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ACADEMICUS REVIEW CENTER, INC.

MATERIALS IN COMMERCIAL LAW1
Fiscal Rocille S. Aquino-Tambasacan2

CORPORATION CODE

Foreign Equity Computation

1. How is the foreign equity of a corporation to be computed, in order to determine its nationality?
It should be based on the voting shares. To construe "capital" as the total outstanding
capital stock, treated as a single class regardless of the actual classification of shares,
contravenes the Constitution. Otherwise, it might create a situation where foreigners, with an
equity of less than 0.001 percent, exercise control over the public utility as they are the ones
who have voting shares, and the Filipinos, holding more than 99.999 percent of the equity,
cannot vote in the election of directors and hence, have no control over the public utility.
Gamboa vs. Teves, 652 SCRA 690, October 9, 2012 and June 28, 2011 (MR)

2. What is the prevailing mode of determining whether or not a corporation is a Filipino

corporation entitled to undertake the exploration, development and utilization (EDU) of natural
resources, such as a mining corporation?
The "control test". 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." Narra Nickel and Mining Development
Corp. vs. Redmond Consolidated Mines, Corp., April 21, 2014 and January 28, 2015 (MR), case
already asked in the 2016 Bar

3. What is the Grandfather Rule?

It is the method by which the percentage of Filipino equity in a corporation engaged in
nationalized activity, provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present, by attributing the nationality of
the second or even subsequent tier of ownership to determine the nationality of the corporate
shareholder.
Thus, to arrive at the actual Filipino ownership and control in a corporation, both the
direct and indirect shareholdings in the corporation are determined. Narra Nickel and Mining
Development Corp. vs. Redmond Consolidated Mines, Corp., April 21, 2014 and January 28,
2015 (MR), case already asked in the 2016 Bar

4. When do you apply the Control Test and the Grandfather rule?
The Control Test and the Grandfather Rule are not incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather, these methods can be used
cumulatively.
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation. It is only when the Control Test is first complied with
that the Grandfather Rule may be applied. If the subject corporation's Filipino equity falls below
the threshold 60%, the corporation is immediately considered foreign-owned, in which case,
there is no more need to resort to the Grandfather Rule.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as to who has the
"beneficial ownership" and "control" of the corporation. In that instance, there is no need for a

1
This material is the same material distributed for the 2016 Bar Review. Certain points were however were
underscored to show that these were already asked in the said Bar.
2
The author of this material is a Senior Assistant City Prosecutor of the City of Manila. She is also a Commercial
Law Professor at San Sebastian College Recoletos-Manila, Polytechnic University of the Philippines and University
of Caloocan, as well as a Commercial Bar Reviewer at Academicus Review Center Inc., Recoletos Review Center and
Albano Review Center. She had authored two books in Commercial Law – Handbook on Insurance Law as well as
Negotiable Instruments in a Nutshell with Central Books. Her article “Disneyfication vis-à-vis Copyright: Original
Stories Lost”, appears in Volume 795 of SCRA.
 dissection or further inquiry on the ownership of the corporate shareholders in both the
investing and investee corporation or the application of the Grandfather Rule. Even if the 60-40
Filipino to foreign equity ratio is apparently met, a resort to the Grandfather Rule is necessary if
doubt exists as to who has "beneficial ownership" and "control."
The "doubt" does not refer to the fact that the apparent Filipino ownership of the
corporation's equity falls below the 60% threshold. Rather, "doubt" refers to various indicia that
the "beneficial ownership" and "control" of the corporation do not reside in Filipino
shareholders but in foreign stakeholders. These indicators are:
a. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;
b. That the foreign investors undertake to provide practically all the technological support
for the joint venture;
c. That the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies. Narra Nickel and Mining Development Corp. vs.
Redmond Consolidated Mines, Corp., April 21, 2014 and January 28, 2015 (MR), case
already asked in the 2016 Bar

Kinds of Corporations

5. Can an entity exercising public functions be automatically considered as a GOCC?

No. GOCCs are stock or non-stock corporations vested with functions relating to public
needs that are owned by the government directly or through its instrumentalities. Three
attributes make an entity a GOCC: (a) its organization as stock or non-stock corporation; (b) the
public character of its function; and (c) government ownership over the same. Funa vs. MECO,
February 4, 2014

6. How do you determine if the government owns a stock or non-stock corporation?

If the government has controlling interest in the corporation. In a stock corporation, it is
when the government owns at least 51% of the corporate capital stock. In a non-stock
corporation, it is when majority of the members are government officials holding such
membership by appointment or designation or there is otherwise substantial participation of
the government in the selection of the corporation's governing board. Funa vs. MECO,
February 4, 2014

Corporate Name

7. Can a corporation object to the use of some words in its corporate name by another?
Yes, if the proposed name is similar or deceptive or confusingly similar to that of any
existing corporation or to any other name already protected by law.
If there be identical, misleading or confusingly similar name to one already registered by
another corporation or partnership with the SEC, the proposed name must contain at least one
distinctive word different from the name of the company already registered.
To show contrast with “BPI Family Bank”, petitioner used the words "GSIS" and "thrift."
But these are not sufficiently distinct words that differentiate their names. While "GSIS" is
merely an acronym of the proper name by which petitioner is identified, the word "thrift" is
simply a classification of the type of bank that petitioner is. Even if the classification of the bank
as "thrift" is appended to petitioner's proposed corporate name, it will not make the said
corporate name distinct from BPI Family Bank because the latter is likewise engaged in the
banking business. The overriding consideration in determining whether a person, using ordinary
care and discrimination, might be misled is the circumstance that both petitioner and
respondent are engaged in the same business of banking. The likelihood of confusion is
accentuated where the goods or business of one corporation are the same or substantially the
same to that of another corporation. GSIS Family Bank vs. BPI Family Bank, September 23,
2015

8. What is the restriction on the exclusive right to use a corporate name?

A corporation has a right to the exclusive use of a corporate name except if:
1. the complainant corporation acquired a prior right over the use of such corporate name;
and
2. the proposed name is either
a. identical or
b. deceptive or confusingly similar to that of any existing corporation or to any
other name already protected by law; or
c. patently deceptive, confusing or contrary to existing law. GSIS Family Bank vs.
BPI Family Bank, September 23, 2015
9. Can the use of a name be objected on the use that the name does not represent the true
membership of the one composing the organization?
Yes. The prohibition against the registration of such a corporate name is for the
avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations.
It would be misleading for the members of Samahan to use "Hanjin Shipyard" in its
name as it could give the wrong impression that all of its members are employed by Hanjin.
Samahan ng Manggagawa sa Hanjin Shipyard vs. Bureau of Labor Relations, October 14, 2015

10. Would change of corporate name result to dissolution?

No. The Corporation Code defined and delineated the different modes of dissolving a
corporation, and amendment of the articles of incorporation was not one of such modes. Zuellig
Freight and Cargo Systems vs. NLRC, July 22, 2013; J. Bersamin, ponente

11. What is the effect of change of corporate name?

The effect of the change of name was not a change of the corporate being. It is similar
to the changing of name of a natural person - there is only a change of name, and not a change
of being.
A change in the corporate name does not make a new corporation. It has no effect on
the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon
such change in its name, is in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its character is in unchanged.
Zuellig Freight and Cargo Systems vs. NLRC, July 22, 2013; J. Bersamin, ponente

Separate Juridical Personality and Piercing the Veil of Corporate Fiction

12. Can an officer and stockholder of the corporation be held liable for its debts?
No. 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 from the people comprising it.
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. 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.
Heirs of Uy vs. International Exchange Bank, February 13, 2013

13. When will the directors, officers or employees of the corporation be solidary liability with that of
the corporation?
a. When directors and trustees or, in appropriate cases, the officers of a corporation:
a1. vote for or assent to patently unlawful acts of the corporation;
a2. act in bad faith or with gross negligence in directing the corporate affairs; and
a3. 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. Heirs of Uy vs. International Exchange Bank, February 13,
2013

14. What are the requisites before a director or officer of a corporation can be held personally liable
for corporate obligations?
a. 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
b. the complainant must clearly and convincingly prove such unlawful acts, negligence or
bad faith. Heirs of Uy vs. International Exchange Bank, February 13, 2013

15. What are the probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil?
a. Stock ownership by one or common ownership of both corporations;
 b. Identity of directors and officers;
c. The manner of keeping corporate books and records;
d. Methods of conducting the business. Heirs of Uy vs. International Exchange Bank,
February 13, 2013

16. What is bad faith for piercing the veil to apply?

Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, not simply bad judgment or negligence. It means breach of a known duty through some
motive or interest or ill will; it partakes of the nature of fraud. Piercing the corporate veil in
order to hold corporate officers personally liable for the corporation's debts requires that the
bad faith or wrongdoing of the director must be established clearly and convincingly as bad faith
is never presumed. Pioneer Insurance Surety Corp. vs. Morning Star Travel & Tours, Inc., July 8,
2015

17. If the corporation itself is compelled to participate in the arbitration proceedings, could the
officers who were sued be likewise compelled to participate in it?
Yes. When the directors are impleaded in a case against a corporation, alleging malice
or bad faith on their part in directing the affairs of the corporation, complainants are effectively
alleging that the directors and the corporation are not acting as separate entities. They are
alleging that the acts or omissions by the corporation that violated their rights are also the
directors' acts or omissions. Complainants effectively pray that the corporate veil be pierced
because the cause of action between the corporation and the directors is the same.
Thus, because the personalities of petitioners and the corporation may later be found to
be indistinct, officers may be compelled to submit to arbitration. Lanuza, Jr. vs. BF Corporation,
October 1, 2014

