properties other than land, the proof of transfer of
registration shall be submitted to the SEC within 90
days from approval of the application by the SEC,
which period may also be extended for justifiable
reasons. [SEC Memorandum Circular No. 14, series
of 2013]
6. A, director and stockholder of Corporation
X, filed a complaint for intra-corporate
dispute against the other directors and
stockholders of the corporation. The
complaint arose when A sought to have the
real board of directors rectify entries in the
Corporation’s General Information Sheet
(GIS) and questioned the stockholder’s
meeting, and to allow him to inspect the
books of the corporation, all of which were
not acted upon. Subsequently, the
corporation was dissolved by revocation of
its franchise. Does the Complaint seek a
continuation of business or is it a
settlement of corporate affairs?
No. Section 122 of the Corporation Code prohibits a
dissolved corporation from continuing its business,
but allows it to continue with a limited personality
Starr Weigand 2014
-6-
in order to settle and close its affairs, including its
complete liquidation. Thus:
Sec. 122. Corporate liquidation. –
Every corporation whose charter
expires by its own limitation or is
annulled by forfeiture or otherwise,
or whose corporate existence for
other purposes is terminated in any
other manner, shall nevertheless be
continued as a body corporate for
three (3) years after the time when
it would have been so dissolved, for
the purpose of prosecuting and
defending suits by or against it and
enabling it to settle and close its
affairs, to dispose of and convey its
property and to distribute its assets,
but not for the purpose of
continuing the business for which it
was established.
There is nothing in the prayers in the complaint
which shows any intention to continue the
corporate business of Corporation X. The Complaint
does not seek to enter into contracts, issue new
stocks, acquire properties, execute business
transactions, etc. Its aim is not to continue the
corporate business, but to determine and vindicate
an alleged stockholder’s right to the return of his
stockholdings and to participate in the election of
directors, and a corporation’s right to remove
usurpers and strangers from its affairs. There is
nothing to show that the resolution of these issues
can be said to continue the business of Corporation
X. [Vitaliano N. Aguirre II and Fidel N. Aguirre II and
Fidel N. Aguirre vs. FQB+, Inc., Nathaniel D. Bocobo,
Priscila Bocobo and Antonio De Villa, G.R. No.
170770. January 9, 2013]
In relation to Question Number 2, will the
dissolution render the complaint moot and
academic?
2013 & 2014 Q and A|Commercial Law

No. A corporation’s board of directors is not
rendered functus officio by its dissolution. Since
Section 122 allows a corporation to continue its
existence for a limited purpose, necessarily there
must be a board that will continue acting for and on
behalf of the dissolved corporation for that
purpose. In fact, Section 122 authorizes the
dissolved corporation’s board of directors to
conduct its liquidation within three years from its
dissolution. Jurisprudence has even recognized the
board’s authority to act as trustee for persons in
interest beyond the said three-year period. Thus,
the determination of which group is the bona fide
or rightful board of the dissolved corporation will
still provide practical relief to the parties involved.
[Ibid.]
7. Can a corporation’s dissolution also bar a
stockholder from enforcing or vindicating
his property right to his shareholdings?
No. A party’s stockholdings in a corporation,
whether existing or dissolved, is a property right
which he may vindicate against another party who
has deprived him thereof. The corporation’s
dissolution does not extinguish such property right.
Section 145 of the Corporation Code ensures the
protection of this right, thus:
Sec. 145. Amendment or repeal. –
No right or remedy in favor of or
against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors,
trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code
or of any part thereof. [Ibid.]
8. B Corp. was dissolved through an
amendment of its articles of incorporation
Starr Weigand 2014
-7-
shortening and terminating its corporate
life. It was issued a SEC certificate of
dissolution, and during such time, it had
deposit accounts with BPI which were
assigned to E Insurance to serve as security
for surety bonds issued by the latter to
guaranty monetary claims of a complainant
in the labor case filed against B Corp. with
the NLRC. NLRC ordered the release and
cancellation of the bonds because the case
was terminated. The certificates of deposit
covering the deposits with BPI were
surrendered by E Insurance to the former
director and corporate secretary of B Corp.
Who can act as trustees of the corporation
even after the expiration of the 3 year
winding-up period for its final liquidation?
The counsel of B Corp. during the labor case before
the NLRC can be considered as a trustee of the
corporation as to matters related to the labor case.
Likewise, the former director and corporate
secretary can also act as trustee-in-liquidation of B
Corp.
A corporation can go beyond the three-year period
in Section 122 of the Corporation Code to complete
its liquidation and to fully dispose of the remaining
corporate assets. If the three-year period expires
without a trustee being appointed, the board of
directors or trustees itself, may be permitted to
continue as trustees by legal implication to
complete corporate liquidation. Likewise, counsel
who prosecuted and defended the corporation in a
labor case, when there was no trustee appointed,
and who in fact in behalf of the corporation may be
considered as a trustee of the corporation at least
with respect to the matter in litigation only. As to
which of them is the proper trustee, the SEC cannot
determine that. Section 122 of the Corporation
Code governing corporate liquidation does not
require SEC approval for the distribution of the
corporate assets of a dissolved corporation. The
liquidation process is an internal concern of the
corporation and falls within the power of the
2013 & 2014 Q and A|Commercial Law

directors and stockholders to determine. [SEC OGC
Opinion No. 14-02, 21 February 2014]
9. Bank A granted loans to Corporation X,
which were secured by promissory notes
and mortgages over properties owned by
another corporation. The transactions were
entered into by Corporation X’s president
and General Manager. Since Corporation X
defaulted in paying its loans, then the
mortgage was foreclosed and eventually
sold. Because there was still remaining
amount to be paid, an action was filed
against Corporation X, its President, and
the latter’s wife, who signed a surety
agreement in favor of the bank, which the
lower court had declared as falsified. Can
the wife of the President be held liable?
No. Basic is the rule in corporation law that a
corporation is a juridical entity which is vested with
a legal personality separate and distinct from those
acting for and in its behalf and, in general, from the
people comprising it. Following this principle,
obligations incurred by the corporation, acting
through its directors, officers and employees, are
its sole liabilities. A director, officer or employee of
a corporation is generally not held personally liable
for obligations incurred by the corporation.24
Nevertheless, this legal fiction may be disregarded
if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes,
or to confuse legitimate issues.25 This is consistent
with the provisions of the Corporation Code of the
Philippines, which states:
Sec. 31. Liability of directors,
trustees or officers. – Directors or
trustees who willfully and knowingly
vote for or assent to patently
unlawful acts of the corporation or
who are guilty of gross negligence or
bad faith in directing the affairs of
Starr Weigand 2014
-8-
the corporation or acquire any
personal or pecuniary interest in
conflict with their duty as such
directors or trustees shall be liable
jointly and severally for all damages
resulting therefrom suffered by the
corporation, its stockholders or
members and other persons.
Solidary liability will then attach to the directors,
officers or employees of the corporation in certain
circumstances, such as:
a. When directors and trustees or, in
appropriate cases, the officers of a
corporation: (1) vote for or assent to
patently unlawful acts of the corporation;
(2) act in bad faith or with gross negligence
in directing the corporate affairs; and (3) are
guilty of conflict of interest to the prejudice
of the corporation, its stockholders or
members, and other persons;
b. 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;
c. When a director, trustee or officer has
contractually agreed or stipulated to hold
himself personally and solidarily liable with
the corporation; or
d. When a director, trustee or officer is made,
by specific provision of law, personally liable
for his corporate action.
Before a director or officer of a corporation can be
held personally liable for corporate obligations,
however, the following requisites must concur: (1)
the complainant must allege in the complaint that
the director or officer assented to patently unlawful
acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.
2013 & 2014 Q and A|Commercial Law

In this case, it was not proven that the wife of the
president of Corporation X committed an act of an
officer of the said corporation that would permit
the piercing of the corporate veil. A reading of the
complaint reveals that the Bank did not demand
that she be held liable for the obligations of
Hammer because she was a corporate officer who
committed bad faith or gross negligence in the
performance of her duties such that the lifting of
the corporate mask would be merited. What the
complaint simply stated is that she, together with
her errant husband acted as surety, as evidenced by
her signature on the Surety Agreement which was
later found by the RTC to have been forged.
The piercing of the veil of corporate fiction is
frowned upon and can only be done if it has been
clearly established that the separate and distinct
personality of the corporation is used to justify a
wrong, protect fraud, or perpetrate a deception.
Hence, any application of the doctrine of piercing
the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to
be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never
unintended may result from an erroneous
application.
[Heirs of Fe Tan Uy (Represented by her heir,
Manling Uy Lim) vs. International Exchange
Bank/Goldkey Development Corporation vs.
International Exchange Bank, G.R. No. 166282/G.R.
No. 166283, February 13, 2013.]
In relation to Question Number 5, can the
corporation, whose property was mortgaged to
secure the loans of Corporation X, be held liable
for the said loans? Note that the two corporations
are owned by the same family, sharing the same
Starr Weigand 2014
-9-
office space, with their assets being co-mingled.
The President of Corporation X is also the Chief
Operating Officer of the other corporation
involved.
Yes. Under a variation of the doctrine of piercing
the veil of corporate fiction, when two business
enterprises are owned, conducted and controlled
by the same parties, both law and equity will, when
necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are
distinct entities and treat them as identical or one
and the same.
While the conditions for the disregard of the
juridical entity may vary, the following are some
probative factors of identity that will justify the
application of the doctrine of piercing the corporate
veil, as laid down in Concept Builders, Inc. v NLRC:
(1) Stock ownership by one or common
ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and
records, and
(4) Methods of conducting the business.
In this case, both corporations are family
corporations, who share the same office, with the
same set of officers, and their assets are co-
mingled. Likewise, when the President of
Corporation X went missing, the other corporation
ceased its operations. Based on these, it is apparent
that the said corporation was merely an adjunct of
Corporation X and, as such, the legal fiction that it
has a separate personality from that of Hammer
should be brushed aside as they are, undeniably,
one and the same. [Ibid.]
10. Spouses F entered into a contract to sell
with G Corp, covering a parcel of land, in G
Corp’s subdivision. Spouses F full paid the
purchase price, but G Corp. failed to
execute the deed of sale and deliver the
title to the spouses. Thus, the spouses filed
2013 & 2014 Q and A|Commercial Law

an action for specific performance or
rescission against G Corp and its Board of
Directors. Can the Board of Directors be
held liable?
No. There is no basis to hold the members of the
board solidarily liable with G Corp for the payment
of damages in favor of Sps. F since it was not shown
that they acted maliciously or dealt with the latter
in bad faith. Settled 1s the rule that in the absence
of malice and bad faith, as in this case, officers of
the corporation cannot be made personally liable
for liabilities of the corporation which, by legal
fiction, has a personality separate and distinct from
its officers, stockholders, and members. [Gotesco
Properties, Inc. v. SpousesFajardo, G.R. No. 201167,
27 February 2013]
11. DBP and PNB foreclosed mortgages on the
properties of MMIC, a corporation. As a
result, they acquired substantially all the
assets of NMIC and resumed its business
operations. NMIC engaged the services of H
Corporation for which it paid the latter.
But, NMIC still had an unpaid balance of
around 8 million pesos. Can DBP and PNB
be held liable for such amount?
No. A corporation is an artificial entity created by
operation of law. It possesses the right of
succession and such powers, attributes, and
properties expressly authorized by law or incident
to its existence. It has a personality separate and
distinct from that of its stockholders and from that
of other corporations to which it may be
connected. As a consequence of its status as a
distinct legal entity and as a result of a conscious
policy decision to promote capital formation, a
corporation incurs its own liabilities and is legally
responsible for payment of its obligations. In other
words, by virtue of the separate juridical
personality of a corporation, the corporate debt or
credit is not the debt or credit of the
Starr Weigand 2014
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stockholder. This protection from liability for
shareholders is the principle of limited liability.
Equally well-settled is the principle that the
corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter
ego of a person or of another corporation. For
reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality or
inequity committed against third persons.
However, the rule is that a court should be careful
in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its
erroneous application. Thus, cutting through the
corporate cover requires an approach characterized
by due care and caution:
Hence, any application of the doctrine of piercing
the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to
be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be
presumed.
Sarona v. National Labor Relations Commission has
defined the scope of application of the doctrine of
piercing the corporate veil:
The doctrine of piercing the corporate veil applies
only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the
corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
2013 & 2014 Q and A|Commercial Law

instrumentality, agency, conduit or adjunct of
another corporation.
In this connection, case law lays down a three-
pronged test to determine the application of the
alter ego theory, which is also known as the
instrumentality theory, namely:
(1) Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
(2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal
right; and
(3) The aforesaid control and breach of duty
must have proximately caused the injury or
unjust loss complained of.
The first prong is the "instrumentality" or "control"
test. This test requires that the subsidiary be
completely under the control and domination of
the parent. It examines the parent corporation’s
relationship with the subsidiary. It inquires whether
a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the
parent corporation such that its separate existence
as a distinct corporate entity will be ignored. It
seeks to establish whether the subsidiary
corporation has no autonomy and the parent
corporation, though acting through the subsidiary
in form and appearance, "is operating the business
directly for itself."
The second prong is the "fraud" test. This test
requires that the parent corporation’s conduct in
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using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the relationship
of the plaintiff to the corporation. It recognizes that
piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms
the plaintiff creditor. As such, it requires a showing
of "an element of injustice or fundamental
unfairness."
The third prong is the "harm" test. This test
requires the plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal or otherwise
unfair manner toward it, caused the harm
suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will have
been treated unjustly by the defendant’s exercise
of control and improper use of the corporate form
and, thereby, suffer damages.
To summarize, piercing the corporate veil based on
the alter ego theory requires the concurrence of
three elements: control of the corporation by the
stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing
the corporate veil.
In applying the alter ego doctrine, the courts are
concerned with reality and not form, with how the
corporation operated and the individual
defendant’s relationship to that operation. With
respect to the control element, it refers not to
paper or formal control by majority or even
complete stock control but actual control which
amounts to "such domination of finances, policies
and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal." In
2013 & 2014 Q and A|Commercial Law

addition, the control must be shown to have been
exercised at the time the acts complained of took
place.
While ownership by one corporation of all or a
great majority of stocks of another corporation and
their interlocking directorates may serve as indicia
of control, by themselves and without more,
however, these circumstances are insufficient to
establish an alter ego relationship or connection
between DBP and PNB on the one hand and NMIC
on the other hand, that will justify the puncturing of
the latter’s corporate cover. "Mere ownership by a
single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the
separate corporate personality." Likewise, the
"existence of interlocking directors, corporate
officers and shareholders is not enough justification
to pierce the veil of corporate fiction in the absence
of fraud or other public policy considerations."
[Phil. National Bank vs. Hydro Resources
Contractors Corp., .G.R. Nos. 167530, 167561,
16760311. March 13, 2013]
12. M filed a complaint against the Cuencas for
collection of sum of money, for which the
court issued a writ of preliminary
attachment, with M posting a bond issued
by S Insurance. The properties of A C Inc.
were levied upon in the execution of the
writ. The Cuencas sought to quash the writ
alleging that (1) the action involved intra-
corporate matters that were within the
original and exclusive jurisdiction of the
Securities and Exchange Commission (SEC);
and (2) there was another action pending
in the SEC as well as a criminal complaint in
the Office of the City Prosecutor of
Parañaque City. This was denied by the CA.
Thus, the Cuencas filed an action for
damages against the S Insurance as a result
of the wrongful attachment. Can the action
prosper?
Starr Weigand 2014
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No. The complaint of the Cuencas lacks a cause of
action. It is true that the Cuencas could bring in
behalf of AC Inc. a proper action to recover
damages resulting from the attachment, however,
such action would be one directly brought in the
name of the corporation. In the instant case, the
Cuencas presented the claim in their own names.
The Cuencas were only stockholders of AC Inc.,
which had a personality distinct and separate from
that of any or all of them. The damages occasioned
to the properties by the levy on attachment,
wrongful or not, prejudiced AC Inc., not them. As
such, only AC Inc. had the right under the
substantive law to claim and recover such damages.
This right could not also be asserted by the Cuencas
unless they did so in the name of the corporation
itself. But that did not happen herein, because AC
Inc. was not even joined in the action either as an
original party or as an intervenor. The Cuencas
were clearly not vested with any direct interest in
the personal properties coming under the levy on
attachment by virtue alone of their being
stockholders in AC Inc. Their stockholdings
represented only their proportionate or aliquot
interest in the properties of the corporation, but
did not vest in them any legal right or title to any
specific properties of the corporation. Without
doubt, AC Inc. remained the owner as a distinct
legal person. [Stronghold Insurance v. Cuenca, G.R.
No. 173297, March 6, 2013]
13. SMP Corp paid local business taxes to the
city of Manila, but they wrote a letter to
the latter claiming a refund of the amount
paid on the ground of double taxation. The
letter was not acted upon, thus SMP filed
and action in the RTC for refund of taxes.
The verification and certification of forum
shopping attached to the petition filed by
SMP was signed by B, but there was no
secretary’s certificate to show her
authority to file the action on behalf of
SMP. Can B file the case on behalf of SMP?
2013 & 2014 Q and A|Commercial Law

