A. Letters of Credit 1. Definition/Concept That issued by one merchant to another for the purpose of attending to a commercial transaction.

1 An instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit.2 An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.3 Through it, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 2. Governing laws a. Code of Commerce b. Uniform Customs and Practice for Documentary Credits 4 3. Nature of letter of credit The LC is a financial device5 developed as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 4. Parties to a letter of credit a. Applicant/buyer/importer one who purchases the goods, procures the LC, and obliges himself to reimburse the issuing bank upon receipt of the documents of title. b. Issuing/opening bank one which issues the LC, and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement; and

Art. 567 Commercial Law Review, C. Villanueva, 2004 ed. 3 Prudential Bank vs. CA, 216 SCRA 257 4 The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable to order. 5 mode of payment
2

c. Seller/exporter/beneficiary one who sells the goods to the buyer, and who delivers the draft and documents to the issuing bank to recover payment.6 d. Advising/notifying bank the correspondent bank7 of the opening bank through which it advises the beneficiary of the LC. e. Confirming bank bank which, upon the request of the beneficiary, confirms the LC issued. f. Paying bank bank on which the drafts are to be drawn, which may be the opening bank or another bank not in the city of the beneficiary. g. Negotiating bank bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. a. Rights and obligations of parties 1. Drawer is liable to person on whom it was issued provided identity proven, for the amount paid within fixed maximum. 2. Bearer has no right of action if not paid by person who issued it. 3. Drawer may annul the letter of credit, informing the bearer and to whom it is addressed. 4. Bearer shall pay the amount received to drawer, otherwise action for execution may be filed with interest and current exchange in place where payment made on place where repaid. 5. If a bearer does not make use of letter of credit within agreed period, or if none, within 6 months from date if in the Philippines, and 12 months if outside the Philippines, it shall be void.8

The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They involve bank-to-bank transactions. 7 agent 8 Arts. 569-572

5. Basic Principles of letter of credit a. Doctrine of independence The three (3) basic contracts are distinct and independent, and the undertakings of the respective parties in each are neither subject to claims and defenses nor affected by the breach in the others. b. Fraud exception principle When the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. 9 c. Doctrine of strict compliance It espouses that the documents tendered by the seller/beneficiary must strictly conform to the terms of the LC.10

Transfield Phils, Inc. vs. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corp., G.R. No. 146717, November 22, 2004 10 i.e. they must include all the documents required by the LC (Feati Bank vs. CA)

B. Warehouse Receipts Law 1. Nature and Functions of a Warehouse Receipt 11 a. To whom delivered: 1. To the person lawfully entitled to the goods 2. To the person named in a non-negotiable receipt or to his assignee 3. To the lawful holder of a negotiable receipt b. Kinds: 1. Negotiable warehouse receipts - a warehouse receipt wherein it is expressly stated that the goods are deliverable to bearer or to the order of a person specified therein.12 2. Non-negotiable warehouse receipts - a warehouse receipt in which it is stated that the goods received will be delivered to the depositor or to any specified person. The receipt should be stamped on its face "non-negotiable." A holder of a non-negotiable receipt not stamped "non-negotiable" believing it to be negotiable may treat the receipt as negotiable.13 c. Distinction between a Negotiable Instrument and a Negotiable Warehouse Receipt Negotiable instrument Subject is money The instrument itself is the object of value
11

Warehouse receipt14 Subject is merchandise The goods are the objects of value

A warehouse receipt is a written acknowledgment by the warehouseman that he has received the goods described therein and holds the same for the person to whom it is issued or as the latter may order. It is a contract between the owner of the goods or the person authorized by the owner to transfer ownership or possession over the goods, on one hand, and the warehouseman, on the other hand, for the latter to store the goods and the former to pay the compensation for that service. A warehouseman is a person lawfully engaged in the business of storing goods for profit. 12 A warehouse receipt stating that the goods are deliverable to bearer is a negotiable warehouse receipt. If the words "non-negotiable" are inserted in the receipt, the insertion is void, and the receipt remains negotiable. 13 A non-negotiable warehouse receipt, if not stamped with the words "non-negotiable," may make a warehouseman liable for damages suffered by a holder of such receipt who purchases it for value supposing it to be negotiable. The said holder may treat, as his option, such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. 14 even if negotiable, is not a negotiable instrument within the meaning of the Negotiable Instruments Law

Intermediate parties become secondarily Intermediate parties are not liable for the liable warehouseman's failure to deliver the goods. d. Rights of a holder of a negotiable warehouse receipt as against a transferee of a non-negotiable warehouse receipt Rights of a holder of a negotiable warehouse Rights of a transferee of a non-negotiable receipt warehouse receipt 1. Such title to the goods as the person negotiating the receipt to him has had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt has had ability to convey to a purchaser in good faith for value; 2. The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman had contracted directly with him. 1. Such person acquires thereby as against the transferor the title of the goods subject to the terms of any agreement with the transferor.