18. When the court disregards the corporation's distinct and separate personality from its directors
or officers, does it mean that the corporation, in all instances and for all purposes, is the same as
its directors, stockholders, officers, and agents?
No. It does not result in an absolute confusion of personalities of the corporation and
the persons composing or representing it. Courts merely discount the distinction and treat them
as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities
for all damages to erring corporate officials who participated in the corporation's illegal acts.
This is done so that the legal fiction cannot be used to perpetrate illegalities and injustices.
Lanuza, Jr. vs. BF Corporation, October 1, 2014

19. What do you mean by separate entity theory?

A corporation has a personality separate and distinct from the persons acting for and in
its behalf and, in general, from the people comprising it. The obligations incurred by the
corporate officers are the direct accountabilities of the corporation they represent, and not
theirs. Thus, a director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation; it is only in exceptional circumstances that
solidary liability will attach to them. WPM International Trading, Inc. vs. Labayen, September
17, 2014

20. What are the instances where the corporate veil is pierced?
a. when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
b. in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud,
or defend a crime; or
c. is used in alter ego cases, i.e., where a corporation is essentially 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 so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. WPM International Trading, Inc. vs.
Labayen, September 17, 2014

21. What are the elements of piercing the corporate veil based on the alter ego theory?
a. 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;
b. 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
 c. The control and breach of duty must have proximately caused the injury or unjust loss
complained of. WPM International Trading, Inc. vs. Labayen, September 17, 2014

Exercise of Corporate Powers

22. Is the purchase of a property valid, absent any authority from the board of directors to enter
into a contract of sale?
No. The power to purchase real property is vested in the board of directors or trustees.
While a corporation may appoint agents to negotiate for the purchase of real property needed
by the corporation, the final say will have to be with the board, whose approval will finalize the
transaction. 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 by-laws. 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. Riosa vs. Tabaco La Suerte Corp., October 23, 2013

23. What is the effect of a meeting of the board of directors which failed to comply with the
formalities of law?
Such meeting is legally infirm if there is failure to comply with the requirements or
formalities of the law or the corporation's by laws.
However, the actions taken in the meeting may be ratified expressly or impliedly.
Ratification means that the principal voluntarily adopts, confirms and gives sanction to the
unauthorized act of its agent on its behalf. Ratification can be made either expressly or
impliedly. Implied ratification can be by silence or acquiescence, acts showing approval or
adoption of the act, or acceptance and retention of benefits flowing therefrom. Lopez Realty,
Inc. vs. Spouses Tanjangco, G.R. No. 154291, November 12, 2014

Disposition and Transfer of Shares

24. Can a corporation whose shares of stock are the subject of a transfer transaction appeal the
ruling rescinding the sale?
No. It was not a party to the sale even though the subject of the sale was its share of
stock. The corporation whose shares of stock are the subject of a transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a party to the
transaction. However, to bind the corporation as well as third parties, it is necessary that the
transfer is recorded in the books of the corporation.
As party to the sale, the seller/stockholder is the one who may appeal the ruling
rescinding the sale. The remedy of appeal is available to a party who has a present interest in
the subject matter of the litigation and is aggrieved or prejudiced by the judgment. The
rescission of the sale does not in any way prejudice the corporation in such a manner that its
interest in the subject matter — the share of stock — is injuriously affected. Forest Hills Golf
and Country Club vs. Vertex Sales, March 6, 2013

25. Can an Oversight Committee call for a meeting to remove existing officers and replace them?
No. Nowhere in the Corporation Code or in the corporation’s by-laws can it be gathered
that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty
and call a special meeting for the purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of shareholders. Subsequent
ratification made by the stockholders did not cure the substantive infirmity, the defect having
set in at the time the void act was done. The defect goes into the very authority of the persons
who made the call for the meeting. Illegal acts of a corporation which contemplate the doing of
an act which is contrary to law, morals or public order, or contravenes some rules of public
policy or public duty are void. They cannot serve as basis for a court action, nor acquire validity
by performance, ratification or estoppel.
A distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which are
contrary to law, morals or public policy or public duty and are void. Mere ultra vires acts or
those which are not illegal or void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by
the stockholders. Bernas vs. Cinco, July 1, 2015
26. Would a person’s inheritance of the shares of stock automatically afford him the rights of a
majority stockholder?
No. All transfers of shares of stock must be registered in the corporate books in order to
be binding on the corporation. An owner of shares of stock cannot be accorded the rights
pertaining to a stockholder — such as the right to call for a meeting and the right to vote, or be
voted for — if his ownership of such shares is not recorded in the Stock and Transfer Book. F.S.
Velasco Co., Inc. vs. Madrid, November 10, 2015

Right to Inspect Records

27. Is the right to be in possession of corporate records enforceable thru a complaint for violation of
a stockholder's right to examine corporate records?
No. 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.
Petitioners are not actually invoking their right to inspect the records and the stock and
transfer book of the corporation. What they seek to enforce is the proprietary right of the
corporation 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 Section 74. Yujuico vs. Quiambao, June 2, 2014

28. Is the presentation of a stock certificate a condition sine qua non for proving one's shareholding
in a corporation?
No. A stock certificate is prima facie evidence that the holder is a shareholder of the
corporation, but the possession of the certificate is not the sole determining factor of one's
stock ownership. A certificate of stock is merely the paper representative or tangible evidence of
the stock itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder's interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of such ownership. It expresses
the contract between the corporation and the stockholder, but it is not essential to the
existence of a share in stock or the creation of the relation of shareholder to the corporation.
Insigne vs. Abra Valley Colleges, Inc., July 29, 2015, J. Bersamin, ponente

29. What is the nature of a stock and transfer book (STB)?

STB is not the exclusive evidence of the matters and things that ordinarily are or should
be written therein, for parol evidence may be admitted to supply omissions from the records, or
to explain ambiguities, or to contradict such records. STB is the book which records the names
and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment thereof; a statement of
every alienation, sale or transfer of stock made, the date thereof and by and to whom made;
and such other entries as may be prescribed by law. STB is necessary as a measure of
precaution, expediency and convenience since it provides the only certain and accurate method
of establishing the various corporate acts and transactions and of showing the ownership of
stock and like matters. However, STB is not a public record, and thus is not exclusive evidence of
the matters and things which ordinarily are or should be written therein. Records and minutes
of a corporation are not conclusive even against the corporation but are prima facie evidence
only, and may be impeached or even contradicted by other competent evidence. Thus, parol
evidence may be admitted to supply omissions in the records or explain ambiguities, or to
contradict such records. Insigne vs. Abra Valley Colleges, Inc., July 29, 2015, J. Bersamin,
ponente

30. Can a stockholder who owns only 0.001% of a corporation ask for examination of corporate
records?
Yes. The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and does not require any specific amount of interest for the
exercise of the right.
Neither could the corporation arbitrarily deny the stockholder’s right to inspect the
corporate books on the basis that her inspection would be used for a doubtful or dubious
reason. The only time when the demand to examine could be refused is when the corporation
puts up as a defense to any action that the person demanding had improperly used any
information secured through any prior examination of the records, or was not acting in good
faith or for a legitimate purpose in making his demand.
The right of the shareholder to inspect the books should not be made subject to the
condition of a showing of any particular dispute or of proving any mismanagement or other
occasion rendering an examination proper, but if the right is to be denied, the burden of proof is
 upon the corporation to show that the purpose of the shareholder is improper, by way of
defense. Terelay Investment and Development Corp. vs. Yulo, August 5, 2015, J. Bersamin,
ponente

31. What are the purposes held to justify a demand for inspection?
a. To ascertain the financial condition of the company or the propriety of dividends;
b. the value of the shares of stock for sale or investment;
c. whether there has been mismanagement;
d. in anticipation of shareholders' meetings to obtain a mailing list of shareholders to
solicit proxies or influence voting;
e. to obtain information in aid of litigation with the corporation or its officers as to
corporate transactions. Terelay Investment and Development Corpo. vs. Yulo, August 5,
2015, J. Bersamin, ponente

32. What are the improper purposes which may justify denial of the right of inspection?
a. Obtaining of information as to business secrets or to aid a competitor;
b. to secure business "prospects" or investment or advertising lists;
c. to find technical defects in corporate transactions in order to bring "strike suits" for
purposes of blackmail or extortion. Terelay Investment and Development Corpo. vs.
Yulo, August 5, 2015, J. Bersamin, ponente

Derivative Suit

33. What is a derivative suit?

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. Since the
directors have the right to decide whether or not a corporation should sue, these directors will
never be willing to sue themselves, or impugn their wrongful or fraudulent decision.
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. Ang vs. Spouses Ang, June 19, 2013

34. What is the basis of a derivative suit?

It is not based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly 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.
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 to make suitable measures for its protection. The basis of a
stockholder's suit is always one in equity. Ang vs. Spouses Ang, June 19, 2013

35. What are the requirements for a derivative suit to prosper?

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative
suits:
a. 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;
b. 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;
c. No appraisal rights are available for the act or acts complained of; and
d. The suit is not a nuisance or harrassment suit. Ang vs. Spouses Ang, June 19, 2013;
doctrine asked in the 2016 Bar