No. The power of a corporation to sue and be sued
is lodged in the board of directors, which exercises
its corporate powers. It necessarily follows that “an
individual corporate officer cannot solely exercise
any corporate power pertaining to the corporation
without authority from the board of directors.”
Thus, physical acts of the corporation, like the
signing of documents, can be performed only by
natural persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board
of directors. Consequently, a verification signed
without an authority from the board of directors is
defective. However, the act of B in filing the action
may be ratified by a subsequent board resolution
passed by the corporation. [Swedish Match
Philippines v. Treasurer of the City of Manila, G.R.
No. 181277, 3 July 2013]
14. H Corp. filed a petition for certiorari against
the Esguerras, but they did not secure
and/or attach a certified true copy of a
board resolution authorizing any of its
officers to file said petition, but it attached
a secretary’s certificate. Should the case be
dismissed?
No. The general rule is that a corporation can only
exercise its powers and transact its business
through its board of directors and through its
officers and agents when authorized by a board
resolution or its bylaws. The power of a corporation
to sue and be sued is exercised by the board of
directors. The physical acts of the corporation, like
the signing of documents, can be performed only
by natural persons duly authorized for the purpose
by corporate bylaws or by a specific act of the
board. Absent the said board resolution, a petition
may not be given due course. H Corp attached all
the necessary documents for the filing of a petition
for certiorari before the court. While the board
resolution may not have been attached, H Corp
complied just the same when it attached the
Secretary’s Certificate, thus proving that its
Starr Weigand 2014
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representative had the authority from the board of
directors to appoint the counsel to represent them
in the case. [Esguerra v. Holcim Philippines, Inc.,
G.R. No. 182571, 2 September 2013
15. SMBI is a family owned and run
corporation. One of the family members
agreed to loan money to SMBI and other
corporations owned by the same family to
settle the corporate obligations. A check
was thus issued in the name of the family
members. SMBI thereafter increased its
capital stock. Thereafter, a series of events
transpired, which lead one of the
stockholders to file a derivative suit,
claiming he has been illegally excluded
from management and participation in the
business of SMBI and that some of the
family members refuse to settle their
obligations with the corporation. Is the
complaint a derivative suit?
No. A derivative suit is an action brought by a
stockholder on behalf of the corporation to enforce
corporate rights against the corporation’s directors,
officers or other insiders. Under Sections 23 and 36
of the Corporation Code, the directors or officers,
as provided under the by-laws, have the right to
decide whether or not a corporation should sue.
Since these directors or officers will never be willing
to sue themselves, or impugn their wrongful or
fraudulent decisions, stockholders are permitted by
law to bring an action in the name of the
corporation to hold these directors and officers
accountable. In derivative suits, the real party in
interest is the corporation, while the stockholder is
a mere nominal party.
The Court, in Yu v. Yukayguan, explained:
The Court has recognized that a stockholder’s right
to institute a derivative suit is not based on any
express provision of the Corporation Code, or even
the Securities Regulation Code, but is impliedly
2013 & 2014 Q and A|Commercial Law

recognized when the said laws make corporate
directors or officers liable for damages suffered by
the corporation and its stockholders for violation of
their fiduciary duties. Hence, a stockholder may sue
for mismanagement, waste or dissipation of
corporate assets because of a special injury to him
for which he is otherwise without redress. In effect,
the suit is an action for specific performance of an
obligation owed by the corporation to the
stockholders to assist its rights of action when the
corporation has been put in default by the wrongful
refusal of the directors or management to make
suitable measures for its protection. The basis of a
stockholder’s suit is always one in equity. However,
it cannot prosper without first complying with the
legal requisites for its institution.
Section 1, Rule 8 of the Interim Rules imposes the
following requirements for derivative suits:
(1) The person filing the suit must be a
stockholder or member at the time the acts
or transactions subject of the action
occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts,
and alleges the same with particularity in
the complaint, to exhaust all remedies
available under the articles of incorporation,
by-laws, laws or rules governing the
corporation or partnership to obtain the
relief he desires;
(3) No appraisal rights are available for the act
or acts complained of; and
(4) The suit is not a nuisance or harassment
suit.
Applying the foregoing, the Complaint is not a
derivative suit. The Complaint failed to show how
the acts of some of the family members resulted in
any detriment to SMBI. The loan was not a
corporate obligation, but a personal debt. The
check was issued to specific persons and not SMBI.
The proceeds of the loan were used for payment of
the obligations of the other corporations owned by
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the family as well as the purchase of real properties
for the brothers. SMBI was never named as a co-
debtor or guarantor of the loan. Both loan
instruments were executed by two of the family
members in their personal capacity, and not in their
capacity as directors or officers of SMBI. Thus, SMBI
is under no legal obligation to satisfy the obligation.
The fact that the family members attempted to
constitute a mortgage over "their" share in a
corporate asset cannot affect SMBI. The Civil Code
provides that in order for a mortgage to be valid,
the mortgagor must be the "absolute owner of the
thing x x x mortgaged." Corporate assets may be
mortgaged by authorized directors or officers on
behalf of the corporation as owner, "as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require." However, the wording of the Mortgage
reveals that it was signed by two of the family
members in their personal capacity as the "owners"
of a pro-indiviso share in SMBI’s land and not on
behalf of SMBI. [Juanito Ang, for and in behalf of
Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto
and Rachel Ang, G.R. No. 201675, June 19, 2013]
16. FEGDI is a stock corporation involved in
developing golf courses, while FELI is
engaged in real estate development. FEGDI
obtained shares of stock in one of FELI’s
projects as a result of its financing support
and construction efforts. It sold some of its
shares to RSACC, which the latter later sold
to VST. However, the shares remained
under the name of FEGDI. Can VST be
considered as owner of the shares of stock?
No. In a sale of shares of stock, physical delivery of
a stock certificate is one of the essential requisites
for the transfer of ownership of the stocks
purchased. Here, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time
from the point the shares should have been
2013 & 2014 Q and A|Commercial Law

delivered. This was a substantial breach of their
contract that entitles VST the right to rescind the
sale under Article 1191 of the Civil Code. It is not
entirely correct to say that a sale had already been
consummated as VST already enjoyed the rights a
shareholder can exercise. The enjoyment of these
rights cannot suffice where the law, by its express
terms, requires a specific form to transfer
ownership. [Fil-Estate Gold and Development, Inc.,
et al. v. Vertex Sales and Trading, Inc., G.R. No.
202079, June 10, 2013]
17. AP is a domestic corporation with G as its
President, and C, the latter’s wife, as its
General Manager. AT is also a Domestic
corporation, with T as its President and U
as its treasurer. AT purchased notebooks
from AP on credit. Loans were also
obtained by AT from AP upon the
representation of T and U. To pay for its
purchases, AT gave AP 82 postdated checks
signed T and U. the check were dishonored
for having been drawn against insufficient
funds. A complaint for collection of sum of
money was filed AT, U, T, and its other
officers. Can AT be held liable?
Yes. The acts of T and U clearly bound the
corporation, and thus, it could be made liable
therefor under the doctrine of apparent authority.
The doctrine of apparent authority provides that a
corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its
officers or any other agent to act within the scope
of an apparent authority, and it holds him out to
the public as possessing the power to do those acts.
The doctrine of apparent authority does not apply if
the principal did not commit any acts or conduct
which a third party knew and relied upon in good
faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct
must have produced a change of position to the
third party’s detriment.
Starr Weigand 2014
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Under Section 23 of the Corporation Code, the
power and responsibility to decide whether the
corporation should enter into a contract that will
bind the corporation is lodged in the board, subject
to the articles of incorporation, bylaws, or relevant
provisions of law. However, just as a natural person
who may authorize another to do certain acts for
and on his behalf, the board of directors may validly
delegate some of its functions and powers to
officers, committees or agents. The authority of
such individuals to bind the corporation is generally
derived from law, corporate bylaws or
authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the
general course of business, viz.:
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that [the] authority to do so
has been conferred upon him, and this includes
powers as, in the usual course of the particular
business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent
powers as the corporation has caused person
dealing with the officer or agent to believe that it
has conferred.
[A]pparent authority is derived not merely from
practice. Its existence may be ascertained through
(1) the general manner in which the corporation
holds out an officer or agent as having the power to
act or, in other words the apparent authority to act
in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or
beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a
corporate officer with the power to bind the
corporation.
2013 & 2014 Q and A|Commercial Law

In People’s Aircargo and Warehousing Co., Inc. v.
Court of Appeals, the Court ruled that the doctrine
of apparent authority is applied when the
petitioner, through its president Antonio Punsalan
Jr., entered into the First Contract without first
securing board approval. Despite such lack of
board approval, petitioner did not object to or
repudiate said contract, thus “clothing” its
president with the power to bind the corporation.
“Inasmuch as a corporate president is often given
general supervision and control over corporate
operations, the strict rule that said officer has no
inherent power to act for the corporation is slowly
giving way to the realization that such officer has
certain limited powers in the transaction of the
usual and ordinary business of the corporation.”
In the absence of a charter or bylaw provision to
the contrary, the president is presumed to have the
authority to act within the domain of the general
objectives of its business and within the scope of
his or her usual duties. [Advance Paper Corporation
and George Haw, in his capacity as President of
Advance Paper Corporation v. Arma Traders
Corporation, Manuel Ting, et al., G.R. No. 176897,
December 11, 2013]
18. L filed a complaint for recovery of
ownership of land against R, alleging that
the latter encroached on a quarter of her
property by arbitrarily extending his
concrete fence beyond the correct limits. R
alleged that this was the fault of OLFI, a
corporation, after the latter trimmed his
property for the construction of the
subdivision road. He thus filed a third party
complaint against OLFI. Acting on the third
party complaint, the court ordered OLFI to
reimburse R, and issued a writ of
execution. The sheriff then proceeded to
garnish the accounts of the general
manager of OLFI in UCPB. Can the funds of
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the general manager be garnished to
satisfy the judgment against OLFI?
No. In order to hold the general manager personally
liable alone for the debts of the corporation and
thus pierce the veil of corporate fiction, it is
required that the bad faith of the officer must first
be established clearly and convincingly. However,
there is nothing to indicate any wrongdoing of the
general manager. Necessarily, it would be unjust to
hold the latter personally liable. Any piercing of the
corporate veil has to be done with caution. There is
no evidence that would prove OLFI's status as a
dummy corporation. A court should be mindful of
the milieu where it is to be applied. It must be
certain that the corporate fiction was misused to
such an extent that injustice, fraud, or crime was
committed against another, in disregard of rights.
The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result
from an erroneous application. [Roxas v. Our Lady’s
Foundation, Inc., G.R. No. 182378, 6 March 2013]
19. P granted loans to NSI. On the part of NSI,
the loan agreement between the two
parties was signed by its president, N.
Payments were made by N, however, NSI
still defaulted on its loan obligation to P,
for which the latter filed a collection suit
against N and NSI. Can N be held jointly
and severally liable for the loan obligation
of NSI?
No. The rule is settled that a corporation is vested
by law with a personality separate and distinct from
the persons composing it. Following this principle, a
stockholder, generally, is not answerable for the
acts or liabilities of the corporation, and vice versa.
The obligations incurred by the corporate officers,
or other persons acting as corporate agents, are the
direct accountabilities of the corporation they
represent, and not theirs. A director, officer or
employee of a corporation is generally not held
2013 & 2014 Q and A|Commercial Law

personally liable for obligations incurred by the
corporation9 and while there may be instances
where solidary liabilities may arise, these
circumstances are exceptional.
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
stocks of the corporation is not, by itself, a
sufficient ground for disregarding the separate
corporate personality. Other than mere ownership
of capital stocks, circumstances showing that the
corporation is being used to commit fraud or proof
of existence of absolute control over the
corporation have to be proven. In short, before the
corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The
mere fact that it was N who, in behalf of the
corporation, signed the loan agreement is not
sufficient to prove that he exercised control over
the corporation’s finances. Neither the absence of a
board resolution authorizing him to contract the
loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among
others, may point the proof required to justify the
piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof
required to support the desired conclusion. It
should be noted in this regard that while N was the
signatory of the loan and the money was delivered
to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed
business plan. There is no sufficient evidence in the
instant case to justify a piercing, in the absence of
proof that the business plan was a fraudulent
scheme geared to secure funds from the
respondent for the petitioners’ undisclosed goals.
[Saverio v. Puyat, G.R. No. 186433, November 27,
2013]
20. PTA is a GOCC which administers tourism
zones. It allowed PTC Cooperative to
operate a restaurant business in one of its
main buildings, but in 1993, its
CALABARZON area manager notified the
Starr Weigand 2014
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latter to cease its operations as a result of
the rehabilitation of its tourism complex.
Thus, PTC Cooperative filed an action in
court to stop PTA from evicting and
preventing it from carrying out the
restaurant business in the main building of
PTA. Can the area manager be held liable?
No. As a general rule the officer cannot be held
personally liable with the corporation, whether
civilly or otherwise, for the consequences of his
acts, if acted for and in behalf of the corporation,
within the scope of his authority and in good faith.
[Rodolfo Laborte, et al. v. Pagsanjan Tourism
Consumers’ Cooperative, et al., G.R. No. 183860,
January 15, 2014]
21. C was a salesman of A, engaged in the
selling of broadcasting equipment. When A
created B Corp. C was made an Assistant
Vice President (AVP) for sales, while AA
was then appointed as VP for sales. C
accused AA of several irregularities which
were made the subject of a memo sent to
A. Allegedly, C was asked by A to tender his
resignation, to which he refused. He
received a memo, signed by A, charging
him with serious misconduct and willful
breach of trust. He was later on barred
from entering company premises, and
allegedly suspended. Thus, he filed a
complaint for illegal dismissal before the
NLRC against B Corp. and A. Does the labor
arbiter of the NLRC have jurisdiction?
Yes. C, although an officer of B Corp. for being its
AVP for Sales, was not a "corporate officer" as the
term is defined by law. ‘Corporate officers’ in the
context of Presidential Decree No. 902-A are those
officers of the corporation who are given that
character by the Corporation Code or by the
corporation’s by-laws. There are three specific
officers whom a corporation must have under
Section 25 of the Corporation Code. These are the
2013 & 2014 Q and A|Commercial Law

president, secretary and the treasurer. The number
of officers is not limited to these three. A
corporation may have such other officers as may be
provided for by its by-laws like, but not limited to,
the vice-president, cashier, auditor or general
manager. The number of corporate officers is thus
limited by law and by the corporation’s by-laws." It
has been held that an "office" is created by the
charter of the corporation and the officer is elected
by the directors and stockholders. On the other
hand, an "employee" usually occupies no office and
generally is employed not by action of the directors
or stockholders but by the managing officer of the
corporation who also determines the compensation
to be paid to such employee.
As may be deduced from the foregoing, there are
two circumstances which must concur in order for
an individual to be considered a corporate officer,
as against an ordinary employee or officer, namely:
(1) the creation of the position is under the
corporation’s charter or by-laws; and (2) the
election of the officer is by the directors or
stockholders. It is only when the officer claiming to
have been illegally dismissed is classified as such
corporate officer that the issue is deemed an intra-
corporate dispute which falls within the jurisdiction
of the trial courts.
Under B Corp.’s By-laws only provide the following
as corporate officers: the President, Vice-President,
Treasurer and Secretary. Although a blanket
authority provides for the Board’s appointment of
such other officers as it may deem necessary and
proper, the respondents failed to sufficiently
establish that the position of AVP for Sales was
created by virtue of an act of B Corp’s board, and
that C was specifically elected or appointed to such
position by the directors. No board resolutions to
establish such facts form part of the case records.
Also, an enabling clause in a corporation’s by-laws
empowering its board of directors to create
additional officers, even with the subsequent
Starr Weigand 2014
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passage of a board resolution to that effect, cannot
make such position a corporate office. The board of
directors has no power to create other corporate
offices without first amending the corporate by-
laws so as to include therein the newly created
corporate office. "To allow the creation of a
corporate officer position by a simple inclusion in
the corporate by-laws of an enabling clause
empowering the board of directors to do so can
result in the circumvention of that constitutionally
well-protected right [of every employee to security
of tenure]."
Likewise, the mere fact that C was a stockholder of
B Corp. at the time of the case’s filing did not
necessarily make the action an intra- corporate
controversy. "Not all conflicts between the
stockholders and the corporation are classified as
intra-corporate. There are other facts to consider in
determining whether the dispute involves
corporate matters as to consider them as intra-
corporate controversies." In determining the
existence of an intra-corporate dispute, the status
or relationship of the parties and the nature of the
question that is the subject of the controversy must
be taken into account.
An intra-corporate controversy, which falls within
the jurisdiction of regular courts, has been regarded
in its broad sense to pertain to disputes that involve
any of the following relationships: (1) between the
corporation, partnership or association and the
public; (2) between the corporation, partnership or
association and the state in so far as its franchise,
permit or license to operate is concerned; (3)
between the corporation, partnership or
association and its stockholders, partners, members
or officers; and (4) among the stockholders,
partners or associates, themselves.
Settled jurisprudence, however, qualifies that when
the dispute involves a charge of illegal dismissal,
the action may fall under the jurisdiction of the LAs
upon whose jurisdiction, as a rule, falls termination
2013 & 2014 Q and A|Commercial Law

disputes and claims for damages arising from
employer-employee relations as provided in Article
217 of the Labor Code.
Considering that the pending dispute particularly
relates to C’s rights and obligations as a regular
officer of B Corp., instead of as a stockholder of the
corporation, the controversy cannot be deemed
intra-corporate. This is consistent with the
"controversy test", which provides that the
incidents of that relationship must also be
considered for the purpose of ascertaining whether
the controversy itself is intra-corporate. The
controversy must not only be rooted in the
existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-
corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental
to the controversy or if there will still be conflict
even if the relationship does not exist, then no
intra-corporate controversy exists. [Raul C. Cosare
v. Broadcom Asia, Inc., et al., G.R. No. 201298,
February 5, 2014]
22. The janitors and their supervisors of the
maintenance department of PCCr, a non-
stock educational institution, were
dismissed from employment as a result of
the termination of the contract PCCr had
with their agency. The contract was
terminated as a result of the discovery of
the revocation of the certificate of
incorporation of the agency. The said
dismissed employees executed quitclaims
and waivers in favor of the agency, which
was already dissolved. Can the janitors and
supervisors hold its agency liable even if it
had already been dissolved? Are the
quitclaims and waivers valid even if
executed 6 years after dissolution?
Starr Weigand 2014
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Yes. The revocation does not result in the
termination of its liabilities. Section 122 of the
Corporation Code provides for a three-year winding
up period for a corporation whose charter is
annulled by forfeiture or otherwise to continue as a
body corporate for the purpose, among others, of
settling and closing its affairs.
Even if said documents six (6) years after the
dissolution, the same are still valid and binding
upon the parties and the dissolution will not
terminate the liabilities incurred by the dissolved
corporation pursuant to Sections 122 and 145 of
the Corporation Code. A corporation is allowed to
settle and close its affairs even after the winding up
period of three (3) years.
Section 145 of the Corporation Code clearly
provides that "no right or remedy in favor of or
against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent
dissolution of said corporation." Even if no trustee
is appointed or designated during the three-year
period of the liquidation of the corporation, it has
been held that the board of directors may be
permitted to complete the corporate liquidation by
continuing as "trustees" by legal implication. [Vigilla
v. College of Criminology, G.R. No. 200094, June 10,
2013]
23. What can be done in case the board refuses
to recognize the legitimacy of newly
elected board members?
An outgoing President or the Board which refuses
to recognize the legitimacy of those newly-elected
and who continue to exercise their functions may
be the subjects of an intra-corporate case filed with
the regular courts. [SEC OGC Opinion No. 14-09, 2
June 2014]
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24. What constitutes a quorum for purposes of
election of directors or trustees of a
corporation?
Section 24 of the Corporation requires the presence
in person or by proxy of “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.” This section governs since it is the provision
which is specifically applicable to quorum of
election of directors or trustees. The phrase
“entitled to vote” should be interpreted to apply to
both stock and non-stock corporations. This does
not include shares under litigation. However, not all
shares under litigation cannot vote. For example,
stock owned by the estate of a decedent may be
voted by the estate’s executor or administrator. If
there is no executor or administrator, then the
shares of a decedent cannot be voted. Also, if there
is a dispute as to who owns the shares, and thus,
who has the right to vote such shares, then the
general rule is that “the registered owner of the
shares of the corporation exercises the right and
the privilege of voting.” [SEC-OGC Opinion No. 13-
11, 20 November 2013]
25. Does cumulative voting apply to election of
trustees of a non-stock condominium
corporation?
The general rule for the election of trustees of a
non-stock corporation is that members may cast as
many votes as there are trustees to be elected but
may cast only one vote per candidate. By way of
exception, a non-stock corporation may adopt
other modes of casting votes, including, but not
limited to, cumulative voting, if the same is
authorized in its articles or by-laws, or the master
deed or the declaration of restrictions (in case of a
non-stock condominium corporation). otherwise,
the general rule that members may not cast more
than one vote for any candidate will apply. [SEC
OGC Opinion No. 14-10, 2 June 2014]
Starr Weigand 2014
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26. What is cumulative voting?
Cumulative voting is a mode of casting votes during
the elections of directors in a stock corporation.
this is in line with Section 24 of the Corporation
Code, which provides that every stockholder
entitled to vote shall have the right to vote in
person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own
name on the stock books of the corporation, or
where the by-laws are silent, at the time of the
election; and said stockholder may vote such
number of shares for as many persons as there are
directors to be elected or he may cumulate said
shares and give one candidate as many votes as the
number of directors to be elected multiplied by the
number of his shares shall equal, or he may
distribute them on the same principle among as
many candidates as he shall see fit: Provided, That
the total number of votes cast by him 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.
Under this provision, there are two methods of
cumulative voting: Cumulative voting for one
candidate, and cumulative voting by distribution.
Under the first method, 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. For example, supposing a stockholder
owns 200 shares and there are five directors to be
elected, he is entitled to 1,000 votes, all of which he
may cast in favor of one candidate.
Under the second 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. For example, a
stockholder with 100 shares is entitled to 500 votes
if there are five directors to be elected. He may cast
2013 & 2014 Q and A|Commercial Law