2. If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt. 3. Prior to the notification of the warehouseman by the transfer or transferee of a non-negotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.15

15

Sec. 42

2. Duties of a Warehouseman 1. To deliver the goods upon demand made by the holder of the receipt or by the depositor. 2. To exercise such care in regard to the goods as a reasonably careful owner of similar goods would exercise. 3. To keep the goods separate from the goods of other depositors, except in the case of fungible goods. 3. Warehousemans Lien All lawful charges for storage and preservation of the goods, all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering, and other charges and expenses in relation to such goods, also all reasonable charges and expenses for notices and advertisements of sale, and for the sale of the goods where default has been made in satisfying the warehousemans lien.

C. Trust Receipts Law 1. Definition/Concept of a Trust Receipt Transaction A trust receipt transaction is any transaction by and between a person referred to as the entruster, and another person referred to as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents a) to sell the goods or procure their sale; or b) to manufacture or process the goods with the purpose of ultimate sale. In the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the

payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of the Decree. 16 a. Loan/security feature 1. This is not a simple loan transaction between a creditor and debtor-importer. 2. The law warrants the validity of the entrusters security interest as against the creditors of the trust receipt agreement. b. Ownership of the goods, documents and instruments under a trust receipt 1. Goods are owned by the bank, and are only released to the importer in trust after the grant of the loan. The bank acquires a security interest in the goods as holder of a security title for the advances it made to the entrustee. 2. Entrustee must deliver money or return unsold goods to entrustor 3. Bank is preferred over other creditors. 4. Bank is also not liable to buyer of goods as vendor 5. Purchaser from entrustee gets good title. 6. No particular form is required for trust receipt 2. Rights of the Entruster17 The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser.

16 17

Sec. 4 Entruster" refers to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.

The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.18 a. Validity of the security interest as against the creditors of the entrustee/innocent purchasers for value The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.19 3. Obligations and Liability of the Entrustee The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.20
18 19

Sec. 7 Sec. 12 20 Sec. 9

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.21 a. Payment/Delivery of proceeds of sale or disposition of goods, documents or instruments Keep said goods or proceeds separate and capable of identification. b. Return of goods, documents or instruments in case of sale Return the goods, documents or instruments in the event of non-sale or upon demand. c. Liability for loss of goods, documents or instruments The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.22 d. Penal sanction if offender is a corporation The penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. 23 4. Remedies available The entrustor can: a. Cancel trust and take possession of the goofs b. File a 3rd party claim or separate civil action at any time upon default or failure of entrustee to comply with terms and conditions of the trust agreement. 24

21 22

Sec. 10 ibid. 23 Sec. 13, last sen. 24 Prudential Bank vs. NLRC, 251 SCRA 421, 1995 Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by the imposition of penal sanctions (Tiomico vs. Court of Appeals, 1999) The offense is malum prohibitum. There is no need to prove damage to the entrustor. (Metropolitan Bank vs. Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981) Offense: estafa under Art. 315 of the Revised Penal Code.

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D. Negotiable Instruments Law25 1. Forms and Interpretation a. Requisites of Negotiability 1. Must be in writing and signed by the maker or drawer; 26 2. Must contain an unconditional promise or order to pay a sum certain in money; 27 3. Must be payable on demand, or at a fixed or determinable future time; 4. Must be payable to order or to bearer;28 and
25

Negotiable instrument (NI) A written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Professors Sundiang and Aquino) 26 Any kind of material that substitutes paper is sufficient. With respect to the signature, it is enough that what the maker or drawer affixed shows his intent to authenticate the writing. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) Signature, binding so long it is intended or adopted as the signature of the signer or made with his authority. No person liable on the instrument whose signature does not appear thereon. One who signs in a trade or assumed name liable to same extent as if he had signed in his own name. (Sec. 18, NIL) Signature of party may be made by duly authorized agent; no particular form of appointment necessary. (Sec. 19, NIL) "In writing" - includes print; written or typed 27 Where the promise or order is made to depend on a contingent event, it is conditional, and the instrument involved is non-negotiable. The happening of the event does not cure the defect. The unconditional nature of the promise or order is not affected by: a) An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or b) A statement of the transaction which gives rise to the instrument Where the promise or order is subject to the terms and conditions of the transaction stated, the instrument is rendered non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.) But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3) The dates of each installment must be fixed or at least determinable and the amount to be paid for each installment. A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) 28 The instrument is payable to order where it is drawn payable to the order of a specified person, or to him or his order. (Sec. 8) The payee must be named or otherwise indicated therein with reasonable certainty. The instrument may be made payable to the order of: a. A payee who is not the maker, drawer or drawee

11

5. When the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.29 b. Kinds of negotiable instrument Promissory note An unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer.30 An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.31

Bill of exchange

b. The drawer or maker c. The drawee d. 2 or more payees jointly e. One or some of several payees f. The holder of an office for a time being Payable to Bearer The instrument is payable to bearer: a. When it is expressed to be so payable; or b. When it is payable to a person named therein or to bearer; or c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or d. When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is an indorsement in blank. (Sec. 9) An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. If it is originally a bearer instrument, it will always be a BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specially, it can no longer be negotiated further by mere delivery, it has to be indorsed. A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) Fictitious payee rule: It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. (Reviewer on Commercial Law, Professors Sundiang and Aquino) 29 Applicable only to a bill of exchange A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession. (Sec. 128) 30 Sec. 184 31 Sec. 126