36. What is an individual suit?

Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation. Villamor, Jr. vs.
Umale, September 24, 2014
37. What are the reasons for disallowing a direct individual suit?
a. A stockholder has no title legal or equitable to the corporate property;
b. The prior rights of the creditors may be prejudiced. The stockholders may not directly
claim those damages for themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets before the dissolution of
the corporation and the liquidation of its debts and liabilities.
c. The filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
d. It would produce wasteful multiplicity of suits; and
e. It would involve confusion in ascertaining the effect of partial recovery by an individual
on the damages recoverable by the corporation for the same act. Villamor, Jr. vs.
Umale, September 24, 2014

38. What is the effect if a complaint did not contain any allegation of any effort to avail of intra-
corporate remedies?
It will be dismissed. Even if petitioners thought it was futile to exhaust intra-corporate
remedies, they should have stated the same in the complaint and specified the reasons for such
opinion. The requirement of this allegation in the complaint is not a useless formality which
may be disregarded at will. Ching vs. Subic Bay Golf and Country Club, Inc., September 10,
2014

Merger and Consolidation

39. Would transfer of all or substantially all the assets of a corporation carry with it the assumption
of corporate liabilities?
Yes, if the transferee would only be continuing the business of the transferor, and hence
an exception under the “Nell Doctrine”. Y-I Leisure Phils., Inc. vs. Yu, September 8, 2015

40. What is the “Nell Doctrine”?

The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the transferor except:
a. Where the purchaser expressly or impliedly agrees to assume such debts;
b. Where the transaction amounts to a consolidation or merger of the corporations;
c. Where the purchasing corporation is merely a continuation of the selling corporation
(business enterprise transfer); and
d. Where the transaction is entered into fraudulently in order to escape liability for such
debts. Y-I Leisure Phils., Inc. vs. Yu, September 8, 2015

41. What do you mean by “business enterprise transfer”?

In such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the latter's business enterprise, including its
goodwill. In other words the transferee purchases not only the assets of the transferor, but
also its business. As a result of the sale, the transferor is merely left with its juridical existence,
devoid of its industry and earning capacity. The transfer must be of such degree that the
transferor corporation is rendered incapable of continuing its business or its corporate purpose.
Y-I Leisure Phils., Inc. vs. Yu, September 8, 2015

42. What is the purpose of the business-enterprise transfer?

It is to protect the creditors of the business by allowing them a remedy against the new
owner of the assets and business enterprise. Otherwise, creditors would be left "holding the
bag," because they may not be able to recover from the transferor who has "disappeared with
the loot," or against the transferee who can claim that he is a purchaser in good faith and for
value. Based on the foregoing, as the exception of the Nell doctrine relates to the protection of
the creditors of the transferor corporation, and does not depend on any deceit committed by
the transferee corporation, then fraud is certainly not an element of the business enterprise
doctrine. Y-I Leisure Phils., Inc. vs. Yu, September 8, 2015

43. What is “free and harmless clause”?

In business-enterprise transfer, it is a contractual stipulation stating that the transferee
shall not be liable for any or all debts arising from the business which were contracted prior to
the time of transfer. Such stipulations are valid, but only as to the transferor and the transferee.
These stipulations however are not binding on the creditors of the business enterprise who can
still go after the transferee for the enforcement of the liabilities. Y-I Leisure Phils., Inc. vs. Yu,
September 8, 2015
44. Does a merger become effective upon approval by the Bangko Sentral as well by the concerned
banking corporations?
No. 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. Merger shall be effective only upon the issuance by the SEC of a
certificate of merger. Bank of Commerce vs. Radio Mindanao Network, April 21, 2014; doctrine
asked in the 2016 Bar

45. What is merger?

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. It 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 corporations.
The absorbing corporation continues its existence while the life or lives of the other
corporations is or are terminated. Bank of Commerce vs. Radio Mindanao Network, April 21,
2014

46. What are the steps for merger or consolidation?

a. The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles.
b. Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least 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 2/3 of the members or of stockholders representing 2/3 of the OCS
will be needed. Appraisal rights must be respected.
c. Execution of the formal agreement, referred to as the articles of merger or
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of the consolidated corporation, or amend the articles of the
surviving corporation.
d. Submission of said articles of merger or consolidation to the SEC for approval.
e. If necessary, the SEC shall set a hearing, notifying all corporations concerned at least
two weeks before.
f. Issuance of certificate of merger or consolidation. Bank of Commerce vs. Radio
Mindanao Network, April 21, 2014

47. What is a de facto merger?

A de facto merger can be pursued by one corporation acquiring all or substantially all of
the properties of another corporation in exchange of shares of stock of the acquiring
corporation. The acquiring corporation would end up with the business enterprise of the target
corporation; whereas, the target corporation would end up with basically its only remaining
assets being the shares of stock of the acquiring corporation. Bank of Commerce vs. Radio
Mindanao Network, April 21, 2014; exact question was asked in the 2016 Bar

Corporation Sole

48. What are the requirements for purchase or sale of property in a corporation sole?
Such corporation may mortgage or sell real property held by it upon obtaining an order
for that purpose from the CFI of the province where the property is situated. In cases where the
rules, regulations and discipline of the religious denomination concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate
and personal property, such rules shall control, and the intervention of the courts shall not be
necessary. Iglesia Filipina Independiente vs. Heirs of Taeza, February 3, 2014

Liquidation and Winding-Up

49. Does revocation of the certificate of incorporation result in the termination of a corporation’s
liabilities?
No. Section 122 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. Vigilla vs. Philippine College of Criminology,
June 10, 2013
50. Can a dissolved corporation enter into agreements such as releases, waivers and quitclaims
beyond the 3-year winding up period?
Yes. Although 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 3 years
from the time the period of dissolution commences, there is no time limit within which the
trustees must complete a liquidation placed in their hands. What is provided in Section 122 is
that the conveyance to the trustees must be made within the 3-year period. But it may be found
impossible to complete the work of liquidation within the 3-year period or to reduce disputed
claims to judgment. The trustees may sue and be sued as such in all matters connected with the
liquidation. Vigilla vs. Philippine College of Criminology, June 10, 2013

51. Who will continue to transact in behalf of the corporation if no trustee is appointed within the
3-year period?
The board of directors may be permitted to complete the corporate liquidation by
continuing as "trustees" by legal implication. Vigilla vs. Philippine College of Criminology, June
10, 2013

52. Will a suit filed by a corporation whose papers were revoked by the SEC prosper?
No. It lacks capacity to sue because it no longer possesses juridical personality by
reason of its dissolution and lapse of the three-year grace period provided under Section 122.
Alabang Development Corp. vs. Alabang Hills Village Association, June 2, 2014

SECURITIES REGULATION CODE

Powers of the SEC

1. Are separate notices and hearings for suspension and revocation of registration of securities and
permit to sell still required?
No. Due notice simply means the information that must be given or made to a
particular person or to the public within a legally mandated period of time so that its recipient
will have the opportunity to respond to a situation or to allegations that affect the individual's or
public's legal rights or duties. The SRC did not provide for any separate notice of hearing to
revoke; there was already substantial compliance when corporation was given opportunity to be
heard. SEC vs. Universal Rightfield Property Holdings, Inc., July 20, 2015

2. Is the revocation of registration of securities and permit to sell them to the public an exercise of
the SEC's quasi-judicial power or of regulatory power?
It is regulatory power. A "quasi-judicial function" is a term which applies to the action,
discretion, etc., of public administrative officers or bodies, who are required to investigate facts,
hold hearings, and draw conclusions from them, as a basis for their official action and to
exercise discretion of a judicial nature. Although the SRC requires due notice and hearing before
issuing an order of revocation, the SEC does not perform such quasi-judicial functions and
exercise discretion of a judicial nature in the exercise of such regulatory power. It neither settles
actual controversies involving rights which are legally demandable and enforceable, nor
adjudicates private rights and obligations in cases of adversarial nature. Rather, when the SEC
exercises its incidental power to conduct administrative hearings and make decisions, it does so
in the course of the performance of its regulatory and law enforcement function. SEC vs.
Universal Rightfield Property Holdings, Inc., July 20, 2015

3. Does SEC possess jurisdiction to rule on the issue of validation of the proxies issued in favor of
certain stockholders?
It has none. This is an ancillary power which is now already vested with the RTC. The
power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when
proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of
PD 902-A. However, when proxies are solicited in relation to the election of corporate directors,
the resulting controversy, even if it raised the violation of the SEC rules on proxy solicitation,
should be properly seen as an election controversy within the original and exclusive jurisdiction
of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of PD 902-A. SEC
vs. CA, October 22, 2014
Intra-corporate Controversy

4. Who is a corporate officer?

'Corporate officers' are those officers of the corporation who are given that character by
the Corporation Code or by the corporation's by-laws.
The mere fact that Cosare was a stockholder of Broadcom 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. Considering that the
dispute relates to Cosare's rights and obligations as a regular officer of Broadcom, instead of as a
stockholder of the corporation, the controversy cannot be deemed intra-corporate.
Although a blanket authority provides for the Board's appointment of such other
officers as it may deem necessary, Broadcom failed to establish that the position of AVP for
Sales was created by virtue of an act of the board, and that Cosare was specifically elected or
appointed to such position by the directors. No board resolutions were submitted; an enabling
clause in the by-laws empowering its board to create additional officers, even with the
subsequent passage of a board resolution to that effect, cannot make such position a corporate
office. The board 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 to do so can result in the circumvention of the right of
every employee to security of tenure. Cosare vs. Broadcom Asia, Inc., February 5, 2014