his votes in any combination desired by him,
provided that the total number of votes cast by him
does not exceed 500, which is the number of shares
owned by him multiplied by the total number of
directors to be elected. [SEC OGC Opinion No. 14-
10, 2 June 2014]
27. Can a hold-over director appoint another
director to fill a vacancy caused by the
resignation of another hold-over director?
No. a vacancy caused by resignation of a hold-over
director or a trustee cannot be filled by the vote of
the directors or trustees, but rather, by the vote of
the stockholders or members in a regular or special
meeting called for the purpose, as provided by
Section 29 of the Corporation Code. Any vacancy
occurring in the board of directors or trustees other
than by removal by the stockholders or members or
by expiration of term, may be filled by majority of
the remaining directors or trustees, if still
constituting a quorum, otherwise, said vacancies
must be filled by the stockholders in a regular or
special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his
predecessor in officer. Thus, in a situation where
directors or trustees are acting in a hold-over
capacity, there are actually vacancies caused by
expiration of terms, and the resignation of a hold-
over director or trustee cannot change the nature
of the vacancy. [Valle Verde Country Club v. Africa,
GR No. 151696, September 4, 2009; SEC-OGC
Opinion No. 13-11, 20 November 2013]
28. Is it required that, in order to be elected as
a member of the board of trustees of a
non-stock corporation, majority of the
votes of the members be obtained?
No. While the Corporation Code requires the
presence of at least majority of the members of the
non-stock corporation for the election of its Board,
it does not require such number of votes for one to
Starr Weigand 2014
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be declared elected. under the Code, the
candidates receiving the highest number of votes
shall be declared elected. Thus, for a candidate to
be elected as trustee, such candidate must be
among the group of candidates who received the
highest number of votes. In case the number of
candidates does not exceed the number of seats in
the board, said candidates, provided they received
votes, can be said to have received the highest
number of votes, as the law requires only plurality
of the votes to cast at the election. [SEC OGC
Opinion No. 14-09, 2 June 2014]
29. Can there be an election of members of the
board which is less than the number of
director/trustees as fixed in the articles of
incorporation?
Yes. An election of less number of directors than
the number which the meeting was called to elect
is valid as to those elected. Thus, the stockholders
or members may opt to elect a number of
directors/trustees less than the number of
directors/trustees as fixed in the articles of
incorporation. Such a situation would merely give
rise to vacancy in the board, which may be later
filled up. The power of the board is not suspended
by vacancies in the board unless the number is
reduced below a quorum. This is so since the board
can only transact business if it reaches a quorum,
which is at least a majority of the number of
trustees as fixed in the articles of incorporation or
by-laws, unless the Articles, by-laws, or Master
Deed, in the case of a condominium corporation
provide for a greater number. For decisions of the
board to be valid as a corporate act, at least a
majority of such majority or quorum has to concur.
However, for the election of officers, the vote of
the majority of all the members of the board as
fixed in the articles of incorporation, rather than
majority of the quorum, shall be required. [SEC OGC
Opinion No. 14-09, 2 June 2014]
2013 & 2014 Q and A|Commercial Law

30. Can notices of stockholders’ or directors’
meetings be sent through electronic mail
(e-mail)? Are the resolutions passed during
such meetings valid?
Yes. Generally and as a default rule, written notice
of the meeting, sent through regular post mail,
must be given to stockholders/directors/ trustees in
relation to the holding of meetings within the
periods provided in the Corporation Code.
However, Section 47(1), (2), and (6) allows the
corporation to provide a different mode of notice in
the by-laws. Thus, since the Corporation Code
requires notice to be sent “in writing”, an e-mail
notice may be included as a mode of notice in the
by-laws of a corporation, since an e-mail is
considered “in writing”. In such a case, the by-laws
must, likewise, provide for mechanics of such
sending of notices through e-mail, including
indication, recording, changing, and recognition of
e-mail addresses of each stockholder/director.
However, it must be stressed that absent such
specific provisions on notice requirements in a
corporation’s current and standing by-laws, the
general or default rule – written notice sent
through regular postal mail – applies. Since such
notice is allowed, provided it is in accordance with a
corporation’s by-laws, then resolutions passed
during such meetings are also valid. [SEC OGC
Opinion No. 13-10, 25 October 2013]
31. APO’s by-laws, a non-stock non-profit
corporation, provide that its members are
those that are issued certificates of
ownership, with only one certificate being
issued for one member. The same by-laws
provide that not more than 500 certificates
of ownership will be issued. However, its
articles of incorporation provide that
members enjoy membership rights, upon
payment of a membership fee, upon
payment of which, they will be issued a
membership fee certificate, which shall not
be issued in excess of 250, with only one
Starr Weigand 2014
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certificate being issued per member. What
is the authorized membership of APO, 500
or 250?
The maximum number of members allowed for
APO is 250. The question arose from what appears
to be a conflict between the articles and the by-
laws. When the by-laws of a corporation are
inconsistent with the articles of incorporation, the
latter shall be controlling, as the by-laws are
subordinate to, and cannot contravene, the
corporate charter. As provided for in the articles of
APO, the maximum permitted number of
Certificates of Membership issued by it is limited to
250, and no member shall be issued more than one
certificate. Hence, the maximum number of
members is the maximum number of certificates
that may be issued, that is 250, by virtue of the
articles of incorporation, and not 500 as provided
by the by-laws. [SEC OGC Opinion No. 14-25, 4
September 2014]
32. L was hired as a Director of CBB, who was
later on appointed as managing director.
Alleging failure to pay a significant portion
of his salary, after closure of CBB and the
incorporation of a new corporation, he
filed a complaint for illegal dismissal
against CBB and its president. Can CBB’s
president be held liable?
Yes. There is indubitable link between closure of
CBB and the incorporation of the new corporation,
which was done to avoid payment of the
obligations to L. CBB ceased to exist only in name; it
re-emerged in the person of the new corporation
for an urgent purpose — to avoid payment by CBB
of the last two installments of its monetary
obligation to L, as well as its other financial
liabilities. Freed of CBB’s liabilities, especially that
owing to L, the new corporation can continue, as
it did continue, CBB’s business. It has long been
settled that the law vests a corporation with a
personality distinct and separate from its
2013 & 2014 Q and A|Commercial Law

stockholders or members. In the same vein, a
corporation, by legal fiction and convenience, is an
entity shielded by a protective mantle and imbued
by law with a character alien to the persons
comprising it. Nonetheless, the shield is not at all
times impenetrable and cannot be extended to a
point beyond its reason and policy. Circumstances
might deny a claim for corporate personality, under
the “doctrine of piercing the veil of corporate
fiction.”
Piercing the veil of corporate fiction is an equitable
doctrine developed to address situations where the
separate corporate personality of a corporation is
abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be
disregarded where the entity is formed or used for
non–legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims
or intentions, in which case, the fiction will be
disregarded and the individuals composing it and
the two corporations will be treated as identical.
[Eric Godfrey Stanley Livesey v. Binswanger
Philippines, Inc. and Keith Elliot, G.R. No. 177493,
March 19, 2014]
33. M was hired by S Tech as the head and
manager of one of its units. Subsequently,
N was employed as her manager. M's hard
disk crashed causing her to lose files, and
she informed N. M’s position was
downgraded twice and later on, she was
informed that her position was redundant.
An action for illegal dismissal was filed by
M against S Tech and its HR Director. Can
the case prosper against the HR Director?
No. It is hornbook principle that personal liability of
corporate directors, trustees or officers attaches
only when: (a) they assent to a patently unlawful
act of the corporation, or when they are guilty
of bad faith or gross negligence in directing its
Starr Weigand 2014
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affairs, or when there is a conflict of interest
resulting in damages to the corporation, its
stockholders or other persons; (b) they consent
to the issuance of watered down stocks or when,
having knowledge of such issuance, do not
forthwith file with the corporate secretary their
written objection; (c) they agree to hold themselves
personally and solidarily liable with the corporation;
or (d) they are made by specific provision of law
personally answerable for their corporate action. In
the case of M, there is no evidence to show that
the above-enumerated exceptions when a
corporate officer becomes personally liable for the
obligation of a corporation to this case. [SPI
Technologies, Inc., et al. v. Victoria K. Mapua, G.R.
No. 191154, April 7, 2014]
34. M Corp employed B, who was later on
dismissed from employment after having
tested positive during a random drug test
conducted in the office. B thus filed an
action for illegal dismissal against M Corp
and E, its president. Should the case
prosper against E?
No. A corporation has a personality separate and
distinct from its officers and board of directors who
may only be held personally liable for damages if it
is proven that they acted with malice or bad faith in
the dismissal of an employee. Absent any evidence
on record that petitioner E acted maliciously or in
bad faith in effecting the termination of
respondent, plus the apparent lack of allegation in
the pleadings E acted in such manner, the doctrine
of corporate fiction dictates that only petitioner
corporation should be held liable for the illegal
dismissal of respondent. [Mirant (Philippines)
Corporation, et al. v. Joselito A. Caro, G.R. No.
181490, April 23, 2014]
35. A mortgage his property to Bank A,
predecessor of Bank B. However, A
defaulted in his payments, so the mortgage
was foreclosed and Bank B bought the
2013 & 2014 Q and A|Commercial Law

property. A offered to repurchase the
property, but no agreement was reached.
With A insisting that a purchase agreement
was reached, he sold portions of the
property after being subdivided, and
offered to pay for the entire property. Bank
B however sold the remaining portions of
the property to another person, which
prompted A to cause an annotation of his
adverse claim on the title thereof.
Thereafter, the property was sold by Bank
B to other persons, without A’s knowledge.
Thus, A filed an action for specific
performance against the bank. Was there a
perfected repurchase agreement between
A and Bank B, even if no acceptance was
made by Bank B’s representatives?
No. No such agreement was reached. Section 23 of
the Corporation Code expressly provides that the
corporate powers of all corporations shall be
exercised by the board of directors. Just as a
natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to
individual officers or agents appointed by it. Thus,
contracts or acts of a corporation must be made
either by the board of directors or by a corporate
agent duly authorized by the board. Absent such
valid delegation/authorization, 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, are held not binding on the
corporation.
Thus, a corporation can only execute its powers and
transact its business through its Board of Directors
and through its officers and agents when
authorized by a board resolution or its by-laws.
In the absence of conformity or acceptance by
properly authorized bank officers of petitioner’s
counter-proposal, no perfected repurchase contract
was born out of the talks or negotiations between
Starr Weigand 2014
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petitioner and Bank B’s representatives. Petitioner
therefore had no legal right to compel respondent
bank to accept the P600,000 being tendered by him
as payment for the supposed balance of repurchase
price. [Heirs of Fausto C. Ignacio vs. Home Bankers
Savings and Trust Co., et al., G.R. No. 177783.
January 23, 2013]
36. TRB sold to BOC its banking business which
was later on approved by the BSP
monetary board. Later, as a result of
previous court litigation, TRB was order to
pay RPN, IBB and BBC damages, for which a
writ of execution was issued, which
included properties covered by the covered
by the sale to BOC. Can BOC be held liable
for the damages to be paid to RPN, IBB and
BBC?
No. Merger is a re-organization of two or more
corporations that results in their consolidating into
a single corporation, which is one of the constituent
corporations, one disappearing or dissolving and
the other surviving. To put it another way, merger
is the absorption of one or more corporations by
another existing corporation, which retains its
identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s). The
absorbing corporation continues its existence while
the life or lives of the other corporation(s) is or are
terminated.
The Corporation Code requires the following steps
for merger or consolidation:
(1) The board of each corporation draws up
a plan of merger or consolidation. Such plan
must include any amendment, if necessary,
to the articles of incorporation of the
surviving corporation, or in case of
consolidation, all the statements required in
the articles of incorporation of a
corporation.
2013 & 2014 Q and A|Commercial Law

(2) Submission of plan to stockholders or
members of each corporation for approval.
A meeting must be called and at least two
(2) weeks’ notice must be sent to all
stockholders or members, personally or by
registered mail. A summary of the plan must
be attached to the notice. Vote of two-
thirds of the members or of stockholders
representing two thirds of the outstanding
capital stock will be needed. Appraisal
rights, when proper, must be respected.
(3) Execution of the formal agreement,
referred to as the articles of merger o[r]
consolidation, by the corporate officers of
each constituent corporation. These take
the place of the articles of incorporation of
the consolidated corporation, or amend the
articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or
consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least
two weeks before.
(6) Issuance of certificate of merger or
consolidation.
Indubitably, it is clear that no merger took place
between BOC and TRB as the requirements and
procedures for a merger were absent. A merger
does not become effective upon the mere
agreement of the constituent corporations. All the
requirements specified in the law must be complied
with in order for merger to take effect. Section 79
of the Corporation Code further provides that the
merger shall be effective only upon the issuance by
the Securities and Exchange Commission (SEC) of a
certificate of merger.
Here, BOC and TRB remained separate corporations
with distinct corporate personalities. What
Starr Weigand 2014
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happened is that TRB sold and BOC purchased
identified recorded assets of TRB in consideration
of BOC’s assumption of identified recorded
liabilities of TRB including booked contingent
accounts. In strict sense, no merger or
consolidation took place as the records do not
show any plan or articles of merger or
consolidation. More importantly, the SEC did not
issue any certificate of merger or consolidation.
[Bank of Commerce v. Radio Philippines Network,
Inc., et al., G.R. No. 195615, April 21, 2014]
37. KMBI’s by-laws and articles of
incorporation provide that its board of
trustees shall consist of 9 members to
serve for one year. But, due to resignation
of five of them, and the death of another,
only 3 members of the board remain. Can
the remaining 3 members continue the
regular business of the corporation and fill
up the vacancies in the board?
The general rule is well-settled that the power of
the board is not suspended by vacancies in the
board unless the number is reduced to below a
quorum, the rule being that the number necessary
to constitute a quorum under a by-law which
provides that a majority of the directors shall be
necessary and sufficient to constitute a quorum, is
a majority of the entire board, notwithstanding that
there may be vacancies in the board at a time. In
the case of KMBI, the presence of 9 members
would be required to constitute a quorum. There
being no quorum with only 3 remaining members
of the board, then the board has no authority to
transact business. Also, they do not have authority
to fill-up vacancies in the board. Not only is there
no quorum, but the circumstances are not one of
those which would allow the remaining directors to
fill in a vacancy. Based on 29 of the Corporation
Code, the remaining directors/trustees can fill-up
the vacancies in the board when: (1) such vacancies
were occasioned by reasons other than removal by
the stockholders/members or expiration of term;
2013 & 2014 Q and A|Commercial Law

and (2) such remaining director/trustees still
constitute a quorum of the Board. These conditions
must concur; otherwise, the filling-up of vacancies
must be done by the stockholders or members in a
regular or special meeting called for the purpose.
[SEC OGC Opinion No. 13-06, 6 May 2013]
38. Does the President of a close corporation
have the authority to decide on matters
concerning the corporation even without
the approval of the Board?
Yes. A close corporation is one where the articles of
incorporation provide that: (1) all the corporation’s
issued stocks of all classes, exclusive of treasury
shares, shall be held of records by not more than a
specified number of persons, not exceeding 20; (2)
all of the issued stocks of all classes shall be subject
to restrictions on transfer permitted by the
Corporation Code; and (3) the corporation shall not
list in any stock exchange or make any public
offering of any of its stock of any class. The main
difference between a close corporation and other
corporations is the identity of stock ownership and
active management, that is, all or most of the
stockholders of a close corporation are active in the
corporate business either as directors, officers or
other key men in management. Where business
associates belong to a small, closely-knit group,
they usually prefer to keep the organization
exclusive and would not welcome strangers. Since it
is through their efforts and managerial skills that
they expect the business to grow and prosper, it is
quite understandable why they would not trust
outsiders to come in and interfere with their
management of business, and much less share
whatever fortune, big or small, that the business
may bring.
In an ordinary corporation, the President’s power of
general control and supervision over the corporate
business grants him an apparent authority to enter
into transactions on behalf o the corporation in the
ordinary course of business, unless prohibited by
Starr Weigand 2014
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the Articles of Incorporation or the By-laws. The
acts, even if priorly unauthorized, may be later
ratified by the Board of Directors or Trustees, which
ratification cleanses the transaction of defects. In
the case of close corporations, the act of the
President, who is also a Director, may not need
later ratification of the Board, provided that any of
the following conditions are present:
1. Before the action is taken, written consent
thereto is signed by all the directors;
2. All the stockholders have actual or implied
knowledge of the action and make no
prompt objection thereto in writing;
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
[SEC OGC Opinion No. 14-23, 26 August
2014]
39. What is the current limit on the
shareholdings of an Independent Director?
Paragraphs 2 and 6, Rule 38 of the Amended IRR of
the Securities Regulation Code are the controlling
provisions on the definition, qualification and
disqualification of an independent director. In other
words, a person is qualified to be elected as an
independent director provided he is independent of
management and free from any business or other
relationship which could, or could reasonably be
perceived to, materially interfere with his exercise
of independent judgment in carrying out his
responsibilities as a director in any covered
company, and includes, among others, any person
who does not own more than 2% of the shares of
the covered company and/or its related
companies or any of its substantial shareholders.
The 10% limit on beneficial ownership in the
2013 & 2014 Q and A|Commercial Law

covered company's equity security in which an
independent director is to be elected no longer
holds true. [SEC OGC Opinion No. 13-04, 18 April
2013; Emphasis supplied]
40. M Corp. was engaged in the business of
selling medical equipment, and has A as
one of its directors. A had a daughter, B,
who owns 80% of E Corp., also engaged in
the selling of medical equipment. Some of
the clients of M Corp. stopped doing
business with it, allegedly due to the
intervention of A, in favor of his daughter’s
interest in E Corp. Is there a conflict of
interest on the part of A, which would
disqualify him from continuing to be a
director in M Corp?
If the by-laws of M Corp. provides as a qualification
for directors that “a director shall not be the
immediate member of the family of any
stockholder in any other firm, company, or
association which competes with the subject
corporation”, then A can be disqualified. Every
corporation has the inherent power to adopt by-
laws for its internal government, and to regulate
the conduct and prescribe the rights of its members
towards itself and among themselves in reference
to the management of its affairs. Thus, under
Section 47(5) of the Corporation Code, a
corporation may prescribe in its by-laws the
qualifications of its directors, officers, and
employees. The qualification that “a director shall
not be the immediate member of the family of any
stockholder in any other firm, company, or
association which competes with the subject
corporation” is a qualificational by-law provision
which may be added to those specified in the
Corporation Code (Sections 23 and 27), pursuant to
the case of Gokongwei v. SEC, GR No. L-45911, 11
April 1979). Thus, corporations have the power to
make by-laws declaring a person employed in the
service of a rival company to be ineligible for the
Corporation’s Board of Directors and a provision
Starr Weigand 2014
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which renders ineligible, or if elected, subjects to
removal, a directors if he be also a director in a
corporation whose business is in competition with
or is antagonistic to the other corporation is valid.
However, these qualifications become effective
only when the by-laws expressly provide for the
same.
However, A may be held liable for damages for bad
faith in directing the affairs of the corporation,
under Section 31 of the Corporation Code, or to
account for any profit obtained to the prejudice of
the corporation by acquiring business opportunity
which should have belonged to the corporation,
pursuant to Section 34 of the Corporation Code.
[SEC OGC Opinion No. 14-04, 21 April 2014]
41. M Corp, T Corp and N Corp applied for
Mineral Production Sharing Agreements
(MPSA) with the DENR. This was opposed
by R Corp because it alleged that at least
60% of the capital stock of the corporations
are owned and controlled by MBMI, a
100% Canadian corporation. R Corp
reasoned that since MBMI is a considerable
stockholder of petitioners, it was the
driving force behind petitioners’ filing of
the MPSAs over the areas covered by
applications since it knows that it can only
participate in mining activities through
corporations which are deemed Filipino
citizens. R Corp argued that given that
petitioners’ capital stocks were mostly
owned by MBMI, they were likewise
disqualified from engaging in mining
activities through MPSAs, which are
reserved only for Filipino citizens. Decide.
It is quite safe to say that petitioners M Corp, T
Corp and N Corp are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or more of
their equity interests.
2013 & 2014 Q and A|Commercial Law