5. What are the requirements for an individual to be considered a corporate officer, as against an
ordinary employee or officer?
a. the creation of the position is under the corporation's charter or by-laws; and
b. the election of the officer is by the directors or stockholders. Cosare vs. Broadcom Asia,
Inc., February 5, 2014

6. What is an intra-corporate controversy?

This pertain to disputes that involve any of the following relationships:
a. between the corporation, partnership or association and the public;
b. between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned;
c. between the corporation, partnership or association and its stockholders, partners,
members or officers; and
d. among the stockholders, partners or associates, themselves. Cosare vs. Broadcom Asia,
Inc., February 5, 2014

7. What are the tests of determining intra-corporate controversy?

The status or relationship of the parties and the nature of the question that is the
subject of the controversy.
Under the nature of the controversy test, the incidents of that relationship must also be
considered. The controversy must not only be rooted in the existence of an intra-corporate
relationship, but must 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. Cosare vs. Broadcom Asia, Inc., February 5, 2014

Exemption from Registration

8. If a bank’s securities are exempt from the registration requirements, is it still required to comply
with the requirement on submission of certain reports?
Yes. Though the securities issued by banking institutions are exempted from
registration, it does not mean that as a listed corporation, it is exempt from complying with the
reports required by the SEC. As a bank, it is primarily subject to the control of the BSP; and as a
corporation trading its securities in the stock market, it is under the supervision of the SEC.
There is no over-supervision here. Each regulating authority operates within the sphere of its
powers. That stringent requirements are imposed is understandable, considering the paramount
importance given to the interests of the investing public. Union Bank vs. SEC, 358 SCRA 479

9. If previously unissued authorized capital stocks are to be issued, are these exempted from SEC
registration?
No. When capital stock is issued in the course of and in compliance with the
requirements of increasing its authorized capital stock, the SEC examines the financial condition
 and financial statements of the corporation, and hence there is no real need for exercise of SEC
authority. Moreover, since approval of an increase in authorized capital stock by the
stockholders holding 2/3 of the outstanding capital stock is required, the directors and officers
of the corporation take pains to inform the shareholders of the financial condition and prospects
of the corporation and of the proposed utilization of the fresh capital sought to be raised.
On the other hand, issuance of previously authorized but unissued capital stock by the
corporation requires only Board of Directors approval. Neither notice to nor approval by the
shareholders or the SEC is required for such issuance. There would be no reasonable
opportunity to inform the stockholders about the very fact of such issuance and about the
condition of the corporation and the potential value of the shares of stock being offered. Nestle
vs. CA, 203 SCRA 504

10. What is a "public company"?

It is any corporation with a class of equity securities listed on an Exchange or with assets
in excess of P50M and having 200 or more holders, at least 200 of which are holding at least 100
shares of a class of its equity securities.
A public company is not limited to a company whose shares of stock are publicly listed;
even companies like the Bank, whose shares are offered only to a specific group of people, are
considered a public company, provided they meet the requirements enumerated above.
Philippine Veterans Bank vs. Callangan, G.R. No. 191995, August 3, 2011

NEGOTIABLE INSTRUMENTS LAW

Elements of Negotiability
1. Are electronic messages from bank customers containing instructions to debit their respective
accounts and pay a certain named recipient negotiable instruments?
No. The electronic messages are not signed by the investor-clients as supposed drawers
of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money
as the payment is supposed to come from a specific fund or account of the investor-clients; and,
they are not payable to order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. HSBC vs. CIR, June 4, 2014

2. When is a check considered a bearer instrument?

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. PNB vs. Spouses Rodriguez,
September 26, 2008

3. Can an actual, existing, and living payee may also be "fictitious"?

Yes. An actual, existing, and living payee may also be "fictitious" if the maker of the
check did not intend for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. PNB vs. Spouses Rodriguez, September 26, 2008

4. Is there any exception to the fictitious payee rule?

Yes. There is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme. PNB vs. Spouses Rodriguez, September 26, 2008

Holder in Due Course

5. A person has knowledge that the drawer is not a party to a contract of loan but still accepted
the check from a third person. Is he then a holder in due course?
No. Knowledge renders him dishonest, hence, in bad faith. His inaction and failure to
verify, despite knowledge that Patrimonio was not a party to the loan, may be construed as
gross negligence amounting to bad faith. Patrimonio vs. Gutierrez, June 4, 2014

6. Who is a holder in due course?

A holder in due course is a holder who has taken the instrument under the following
conditions:
 a. That it is complete and regular upon its face;
b. That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. Patrimonio vs. Gutierrez,
June 4, 2014

7. What do you mean by “acquisition in good faith”?

Acquisition in good faith means taking without knowledge or notice of equities of any
sort which could be set up against a prior holder of the instrument. It means that he does not
have any knowledge of fact which would render it dishonest for him to take a negotiable paper.
The absence of the defense, when the instrument was taken, is the essential element of good
faith.

Liabilities of Parties

8. What are the liabilities of the drawee, the intermediary banks, and the account holders for
altered checks?
A depositary/collecting bank where a check is deposited, and which endorses the check
upon presentment with the drawee bank, is an endorser. An endorser warrants "that the
instrument is genuine and in all respects what it purports to be; that he has good title to it; that
all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting." The depositary/collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an assertion that
the party making the presentment has done its duty to ascertain the genuineness of the
endorsements. If any of the warranties made by the depositary/collecting bank turns out to be
false, then the drawee bank may recover from it up to the amount of the check. Areza vs.
Express Savings Bank, September 10, 2014; doctrine already asked in the 2016 Bar

9. If the drawee bank fails to comply with the 24 hour period to return a forged or altered check to
the collecting bank, is the collecting bank is absolved from liability?
No. The 24-hour clearing rule does not apply to altered checks. These may be returned
within the prescriptive period fixed by law which is 10 years because a check or the
endorsement thereon is a written contract. Areza vs. Express Savings Bank, September 10,
2014

10. What is an accommodation party?

An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to some
other person. Such person is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of the taking of the instrument knew him to be only an accommodation
party. In lending his name to the accommodated party, the accommodation party is in effect a
surety for the latter. He lends his name to enable the accommodated party to obtain credit or to
raise money. He receives no part of the consideration for the instrument but assumes liability to
the other parties thereto because he wants to accommodate another. Aglibot vs. Santia,
December 5, 2012

11. What is the relation between an accommodation party and the party accommodated?
It is one of principal and surety — the accommodation party being the surety. A surety is
bound equally and absolutely with the principal and is deemed an original promisor and debtor
from the beginning. The liability is immediate and direct. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the
instrument; nor is it correct to say that the holder for value is not a holder in due course merely
because at the time he acquired the instrument, he knew that the indorser was only an
accommodation party.
Unlike in a contract of suretyship, the liability of the accommodation party remains not
only primary but also unconditional to a holder for value, such that even if the accommodated
party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such extension does
not release him because as far as a holder for value is concerned, he is a solidary co-debtor.
Aglibot vs. Santia, December 5, 2012
12. What is “No Erasure Rule”?
Under CHOM No. 15-460 effective January 4, 2016, any check with erasure, alteration
and/or deficiency (with missing or unfilled-up portions) – regardless of any signature or initial to
indicate authorization of erasures and alterations – shall no longer be eligible or acceptable for
clearing.

TRANSPORTATION LAW

Liability of Common Carriers

1. If a bus passenger was shot by his fellow passenger, should the common carrier be held liable?
No. The common carrier is not an insurer of the absolute safety of its passengers.
Where the injury sustained by the passenger was in no way due (1) to any defect in the means
of transport or in the method of transporting, or (2) to the negligent or willful acts of the
common carrier's employees with respect to the foregoing — such as when the injury arises
wholly from causes created by strangers which the carrier had no control of or prior knowledge
to prevent, the common carrier should not be held liable.
A common carrier is responsible for injuries suffered by a passenger on account of the
willful acts or negligence of other passengers or of strangers, if the common carrier's employees
through the exercise of the diligence of a good father of a family could have prevented or
stopped the act or omission. There was no showing that danger exists so as to impel the
common carrier to implement heightened security measures to ensure the safety of its
passengers. G.V. Florida Transport, Inc. vs. Heirs of Battung, October 14, 2015

2. Is the beach resort offering ferry services for its passengers a common carrier?
Yes. Its ferry services are so intertwined with its main business as to be properly
considered ancillary thereto. The constancy of ferry services in its resort operations is
underscored by its having its own boats. And the tour packages it offers, which include the ferry
services, may be availed of by anyone who can afford to pay the same. These services are thus
available to the public.
That respondent does not charge a separate fee for its ferry services is of no moment. It
would be imprudent to suppose that it provides said services at a loss. It is the practice of beach
resort operators offering tour packages to factor the transportation fee in arriving at the tour
package price. That guests who opt not to avail of respondent's ferry services pay the same
amount is likewise inconsequential. These guests may only be deemed to have overpaid. Cruz
vs. Sun Holidays, Inc., June 29, 2010

3. What is the degree of diligence imposed on common carriers?

Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence for the safety of the passengers transported by them,
according to all the circumstances of each case. They are bound to carry the passengers safely
as far as human care and foresight can provide, using the utmost diligence of very cautious
persons, with due regard for all the circumstances.
When a passenger dies or is injured in the discharge of a contract of carriage, it is
presumed that the common carrier is at fault or negligent. There is even no need for the court
to make an express finding of fault or negligence on the part of the common carrier. This
statutory presumption may only be overcome by evidence that the carrier exercised
extraordinary diligence. Cruz vs. Sun Holidays, Inc., June 29, 2010

4. What are the elements of a "fortuitous event"?

a. the cause of the unforeseen and unexpected occurrence, or the failure of the debtors to
comply with their obligations, must have been independent of human will;
b. the event that constituted the caso fortuito must have been impossible to foresee or, if
foreseeable, impossible to avoid;
c. the occurrence must have been such as to render it impossible for the debtors to fulfill
their obligation in a normal manner; and
d. the obligor must have been free from any participation in the aggravation of the
resulting injury to the creditor.
To fully free a common carrier from any liability, the fortuitous event must have been
the proximate and only cause of the loss. And it should have exercised due diligence to prevent
or minimize the loss before, during and after the occurrence of the fortuitous event. Cruz vs.
Sun Holidays, Inc., June 29, 2010
5. Under what circumstances may a carrier be exempted from from liability for the loss of the
goods?
Under Article 1734, these are:
a. Flood, storm, earthquake, lightning, or other natural disaster or calamity;
b. Act of the public enemy in war, whether international or civil;
c. Act or omission of the shipper or owner of the goods;
d. The character of the goods or defects in the packing or in the containers; and
e. Order or act of competent public authority. Loadstar Shipping vs. Pioneer Asia
Insurance, January 24, 2006

6. Is loss due to fire covered under Art. 1734?

Fire is not one of those enumerated which exempts a carrier from liability for loss or
destruction of the cargo. Thus, the the common carrier shall be presumed to have been at fault
or to have acted negligently, unless it proves that it has observed the extraordinary diligence
required by low.
Even if fire were to be considered a natural disaster, it is required under Article 1739
that the natural disaster must have been the proximate and only cause of the loss, and that the
carrier has exercised due diligence to prevent or minimize the loss before, during or after the
occurrence of the disaster. DSR-Senator Lines vs. Federal Phoenix Assurance, October 7, 2003

7. If the bills of lading made reference to the invoices which specified among others the weight,
quantity, description and value of the cargoes but the bill itself did not contain the value of the
cargo, would the liability be limited only as an effect?
No. There was compliance of the requirement provided by COGSA. The declaration
requirement does not require that all the details must be written down on the very bill of lading
itself. Compliance can be attained by incorporating the invoice, by way of reference, to the bill
of lading provided that the former containing the description of the nature, value and/or
payment of freight charges is duly admitted as evidence. Eastern Shipping Lines, Inc.(ESLI) vs.
BPI/MS Insurance Corp., January 12, 2015

8. What is the degree of diligence required of common carrier for carriage of goods?
Common carriers, from the nature of their business and on public policy considerations,
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. Eastern Shipping
Lines, Inc. vs. BPI/MS Insurance Corp., January 12, 2015

9. How long would the required degree of diligence last?

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. Eastern Shipping Lines, Inc. vs. BPI/MS Insurance
Corp., January 12, 2015
When the goods shipped are either lost or arrive in damaged condition, a presumption
arises against the carrier of its failure to observe that diligence, and there need not be an
express finding of negligence to hold it liable. To overcome the presumption of negligence in
the case of loss, destruction or deterioration of the goods, the common carrier must prove that
it exercised extraordinary diligence. Phil Charter Insurance Corp vs. Unknown Owner of the
Vessel M/V National Honor, National Shipping Corp and International Container Services Inc,
July 8, 2005

10. What is a “clean bill of lading”?

It is one which has no notation of any defect or damage in the goods. A clean bill of
lading constitutes prima facie evidence of the receipt by the carrier of the goods as therein
described. Eastern Shipping Lines, Inc. vs. BPI/MS Insurance Corp., January 12, 2015

11. What are the laws regulating the liability of the common carrier for loss, destruction or
deterioration of goods?
Per Civil Code, the law of the country to which the goods are to be transported shall
govern the liability of the common carrier for their loss, destruction or deterioration. The Civil
Code takes precedence as the primary law over the rights and obligations of common carriers
with the Code of Commerce and COGSA applying suppletorily.
The New Civil Code provides that a stipulation limiting a common carrier's liability to the
value of the goods appearing in the bill of lading is binding, unless the shipper or owner declares
a greater value. In addition, a contract fixing the sum that may be recovered by the owner or
 shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just
under the circumstances, and has been fairly and freely agreed upon.
COGSA, on the other hand, provides that an amount recoverable in case of loss or
damage shall not exceed US$500.00 per package or per customary freight unless the nature and
value of such goods have been declared by the shipper before shipment and inserted in the bill
of lading. Eastern Shipping Lines, Inc. vs. BPI/MS Insurance Corp., January 12, 2015

Common vs. Private Carrier

12. Is a customs broker a common carrier?

Yes. The transportation of goods is an integral part of a customs broker, the customs
broker is also a common carrier. The broker undertakes to deliver the goods for pecuniary
consideration. The obligation to carry goods for its customers is part and parcel of petitioner's
business. Schmitz Transport & Brokerage vs. Transport Venture, 456 SCRA 557; A.F. Sanchez
Brokerage vs. CA, December 21, 2004

13. What is a charter party?

A charter party is a contract by which an entire ship, or some principal part thereof, is
let by the owner to another person for a specified time or use; a contract of affreightment by
which the owner of a ship or other vessel lets the whole or a part of her to a merchant or other
person for the conveyance of goods, on a particular voyage, in consideration of the payment of
freight. Philam Insurance vs.Heung-A Shipping and Wallem Phils., July 23, 2014

14. What are the types of charter parties?

Contract of affreightment whereby the use of shipping space on vessels is leased in part
or as a whole, to carry goods for others. The charter-party provides for the hire of vessel only,
either for a determinate period of time (time charter) or for a single or consecutive voyage
(voyage charter). The shipowner supplies the ship's stores, pay for the wages of the master and
the crew, and defray the expenses for the maintenance of the ship. The voyage remains under
the responsibility of the carrier and it is answerable for the loss of goods received for
transportation. The charterer is free from liability to third persons in respect of the ship.
Charter by demise or bareboat charter under which the whole vessel is let to the
charterer with a transfer to him of its entire command and possession and consequent control
over its navigation, including the master and the crew, who are his servants. The charterer
mans the vessel with his own people and becomes, in effect, the owner for the voyage or
service stipulated and hence liable for damages or loss sustained by the goods transported.
Philam Insurance vs. Heung-A Shipping and Wallem Phils., July 23, 2014

15. Would a voyage-charter convert the common carrier into a private carrier?
No. It is only when the charter includes both the vessel and its crew, as in a bareboat or
demise that a common carrier becomes private, at least insofar as the particular voyage
covering the charter-party is concerned. Indubitably, a shipowner in a time or voyage charter
retains possession and control of the ship, although her holds may, for the moment, be the
property of the charterer. Loadstar Shipping vs. Pioneer Asia Insurance, January 24, 2006

16. Is there any exception to the rule that voyage-charter convert the carrier into a private carrier?
Yes, despite the denomination as Time Charter by the parties, their agreement reflected
that their intention was to enter into a Bareboat Charter Agreement. In determining the nature
of a contract, courts are not bound by the title or name given by the parties. The decisive factor
in evaluating an agreement is the intention of the parties, as shown, not necessarily by the
terminology used in the contract but by their conduct, words, actions and deeds prior to, during
and immediately after executing the agreement.
Fortune Sea was converted into a private carrier by reason of the time-charter with
Northern Transport. The time charter party agreement executed by Fortune Sea and Northern
Transport clearly shows that the charter includes both the vessel and its crew thereby making
Northern Transport the owner pro hac vice of M/V Ricky Rey during the whole period of the
voyage. Federal Phoenix Assurance Co. Ltd. vs. Fortune Sea Carrier, Inc., November 23, 2015

Registered Owner Rule

17. Can the registered owner shield itself from liability when it sold the vehicle to someone else
considering the agreement in the contract?
No. Under the “registered-owner rule”, the registered owner of the motor vehicle
involved in a vehicular accident could be held liable for the consequences. Regardless of sales
made of a motor vehicle, the registered owner is the lawful operator insofar as the public and
 third persons are concerned; consequently, it is directly and primarily responsible for the
consequences of its operation.
However, MMTC could recover from Mina's Transit the actual employer of the negligent
driver, under the principle of unjust enrichment, by means of a cross-claim seeking
reimbursement of all the amounts that it could be required to pay as damages arising from the
driver's negligence. Metro Manila Transit Corp. vs. Cuevas, June 15, 2015, J. Bersamin,
ponente

INSURANCE CODE

Salient amendments introduced by RA 10607 (August 15, 2013)