Basically, there are two acknowledged tests in
determining the nationality of a corporation: the
control test and the grandfather rule.
Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws
pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources
owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine
nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in
the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares
shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital
of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall
be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020,
stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of
Philippine nationality," pertains to the control test
or the liberal rule. On the other hand, the second
part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only
the number of shares corresponding to such
percentage shall be counted as Philippine
nationality," pertains to the stricter, more stringent
grandfather rule.
Starr Weigand 2014
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Prior to this recent change of events, petitioners
were constant in advocating the application of the
"control test" under RA 7042, as amended by RA
8179, otherwise known as the Foreign Investments
Act (FIA), rather than using the stricter grandfather
rule.
"Corporate layering" is admittedly allowed by the
FIA; but if it is used to circumvent the Constitution
and pertinent laws, then it becomes illegal.
Sec. 2, Article XII of the Constitution focuses on the
State entering into different types of agreements
for the exploration, development, and utilization of
natural resources with entities who are deemed
Filipino due to 60 percent ownership of capital is
pertinent to this case, since the issues are centered
on the utilization of our country’s natural resources
or specifically, mining. Thus, there is a need to
ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only
allowed corporations or associations "at least 60
percent of such capital is owned by such citizens."
Elementary in statutory construction is when there
is conflict between the Constitution and a statute,
the Constitution will prevail. In this instance,
specifically pertaining to the provisions under Art.
XII of the Constitution on National Economy and
Patrimony, Sec. 3 of the FIA will have no place of
application. As decreed by the honorable framers of
our Constitution, the grandfather rule prevails and
must be applied.
Paragraph 7, DOJ Opinion No. 020, Series of 2005
provides:
The above-quoted SEC Rules provide for the
manner of calculating the Filipino interest in a
corporation for purposes, among others, of
determining compliance with nationality
requirements (the ‘Investee Corporation’). Such
manner of computation is necessary since the
shares in the Investee Corporation may be owned
both by individual stockholders (‘Investing
2013 & 2014 Q and A|Commercial Law

Individuals’) and by corporations and partnerships
(‘Investing Corporation’). The said rules thus
provide for the determination of nationality
depending on the ownership of the Investee
Corporation and, in certain instances, the Investing
Corporation.
Under the above-quoted SEC Rules, there are two
cases in determining the nationality of the Investee
Corporation. The first case is the ‘liberal rule’, later
coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states,
‘(s)hares belonging to corporations or partnerships
at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine
nationality.’ Under the liberal Control Test, there is
no need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least
60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the
Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules
which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine
nationality." Under the Strict Rule or Grandfather
Rule Proper, the combined totals in the Investing
Corporation and the Investee Corporation must be
traced (i.e., "grandfathered") to determine the total
percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the
shares must first be traced to the level of the
Investing Corporation and added to the shares
directly owned in the Investee Corporation.
In other words, based on the said SEC Rule and DOJ
Opinion, the Grandfather Rule or the second part of
the SEC Rule applies only when the 60-40 Filipino-
foreign equity ownership is in doubt (i.e., in cases
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where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint
venture corporation which is either 60-40% Filipino-
alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino- foreign equity ownership
is not in doubt, the Grandfather Rule will not apply.
The “control test” is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art.
II of the 1987 Constitution, entitled to undertake
the exploration, development and utilization of the
natural resources of the Philippines. When in the
mind of the Court there is doubt, based on the
attendant facts and circumstances of the case, in
the 60-40 Filipino-equity ownership in the
corporation, then it may apply the “grandfather
rule.”
After a scrutiny of the evidence extant on record,
the Court finds that this case calls for the
application of the grandfather rule since, as ruled
by the POA and affirmed by the OP, doubt prevails
and persists in the corporate ownership of
petitioners. Here, doubt is present in the 60-40
Filipino equity ownership the corporations, since
their common investor, the 100% Canadian
corporation––MBMI, funded them. [Narra Nickel
Mining and Development Corp., et al. v. Redmont
Consolidated Mines, G.R. No. 195580, April 21,
2014]
N.B. Primarily, it is the incorporation test which
should be applied in determining the nationality of
a corporation. "Under Philippine jurisdiction, the
primary test is always the Place of Incorporation
Test since we adhere to the doctrine that a
corporation is a creature of the State whose laws it
has been created. A corporation organized under
the laws of a foreign country, irrespective of the
nationality of the persons who control it is
necessarily a foreign corporation. The control test
and the principal place of business test (siege
2013 & 2014 Q and A|Commercial Law

social), are merely adjunct tests, when the place of
incorporation test indicates that the subject
corporation is organized under Philippine laws.”
However, based upon the foregoing, while the
incorporation test serves as the primary test under
Philippine jurisdiction, other tests such as the
control test must be used for purposes of
compliance with the provisions of the Constitution
and of other laws on nationality requirements. Even
if the corporation is a creature of the State, there is
a need to further safeguard/regulate certain areas
of investment and activities for the protection of
the interests of Filipinos. For instance, the control
test is used to determine the eligibility of a
corporation, which has foreign equity participation
in its ownership structure, to engage in nationalized
or partly nationalized activities. [SEC-OGC Opinion
No. 11-42, 12 October 2011; Underscoring supplied]
42. For purposes of determining compliance
with ownership requirements under the
Constitution and existing laws, for
corporations engaged in areas of activities
or enterprises specifically reserved, wholly
or partly, to Philippine Nationals, what
should be considered?
For this purpose, ‘capital’ under Section 11, Article
XII of the 1987 Constitution refers to shares of stock
entitled to vote in the election of directors. [Heirs of
Gamboa v. Teves, G.R.No.176579, October 9, 2012]
Thus, for purposes of determining compliance
therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to
vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or
not entitled to vote in the election of directors. [SEC
Memorandum Circular no. 8, series of 2013]
Both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine
whether a corporation is a “Philippine national.”
Starr Weigand 2014
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[Heirs of Gamboa v. Teves, G.R.No.176579, October
9, 2012]
43. Y was the newly elected president of S
Corp. who, during a meeting, demanded
the turnover of the corporate records from
Q. The said records, however, were with C,
the corporate accountant, who kept them
for Q. Later on, C and Q caused the removal
of the corporate records from the company
premises. B, the corporate secretary, also
demanded for the turnover of the stock
and transfer book from P. P however said it
will be deposited in a safety deposit but
with E Bank. But, this was also taken by Q.
Q brought the book to the company office
and demanded that entries be made
therein. A court had already ordered that
the said entries be deleted, but Q refused
to do so, and he still kept custody of the
corporate records. Thus, a criminal
complaint was filed against C, Q, and P.
Should the case be dismissed?
Yes. A criminal action based on the violation of a
stockholder's right to examine or inspect the
corporate records and the stock and transfer book
of a corporation under the second and fourth
paragraphs of Section 74 of the Corporation Code-
such as this criminal case--can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation. However, the
instant case clearly suggest that respondents are
neither in relation to S Corp. While Section 74 of
the Corporation Code expressly mentions the
application of Section 144 only in relation to the act
of "refus[ing] to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from [the corporation's]
records or minutes," the same does not mean that
the latter section no longer applies to any other
possible violations of the former section.
It must be emphasized that Section 144 already
2013 & 2014 Q and A|Commercial Law

purports to penalize "[v]iolations" of "any
provision" of the Corporation Code "not otherwise
specifically penalized therein." It is inconsequential
the fact that that Section 74 expressly mentions the
application of Section 144 only to a specific act, but
not with respect to the other possible violations of
the former section.
There is no cogent reason why Section 144 of the
Corporation Code cannot be made to apply to
violations of the right of a stockholder to inspect
the stock and transfer book of a corporation under
Section 74(4) given the already unequivocal intent
of the legislature to penalize violations of a parallel
right, i.e., the right of a stockholder or member to
examine the other records and minutes of a
corporation under Section 74(2). Certainly, all the
rights guaranteed to corporators under Section 74
of the Corporation Code are mandatory for the
corporation to respect. All such rights are just the
same underpinned by the same policy
consideration of keeping public confidence in the
corporate vehicle thru an assurance of
transparency in the corporation's operations.
Refusing to allow inspection of the stock and
transfer book when done in violation of Section
74(4) of the Corporation Code, properly falls within
the purview of Section 144 of the same code and
thus may be penalized as an offense.
A criminal action based on the violation of a
stockholder's right to examine or inspect the
corporate records and the stock and transfer hook
of a corporation under the second and fourth
paragraphs of Section 74 of the Corporation Code
can only he maintained against corporate officers
or any other persons acting on behalf of such
corporation.
A perusal of the second and fourth paragraphs of
Section 74, as well as the first paragraph of the
same section, reveal that they are provisions that
obligates a corporation: they prescribe what books
Starr Weigand 2014
- 31 -
or records a corporation is required to keep; where
the corporation shall keep them; and what are the
other obligations of the corporation to its
stockholders or members in relation to such books
and records. Hence, by parity of reasoning, the
second and fourth paragraphs of Section 74,
including the first paragraph of the same section,
can only be violated by a corporation. It is clear
then that a criminal action based on the violation of
the second or fourth paragraphs of Section 74 can
only be maintained against corporate officers or
such other persons that are acting on behalf of the
corporation. Violations of the second and fourth
paragraphs of Section 74 contemplates a situation
wherein a corporation, acting thru one of its
officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and
the stock and transfer book of such corporation.
The problem the instant case and the evidence
submitted during preliminary investigation is that
they do not establish that respondents were acting
on behalf of S Corp. Quite the contrary, the
scenario painted by the complaint is that the
respondents are merely outgoing officers of S Corp
who, for some reason, withheld and refused to
tum-over the company records of S Corp; that it is
the petitioners who are actually acting on behalf of
S Corp; and that S Corp is actually merely trying to
recover custody of the withheld records. In other
words, petitioners are not actually invoking their
right to inspect the records and the stock and
transfer book of S Corp under the second and
fourth paragraphs of Section 74. What they seek to
enforce is the proprietary right of S Corp to be in
possession of such records and book. Such right,
though certainly legally enforceable by other
means, cannot be enforced by a criminal
prosecution based on a violation of the second and
fourth paragraphs of Section 74. That is simply not
the situation contemplated by the second and
fourth paragraphs of Section 74 of the Corporation
Code. [Aderito Z. Yujuico and Bonifacio C. Sumbilla
2013 & 2014 Q and A|Commercial Law

v. Cezar T. Quiambao and Eric C. Pilapil, G.R. No.
180416, June 2, 2014]
44. A complaint for injunction and damages
was filed by ADC Corp against AHV
Association and its president. This arose as
ADC alleged that AHV Association
constructed a multi-purpose hall and
swimming pool on one of the parcels of
land owned by ADC which were to be sold
without its consent and approval.
However, its SEC registration had been
revoked more than three years prior to the
institution of the action. Can it still file the
instant case?
No. It is to be noted that the time during which the
corporation, through its own officers, may conduct
the liquidation of its assets and sue and be sued as
a corporation is limited to three years from the
time the period of dissolution commences; but
there is no time limit within which the trustees
must complete a liquidation placed in their hands.
It is provided only (Corp. Law, Sec. 78 [now Sec.
122]) that the conveyance to the trustees must be
made within the three-year period. It may be found
impossible to complete the work of liquidation
within the three-year period or to reduce disputed
claims to judgment. The authorities are to the
effect that suits by or against a corporation abate
when it ceased to be an entity capable of suing or
being sued (7 R.C.L., Corps., par. 750); but trustees
to whom the corporate assets have been conveyed
pursuant to the authority of Sec. 78 [now Sec. 122]
may sue and be sued as such in all matters
connected with the liquidation. Still in the absence
of a board of directors or trustees, those having any
pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make
proper representations with the Securities and
Exchange Commission, which has primary and
sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the
Starr Weigand 2014
- 32 -
corporate concerns. The trustee of a corporation
may continue to prosecute a case commenced by
the corporation within three years from its
dissolution until rendition of the final judgment,
even if such judgment is rendered beyond the
three-year period allowed by Section 122 of the
Corporation Code. However, there is nothing in the
said cases which allows an already defunct
corporation to initiate a suit after the lapse of the
said three-year period. [Alabang Development
Corporation v. Alabang Hills Village Association and
Rafael Tinio, G.R. No. 187456, June 2, 2014]
45. INC, a religious corporation, had been in
existence since 1914. Has its corporate
term expired in line with the provisions of
the Corporation Code?
No. Religious corporations may be allowed to exist
perpetually. While the Corporation Code has
specific provisions for religious corporations, set
out in Title XIII on Special Corporations, particularly
Sections 110 and 116, both of which do not provide
for a term of existence for religious corporations,
whether classified as a corporation sole or religious
society. The law never intended to limit the
corporate life of religious corporations, hence, they
may be allowed to exist perpetually. Religious
corporations may limit their corporate term by
providing a specific term in their articles of
incorporation. However, absent such specification,
it shall be understood that the corporation
intended to exist for an indefinite period. [SEC OGC
Opinion No. 14-18, 10 July 2014]
46. What is the corporate term of an
educational institution incorporated under
the Corporation Code?
The corporate terms of such should also be 50
years in accordance with the provisions of the
Corporation Code. However, if the corporation was
incorporated under the older Corporation Law,
which did not require a maximum corporate term
2013 & 2014 Q and A|Commercial Law

for corporations, then they should amend their
articles of incorporation to comply with the
applicable provisions of the Corporation Code on or
before May 1, 1982, the expiry date of the two (2)
year period, the SEC will consider the provisions of
the latter law as written into the articles of
incorporation as of May 1, 1980, the date of
effectivity of the Corporation Code." Hence, based
on the said pronouncement, the 50-year period
should be counted from 01 May 1980, in
accordance with the Corporation Code. The 50-year
period should not be counted from the date of
registration as this would adversely affect the
operations of pre-war schools which were
established more than fifty (50) years from the date
of effectivity of the Corporation Code since it would
result in the dissolution of said corporations as the
50-year period had already lapsed. [SEC-OGC
Opinion No. 13-05, 24 April 2013]
- 33 -
not necessarily include ‘investment in a
partnership’. There being differences between the
two, the effects of such investments should be
differentiated. Investment in a partnership will only
be akin to an investment in a corporation that is
exempt from the doing of business rule only when
the foreign corporation is exclusively a limited
partner and takes no part in the management and
control of the business operation of the limited
partnership. If the corporation is not a limited
partner and actively takes part in the control of the
business, then the corporation is doing business in
the Philippines as provided in Section 3(d) of the
FIA, thus, must secure a license to do business in
the Philippines. [SEC Opinion No. 14-01, 21
February 2014]

47. Is a foreign corporation required to obtain

a license to transact business in the
Philippines if such becomes a member of a
petroleum consortium, but is not the
operator thereof, and will hold only a
minority and non-controlling interest
therein?

Yes, if the corporation is not a mere limited partner,

then the subject foreign corporation still needs to
obtain a license to do business in the Philippines
under the Foreign Investments Act (FIA) of 1991,
notwithstanding the fact that it holds a minority
and non-controlling interest in the consortium. A
consortium or joint venture is a form of
partnership, governed by the laws of partnership.
Doing business is, among others, the participation
in the management, supervision, or control of any
domestic business, firm, entity, or corporation. in
order to be exempted from obtaining a license to
do business in the Philippines, the foreign
corporation must prove that it merely invested as a
shareholder in a domestic corporation. This is
limited to ‘investment in a corporation’, which does

Starr Weigand 2014 2013 & 2014 Q and A|Commercial Law


Securities Regulation Code
1. A complaint was filed by joint account
holders, G, T, and L, against Citibank NA
and its officials for violation of the Revised
Securities Act (RSA) and the Securities
Regulation Code. It was alleged that G, T,
and L were induced by the bank’s VP and
Director to sign a subscription agreement
to purchase income notes. Later on, they
were again made to purchase other income
notes. They found out that the investments
declined and that the notes were not
registered with the SEC in accordance with
the law. Citibank and its officials alleged
that the action had already prescribed.
What is the prescriptive period applicable
in the instant case?
The SRC does not provide for a prescriptive period
for the enforcement of criminal liability, thus, RA
3362 would come into play. Under Section 73 of the
SRC, violation of its provisions or the rules and
regulations is punishable with imprisonment of not
less than seven (7)years nor more than twenty-one
(21) years. Applying Section 1 of Act No.3326, a
criminal prosecution for violations of the SRC shall,
therefore, prescribe in twelve (12) years.
Hand in hand with Section 1, Section 2 of Act No.
3326 states that "prescription shall begin to run
from the day of the commission of the violation of
the law, and if the same be not known at the time,
from the discovery thereof and the institution of
judicial proceedings for its investigation and
punishment." [Citibank N.A. v. Tanco-Gabaldon,
G.R. No. 198444, September 4, 2013]
Starr Weigand 2014
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Transportation Laws
1. N Corp. shipped goods to UMC from Japan
to Manila. The goods were insured by P
Insurance against all risks. When they
arrived in Manila, it was found that one
package was in bad order. UMC declared
the damaged goods as a total loss. P
insurance paid UMC for the loss, and filed a
complaint against N Corp. and the brokers.
The goods were delivered to UMC on May
12, 1995, and it filed a bad order survey on
that same day. The action was filed by the
insurer on January 18, 1996. Has the action
prescribed?
No. The prescriptive period for filing an action for
the loss or damage of the goods under the COGSA
is found in paragraph (6), Section 3, thus:
(6) Unless notice of loss or damage and the
general nature of such loss or damage be given
in writing to the carrier or his agent at the port
of discharge before or at the time of the
removal of the goods into the custody of the
person entitled to delivery thereof under the
contract of carriage, such removal shall be
prima facie evidence of the delivery by the
carrier of the goods as described in the bill of
lading. If the loss or damage is not apparent, the
notice must be given within three days of the
delivery.
Said notice of loss or damage maybe endorsed
upon the receipt for the goods given by the person
taking delivery thereof.
The notice in writing need not be given if the state
of the goods has at the time of their receipt been
the subject of joint survey or inspection.
In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year after
2013 & 2014 Q and A|Commercial Law