→ Insurance Commissioner’s jurisdiction over insurance claims is raised from P100,000 to P5M
(Sec. 439)
→ Incorporated the doctrine in Philamlife vs. Ansaldo where the Commissioner does not have
jurisdiction over relationship between the insurance company and its agents (Sec. 439)
→ Rights, title and interest on an insurance taken out by the original owner on the life of the
insured automatically vests on the insured upon death of the original owner (Sec. 3)
→ If the insured does not change the beneficiary during his lifetime, the designation is deemed
irrevocable. (Sec. 11) Old rule makes the presumption of revocability.
→ If the interest of the beneficiary is forfeited, the same shall pass to the other beneficiaries in the
policy; if none, to the estate of the insured. (Sec. 12) Old rule provides relatives of the insured.
→ If a representation is false in a material point, injured party is entitled to rescission (Sec. 45) Old
rule says that the right to rescind is waived by acceptance of premiums despite knowledge of
the ground for rescission.
→ In an open policy, the amount indicated therein is only the insured’s maximum liability. (Sec.
60) Old rule is silent.
→ Incorporated the doctrine in UCPB vs. Masagana Telamart where a 90-day credit extension for
payment of premiums may be given. (Sec. 77)
→ Government employees may pay their insurance premiums thru salary deductions, provided the
cashier is authorized to make the deductions and to remit such deductions. (Sec. 78)
→ Insured entitled to return of premium if the policy is rescinded on ground of fraud. (Sec. 82)
→ The insurer may accept payments for future premium payments. (Sec. 84)
→ In fire insurance, a written notice of loss must be given to the insured otherwise the latter would
be exonerated. (Sec. 90)
→ CMVLI restores property damage. Old rule covers only death and bodily injury.
→ In no-fault indemnity provision in CMVLI, the amount now is not less than P15,000. (Sec. 391)
Old rule says not more than P5,000.
→ A contract for payment of annuities and lump sums under a retirement program where a life
insurance company manages the program is a life insurance (Sec. 181).
→ The guardian may exercise the rights of a minor beneficiary under a life insurance even if there
is no bond if the amount does not exceed P500,000. (Sec. 181). Old rule says P20,000.
→ In the absence of the father or mother, grandparent, eldest brother or sister at least 18 years of
age or any relative who has actual custody of the minor shall act as guardian without need of
court order. Payment by the insurer to them shall relieve it of liability. (Sec. 181)
→ New title on Microinsurance (Sec. 187). It is a financial product that meets the risk protection
needs of the poor, provided, the amount of daily contributions does not exceed 7.5% of the
current daily minimum wage rate for non-agricultural workers in Metro Manila AND the
maximum sum of benefits is not more than 1,000 times the current daily minimum wage.

Security Deposit

1. Can the deposits made by insurance companies with the Insurance Commissioner be garnished
by the court?
No. These securities are intended to answer for the claims of all policy holders in the
event that the depositing insurance company becomes insolvent or otherwise unable to satisfy
their claims. The security deposit must be ratably distributed among all the insured who are
entitled to their respective shares; it cannot be garnished or levied upon by a single claimant, to
the detriment of the others.
To allow the garnishment of that deposit would impair the fund by decreasing it to less
than the percentage of paid-up capital that the law requires to be maintained. Further, this
move would create a preference of credit over the other policy holders and beneficiaries.
Republic vs. Del Monte Motors, 504 SCRA 53, Capital Insurance and Surety & Co. Inc. vs. Del
Monte Motor Works, Inc., December 9, 2015, J. Bersamin, ponente
Disqualification of Beneficiary

2. When the beneficiaries of the insurance proceeds are the illegitimate children and mistress, can
the legitimate family recover it?
No. The legal family are third parties to the insurance contracts and, are not entitled to
the proceeds thereof. The revocation of the mistress as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that the designation of the
illegitimate children as beneficiaries remains valid. Because no legal proscription exists in
naming as beneficiaries the children of illicit relationships by the insured, the shares of the
mistress in the insurance proceeds must be awarded to the said illegitimate children to the
exclusion of the legal family. It is only in cases where the insured has not designated any
beneficiary, or when the designated beneficiary is disqualified by law to receive the proceeds,
that the insurance policy proceeds shall redound to the benefit of the estate of the insured.
Heirs of Maramag vs. Maramag, 586 SCRA 774

Concealment

3. If it the wife who filled-up the life insurance policy of her husband and failed to disclose the true
state of health (installation of pacemaker), is there concealment?
Yes. The responsibility for preparing the application belonged to the insured. The
insured cannot sign the application and disown the responsibility for having it filled up. If he
furnished the wife the needed information and delegated to her the filling up of the application,
then she acted on his instruction, not on the insurance company’s instruction. Florendo vs.
Philam, G.R. No. 186983, February 22, 2012

Incontestability Clause

4. What is “incontestability clause”?

Under Section 48, an insurer is given 2 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 2-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. Manila Bankers Life Insurance vs. Aban, July 29, 2013

Premium Payment

5. Is an insurance contract effective despite partial payment only of premiums?

Yes. Non-payment of subsequent installment premiums would not prevent the
insurance contract from taking effect. The policy is valid even if the premiums were paid on
installments. GSIS vs. Prudential Guarantee and Assurance, November 20, 2013

Insurance Claim

6. What is the effect of a fraudulent claim on an insurance policy?

False and material statement made with an intent to deceive or defraud voids an
insurance policy. Such a proof of claim is a bar against the insured from recovering on the policy
even for the amount of his actual loss. United Merchants Corp. vs. Country Bankers, G.R. No.
198588, July 11, 2012

Double Insurance

7. What is “principle of contribution”?

Principle of contribution states that "where the insured is over insured by double
insurance, each insurer is bound, as between himself and the other insurers, to contribute
ratably to the loss in proportion to the amount for which he is liable under his contract."
Malayan Insurance vs. Philippines First Insurance, G.R. No. 184300, July 11, 2012

8. What are the requisites for double insurance?

a. The person insured is the same;
b. Two or more insurers insuring separately;
c. There is identity of subject matter;
d. There is identity of interest insured; and
 e. There is identity of the risk or peril insured against. Malayan Insurance vs. Philippines
First Insurance, G.R. No. 184300, July 11, 2012

Rescission

9. When can an insurer exercise its right to rescind an insurance contract pursuant to an
alteration?
a. the policy limits the use or condition of the thing insured;
b. there is an alteration in said use or condition;
c. the alteration is without the consent of the insurer;
d. the alteration is made by means within the insured's control;
e. the alteration increases the risk of loss. Malayan Insurance vs. PAP Co., Ltd, August 7,
2013

Collateral Source Rule

10. Per CBA, the company is supposed to shoulder the hospitalization expenses of the dependents
of its covered employees. However, the hospitalization expenses were paid by the dependent's
own health insurance. Can the employees ask for another payment, this time from the
company?
No. Under the “collateral source rule”, the defendant is prevented from benefitting
from the plaintiff's receipt of money from other sources. 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. 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.
However, it is not applicable 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. Mitsubishi Motors Phils. Salaried Employees Union vs.
Mitsubishi Motors Phils, June 17, 2013

INTELLECTUAL PROPERTY CODE

Salient amendments introduced by RA 10372 (February 28, 2013)

→ A new Bureau is added - Bureau of Copyright and Related Rights. (Sec. 6) Under Sec. 9A, it has
the following powers:
a. Exercise original jurisdiction to resolve disputes relating to the terms of a license
involving the author's right to public performance or other communication of his work;
b. Accept, review and decide on applications for the accreditation of collective
management organizations;
c. Conduct studies and researches in the field of copyright and related rights; and
d. Provide other copyright and related rights service
Note that a work is not required to be registered in the Bureau of Copyright to be
afforded protection.
→ The IPO, under Sec. 7, undertakes enforcement functions supported by concerned agencies such
as the PNP, NBI, the Bureau of Customs, the OMB, and the LGU, among others and can conduct
visits during reasonable hours to establishments and businesses engaging in activities violating
intellectual property rights and provisions based on report, information or complaint received
by the office;
→ Copyright owner has the right to regular statements of accounts from the assignee or the
licensee with regard to assigned or licensed work. (Sec. 180)
→ The societies designated to enforce the rights of their members must first secure the necessary
accreditation from IPO. (Sec. 183)
→ There is no infringement in the reproduction or distribution of published materials in a
specialized format exclusively for the use of the blind provided that it shall be made on a
nonprofit basis and shall indicate the copyright owner and the date of the original publication
(Sec. 184).
→ Decompilation was stressed as an illustration of fair use under Sec. 185. Examples are
jailbreaking (for IOS) and rooting (for android). This refers to the process of removing vendor-
imposed limitations on tablets, mobile phones and electronic gadgets. It is not illegal but would
be in violation of the OS terms of use hence voiding warranty.
→ Under Sec. 188, reprographic reproduction by libraries is no longer for a single copy but a
limited number of copies.
→ There is no longer any ban for importation for personal purposes as the old Sec. 190 was
deleted.
→ Deposit of the copyrighted work with the National Library and SC Library can be made at any
time during subsistence of the copyright. The old law requires that the same must be made
after first public dissemination. Also, only works in the field of law shall be deposited with the
Supreme Court Library. Such registration and deposit is not a condition of copyright protection.
(Sec. 191)
→ The term of moral rights was changed. The right of an author to authorship shall last during the
lifetime of the author and in perpetuity after his death. The rights of an author to oppose
alteration/distortion/restraint shall be coterminous with the economic rights. (Sec. 198) Under
the old law, the term for moral rights is just the same with economic rights which is 50 years.
→ The moral rights shall not be assignable or subject to license. The person to be charged with the
posthumous enforcement of these rights shall be named in a written instrument which shall be
filed with the National Library. In default of such person, such enforcement shall devolve upon
either the author's heirs, and in default of the heirs, the Director of the National Library. (Sec.
198)
→ Under Sec. 216, there is infringement when a person:
a. Directly commits an infringement;
b. Benefits from the infringing activity of another person who commits an infringement if
the person benefiting has been given notice of the infringing activity and has the right
and ability to control the activities of the other person;
c. With knowledge of infringing activity, induces, causes or materially contributes to the
infringing conduct of another.
Thus, mall owners are not automatically penalized when their tenant sells copyrighted
material because of the requirement under the 2nd paragraph.
→ Also under Sec. 216, the damages to be awarded may be doubled if the person:
a. Circumvents effective technological measures; or
b. Having reasonable grounds to know that it will induce, enable, facilitate or conceal the
infringement, remove or alter any electronic rights management information from a
copy of a work, sound recording, or fixation of a performance, or distribute, import for
distribution, broadcast, or communicate to the public works or copies of works without
authority, knowing that electronic rights management information has been removed or
altered without authority
→ Copyright owner may elect to recover statutory damages instead of actual damages but it can
only be equal to the filing fee but not less than P50,000. The following factors are considered
for the award of statutory damages:
a. The nature and purpose of the infringing act;
b. The flagrancy of the infringement;
c. Whether the defendant acted in bad faith;
d. The need for deterrence;
e. Any loss that the plaintiff has suffered or is likely to suffer by reason of the
infringement; and
f. Any benefit shown to have accrued to the defendant by reason of the infringement.
But if the infringer was not aware that there was infringement, the court may reduce
the award of statutory damages to not more than P10,000.

Trademark

11. Can identical marks be registered for products from the same classification?
Yes. Mere uniformity in categorization, by itself, does not automatically preclude the
registration of what appears to be an identical mark. The category is not the sole and decisive
factor in determining a possible violation of intellectual property right. Emphasis should be on
the similarity of the products involved and not on the arbitrary classification or general
description of their properties or characteristics. The mere fact that one person has adopted and
used a trademark on his goods would not, without more, prevent the adoption and use of the
same trademark by others on unrelated articles of a different kind. Taiwan Kolin Corp., Ltd. vs.
Kolin Electronics Co., Inc., March 25, 2015, case already asked in the 2016 Bar

12. What are the factors in determining whether or not the products of the parties involved are
related?
a. the business (and its location) to which the goods belong;
b. the class of product to which the goods belong;
 c. the product's quality, quantity, or size, including the nature of the package, wrapper or
container;
d. the nature and cost of the articles;
e. the descriptive properties, physical attributes or essential characteristics with reference
to their form, composition, texture or quality;
f. the purpose of the goods;
g. whether the article is bought for immediate consumption, that is, day-to-day household
items;
h. the fields of manufacture;
i. the conditions under which the article is usually purchased;
j. the channels of trade through which the goods flow, how they are distributed,
marketed, displayed and sold. Taiwan Kolin Corp., Ltd. vs. Kolin Electronics Co., Inc.,
March 25, 2015, case already asked in the 2016 Bar

13. With the use of the competing marks, was there confusion on the part of the buyer?
None. While both competing marks refer to the word "KOLIN" written in upper case
letters and in bold font, there are distinct visual and aural differences between them: Kolin
Electronics' mark is italicized and colored black while that of Taiwan Kolin is white in pantone
red color background. The differing features between the two, though they may appear
minimal, are sufficient to distinguish one brand from the other.
The products involved in the case at bar are various kinds of electronic products. These
are not ordinary consumable household items, like catsup, soy sauce or soap which are of
minimal cost. The products of the contending parties are relatively luxury items not easily
considered affordable. Accordingly, the casual buyer is predisposed to be more cautious and
discriminating in and would prefer to mull over his purchase. Confusion and deception, then, is
less likely. Taiwan Kolin Corp., Ltd. vs. Kolin Electronics Co., Inc., March 25, 2015, case already
asked in the 2016 Bar

14. What is unfair competition?

It refers to passing 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.
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. Republic Gas vs. Petron Corp., June 17, 2013

15. What are the elements of trademark infringement?

a. The trademark being infringed is registered in the IPO;
b. The trademark is reproduced, counterfeited, copied, or colorably imitated by the
infringer;
c. 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;
d. 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
e. The use or application of the infringing mark is without the consent of the trademark
owner or the assignee thereof.
The likelihood of confusion is the gravamen of the offense of trademark infringement.
Diaz vs. People, February 18, 2013

16. What are the two tests to determine likelihood of confusion?

They are the dominancy test and the holistic test.
The dominancy test focuses on the similarity of the main, prevalent or essential features
of the competing trademarks that might cause confusion. Infringement takes place when the
competing trademark contains the essential features of another. Imitation or an effort to
imitate is unnecessary. The question is whether the use of the marks is likely to cause confusion
or deceive purchasers.
The holistic test considers the entirety of the marks, including labels and packaging, in
determining confusing similarity. The focus is not only on the predominant words but also on
the other features appearing on the labels.
 As to what test should be applied in a trademark infringement case, no set rules can be
deduced because each case must be decided on its merits. In such cases, even more than in any
other litigation, precedent must be studied in the light of the facts of the particular case. That is
the reason why in trademark cases, jurisprudential precedents should be applied only to a case
if they are specifically in point. Diaz vs. People, February 18, 2013, doctrine already asked in the
2016 Bar

17. When can a trademark be susceptible to registration?

A trademark device is susceptible to registration if it is crafted fancifully or arbitrarily
and is capable of identifying and distinguishing the goods of one manufacturer or seller from
those of another. Apart from its commercial utility, the benchmark of trademark registrability is
distinctiveness.
A mark cannot be registered if it is identical with a registered mark belonging to a
different proprietor with an earlier filing or priority date, with respect to the same or closely
related goods or services, or has a near resemblance to such mark as to likely deceive or cause
confusion. Great White Shark vs. Caralde, November 21, 2012

Copyright

18. Are news footages copyrightable material?

Yes. Works are protected by the sole fact of their creation, irrespective of their mode or
form of expression, as well as of their content, quality and purpose. These include audiovisual
works and cinematographic works and works produced by a process analogous to
cinematography or any process for making audio-visual recordings.
It is true that news of the day and other miscellaneous facts having the character of
mere items of press information are considered unprotected subject matter. However,
expression of the news of the day, particularly when it underwent a creative process, is entitled
to protection. ABS-CBN vs. Gozon, March 11, 2015

19. What is fair use?

It is a privilege to use the copyrighted material in a reasonable manner without the
consent of the copyright owner or as copying the theme or ideas rather than their expression.
Fair use is an exception to the copyright owner's monopoly of the use of the work to avoid
stifling the very creativity which that law is designed to foster. ABS-CBN vs. Gozon, March 11,
2015

20. What is the “four-factor test”?

These are the factors to determine if there was fair use of a copyrighted work:
a. The purpose and character of the use, including whether such use is of a commercial
nature or is for non-profit educational purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the portion used in relation to the copyrighted work as
a whole; and
d. The effect of the use upon the potential market for or value of the copyrighted work.
ABS-CBN vs. Gozon, March 11, 2015

21. What is “transformative test??

The "transformative test" is generally used in reviewing the purpose and character of
the usage of the copyrighted work. The court must look into whether the copy of the work adds
new expression, meaning or message to transform it into something else. ABS-CBN vs. Gozon,
March 11, 2015

22. Is good faith a defense in copyright infringement?

No. The general rule is that acts punished under a special law are malum prohibitum.
An act which is declared malum prohibitum, malice or criminal intent is completely immaterial.
ABS-CBN vs. Gozon, March 11, 2015

BANKING LAW

AMLA, (RA 10365 dated February 15, 2013 amending RA 9160)

→ Covered persons now also include:

a. jewelry dealers in precious metals and precious stones for transactions in excess of
P1M;
 b. company service providers which, as a business, provide any of the following services to
third parties:
(i) acting as a formation agent of juridical persons;
(ii) acting as (or arranging for another person to act as) a director or corporate
secretary of a company, a partner of a partnership, or a similar position in
relation to other juridical persons;
(iii) providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a partnership or any
other legal person or arrangement; and
(iv) acting as (or arranging for another person to act as) a nominee shareholder for
another person; and
c. persons who provide any of the following services:
(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or management of
companies; and
(iv) creation, operation or management of juridical persons or arrangements, and
buying and selling business entities.

→ Covered persons exclude lawyers and accountants acting as independent legal professionals in
relation to information concerning their clients or where disclosure of information would
compromise client confidences or the attorney-client relationship: Provided, That these lawyers
and accountants are authorized to practice in the Philippines and shall continue to be subject to
the provisions of their respective codes of conduct and/or professional responsibility or any of
its amendments.

→ Unlawful activity used to be only the following items:

1. Kidnapping for ransom;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of RA9165, of the Comprehensive
Dangerous Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of RA3019 or the Anti-Graft and Corrupt
Practices Act;
4. Plunder;
5. Robbery and extortion;
6. Jueteng and Masiao;
7. Piracy on the high seas;
8. Qualified theft;
9. Swindling;
10. Smuggling;
11. Violations of RA8792, or the Electronic Commerce Act of 2000;
12. Hijacking and other violations under RA6235; destructive arson and murder;
13. Fraudulent practices and other violations under RA8799 or the Securities Regulation
Code of 2000;
14. Felonies or offenses of a similar nature that are punishable under the penal laws of
other countries.