delivery of the goods or the date when the goods
should have been delivered: Provided, That 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 year
after the delivery of the goods or the date when the
goods should have been delivered.
A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode
of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and
a buyer, who wants to have control of his goods
before paying. However, letters of credit are
employed by the parties desiring to enter into
commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the
parties to the original transaction, in these cases, N
Corp. as the seller and UMC as the buyer. Hence,
the latter, as the buyer of the goods, should be
regarded as the person entitled to delivery of the
goods. Accordingly, for purposes of reckoning when
notice of loss or damage should be given to the
carrier or its agent, the date of delivery to UMC is
controlling.
A request for, and the result of a bad order
examination, done within the reglementary period
for furnishing notice of loss or damage to the
carrier or its agent, serves the purpose of a claim. A
claim is required to be filed within the reglementary
period to afford the carrier or depositary
reasonable opportunity and facilities to check the
validity of the claims while facts are still fresh in the
minds of the persons who took part in the
transaction and documents are still available. Here,
UMC filed a request for bad order survey on May
12, 1995, even before all the packages could be
unloaded to its warehouse.
Moreover, paragraph (6), Section 3 of the COGSA
clearly states that failure to comply with the notice
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- 35 -
requirement shall not affect or prejudice the right
of the shipper to bring suit within one year after
delivery of the goods. The insurer, as subrogee of
UMC, filed the Complaint for damages on January
18, 1996, just eight months after all the packages
were delivered to its possession on May 17, 1995.
Evidently, the action was seasonably filed. [Asian
Terminals, Inc. v. Philam Insurance Co., Inc. (now
Chartis Philippines Insurance Inc.)/ Philam Insurance
Co., Inc. (now Chartis Philippines Insurance Inc.) v.
Westwind Shipping Corporation and Asian
Terminals, Inc./ Westwind Shipping Corporation v.
Philam Insurance Co., Inc. and Asian Terminals, Inc.,
G.R. Nos. 181163/181262/181319, July 24, 2013]
2. S Corp. shipped goods on board a vessel
owned by E Shipping, to be delivered to the
consignee, C Steel. The goods were insured
by MS Insurance. The shipment arrived in
Manila, but it was found that some of the
goods were in bad condition. When
delivered to C Steel, the latter rejected the
goods being unfit for their intended
purpose. S Corp thereafter shipped another
batch of goods under similar
circumstances, which when they arrived in
Manila, were also found to be in bad order.
Again, C Steel rejected the goods. C Steel
was paid by MS Insurance for the damage
to the goods, and thus, MS Insurance filed
an action for damages against E Shipping
and the stevedore. Can E Shipping be held
liable?
Yes. It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain
under the custody of the carrier. Based evidence
presented, the goods were damaged even before
they were turned over to the stevedore. Such
damage was even compounded by the negligent
acts of E Shipping and the Stevedore which both
mishandled the goods during the discharging
operations. Thus, it bears stressing unto E Shipping
that common carriers, from the nature of their
2013 & 2014 Q and A|Commercial Law

business and for reasons of public policy, are bound
to observe extraordinary diligence in the vigilance
over the goods transported by them. Subject to
certain exceptions enumerated under Article 1734
of the Civil Code, common carriers are responsible
for the loss, destruction, or deterioration of the
goods. The extraordinary responsibility of the
common carrier lasts from the time the goods are
unconditionally placed in the possession of, and
received by the carrier for transportation until the
same are delivered, actually or constructively, by
the carrier to the consignee, or to the person who
has a right to receive them. Owing to this high
degree of diligence required of them, common
carriers, as a general rule, are presumed to have
been at fault or negligent if the goods they
transported deteriorated or got lost or destroyed.
That is, unless they prove that they exercised
extraordinary diligence in transporting the goods. In
order to avoid responsibility for any loss or damage,
therefore, they have the burden of proving that
they observed such high level of diligence. In this
case, E Shipping failed to hurdle such burden.
[Eastern Shipping Lines v. BPI/MS Insurance
Corporation, G.R. No. 193986, 15 January 2014]
3. R made travel reservations with S Travel
for his family’s trip to Australia. Upon
booking and confirmation of his flight
schedule, R paid the airfare and was issued
Cathay Pacific round-trip plane tickets for
Manila-HongKong-Adelaide-HongKong-
Manila. Their flight to Australia went
smoothly. Before the flight back to Manila,
the booking was reconfirmed and it was
said that the reservation was still Ok as
scheduled. They were only able to take a
flight out back to Manila on the next day.
When R and his family were at the airport
to catch the flight back to Manila, they
were informed by S Travel that they did not
have confirmed reservations. Cathay,
however, said that S Travel failed to input
the ticket numbers of R, and made
Starr Weigand 2014
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fictitious bookings for the other members
of R’s family. In Manila, R was informed
that it was Cathay that cancelled the
bookings. A complaint for damages was
filed against Cathay and S Travel. Can
Cathay and S Travel be held liable?
The determination of whether or not the award of
damages is correct depends on the nature of R’s
contractual relations with Cathay Pacific and S
Travel. The cause of action against Cathay Pacific
stemmed from a breach of contract of carriage. A
contract of carriage is defined as one whereby a
certain person or association of persons obligate
themselves to transport persons, things, or news
from one place to another for a fixed price. Under
Article 1732 of the Civil Code, this "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"
is called a common carrier.
R and his family entered into a contract of carriage
with Cathay Pacific. As far as R and his family are
concerned, they were holding valid and confirmed
airplane tickets. The ticket in itself is a valid written
contract of carriage whereby for a consideration,
Cathay Pacific undertook to carry respondents in its
airplane for a round-trip flight from Manila to
Adelaide, Australia and then back to Manila. In fact,
R called the Cathay Pacific office before his return
flight to re-confirm his booking. He was even
assured by a staff of Cathay Pacific that he does not
need to reconfirm his booking. Cathay Pacific
breached its contract of carriage with respondents
when it disallowed them to board the plane to go
back to Manila on the date reflected on their
tickets. Thus, Cathay Pacific opened itself to claims
for compensatory, actual, moral and exemplary
damages, attorney’s fees and costs of suit.
In contrast, the contractual relation between S
Travel and R is a contract for services. The object of
2013 & 2014 Q and A|Commercial Law
 - 37 -
the contract is arranging and facilitating the latter’s Insurance Law
booking and ticketing. It was even S Travel which
issued the tickets. Since the contract between the 1. In a CBA, it was provided that the employer
parties is an ordinary one for services, the standard will shoulder hospitalization expenses of
of care required of respondent is that of a good the dependents of covered employees
father of a family under Article 1173 of the Civil subject to certain limitations and
Code. This connotes reasonable care consistent restrictions. Accordingly, covered
with that which an ordinarily prudent person would employees pay part of the hospitalization
have observed when confronted with a similar insurance premium through monthly salary
situation. The test to determine whether deductions while the company, upon
negligence attended the performance of an hospitalization of the covered employees'
obligation is: did the defendant in doing the alleged dependents, shall pay the hospitalization
negligent act use that reasonable care and caution expenses incurred for the same. The
which an ordinarily prudent person would have conflict arose when a portion of the
used in the same situation? If not, then he is guilty hospitalization expenses of the covered
of negligence. There was indeed failure on the part employees' dependents were
of S Travel to exercise due diligence in performing paid/shouldered by the dependent's own
its obligations under the contract of services. It was health insurance. While the company
established by Cathay Pacific, that S Travel failed to refused to pay the portion of the hospital
input the correct ticket number for R’s ticket. expenses already shouldered by the
Cathay Pacific even asserted that S Travel made two dependents' own health insurance, the
fictitious bookings for the members of R’s family. union insists that the covered employees
The negligence of S Travel renders it also liable for are entitled to the whole and undiminished
damages. [Cathay Pacific Airways v. Juanita Reyes, amount of said hospital expenses. Decide.
et al., G.R. No. 185891, June 26, 2013]
The covered employees are not entitled to full
payment of the hospital expenses incurred by their
dependents, including the amounts already paid by
other health insurance companies based on the
theory of collateral source rule.

As part of American personal injury law, the

collateral source rule was originally applied to tort
cases wherein the defendant is prevented from
benefiting from the plaintiff’s receipt of money
from other sources. Under this rule, if an injured
person receives compensation for his injuries from
a source wholly independent of the tortfeasor, the
payment should not be deducted from the damages
which he would otherwise collect from the
tortfeasor. In a recent Decision by the Illinois
Supreme Court, the rule has been described as “an
established exception to the general rule that
damages in negligence actions must be

Starr Weigand 2014 2013 & 2014 Q and A|Commercial Law


compensatory.” The Court went on to explain that
although the rule appears to allow a double
recovery, the collateral source will have a lien or
subrogation right to prevent such a double
recovery.
The collateral source rule applies in order to place
the responsibility for losses on the party causing
them. Its application is justified so that “the
wrongdoer should not benefit from the
expenditures made by the injured party or take
advantage of contracts or other relations that may
exist between the injured party and third persons.”
Thus, it finds no application to cases involving no-
fault insurances under which the insured is
indemnified for losses by insurance companies,
regardless of who was at fault in the incident
generating the losses. Here, it is clear that the
employer is a no-fault insurer. Hence, it cannot be
obliged to pay the hospitalization expenses of the
dependents of its employees which had already
been paid by separate health insurance providers of
said dependents. [Mitsubishi Motors Philippines
Salaried Employees Union v. Mitsubishi Motors
Philippines Corporation, G.R. No. 175773, June 17,
2013]
2. M Insurer insured PAP’s machineries and
equipment against fire, for a period of one
year, for the amount of 15 million pesos.
This was procured by PAP for its
mortgagee, RCBC. The insurance policy was
renewed before the lapse of one year, on
an ‘as is’ basis, and it was agreed that the
things insured will not be moved to
another location, without the consent of M
insurer. The machineries and equipment
were thereafter lost in a fire, which
prompted PAP to claim from M insurer. The
claim was denied on the ground that the
things insured were transferred to a
different location from that indicated in the
policy. Can M insurer be held liable for the
loss?
Starr Weigand 2014
- 38 -
No. Here, by the clear and express condition in the
renewal policy, the removal of the insured property
to any building or place required the consent of the
insurer. Any transfer effected by the insured,
without the insurer’s consent, would free the latter
from any liability. Considering that the original
policy was renewed on an “as is basis,” it follows
that the renewal policy carried with it the same
stipulations and limitations. The terms and
conditions in the renewal policy provided, among
others, that the location of the risk insured against
is at PAP’s factory. The subject insured properties,
however, were totally burned at another factory.
Although it was also located in the same area, the
other factory was not the location stipulated in the
renewal policy. There being an unconsented
removal, the transfer was at PAP’s own risk.
Consequently, it must suffer the consequences of
the fire. Thus, the Court agrees with the report of
an international loss adjuster which investigated
the fire incident at the other factory, which opined
that “[g]iven that the location of risk covered under
the policy is not the location affected, the policy
will, therefore, not respond to this loss/claim.” It
can also be said that with the transfer of the
location of the subject properties, without notice
and without M insurer’s consent, after the renewal
of the policy, PAP clearly committed concealment,
misrepresentation and a breach of a material
warranty.
Accordingly, an insurer can exercise its right to
rescind an insurance contract when the following
conditions are present, to wit:
1) the policy limits the use or condition of the
thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the
insurer;
4) the alteration is made by means within the
insured’s control; and
5) the alteration increases the risk of loss.
2013 & 2014 Q and A|Commercial Law

In the case at bench, all these circumstances are
present. It was clearly established that the renewal
policy stipulated that the insured properties were
located at PAP’s factory; that PAP removed the
properties without the consent of M insurer; and
that the alteration of the location increased the risk
of loss. [Malayan Insurance Company, Inc. v. PAP
co., Ltd. (Philippine Branch), G.R. No. 200784,
August 7, 2013]
3. M Insurance issued a life insurance policy
covering the life of S, with A as beneficiary.
More than two years after the insurance
was issued, S died, thus, A filed a claim for
the proceeds. The claim was denied
because the claim was spurious, as it
appeared after its investigation that S did
not actually apply for insurance coverage,
was unlettered, sickly, and had no visible
source of income to pay for the insurance
premiums; and that A was an impostor,
posing as S and fraudulently obtaining
insurance in the latter’s name without her
knowledge and consent. Can M Insurance
deny the claim?
No. "Fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind
the contract." In the absence of proof of such
fraudulent intent, no right to rescind arises. There
being no evidence that there was indeed fraud,
except for the self-serving result of M Insurance’s
investigation, then the claim cannot be denied.
Also, Section 48 of the Insurance Code will prevent
the insurer from barring the claim. The results and
conclusions arrived at during the investigation
conducted unilaterally by petitioner after the claim
was filed may simply be dismissed as self-serving
and may not form the basis of a cause of action
given the existence and application of Section 48,
which provides that if the life insurance policy has
been in force for at least two years from its date of
issuance, the insurer cannot deny the claim on the
Starr Weigand 2014
- 39 -
ground of concealment or misrepresentation by the
insured.
Section 48 serves a noble purpose, as it regulates
the actions of both the insurer and the insured.
Under the provision, an insurer is given two years –
from the effectivity of a life insurance contract and
while the insured is alive – to discover or prove that
the policy is void ab initio or is rescindible by reason
of the fraudulent concealment or
misrepresentation of the insured or his agent. After
the two-year period lapses, or when the insured
dies within the period, the insurer must make good
on the policy, even though the policy was obtained
by fraud, concealment, or misrepresentation. This is
not to say that insurance fraud must be rewarded,
but that insurers who recklessly and
indiscriminately solicit and obtain business must be
penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of
bona fide takers of insurance and the public in
general.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments on life insurance, only to later on deny a
claim on the policy on specious claims of fraudulent
concealment and misrepresentation, such as what
obtains in the instant case. Thus, instead of
conducting at the first instance an investigation into
the circumstances surrounding the issuance of the
subject insurance policy which would have timely
exposed the supposed flaws and irregularities
attending it as it now professes, M Insurance
appears to have turned a blind eye and opted
instead to continue collecting the premiums on the
policy. For nearly three years, the insurer collected
the premiums and devoted the same to its own
profit. It cannot now deny the claim when it is
called to account. Section 48 must be applied to it
with full force and effect. [Manila Bankers v.
Crisencia Aban, GR No. 175666, July 29, 2013]
2013 & 2014 Q and A|Commercial Law

4. V Corp operated a tanker which was
chartered by C Inc. to transport petroleum.
The petroleum was insured by AHA Co.
however, during the course of the voyage,
the tanker collided with another vessel and
sank along with the petroleum. AHA Co.
indemnified C Inc. for the loss, and later
sued V Corp for reimbursement. What is
the prescriptive period for filing an action
for reimbursement by the insurer as a
result of subrogation?
The cause of action of the insurer is one which
arose out of subrogation by virtue of Article 2207 of
the Civil Code, which is based upon an obligation
created by law. It comes under Article 1194(2) of
the Civil Code and prescribes in ten years. [Vector
Shipping v. American Home Insurance, GR No.
159213, 3 July 2013]
N.B. If there is a period within which the insured
can file a claim with the wrongdoer, the subrogated
insurance company is also bound by such period.
The subrogated insurance company stands in the
place and in substitution of the consignee. [Federal
Express v. American Home Assurance, G.R. No.
150094, August 18, 2004]
5. R insured her car with P Insurer in case of
loss or damage thereto. The car was to be
taken to an auto shop by R’s driver, but the
driver no longer return. After efforts to find
it failed, R notified the insurer of the loss.
The claim of R against the insurer was
denied because of a provision in the policy
which exempts the insurer from liability in
case malicious damage to the car was
caused by the employee of the insured. Can
the insurer deny R’s claim on such ground?
No. A contract of insurance is a contract of
adhesion. When the terms of the insurance
contract contain limitations on liability, courts
should construe them in such a way as to preclude
Starr Weigand 2014
- 40 -
the insurer from non-compliance with his
obligation.
The words "loss" and "damage" mean different
things in common ordinary usage. The word "loss"
refers to the act or fact of losing, or failure to keep
possession, while the word "damage" means
deterioration or injury to property.
Therefore, the insurer cannot exclude the loss of
vehicle under the exceptions in the insurance policy
since the same refers only to "malicious damage,"
or more specifically, "injury" to the motor vehicle
caused by a person under the insured’s service. It
clearly does not contemplate "loss of property," as
what happened in the instant case.
"Malicious damage," as provided for in the subject
policy as one of the exceptions from coverage, is
the damage that is the direct result from the
deliberate or willful act of the insured, members of
his family, and any person in the insured’s service,
whose clear plan or purpose was to cause damage
to the insured vehicle for purposes of defrauding
the insurer
Theft perpetrated by a driver of the insured is not
an exception to the coverage from the insurance
policy subject of this case. This is evident from the
very provision of the insurance policy. The
insurance company, subject to the limits of liability,
is obligated to indemnify the insured against theft.
Said provision does not qualify as to who would
commit the theft. Thus, even if the same is
committed by the driver of the insured, there being
no categorical declaration of exception, the same
must be covered. "(A)n insurance contract should
be interpreted as to carry out the purpose for
which the parties entered into the contract which is
to insure against risks of loss or damage to the
goods. Such interpretation should result from the
natural and reasonable meaning of language in the
policy. Where restrictive provisions are open to two
interpretations, that which is most favorable to the
2013 & 2014 Q and A|Commercial Law

insured is adopted." The defendant would argue
that if the person employed by the insured would
commit the theft and the insurer would be held
liable, then this would result to an absurd situation
where the insurer would also be held liable if the
insured would commit the theft. This argument is
certainly flawed. Of course, if the theft would be
committed by the insured himself, the same would
be an exception to the coverage since in that case
there would be fraud on the part of the insured or
breach of material warranty under Section 69 of the
Insurance Code.
Indemnity and liability insurance policies are
construed in accordance with the general rule of
resolving any ambiguity therein in favor of the
insured, where the contract or policy is prepared by
the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in
other words, it should be construed liberally in
favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with
extreme jealousy and must be construed in such a
way as to preclude the insurer from non-
compliance with its obligations. [Alpha Insurance
and Surety Co. v. Arsenia Sonia Castor, G.R. No.
198174, September 2, 2013]
6. A was a health insurance policy holder of M
Inc. He underwent emergency medical
appendectomy causing him to incur
medical expenses while in the US.
However, M In. only approved
reimbursement of a portion of the
expenses, which was based on the average
cost of the procedure if done in Manila.
With the denial of his claim for
reimbursement, A filed a complaint for
breach of contract against M Inc. Should
the action prosper?
Yes. M Inc.’s liability to A under the subject Health
Care Contract should be based on the expenses for
Starr Weigand 2014
- 41 -
hospital and professional fees which he actually
incurred, and should not be limited by the amount
that he would have incurred had his emergency
treatment been performed in an accredited
hospital in the Philippines. . For purposes of
determining the liability of a health care provider
to its members, jurisprudence holds that a health
care agreement is in the nature of non-life
insurance, which is primarily a contract of
indemnity. Once the member incurs hospital,
medical or any other expense arising from sickness,
injury or other stipulated contingent, the health
care provider must pay for the same to the extent
agreed upon under the contract. that a health care
agreement is in the nature of a non-life insurance.
It is an established rule in insurance contracts that
when their terms contain limitations on liability,
they should be construed strictly against the
insurer. These are contracts of adhesion the terms
of which must be interpreted and enforced
stringently against the insurer which prepared the
contract. This doctrine is equally applicable to
health care agreements. L]imitations of liability on
the part of the insurer or health care provider must
be construed in such a way as to preclude it from
evading its obligations. Accordingly, they should be
scrutinized by the courts with "extreme jealousy"
and "care" and with a "jaundiced eye. [Fortune
Medicare, Inc. v. David Robert U. Amorin, G.R. No.
195872, March 12, 2014]
7. What is Microinsurance?
Microinsurance is an activity providing specific
insurance, insurance-like and other similar products
and services that meet the needs of the low-income
sector for risk protection and relief against distress,
misfortune and other contingent events. This shall
include all forms of insurance, insurance-like and
other similar activities with the following features:
a. Premiums, contributions, fees or charges
are collected or deducted prior to the
occurrence of a contingent event; and
2013 & 2014 Q and A|Commercial Law

b. Guaranteed benefits are provided upon
occurrence of a contingent event.
Insurance companies offering microinsurance will
have a something called a “microinsurance
product” which is a financial product or service that
meets the risk protection needs of the poor where:
a. The amount of premiums, contributions,
fees or charges, computed on a daily basis,
does not exceed 5% of the current daily
minimum wage rate for non-agricultural
workers in Metro Manila; and
b. The maximum sum of guaranteed benefits is
not more than 500 times the daily minimum
wage rate for non-agricultural workers in
Metro Manila.
All insurance companies, cooperative insurance
societies and mutual benefit associations licensed
by the Insurance Commissioner may provide
microinsurrance products and services following
prescribed regulatory and prudential requirements.
[Insurance Memorandum Circular No. 1-2010, 29
January 2010]
Starr Weigand 2014
- 42 -
Intellectual Property Laws
1. “HIPOLITO & SEA HORSE & TRIANGULAR
DEVICE," "FAMA," and other related marks
were owned by CH S.A. of Portugal to
designate kerosene burners. L claimed that
the true owner of the marks G corp.
assigned them to him. However, he
claimed that he bought kerosene burners
from W Corp. with the subject marks and
indicated thereon that they were made in
Portugal. He thus filed a complaint against
W Corp. and its officers for false
designation of origin. Can W Corp. be held
liable?
Yes. W Corp. did not have authority from CH S.A. to
place the words “Made in Portugal” and “Original
Portugal” with the trademarks on the burners
produced in the Philippines. W Corp. placed the
words "Made in Portugal" and "Original Portugal"
with the disputed marks knowing fully well —
because of their previous dealings with the
Portuguese company — that these were the marks
used in the products of CH S.A. Portugal. More
importantly, the products that W Corp. sold were
admittedly produced in the Philippines, with no
authority CH S.A. Portugal. The law on trademarks
and trade names precisely precludes a person from
profiting from the business reputation built by
another and from deceiving the public as to the
origins of products. [Uyco v. Lo, G.R. No. 202423,
January 28, 2013]
2. Levi’s Inc. was a licensee of Levi’s, a US
Corporation owner of trademarks and
designs of Levi’s Jeans. It received
information that D was selling counterfeit
Levi’s jeans, and with the help of the NBI,
had seized from D’s shop several fake Levi’s
jeans, with the trademark “LS JEANS
TAILORING”. It charged D with the crime of
trademark infringement. Is D guilty of
infringement?
2013 & 2014 Q and A|Commercial Law