→ The following are additional unlawful activities:

1. Terrorism and conspiracy to commit terrorism;
2. Financing of terrorism under RA10168 or the Terrorism Financing Prevention and
Suppression Act of 2012;
3. Bribery and Corruption of Public Officers;
4. Frauds and Illegal Exactions and Transactions;
5. Malversation of Public Funds and Property;
6. Forgeries and Counterfeiting;
7. Violations of Sections 4 to 6 of RA9208, or Anti-Trafficking in Persons Act of 2003;
8. Violations of Sections 78 to 79 of Chapter IV, of PD705, or Revised Forestry Code of the
Philippines;
9. Violations of Sections 86 to 106 of Chapter VI, of RA8550, or the Philippine Fisheries
Code of 1998;
10. Violations of Sections 101 to 107, and 110 of RA7942, or the Philippine Mining Act of
1995;
11. Violations of Section 27(c), (e), (f), (g) and (i), of RA9147, or the Wildlife Resources
Conservation and Protection Act;
12. Violation of Section 7(b) of RA9072, or the National Caves and Cave Resources
Management Protection Act;
 13. Violation of RA6539, or Anti-Carnapping Act of 2002;
14. Violations of Sections 1, 3 and 5 of PD1866;
15. Violation of PD1612, or the Anti-Fencing Law;
16. Violation of Section 6 of RA8042, or the Migrant Workers and Overseas Filipinos Act of
1995, as amended by RA10022;
17. Violation of RA8293, or the Intellectual Property Code of the Philippines;
18. Violation of Section 4 of RA9995, or Anti-Photo and Video Voyeurism Act of 2009;
19. Violation of Section 4 of RA9775, or Anti-Child Pornography Act of 2009;
20. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of RA7610.

→ Generally, a court order is required for examination by AMLC of deposits. But per Sec. 11 of RA
10167 (June 18, 2012) no court order shall be required if the following are the predicate crimes:
1. Kidnapping for ransom;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of RA9165, of the Comprehensive
Dangerous Drugs Act of 2002;
3. Hijacking and other violations under RA6235; destructive arson and murder;
4. Terrorism and conspiracy to commit terrorism (also under RA 10168)

→ Money Laundering Offense is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any unlawful activity:
a. transacts said monetary instrument or property;
b. performs or fails to perform any act as a result of which he facilitates the offense of
money laundering
c. any person knowing that any monetary instrument or property is required to be
disclosed and filed with the Anti-Money Laundering Council, fails to do so.

→ The following are additional instances when money laundering is committed:

a. converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
b. conceals or disguises the true nature, source, location, disposition, movement or
ownership of or rights with respect to said monetary instrument or property;
c. attempts or conspires to commit money laundering offenses;
d. aids, abets, assists in or counsels the commission of the money laundering offenses

→ CA Freeze order now good for 6 months; old rule 20 days (Sec. 10) Can no longer be extended
(Ligot vs. Republic, March 6, 2013)

General Banking Law

23. Can cashiering (i.e., cash-delivery and deposit pick-up) and accounting requirements, including
check clearing, delivery of bank statements, fund transfers, card production, operations
accounting and control, and cash servicing, be outsourced by a bank?
Yes. 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 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. BPI Employees Union vs. BPI, July 24, 2013

24. Can a bank enter into two-year contracts of lease of properties ceded to them through dacion
en pago?
Yes. Section 52 gives banks 5 years to dispose of properties conveyed to them in
satisfaction of debts previously contracted in the course of its dealings. Union Bank vs. Tiu, G.R.
No. 17309192, September 7, 2011

25. When banks are competing over the ownership of certain securities bought by the BSP pursuant
to its exercise of open market operation, can the BSP adjudicate its ownership?
No. BSP has no quasi-judicial power to resolve these competing claims as part of its
power to engage in open market operations. Nothing in the BSP's charter confers on the BSP the
jurisdiction or authority to determine this kind of claims, arising out of a subsequent transfer or
assignment of evidence of indebtedness — a matter that appropriately falls within the
competence of courts of general jurisdiction. Bank of Commerce vs. Planters Development
Bank, September 24, 2012
26. What is “open market operation”?
Open market operation is a monetary tool where the BSP publicly buys or sells
government securities from (or to) banks and financial institutions in order to expand or
contract the supply of money. By controlling the money supply, the BSP is able to exert some
influence on the prices of goods and services and achieve its inflation objectives. Bank of
Commerce vs. Planters Development Bank, September 24, 2012

Secrecy of Bank Deposits

27. Can the father examine the dollar account opened by her daughter, which came from their joint
dollar account with another bank?
Yes. There is no issue as to the source of the funds. Mary Margaret Dee declared the
source to be Jose Gotianuy. There is likewise no dispute that these funds in the form of Citibank
US dollar Checks are now deposited with China Bank. As the owner of the funds unlawfully
taken and which are undisputably now deposited with China Bank, Jose Gotianuy has the right
to inquire into the said deposits. China Banking Corp vs. CA, 511 SCRA 110

Truth in Lending Act

28. Is there substantial compliance with the Truth in Lending Act when the borrowers were given
copies of the promissory notes after their execution. ?
None. The TLA provides that the disclosure statement must be furnished prior to the
consummation of the transaction.
The rationale of this provision is to protect users of credit from a lack of awareness of
the true cost thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned
amount. The law thereby seeks to protect debtors by permitting them to fully appreciate the
true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions. UCPB vs. Beluso, 530 SCRA 567

29. What happens to the loan when there is no compliance with the TLA?
If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to collect such
charge or increases thereof, even if stipulated in the promissory note. However, such failure
shall not affect the validity or enforceability of any contract or transaction.
Nonetheless, there is substantial compliance even if the bank failed to disclose the
requisite information in the disclosure statement form authorized by the Central Bank, but did
so in the loan transaction documents between it and Arcilla. DBP vs. Arcilla, 462 SCRA 599

30. Is a stipulation in a loan agreement allowing the bank to increase or decrease interest rates
"within the limits allowed by law at any time depending on whatever policy it may adopt in the
future" valid?
No. The rationale of the TLA is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true cost
by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the
true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions.
The fact that the spouses later received several statements of account detailing its
outstanding obligations does not cure respondent's breach. The belated discovery of the true
cost of credit does not reverse the ill effects of an already consummated business decision.
Neither may the statements be considered proposals sent to secure the petitioners' conformity;
they were sent after the imposition and application of the interest rate, and not before.
Spouses Silos vs. PNB, July 2, 2014, case already asked in the 2016 Bar

Unclaimed Balances Law

31. Must a bank issue individual notices upon depositors with unclaimed balances?
No. As to depositors or other claimants of the unclaimed balances, service is made by
publication of a copy of the summons in a newspaper of general circulation in the locality where
the institution is situated. Issuance of individual notices upon depositors is not required. RCBC
vs. Hi-Tri Devt. Corp., June 13, 2012
PDIC

32. Should the funds placed by foreign banks in their branches in the Philippines be treated as
deposits made by third parties subject to deposit insurance under the PDIC?
No. Citibank and BA did not incorporate a separate domestic corporation to represent
its business interests in the Philippines. Their Philippine branches are merely branches, without
a separate legal personality from their parent company, Citibank and BA. Thus, being one and
the same entity, the funds placed by the Citibank and BA in their respective branches in the
Philippines should not be treated as deposits made by third parties subject to deposit insurance
under the PDIC. PDIC vs. Citibank, April 11, 2012

33. What is “close now, hear later” doctrine?

The "close now, hear later" doctrine is justified as a measure for the protection of the
public interest. Swift action is called for on the part of the BSP when it finds that a bank is in
dire straits.
Thus, MB may forbid a bank from doing business and place it under receivership without
prior notice and hearing. RA 7653 provides, whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds that a bank or quasi-bank:
a. is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
b. has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or
c. cannot continue in business without involving probable losses to its depositors or
creditors; or
d. has wilfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the Phils and designate the
PDIC as receiver of the banking institution. Vivas vs. Monetary Board, August 7, 2013

Trust Receipts Law

34. What is a trust receipt transaction?

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. Hur Tin Yang vs. People, August 14, 2013, case already asked in the 2016 Bar

35. Is there a trust receipt transaction when the entruster knew that the goods are not intended to
be sold?
None. 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 vs. People,
August 14, 2013, case already asked in the 2016 Bar

Letters of Credit

36. What is a letter of credit?

It is a written instrument whereby the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee. PNB vs. San Miguel, January 15, 2014; case already asked in the
2016 Bar

37. Can an issuing bank relieve itself of liability from the beneficiary of a letter of credit?
No, following the “independence principle”.
The engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it, independent of any breach of the
main contract and precludes the issuing bank from determining whether the main contract is
actually accomplished or not.
The independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract. As the principle's nomenclature clearly suggests,
the obligation under the letter of credit is independent of the related and originating contract.
The letter of credit is separate and distinct from the underlying transaction. PNB vs. San
Miguel, January 15, 2014, case already asked in the 2016 Bar
38. Is there any exception to the independence principle?
Yes. Fraud is an exception. The untruthfulness of a certificate accompanying a demand
for payment under a standby credit may qualify as fraud sufficient to support an injunction
against payment. The remedy for fraudulent abuse is an injunction. However, injunction should
not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent
abuse of the independent purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously damaged. Transfield vs. Luzon Hydro, November 22, 2004

39. What are the types of letters of credit?

These are commercial (for sale settings) and standby (for non-sale settings).
There are three significant differences between them. First, commercial credits involve
the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is payable upon certification of
a party's nonperformance of the agreement. The documents that accompany the beneficiary's
draft tend to show that the applicant has not performed. The beneficiary of a commercial credit
must demonstrate by documents that he has performed his contract. The beneficiary of the
standby credit must certify that his obligor has not performed the contract. Transfield vs. Luzon
Hydro, November 22, 2004