No. The elements of the offense of trademark
infringement under the
Intellectual Property Code are, therefore, the
following:
1. The trademark being infringed is registered
in the Intellectual Property Office;
2. The trademark is reproduced, counterfeited,
copied, or colorably imitated by the
infringer;
3. The infringing mark is used in connection
with the sale, offering for sale, or
advertising of any goods, business or
services; or the infringing mark is applied to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to
be used upon or in connection with such
goods, business or services;
4. The use or application of the infringing mark
is likely to cause confusion or mistake or to
deceive purchasers or others as to the
goods or services themselves or as to the
source or origin of such goods or services or
the identity of such business; and
5. The use or application of the infringing mark
is without the consent of the trademark
owner or the assignee thereof.
The gravamen of the offense is he likelihood of
confusion. There are two tests to determine
likelihood of confusion, namely: the dominancy
test, and the holistic test. The holistic test is
applicable here considering that the herein criminal
cases also involved trademark infringement in
relation to jeans products. Accordingly, the jeans
trademarks of Levi’s and D must be considered as a
whole in determining the likelihood of confusion
between them. The jeans made and sold by Levi’s,
were very popular in the Philippines. The
consuming public knew that the original Levi’s jeans
were under a foreign brand and quite expensive.
Such jeans could be purchased only in malls or
boutiques as ready-to-wear items, and were not
available in tailoring shops like those of D’s as well
Starr Weigand 2014
- 43 -
as not acquired on a “made-to-order” basis. Under
the circumstances, the consuming public could
easily discern if the jeans were original or fake
Levi’s jeans, or were manufactured by other brands
of jeans. D used the trademark “LS JEANS
TAILORING” for the jeans he produced and sold in
his tailoring shops. His trademark was visually and
aurally different from the trademark “LEVI STRAUSS
& CO” appearing on the patch of original jeans
under the trademark LEVI’S. The word “LS” could
not be confused as a derivative from “LEVI
STRAUSS” by virtue of the “LS” being connected to
the word “TAILORING”, thereby openly suggesting
that the jeans bearing the trademark “LS JEANS
TAILORING” came or were bought from the
tailoring shops of D, not from the malls or
boutiques selling original Levi’s jeans to the
consuming public. [Diaz v. People, G.R. No. 180677,
18 February 2013]
3. A French partnership filed with the IPO a
trademark application for the mark "LE
CORDON BLEU & DEVICE". This was
opposed by Ecole alleging that it was the
owner of the mark "LE CORDON BLEU,
ECOLE DE CUISINE MANILLE," which it has
been using since 1948 in cooking and other
culinary activities, including in its
restaurant business, it has earned immense
and invaluable goodwill such that
Cointreau’s use of the subject mark will
actually create confusion, mistake, and
deception to the buying public as to the
origin and sponsorship of the goods, and
cause great and irreparable injury and
damage to Ecole’s business reputation and
goodwill as a senior user of the same. Can
the said mark of the French partnership be
registered?
Yes. Foreign marks which are not registered are still
accorded protection against infringement and/or
unfair competition. Under the Paris Convention, the
Philippines is obligated to assure nationals of the
2013 & 2014 Q and A|Commercial Law

signatory-countries that they are afforded an
effective protection against violation of their
intellectual property rights in the Philippines in the
same way that their own countries are obligated to
accord similar protection to Philippine nationals.
“Thus, under Philippine law, a trade name of a
national of a State that is a party to the Paris
Convention, whether or not the trade name forms
part of a trademark, is protected “without the
obligation of filing or registration.’”
The present law on trademarks, Republic Act No.
8293, otherwise known as the Intellectual Property
Code of the Philippines, as amended, has already
dispensed with the requirement of prior actual use
at the time of registration. Thus, there is more
reason to allow the registration of the subject mark
under the name of the French partnership as its
true and lawful owner.
The function of a trademark is to point out
distinctly the origin or ownership of the goods (or
services) to which it is affixed; to secure to him,
who has been instrumental in bringing into the
market a superior article of merchandise, the fruit
of his industry and skill; to assure the public that
they are procuring the genuine article; to prevent
fraud and imposition; and to protect the
manufacturer against substitution and sale of an
inferior and different article as his product. As such,
courts will protect trade names or marks, although
not registered or properly selected as trademarks,
on the broad ground of enforcing justice and
protecting one in the fruits of his toil. [Ecole De
Cuisine Manille (Cordon Bleu of the Philippines), Inc.
v. Renaud Cointreau & CIE and Le Condron Bleu
Int’l., B.V., G.R. No. 185830, June 5, 2013]
4. F Manufacturing filed a case against
Harvard U, an educational corporation in
the US, for the cancellation of its
registration of trademark. It alleged that
since 1995, it had used the trademark
“Harvard” for its goods, for which its
Starr Weigand 2014
- 44 -
predecessor had secured a certificate of
registration with the IPO. Can the action
prosper?
No. F Manufacturing’s registration of the mark
"Harvard" should not have been allowed because
Section 4(a) of R.A. No. 166 prohibits the
registration of a mark "which may disparage or
falsely suggest a connection with persons, living or
dead, institutions, beliefs x x x." its use of the mark
"Harvard," coupled with its claimed origin in the US,
obviously suggests a false connection with Harvard
University. On this ground alone, F Manufacturing’s
registration of the mark "Harvard" should have
been disallowed.
Also, the Philippines and the United States of
America are both signatories to the Paris
Convention for the Protection of Industrial Property
(Paris Convention). The Philippines became a
signatory to the
Paris Convention on 27 September 1965. The
Philippines is obligated to assure nationals of
countries of the Paris Convention that they are
afforded an effective protection against violation of
their intellectual property rights in the Philippines
in the same way that their own countries are
obligated to accord similar protection to Philippine
nationals. Thus, under Philippine law, a trade name
of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms
part of a trademark, is protected "without the
obligation of filing or registration."
Indeed, Section 123.1(e) of R.A. No. 8293 now
categorically states that "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," cannot be registered by another in the
Philippines. Section 123.1(e) does not require that
the well-known mark be used in commerce in the
Philippines but only that it be well-known in the
Philippines.
2013 & 2014 Q and A|Commercial Law

In determining whether a mark is well-known, the
following criteria or any combination thereof may
be taken into account:
(a) the duration, extent and geographical area
of any use of the mark, in particular, the
duration, extent and geographical area of
any promotion of the mark, including
advertising or publicity and the
presentation, at fairs or exhibitions, of the
goods and/or services to which the mark
applies;
(b) the market share, in the Philippines and in
other countries, of the goods and/or
services to which the mark applies;
(c) the degree of the inherent or acquired
distinction of the mark;
(d) the quality-image or reputation acquired by
the mark;
(e) the extent to which the mark has been
registered in the world;
(f) the exclusivity of registration attained by
the mark in the world;
(g) the extent to which the mark has been used
in the world;
(h) the exclusivity of use attained by the mark
in the world;
(i) the commercial value attributed to the mark
in the world;
(j) the record of successful protection of the
rights in the mark;
(k) the outcome of litigations dealing with the
issue of whether the mark is a well-known
mark; and
(l) the presence or absence of identical or
similar marks validly registered for or used
on identical or similar goods or services and
owned by persons other than the person
claiming that his mark is a well-known mark.
Since "any combination" of the foregoing criteria is
sufficient to determine that a mark is well-known, it
is clearly not necessary that the mark be used in
commerce in the Philippines. Thus, while under the
Starr Weigand 2014
- 45 -
territoriality principle a mark must be used in
commerce in the Philippines to be entitled to
protection, internationally well-known marks are
the exceptions to this rule.
Thus, the trademark of Harvard U, even if not
registered here, is still entitled to protection.
"Harvard" is the trade name of the world famous
Harvard University, and it is also a trademark of
Harvard University. Under Article 8 of the Paris
Convention, as well as Section 37 of R.A. No. 166,
Harvard University is entitled to protection in the
Philippines of its trade name "Harvard" even
without registration of such trade name in the
Philippines. This means that no educational entity
in the Philippines can use the trade name "Harvard"
without the consent of Harvard University.
Likewise, no entity in the Philippines can claim,
expressly or impliedly through the use of the name
and mark "Harvard," that its products or services
are authorized, approved, or licensed by, or
sourced from, Harvard University without the
latter's consent. [Fredco Manufacturing v. President
and Fellows of Harvard College, GR No. 185917, 1
June, 2011]
5. B Corp. was a German company who
applied for various trademark registrations
with the IPO, which included the mark
“Birkenstock”. However, registration
proceedings were halted because the IPO
found an existing registration for the mark
“Birkenstock and Device,” in the name of S
Corp. predecessor of PS Marketing. But, PS
Marketing did not file a declaration of
actual use (DAU) of the said marks. Should
the registration of B corp. be allowed?
Yes. The law requires the filing of a DAU on
specified periods, and failure to file the DAU within
the requisite period results in the automatic
cancellation of registration of a trademark. In turn,
such failure is tantamount to the abandonment or
withdrawal of any right or interest the registrant
2013 & 2014 Q and A|Commercial Law

has over his trademark. Also, it must be
emphasized that registration of a trademark, by
itself, is not a mode of acquiring ownership. If the
applicant is not the owner of the trademark, he has
no right to apply for its registration. Registration
merely creates a prima facie presumption of the
validity of the registration, of the registrant’s
ownership of the trademark, and of the exclusive
right to the use thereof. Such presumption, just like
the presumptive regularity in the performance of
official functions, is rebuttable and must give way
to evidence to the contrary.
Clearly, it is not the application or registration of a
trademark that vests ownership thereof, but it is
the ownership of a trademark that confers the right
to register the same. A trademark is an industrial
property over which its owner is entitled to
property rights which cannot be appropriated by
unscrupulous entities that, in one way or another,
happen to register such trademark ahead of its true
and lawful owner. The presumption of ownership
accorded to a registrant must then necessarily yield
to superior evidence of actual and real ownership
of a trademark.
In the instant case, B Corp. is the owner of the mark
"BIRKENSTOCK." There is evidence relating to the
origin and history of "BIRKENSTOCK" and its use in
commerce long before respondent was able to
register the same here in the Philippines. It has
been sufficiently proven that "BIRKENSTOCK" was
first adopted in Europe in 1774 by its inventor,
Johann Birkenstock, a shoemaker, on his line of
quality footwear and thereafter, numerous
generations of his kin continuously engaged in the
manufacture and sale of shoes and sandals bearing
the mark "BIRKENSTOCK" until it became the entity
now known as the petitioner. Petitioner also
submitted various certificates of registration of the
mark "BIRKENSTOCK" in various countries and that
it has used such mark in different countries
worldwide, including the Philippines. This being the
case, B Corp. is the true and lawful owner of the
Starr Weigand 2014
- 46 -
mark "BIRKENSTOCK" and entitled to its
registration, and that PS Marketing was in bad faith
in having it registered in its name. [Birkenstock
Orthopaedie GMBH and Co. KG v. Philippine Shoe
Expo Maarketing, G.R. No. 194307, November 20,
2013]
6. P Corp and S Corp supply and produce LPG
in the Philippines. P Corp is the registered
owner of the trademarks “Gasul” and Gasul
cylinders, while S Corp was the authorized
user of “Shellane” and Shellane cylinders in
the Philippines. With the help of the NBI, it
was found that R Corp was engaged in the
refilling and sale of LPG cylinders bearing
the registered marks of the P Corp and S
Corp without authority from the latter. Can
R Corp be held liable for infringement of
trademark and unfair competition?
Yes. The mere unauthorized use of a container
bearing a registered trademark in connection with
the sale, distribution or advertising of goods or
services which is likely to cause confusion, mistake
or deception among the buyers or consumers can
be considered as trademark infringement. In the
instant case, R Corp committed trademark
infringement when they refilled, without the
consent of P Corp and S Corp, the LPG containers
bearing the latter’s registered marks. R Corp’s acts
will inevitably confuse the consuming public, since
they have no way of knowing that the gas
contained in the LPG tanks bearing the marks of P
Corp and S Corp is in reality not the latter’s LPG
product after the same had been illegally refilled.
The public will then be led to believe that R Corp
are authorized refillers and distributors of the LPG
products, considering that they are accepting
empty containers P Corp and S Corp, and refilling
them for resale.
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
2013 & 2014 Q and A|Commercial Law

the goods or business of another with the end and
probable effect of deceiving the public. Passing off
(or palming off) takes place where the defendant,
by imitative devices on the general appearance of
the goods, misleads prospective purchasers into
buying his merchandise under the impression that
they are buying that of his competitors. Thus, the
defendant gives his goods the general appearance
of the goods of his competitor with the intention of
deceiving the public that the goods are those of his
competitor. In the present case, P Corp and S Corp
pertinently observed that by refilling and selling
LPG cylinders bearing their registered marks, R Corp
was selling goods by giving them the general
appearance of goods of another manufacturer.
There is a showing that the consumers may be
misled into believing that the LPGs contained in the
cylinders bearing the marks "GASUL" and
"SHELLANE" are those goods or products of the P
Corp and S Corps when, in fact, they are not.
Obviously, the mere use of those LPG cylinders
bearing the trademarks "GASUL" and "SHELLANE"
will give the LPGs sold by R Corp the general
appearance of the products of the P Corp and S
Corp. [Republic Gas Corporation v. Petron
Corporation and Plipinas Shell, G.R. No. 194062,
June 17, 2013]
7. S Corp. filed an application for the issuance
of search warrant to search a warehouse of
IPI, alleging that the latter engaged in
infringement of trademark. Upon
implementation of the warrant, it was
found that there were more than 6,000
pairs of shoes bearing S Corp’s registered
trademark (stylized S with an oval design).
Was there infringement?
Yes. There is colorable imitation between the shoes
of IPI and S Corp. The essential element of
infringement under R.A. No. 8293 is that the
infringing mark is likely to cause confusion. In
determining similarity and likelihood of confusion,
Starr Weigand 2014
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jurisprudence has developed tests: the Dominancy
Test and the Holistic or Totality Test.
The Dominancy Test focuses on the similarity of the
prevalent or dominant features of the competing
trademarks that might cause confusion, mistake,
and deception in the mind of the purchasing public.
Duplication or imitation is not necessary; neither is
it required that the mark sought to be registered
suggests an effort to imitate. Given more
consideration are the aural and visual impressions
created by the marks on the buyers of goods, giving
little weight to factors like prices, quality, sales
outlets, and market segments.
In contrast, the Holistic or Totality Test necessitates
a consideration of the entirety of the marks as
applied to the products, including the labels and
packaging, in determining confusing similarity. The
discerning eye of the observer must focus not only
on the predominant words, but also on the other
features appearing on both labels so that the
observer may draw conclusion on whether one is
confusingly similar to the other.
Relative to the question on confusion of marks and
trade names, jurisprudence has noted two (2) types
of confusion, viz.: (1) confusion of goods (product
confusion), where the ordinarily prudent purchaser
would be induced to purchase one product in the
belief that he was purchasing the other; and (2)
confusion of business (source or origin confusion),
where, although the goods of the parties are
different, the product, the mark of which
registration is applied for by one party, is such as
might reasonably be assumed to originate with the
registrant of an earlier product, and the public
would then be deceived either into that belief or
into the belief that there is some connection
between the two parties, though inexistent.
Applying the Dominancy Test to the case at bar, this
Court finds that the use of the stylized "S" by IPI in
its shoes infringes on the mark already registered
2013 & 2014 Q and A|Commercial Law

by S Corp. with the IPO. While it is undisputed that
S Corp.’s stylized "S" is within an oval design, to this
Court's mind, the dominant feature of the
trademark is the stylized "S," as it is precisely the
stylized "S" which catches the eye of the purchaser.
Thus, even if IPI did not use an oval design, the
mere fact that it used the same stylized "S", the
same being the dominant feature of S Copr.'s
trademark, already constitutes infringement under
the Dominancy Test. [Sketchers USA v. Inter Pacific
Industrial, GR No. 164321, Marche 23, 2011]
8. EYIS corp., a Philippine company,
distributes air conditioners and other
industrial tools and equipment. SD corp.,
on the other hand, is a Taiwanese company
engaged in the manufacture of air
compressors. Both claimed to have the
right to register the trademark "VESPA" for
air compressors. EYIS buys air compressors
from SD, but the documents do not show
that the said goods were marked as
“VESPA”. EYIS was able to register the
mark “VESPA” with the IPO. A month later,
SD was also granted registration. SD filed a
petition to cancel EYIS’ registration. Who is
the true owner of the mark?
EYIS must be considered as the prior and
continuous user of the mark "VESPA" and its true
owner. Hence, EYIS is entitled to the registration of
the mark in its name. the registration of a mark is
prevented with the filing of an earlier application
for registration. This must not, however, be
interpreted to mean that ownership should be
based upon an earlier filing date. While RA 8293
removed the previous requirement of proof of
actual use prior to the filing of an application for
registration of a mark, proof of prior and
continuous use is necessary to establish ownership
of a mark. Such ownership constitutes sufficient
evidence to oppose the registration of a mark. Sec.
134 of the IP Code provides that "any person who
believes that he would be damaged by the
Starr Weigand 2014
- 48 -
registration of a mark x x x" may file an opposition
to the application. The term "any person"
encompasses the true owner of the mark the prior
and continuous user. Notably, the Court has ruled
that the prior and continuous use of a mark may
even overcome the presumptive ownership of the
registrant and be held as the owner of the mark. By
itself, registration is not a mode of acquiring
ownership. When the applicant is not the owner of
the trademark being applied for, he has no right to
apply for registration of the same. Registration
merely creates a prima facie presumption of the
validity of the registration, of the registrants
ownership of the trademark and of the exclusive
right to the use thereof. Such presumption, just like
the presumptive regularity in the performance of
official functions, is rebuttable and must give way
to evidence to the contrary. In the instant case, EYIS
is the prior user of the mark, and is thus the true
owner thereof. [E.Y. Industrial Sales v. Shen Dar
Electricity and Machinery Co. Ltd., GR No. 184850,
20 October 2010]
9. M Pharmaceuticals registered “Dermalin”
as its trademark. Thereafter, D Inc. sought
to have “Dermaline” registered as a
trademark under its name. this was
opposed to be M Pharmaceuticals allegeing
that registration by D Inc. will likely cause
confusion, mistake and deception to the
purchasing public, as the trademark sought
to be registered by D Inc. so resembles its
trademark, “Dermalin”. Can the trademark
“Dermaline” be registered?
No. While there are no set rules that can be
deduced as what constitutes a dominant feature
with respect to trademarks applied for registration;
usually, what are taken into account are signs,
color, design, peculiar shape or name, or some
special, easily remembered earmarks of the brand
that readily attracts and catches the attention of
the ordinary consumer. Verily, when one applies for
the registration of a trademark or label which is
2013 & 2014 Q and A|Commercial Law

almost the same or that very closely resembles one
already used and registered by another, the
application should be rejected and dismissed
outright, even without any opposition on the part
of the owner and user of a previously registered
label or trademark. This is intended not only to
avoid confusion on the part of the public, but also
to protect an already used and registered
trademark and an established goodwill. In the
instant case, the likelihood of confusion is
apparent. The two marks are almost spelled the
same way and are even pronounced in practically
the same manner in three (3) syllables. Thus, when
an ordinary purchaser, for example, hears an
advertisement of D Inc.'s applied trademark over
the radio, chances are he will associate it with M
Pharmaceutical's registered mark.
Even if the marks do not refer to the same
classification of goods, does not eradicate the
possibility of mistake on the part of the purchasing
public to associate the former with the latter.
Indeed, the registered trademark owner may use its
mark on the same or similar products, in different
segments of the market, and at different price
levels depending on variations of the products for
specific segments of the market. The Court is
cognizant that the registered trademark owner
enjoys protection in product and market areas that
are the normal potential expansion of his business.
Verily, when one applies for the registration of a
trademark or label which is almost the same or that
very closely resembles one already used and
registered by another, the application should be
rejected and dismissed outright, even without any
opposition on the part of the owner and user of a
previously registered label or trademark. This is
intended not only to avoid confusion on the part of
the public, but also to protect an already used and
registered trademark and an established goodwill.
[Dermaline, Inc. v. Myra Pharmaceuticals, GR No.
190065, 16 August 2010]
Starr Weigand 2014
- 49 -
10. K Inc. had the trademarks, trading styles,
company names and business names
"KENNEX", "KENNEX & DEVICE", "PRO
KENNEX" and "PRO-KENNEX", in its name.
S Corp. filed an action against K Inc.
alleging trademark infringement, saying
that K Inc. is a mere distributor of the
goods covered by the marks and it is the
actual owner of the marks. However, S
Corp.’s registration of the marks was
cancelled by in a registration cancellation
case. Can the action prosper? Was there
unfair competition?
No. By operation of law, specifically Section 19 of
RA 166, the trademark infringement aspect of S
Corp.'s case has been rendered moot and academic
in view of the finality of the decision in the
Registration Cancellation Case. In short, S Corp. is
left without any cause of action for trademark
infringement since the cancellation of registration
of a trademark deprived it of protection from
infringement from the moment judgment or order
of cancellation became final. To be sure, in a
trademark infringement, title to the trademark is
indispensable to a valid cause of action and such
title is shown by its certificate of registration. With
its certificates of registration over the disputed
trademarks effectively cancelled with finality, S
Corp.'s case for trademark infringement lost its
legal basis and no longer presented a valid cause of
action.
Likewise, there can be no infringement committed
by K Inc. who was adjudged with finality to be the
rightful owner of the disputed trademarks in the
Registration Cancellation Case. Even prior to the
cancellation of the registration of the disputed
trademarks, S Corp. - as a mere distributor and not
the owner – cannot assert any protection from
trademark infringement as it had no right in the
first place to the registration of the disputed
trademarks. In fact, jurisprudence holds that in the
absence of any inequitable conduct on the part of
2013 & 2014 Q and A|Commercial Law
 - 50 -
the manufacturer, an exclusive distributor who
employs the trademark of the manufacturer does
not acquire proprietary rights of the manufacturer,
and a registration of the trademark by the
distributor as such belongs to the manufacturer,
provided the fiduciary relationship does not
terminate before application for registration is
filed.

To establish trademark infringement, the following

elements must be proven: (1) the validity of
plaintiff's mark; (2) the plaintiff's ownership of the
mark; and (3) the use of the mark or its colorable
imitation by the alleged infringer results in
"likelihood of confusion." Based on these elements,
it is immediately obvious that the second element –
the plaintiff's ownership of the mark - was what the
Registration Cancellation Case decided with finality.
On this element depended the validity of the
registrations that, on their own, only gave rise to
the presumption of, but was not conclusive on, the
issue of ownership.
.
Likewise, there is also no unfair competition in the
instant case. 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 (1)
confusing similarity in the general appearance of
the goods; and (2) intent to deceive the public and
defraud a competitor. In the instant case, there is
no evidence exists showing that K Inc. ever
attempted to pass off the goods it sold (i.e.
sportswear, sporting goods and equipment) as
those of S Corp. In addition, there is no evidence of
bad faith or fraud imputable to K Inc. in using the
disputed trademarks. [Superior Commercial
Enterprises v. Kunnan Enterprises., GR No. 169974,
April 20, 2010]

Starr Weigand 2014 2013 & 2014 Q and A|Commercial Law


Banking Laws
1. The BSP, through the Monetary Board is
granted the power and authority to
prescribe different maximum rates of
interest which may be imposed for a loan
or renewal thereof or the forbearance of
any money, goods or credits, provided that
the changes are effected gradually and
announced in advance. Thus, it issued CB
Circular No. 905, removing all interest
ceilings and suspended the usury law. Did
the BSP commit grave abuse of discretion
in issuing CB Circular No. 905?
No. The BSP has the power to do so. It has been
held that CB Circular No. 905 “did not repeal nor in
anyway amend the Usury Law but simply
suspended the latter’s effectivity;” that “a [CB]
Circular cannot repeal a law, [for] only a law can
repeal another law;” that “by virtue of CB Circular
No. 905, the Usury Law has been rendered
ineffective;” and “Usury has been legally non-
existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon.”
The law creating the BSP covered only loans
extended by banks, whereas under Section 1-a of
the Usury Law, as amended, the BSP-MB may
prescribe the maximum rate or rates of interest for
all loans or renewals thereof or the forbearance of
any money, goods or credits, including those for
loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance
companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of
borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. By
lifting the interest ceiling, CB Circular No. 905
merely upheld the parties’ freedom of contract to
agree freely on the rate of interest. Article 1306 of
the New Civil Code provides that the contracting
parties may establish such stipulations, clauses,
terms and conditions as they may deem
Starr Weigand 2014
- 51 -
convenient, provided they are not contrary to law,
morals, good customs, public order, or public
policy.
Nothing in CB Circular No. 905 grants lenders a
carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. Stipulations
authorizing iniquitous or unconscionable interests
have been invariably struck down for being
contrary to morals, if not against the law. Indeed,
under Article 1409 of the Civil Code, these contracts
are deemed inexistent and void ab initio, and
therefore cannot be ratified, nor may the right to
set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of
usurious interest does not affect the lender’s right
to recover the principal of a loan, nor affect the
other terms thereof. [Advocates for Truth in
Lending v. Bangko Sentral Monetary Board, G.R. No.
192986, 15 January 2013]
2. The late Mr. G deposited 2 million pesos
with PALI. Conflicting claims of his relatives
were presented to PALI seeking the release
of the money deposited. Pending
investigation of the claims, PALI deposited
the money with UCPB, in account which
was in trust for the heirs of Mr. G. UCPB
however allowed PALI to withdraw the
money leaving a balance of around 9
thousand pesos. Can UCPB be held liable
for the allowing the withdrawal?
No. UCPB did not become a trustee by the mere
opening of the ACCOUNT. While this may seem to
be the case, by reason of the fiduciary nature of the
bank’s relationship with its depositors, this fiduciary
relationship does not “convert the contract
between the bank and its depositors from a simple
loan to a trust agreement, whether express or
implied.” It simply means that the bank is obliged to
observe “high standards of integrity and
performance” in complying with its obligations
2013 & 2014 Q and A|Commercial Law

under the contract of simple loan. Per Article 1980
of the Civil Code, a creditor-debtor relationship
exists between the bank and its depositor. The
savings deposit agreement is between the bank and
the depositor; by receiving the deposit, the bank
impliedly agrees to pay upon demand and only
upon the depositor’s order. [Joseph Goyanko, Jr., as
administrator of the Estate of Joseph Goyanko, Sr.
vs. United Coconut Planters Bank, Mango Avenue
Branch, G.R. No. 179096. February 6, 2013]
3. BOMC was created by a BSP circular to
provide support service for banks, and is a
subsidiary of BPI. A service agreement was
entered into by BPI and BOMC where the
latter provides services to a branch of the
former. Later on, the services included
those for another branch. As a result, some
services of the employees of BPI were
transferred to BOMC. This was contested
by the Union of BPI, mainly invoking DOLE
department order No. 10 which provides
what jobs may be contracted out. BSP has a
circular on bank service contracts, while
the DOLE has a department order
governing what jobs may be contracted
out. Which administrative issuance should
prevail?
Both actually apply. There is no conflict between
D.O. No. 10 and CBP Circular No. 1388. In fact, they
complement each other.
Consistent with the maxim, interpretare et
concordare leges legibus est optimus interpretandi
modus, a statute should be construed not only to
be consistent with itself but also to harmonize with
other laws on the same subject matter, as to form a
complete, coherent and intelligible system of
jurisprudence.35 The seemingly conflicting
provisions of a law or of two laws must be
harmonized to render each effective.36 It is only
when harmonization is impossible that resort must
be made to choosing which law to apply.
Starr Weigand 2014
- 52 -
In the case at bench, the Union submits that while
the Central Bank regulates banking, the Labor Code
and its implementing rules regulate the
employment relationship. To this, the Court agrees.
The fact that banks are of a specialized industry
must, however, be taken into account. The
competence in determining which banking
functions may or may not be outsourced lies with
the BSP. This does not mean that banks can simply
outsource banking functions allowed by the BSP
through its circulars, without giving regard to the
guidelines set forth under D.O. No. 10 issued by the
DOLE.
While D.O. No. 10, Series of 1997, enumerates the
permissible contracting or subcontracting activities,
it is to be observed that, particularly in Sec. 6(d)
invoked by the Union, the provision is general in
character – "x x x Works or services not directly
related or not integral to the main business or
operation of the principal… x x x." This does not
limit or prohibit the appropriate government
agency, such as the BSP, to issue rules, regulations
or circulars to further and specifically determine the
permissible services to be contracted out. CBP
Circular No. 138838 enumerated functions which
are ancillary to the business of banks, hence,
allowed to be outsourced. Thus, sanctioned by said
circular, BPI outsourced the cashiering (i.e., cash-
delivery and deposit pick-up) and accounting
requirements of its Davao City branches D.O. No. 10
is but a guide to determine what functions may be
contracted out, subject to the rules and established
jurisprudence on legitimate job contracting and
prohibited labor only contracting. Even if the Court
considers D.O. No. 10 only, BPI would still be within
the bounds of D.O. No. 10 when it contracted out
the subject functions. This is because the subject
functions were not related or not integral to the
main business or operation of the principal which is
the lending of funds obtained in the form of
deposits. From the very definition of “banks” as
provided under the General Banking Law, it can
2013 & 2014 Q and A|Commercial Law

easily be discerned that banks perform only two (2)
main or basic functions – deposit and loan
functions. Thus, cashiering, distribution and
bookkeeping are but ancillary functions whose
outsourcing is sanctioned under CBP Circular No.
1388 as well as D.O. No. 10. Even BPI itself
recognizes that deposit and loan functions cannot
be legally contracted out as they are directly
related or integral to the main business or
operation of banks. The CBP’s Manual of
Regulations has even categorically stated and
emphasized on the prohibition against outsourcing
inherent banking functions, which refer to any
contract between the bank and a service provider
for the latter to supply, or any act whereby the
latter supplies, the manpower to service the
deposit transactions of the former. [BPI Employees
Union-Davao City-Fubu (BPIEU-Davao City-Fubu) v.
Bank of the Philippine Islands (BPI), et al., G.R. No.
174912, July 24, 2013]
4. A was the corporate secretary of BPI, a
bank. He was also the corporate secretary
of IPB, a quasi-bank. Does this violate the
rule on interlocking directors?
No, not exactly. As a general rule, there shall be no
concurrent officerships, including secondments,
between banks, or between an bank and a quasi-
bank or a non-bank financial institution. However,
subject to approval of the Monetary Board,
concurrent officerships, including secondments,
may be allowed for “concurrent officiership
positions as corporate secretary or assistance
corporate secretary between bank/s, quasi-bank/s
and non-bank financial institutions,” provided that
proof of disclosure to and consent from all of the
involved financial institutions, on the concurrent
officership positions, shall be submitted to the BSP.
Likewise, concurrent officership positions in the
same capacity which do not involve management
functions, i.e. internal auditors, corporate
secretary, assistant corporate secretary and
security officer, between a quasi-bank and one or
Starr Weigand 2014
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more of its subsidiary quasi-banks or non-bank
financial institutions, or between a quasi-bank
and/or a non-bank financial institution, or between
bank/s, quasi-bank/s and non-bank financial
institution/s, other than investment houses, may
also be allowed. Provides than in the last two
instances, at least 20% of the equity of each bank,
quasi-bank and non-bank financial institution is
owned by a holding company or by any banks or
quasi-banks within the group. [BSP Circular No. 851,
series of 2014, amending Section X145 of the
Manual of Regulations for Banks (MORB) and
Section 4145Q of the Manual for Regulations for
Non-Bank Financial Institutions (MORNBFI)]
5. BSP Circular No. 799 was issued in 2013,
which changed the legal rate of interest for
loans and forebearances of money from
12% to 6% per annum. How will this affect
the rules governing interest rates laid down
by the Court in the case of Eastern Shipping
Lines?
The guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody
BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasicontracts,
delicts or quasi-delicts is breached, the
contravenor can be held liable for
damages. The provisions under Title
XVIII on “Damages” of the Civil Code
govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of
interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
2013 & 2014 Q and A|Commercial Law

i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In
the absence of stipulation, the rate of
interest shall be 6% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil
Code.
6. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the
court at the rate of 6% per annum. No
interest, however, shall be adjudged on
unliquidated claims or damages, except
when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at
the time the demand is made, the interest shall
begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount
finally adjudged.
7. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such
finality until its satisfaction, this interim
period being deemed to be by then an
equivalent to a forbearance of credit. And,
in addition to the above, judgments that
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have become final and executory prior to
July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the
rate of interest fixed therein.
[Dario Nacar v. Gallery Frames and/or Felipe
Bordey, Jr., G.R. No. 189871, August 13, 2013.]
8. M obtained a loan with time deposit from
Prubank evidenced by a promissory note,
wherein it was stipulated that the loan was
subject to 21% p.a., attorney's fees
equivalent to 15% of the total amount due
but not less than P200.00 and, in case of
default, a penalty and collection charges of
12% p.a. of the total amount due, with
maturity date of 10 January 1985. The loan
was renewed up to 17 February 1985.
Through a deed of assignment, M
authorized BPI to pay his loan obligations
with Prubank. M and his wife again
obtained a loan from BPI covered by a
promissory note with maturity date of 22
March 1990, to bear interest at 23% p.a.,
with attorney's fees equivalent to 15% p.a.
of the total amount due. To secure such
loan, M mortgaged his land in favor of BPI.
M failed to pay his loan obligations, thus
BPI sought to have the mortgage
extrajudicially foreclosed. Thereafter, M
and his wife filed an action for annulment
of mortgage. Are the interest rate of 23%
p.a. and the penalty charge of 12% p.a.,
excessive or unconscionable?
No. Jurisprudence establish that the 24% p.a.
stipulated interest rate was not considered
unconscionable, thus, the 23% p.a. interest rate
imposed on M’s loan in this case can by no means
be considered excessive or unconscionable. In
Medel v. Court of Appeals, the Court found the
stipulated interest rate of 66% p.a. or a 5.5% per
month on a P500,000.00 loan excessive,
unconscionable and exorbitant, hence, contrary to
2013 & 2014 Q and A|Commercial Law

morals if not against the law and declared such
stipulation void. In Toring v. Spouses Ganzon-Olan,
the stipulated interest rates involved were 3% and
3.81% per month on a P10 million loan, which the
Court found under the circumstances excessive and
reduced the same to 1% per month. While in Chua
v. Timan, where the stipulated
interest rates were 7% and 5% a month, which are
equivalent to 84% and 60% p.a., respectively, the
Court reduced the same to 1% per month or 12%
p.a. the Court said that it need not unsettle the
principle it had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and
higher are excessive, unconscionable and
exorbitant, hence, the stipulation was void for
being contrary to morals. However, in Spouses
Zacarias Bacolor and Catherine Bacolor v. Banco
Filipino Savings and Mortgage Bank, Dagupan City
Branch, this Court held that the interest rate of 24%
per annum on a loan of P244,000.00, agreed upon
by the parties, may not be considered as
unconscionable and excessive. As such, the Court
ruled that the borrowers cannot renege on their
obligation to comply with what is incumbent upon
them under the contract of loan as the said
contract is the law between the parties and they
are bound by its stipulations.
Also, in Garcia v. Court of Appeals, the Court
sustained the agreement of the parties to a 24%
per annum interest on an P8,649,250.00 loan
finding the same to be reasonable and clearly
evidenced by the amended credit line agreement
entered into by the parties as well as two
promissory notes executed by the borrower in
favor of the lender.
Likewise, the stipulated 12% p.a. penalty charge is
not excessive or unconscionable. In Ruiz v. CA, the
Court has held that 1% surcharge on the principal
loan for every month of default is valid. This
surcharge or penalty stipulated in a loan agreement
in case of default partakes of the nature of
liquidated damages under Art. 2227 of the New
Civil Code, and is separate and distinct from
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interest payment. Also referred to as a penalty
clause, it is expressly recognized by law. It is an
accessory undertaking to assume greater liability on
the part of an obligor in case of breach of an
obligation. The obligor would then be bound to pay
the stipulated amount of indemnity without the
necessity of proof on the existence and on the
measure of damages caused by the breach. The
enforcement of the penalty can be demanded by
the creditor only when the non-performance is due
to the fault or fraud of the debtor. The non-
performance gives rise to the presumption of fault;
in order to avoid the payment of the penalty, the
debtor has the burden of proving an excuse - the
failure of the performance was due to either force
majeure or the acts of the creditor himself. In the
instant case, petitioners defaulted in the payment
of their loan obligation with respondent bank and
their contract provided for the payment of 12% p.a.
penalty charge, and since there was no showing
that petitioners' failure to perform their obligation
was due to force majeure or to respondent bank's
acts, petitioners cannot now back out on their
obligation to pay the penalty charge. [Mallari v.
Prudential Bank, G.R. No. 197861, 5 June 2013]
9. The Lims obtained a loan from DBP to
finance their business. It was covered by a
promissory note wherein it was stipulated
that the loan is subject to an interest rate
of 9% per annum and penalty charge of
11% per annum. Another loan was
obtained by the Lim, covered by another
promissory note with an interest rate of
12% per annum and a penalty charge of
1/3% per month on the overdue
amortization. The loans were covered by
mortgages on the properties of the Lims.
They failed to pay their loans as a result of
the collapse of their business. DBP sought
to foreclose the mortgage and sell the
properties, but the Lims asked for an
extension of the period within which they
could pay. They were granted an extension,
2013 & 2014 Q and A|Commercial Law

subject to the condition that they will be
liable for an additional interest of 18.5%,
and other additional penalties. Is the
imposition of additional penalties and
interests allowed under the law?
No. The imposition of additional interest and
penalties not stipulated in the Promissory Notes,
this should not be allowed. Article 1956 of the Civil
Code specifically states that "no interest shall be
due unless it has been expressly stipulated in
writing." Thus, the payment of interest and
penalties in loans is allowed only if the parties
agreed to it and reduced their agreement in
writing. In this case, the Lims never agreed to pay
additional interest and penalties. Hence, the
imposition of additional interest and penalties are
illegal, and thus, void. [Lim v. Development Bank of
the Philiipines, G.R. No. 177050, July 01, 2013]
10. The Spouses J obtained a loan from
Chinabank covered by two promissory
notes, secured by real estate mortgage
over their property in White Plains. They
failed to pay their loan, thus the mortgage
was foreclosed. Since the proceeds of the
sale of the mortgage property did not cover
the entire amount of the loan, Chinabank
filed and action against the Spouses J for
collection of the remaining balance. During
the trial it was found that the interest rate
on the loan changes every month based on
the prevailing market rate and DBP
allegedly notified the spouses of the
prevailing rate by calling them monthly
before their account became past due. DBP
also alleged that the spouses agreed to a
changing interest rate by signing the
promissory note, indicating that they
agreed to pay interest at the prevailing
rate. Can DBP subject the loan of the
spouses to a changing rate of interest?
Starr Weigand 2014
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No. It is now settled that an escalation clause is
void where the creditor unilaterally determines and
imposes an increase in the stipulated rate of
interest without the express conformity of the
debtor. Such unbridled right given to creditors to
adjust the interest independently and upwardly
would completely take away from the debtors the
right to assent to an important modification in their
agreement and would also negate the element of
mutuality in their contracts. While a ceiling on
interest rates under the Usury Law was already
lifted under Central Bank Circular No. 905, nothing
therein "grants lenders carte blanche authority to
raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging
of their assets." The provision in the promissory
notes of the Spouses J authorizing DBP to increase,
decrease or otherwise change from time to time
the rate of interest and/or bank charges "without
advance notice" to the spouses, "in the event of
change in the interest rate prescribed by law or the
Monetary Board of the Central Bank of the
Philippines," does not give DBP unrestrained
freedom to charge any rate other than that which
was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is
left to the will of respondent bank alone. It violates
the essence of mutuality of the contract.
Modifications in the rate of interest for loans
pursuant to an escalation clause must be the result
of an agreement between the parties. Unless such
important change in the contract terms is mutually
agreed upon, it has no binding effect. In the
absence of consent on the part of the spouses to
the modifications in the interest rates, the adjusted
rates cannot bind them. Monthly telephone calls to
the spouses advising them of the prevailing interest
rates would not suffice. A detailed billing statement
based on the new imposed interest with
corresponding computation of the total debt should
have been provided by the DBP to enable the
spouses to make an informed decision. An
appropriate form must also be signed by the
spouses to indicate their conformity to the new
2013 & 2014 Q and A|Commercial Law

rates. Compliance with these requisites is essential
to preserve the mutuality of contracts. For indeed,
one-sided impositions do not have the force of law
between the parties, because such impositions are
not based on the parties’ essential equality. Hence,
the interest charged over the interest rate indicated
in the promissory notes is invalid. [Juico v. China
Banking Corporation, G.R. No. 187678, April 10,
2013]
11. Spouses A obtained a loan from PNB,
secured by a real estate mortgage, and
covered by 12 promissory notes providing
for varying interest rates of 17.5% to 27%
per interest period. It was agreed upon by
the parties that the rate of interest may be
increased or decreased for the subsequent
interest periods, with prior notice to the
spouses in the event of changes in interest
rates prescribed by law or the Monetary
Board, or in the bank’s overall cost of
funds. Can PNB impose varying rates of
interest on the loan of the spouses?
No. The interest rates imposed by DBP are
excessive and arbitrary. Thus, the foregoing interest
rates imposed on the Spouse’s loan obligation
without their knowledge and consent should be
disregarded, not only for being iniquitous and
exorbitant, but also for being violative of the
principle of mutuality of contracts. In the instant
case, it is clear from the contract of loan between
the spouses and the bank that the spouses, as
borrowers, agreed to the payment of interest on
their loan obligation. That the rate of interest was
subsequently declared illegal and unconscionable
does not entitle the spouses to stop payment of
interest. It should be emphasized that only the rate
of interest was declared void. The stipulation
requiring the Spouses to pay interest on their loan
remains valid and binding. They are, therefore,
liable to pay interest from the time they defaulted
in payment until their loan is fully paid. Pursuant to
Circular No. 799, series of 2013, issued by the Office
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of the Governor of the BSP on 21 June 2013, and in
accordance with the ruling of the Supreme Court in
the recent case of Dario Nacar v. Gallery Frames
and/or Felipe Bordey, Jr., effective 1 July 2013, the
rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as
to such rate of interest, shall be six percent (6%)
per annum. Accordingly, the rate of interest of 12%
per annum on petitioners-spouses’ obligation shall
apply from the date of default – until 30 June 2013
only. From 1 July 2013 until fully paid, the legal rate
of 6% per annum shall be applied to the Spouses’
unpaid obligation. [Andal v. Philippine National
Bank, G.R. No. 194201, November 27, 2013]
12. ECBI was a banking institution which
underwent BSP’s general examination. It
was issued a cease and desist order and
enjoined it from pursuing certain acts and
transactions that were considered unsafe
or unsound banking practices, and from
doing such other acts or transactions
constituting fraud or might result in the
dissipation of its assets. This was the result
of the continuing refusal of ECBI’s BOD to
allow the examination of the BSP.
Thereafter, for defying the cease and desist
order, BSP issued as resolution placing it
under receivership. Was the action of the
BSP proper?
Yes. The Monetary Board (MB) may forbid a bank
from doing business and place it under receivership
without prior notice and hearing. This is called the
“close now, hear later” doctrine. It must be
emphasized that R.A .No. 7653 is a later law and
under said act, the power of the MB over banks,
including rural banks, was increased and expanded.
The Court, in several cases, upheld the power of the
MB to take over banks without need for prior
hearing. Prior hearing is not necessary inasmuch as
the law entrusts to the MB the appreciation and
determination of whether any or all of the statutory
2013 & 2014 Q and A|Commercial Law

grounds for the closure and receivership of the
erring bank are present. The MB, under R.A. No.
7653, has been invested with more power of
closure and placement of a bank under receivership
for insolvency or illiquidity, or because the bank’s
continuance in business would probably result in
the loss to depositors or creditors.
Accordingly, the MB can immediately implement its
resolution prohibiting a banking institution to do
business in the Philippines and, thereafter, appoint
the PDIC as receiver. The procedure for the
involuntary closure of a bank is summary and
expeditious in nature. Such action of the MB shall
be final and executory, but may be later subjected
to a judicial scrutiny via a petition for certiorari to
be filed by the stockholders of record of the bank
representing a majority of the capital stock.
Obviously, this procedure is designed to protect the
interest of all concerned, that is, the depositors,
creditors and stockholders, the bank itself and the
general public. The protection afforded public
interest warrants the exercise of a summary
closure.
Management take-over under Section 11 of R.A.
No. 7353 was no longer feasible considering the
financial quagmire that engulfed ECBI showing
serious conditions of insolvency and illiquidity.
Besides, placing ECBI under receivership would
effectively put a stop to the further draining of its
assets. [Alfeo D. Vivas, on his behalf and on behalf
of the Shareholders or Eurocredit Community Bank
v. The Monetary Board of the Bangko Sentral ng
Pilipinas and the Philippine Deposit Insurance
Corporation, G.R. No. 191424, August 7, 2013]
13. G Corp. obtained a loan from DBP bank to
finance its development of a resort
complex. To secure it, a promissory note
was executed by the G Corp. and
mortgages were constituted on its
properties. Also, a cash equity was put up.
The loan was released to G Corp. in
Starr Weigand 2014
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tranches, but DBP eventually refused to
release the balance thereof, alleging that it
failed to develop the said resort complex.
DBP then foreclose the mortgages, which
prompted G Corp. to file an action for
specific performance against DBP. Was it
proper for DBP to foreclose the mortgages?
No. Considering that it had yet to release the entire
proceeds of the loan, DBP could not yet make an
effective demand for payment upon G Corp. to
perform its obligation under the loan. Being a
banking institution, DBP owed it to G Corp. to
exercise the highest degree of diligence, as well as
to observe the high standards of integrity and
performance in all its transactions because its
business was imbued with public interest. The high
standards were also necessary to ensure public
confidence in the banking system. The stability of
banks largely depends on the confidence of the
people in the honesty and efficiency of banks. Thus,
DBP had to act with great care in applying the
stipulations of its agreement with G Corp., lest it
erodes such public confidence. Yet, DBP failed in its
duty to exercise the highest degree of diligence by
prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the
mortgaged properties despite G Corp. not being yet
in default. [Development Bank of the Philippines
(DBP) v. Guariña Agricultural and Realty
Development Corporation, G.R. No. 160758. January
15, 2014]
14. The spouses S applied for a loan which was
granted by BPI for a term of six months,
secured by a mortgage over land owned by
the Spouses S. the Spouses S later on
obtained a credit line from BPI in the
amount of P5.7 million. The mortgage was
released on the representation of the
spouses that the proceeds will be used to
pay the loans, but the same remained
unpaid. Having defaulted on their loan
obligations, BPI demanded payment.
2013 & 2014 Q and A|Commercial Law

However, the spouses filed a complaint
against BPI, to maintain the status quo, and
alleged that BPI "deliberately refused to
comply with the condition/undertaking of
the loan for IGLF endorsement and
approval" until the maturity date of the
loan lapsed to their great prejudice and
irreparable damage. They further alleged
they neither executed any P5.7 Million
promissory note nor did they receive P5.7
Million from BPI. Thus, there is no existing
P5.7 Million Credit Line Facility Agreement
as far as they are concerned. Is the
contention of the Spouses correct?
No. It appears from the allegations that Spouses S
have misconstrued the concept of a Credit Line
Facility Agreement. A credit line is "that amount of
money or merchandise which a banker, merchant,
or supplier agrees to supply to a person on credit
and generally agreed to in advance." It is the fixed
limit of credit granted by a bank, retailer, or credit
card issuer to a customer, to the full extent of
which the latter may avail himself of his dealings
with the former but which he must not exceed and
is usually intended to cover a series of transactions
in which case, when the customer’s line of credit is
nearly exhausted, he is expected to reduce his
indebtedness by payments before making any
further drawings.
- 59 -
15. ABC is a trust corporation which is a
subsidiary of Z Corp., a quasi-bank. Are the
assets held in trust by ABC included in the
computation of the single borrower’s limit
for Z Corp.?
No. In case a stand-alone trust corporation is a
subsidiary or an affiliate of a quasi-bank, the asset
under management of the trust corporation shall
not form part of the relevant exposures of the
parent quasi-bank for purposes of calculating the
single borrower’s limit and the ceilings for
accommodation to DOSRI of the parent quasi-bank.
Likewise, the purchase by the trust corporation, in
behalf of its client, of securities and instruments
issued by its parent quasi-bank shall not form part
of the relevant exposure of the trust corporation
for purposes of the single borrower’s limits and
DOSRI ceilings of the said trust corporation. [BSP
Circular No. 849, Series of 2014]

Thus, contrary to the belief and understanding of

Spouses S, BPI does not have to require the
execution of promissory note of the entire P5.7
Million since a credit line as stated above, is merely
a fixed limit of credit. Furthermore, still applying
the above quoted definition, a credit line usually
presupposes a series of transactions until the credit
line is nearly exhausted. BPI is not obliged to
release the amount of P5.7 Million to Spouses S all
at once, in a single transaction. [Spouses Pio Dato
and Sonia Y. Sia v. Bank of the Philippine Islands,
G.R. No. 181873, November 27, 2013]

Starr Weigand 2014 2013 & 2014 Q and A|Commercial Law


Anti-Money Laundering Law
1. The AMLC filed an Urgent Ex-Parte
Application for the issuance of a freeze
order with the CA against certain monetary
instruments and properties of the L et al.,
pursuant to the Anti-Money Laundering Act
of 2001. This application was based on the
February 1, 2005 letter of the Office of the
Ombudsman to the AMLC, recommending
that the latter conduct an investigation on
L and his family for possible violation of the
law. The CA granted the application and
issued the freeze order. Thereafter, an
Urgent Motion for Extension of Effectivity
of Freeze Order was filed, arguing that if
the bank accounts, web accounts and
vehicles of L not continuously frozen, they
could be placed beyond the reach of law
enforcement authorities and the
government’s efforts to recover the
proceeds of the L’s unlawful activities
would be frustrated. In support of the
motion, it was alleged that various cases
against L were presently being investigated
by the Ombudsman. The motion for
extension was also granted by the CA. L
sought to have the extended freeze order
lifted, arguing that there was no evidence
to support the extension of the freeze
order, and that the extension not only
deprived them of their property without
due process; it also punished them before
their guilt could be proven. The CA
subsequently denied this motion. The Rules
on Civil Forfeiture took effect and stated
that an extension of a freeze order was
only for a maximum period of 6 months.
Thus, L asked the CA to reconsider its
resolution denying his motion, insisting
that the freeze order should be lifted
considering: (a) no predicate crime has
been proven to support the freeze order’s
issuance; (b) the freeze order expired six
Starr Weigand 2014
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months after it was issued; and (c) the
freeze order is provisional in character and
not intended to supplant a case for money
laundering. Should L’s Motion for
Reconsideration be granted?
Yes. A freeze order is an extraordinary and interim
relief issued by the CA to prevent the dissipation,
removal, or disposal of properties that are
suspected to be the proceeds of, or related to,
unlawful activities as defined in Section 3(i) of RA
No. 9160, as amended. The primary objective of a
freeze order is to temporarily preserve monetary
instruments or property that are in any way related
to an unlawful activity or money laundering, by
preventing the owner from utilizing them during
the duration of the freeze order. The relief is pre-
emptive in character, meant to prevent the owner
from disposing his property and thwarting the
State’s effort in building its case and eventually
filing civil forfeiture proceedings and/or prosecuting
the owner.
The Anti-Money Laundering Act of 2001, as
amended, from the point of view of the freeze
order that it authorizes, shows that the law is silent
on the maximum period of time that the freeze
order can be extended by the CA. The final
sentence of Section 10 of the Anti-Money
Laundering Act of 2001 provides, "the freeze order
shall be for a period of twenty (20) days unless
extended by the court." In contrast, Section 55 of
the Rule in Civil Forfeiture Cases qualifies the grant
of extension "for a period not exceeding six
months" "for good cause" shown.
Nothing in the law grants the owner of the "frozen"
property any substantive right to demand that the
freeze order be lifted, except by implication, i.e., if
he can show that no probable cause exists or if the
20-day period has already lapsed without any
extension being requested from and granted by the
CA. Notably, the Senate deliberations on RA No.
9160 even suggest the intent on the part of our
2013 & 2014 Q and A|Commercial Law

legislators to make the freeze order effective until
the termination of the case, when necessary.
The silence of the law, however, does not in any
way affect the Court’s own power under the
Constitution to "promulgate rules concerning the
protection and enforcement of constitutional rights
xxx and procedure in all courts." Pursuant to this
power, the Court issued A.M. No. 05-11-04-SC,
limiting the effectivity of an extended freeze order
to six months – to otherwise leave the grant of the
extension to the sole discretion of the CA, which
may extend a freeze order indefinitely or to an
unreasonable amount of time – carries serious
implications on an individual’s substantive right to
due process. This right demands that no person be
denied his right to property or be subjected to any
governmental action that amounts to a denial. The
right to due process, under these terms, requires a
limitation or at least an inquiry on whether
sufficient justification for the governmental action.
In this case, the law has left to the CA the authority
to resolve the issue of extending the freeze order it
issued. Without doubt, the CA followed the law to
the letter, but it did so by avoiding the fundamental
law’s command under its Section 1, Article III. This
command sought to implement through Section
53(b) of the Rule in Civil Forfeiture Cases which the
CA erroneously assumed does not apply. The
extension granted by the CA effectively bars L from
using any of the property covered by the freeze
order until after an eventual civil forfeiture
proceeding is concluded in their favor and after
they shall have been adjudged not guilty of the
crimes they are suspected of committing. These
periods of extension are way beyond the intent and
purposes of a freeze order which is intended solely
as an interim relief; the civil and criminal trial courts
can very well handle the disposition of properties
related to a forfeiture case or to a crime charged
and need not rely on the interim relief that the
appellate court issued as a guarantee against loss of
property while the government is preparing its full
Starr Weigand 2014
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case. A freeze order is meant to have a temporary
effect; it was never intended to supplant or replace
the actual forfeiture cases where the provisional
remedy - which means, the remedy is an adjunct of
or an incident to the main action – of asking for the
issuance of an asset preservation order from the
court where the petition is filed is precisely
available. For emphasis, a freeze order is both a
preservatory and preemptive remedy.
Thus, as a rule, the effectivity of a freeze order may
be extended by the CA for a period not exceeding
six months. Before or upon the lapse of this period,
ideally, the Republic should have already filed a
case for civil forfeiture against the property owner
with the proper courts and accordingly secure an
asset preservation order or it should have filed the
necessary information. Otherwise, the property
owner should already be able to fully enjoy his
property without any legal process affecting it.
However, should it become completely necessary
for the Republic to further extend the duration of
the freeze order, it should file the necessary motion
before the expiration of the six-month period and
explain the reason or reasons for its failure to file
an appropriate case and justify the period of
extension sought. The freeze order should remain
effective prior to the resolution by the CA, which is
hereby directed to resolve this kind of motion for
extension with reasonable dispatch. [Ligot v.
Republic of the Philippines, G.R. No. 176944, March
6, 2013]
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2013 & 2014 Q and A|Commercial Law