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Check

A bill of exchange drawn on a bank payable on demand.32 It is the most common form of bill of exchange. 2. Completion and delivery a. Insertion of date

Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.33 b. Completion of blanks Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.34 c. Incomplete and undelivered instruments If completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of a holder in due course but subsequent indorsers are liable. This is a real defense.35 d. Complete but undelivered instruments 1. Between immediate parties and those who are similarly situated, delivery must be coupled with the intention of transferring title to the instrument. 2. As to a holder in due course, it is conclusively presumed that there was valid delivery; and
32 33

Sec. 185 Sec. 13 34 Sec. 14 35 Sec. 15

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3. As against an immediate party and remote party who is not a holder in due course, presumption of a valid and intentional delivery is rebuttable. 36 3. Rules of interpretation a. Discrepancy between the amount in figures and that in words the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. b. Payment for interest is provided for interest runs from the date of the instrument, if undated, from issue thereof. c. Instrument undated consider date of issue. d. Conflict between written and printed provisions written provisions prevail. e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; f. If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser. g. If two or more persons sign We promise to pay, their liability is joint37 but if they sign I promise to pay, the liability is solidary.38 4. Signature a. Signing in trade name One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.39 b. Signature of agent The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.40 Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.41

36 37

Sec. 16 each liable for his part 38 each can be compelled to comply with the entire obligation (Sec. 17) 39 Sec. 18 40 Sec. 19 41 Sec. 20

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c. Indorsement by minor or corporation The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.42 d. Forgery43 Counterfeit making or fraudulent alteration of any writing, which may consist of: 1. Signing of anothers name with intent to defraud; or 2. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.44 General Rule: When a signature is forged or made without the authority of the person, the signature45 is wholly inoperative.46 Exception: Unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.47 5. Consideration Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. Every person whose signature appears thereon is presumed to have become a party thereto for value.48
42 43

Sec. 22 Persons precluded from setting up defense of forgery 1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors. 2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery. 44 1 Agbayani, 1992 ed. 45 not instrument itself and the genuine signatures 46 Legal Effects: 1. No right to retain the instrument 2.To give a discharge therefore 3. To enforce payment thereof against any party thereto, can be acquired through or under such signature 47 Sec. 23 48 Sec. 24 What constitutes value: a. An antecedent or pre-existing debt b. Value previously given c. Lien arising from contract or by operation of law. (Sec. 27)

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6. Accommodation party One who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. 49 7. Negotiation a. Distinguished from assignment Negotiation Assignment

The transfer of the instrument from one The transferee does not become a holder person to another so as to constitute the and he merely steps into the shoes of the transferee as holder thereof.50 transferor. Any defense available against the transferor is available against the transferee. 51 b. Modes of negotiation Issuance First delivery of the instrument complete in form to a person who takes it as a holder.52 1. If payable to bearer, a negotiable instrument may be negotiated by mere delivery. 2. If payable to order, a NI may be negotiated by indorsement completed by delivery.53

Subsequent Negotiation

49 50

Sec. 29 Sec.30 51 Timoteo B. Aquino, Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents Assignment may be effected whether the instrument is negotiable or non-negotiable. (Sesbreo vs. CA, 222 SCRA 466) 52 Sec. 191 Steps: 1. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.)

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Incomplete negotiation of order instrument

Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein and he also acquires the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is made.54

c. Kinds of Indorsement Special Specifies the person to whom or to whose order, the instrument is to be payable.55 Specifies no indorsee. a. Instrument becomes payable to bearer and may be negotiated by delivery.56 b. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement.57 Absolute One by which indorser binds himself to pay: a. Upon no other condition than failure of prior parties to do so; b. Upon due notice to him of such failure.

Blank

53

In both cases, delivery must be intended to give effect to the transfer of instrument. (Development Bank vs. Sima Wei, 219 SCRA 736) 54 Sec. 49 55 Sec. 34 56 id. 57 Sec. 35

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Conditional

Right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions.58 When it either: a. Prohibits further negotiation of the instrument; or b. Constitutes the indorsee the agent of the indorser; or c. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive.

Restrictive

Qualified

Constitutes the indorser a mere assignor of the title to the instrument.59 Indorsement payable to two (2) or more persons. A person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.60

Joint

Irregular

58 59

Sec. 39 Sec. 38 It is made by adding to the indoser's signature words like "sans recourse, without recourse", "indorser not holder", "at the indorser's own risk", etc. 60 Sec. 64

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8. Rights of the Holder61 a. Holder in Due Course62 1. May sue on the instrument in his own name; 2. May receive payment and if payment is in due course, the instrument is discharged; 3. Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves; and 4. May enforce payment of the instrument for the full amount thereof against all parties liable thereon.63 b. Defenses against the Holder In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.64

61 62

Holder - a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191) A holder who has taken the instrument under the following conditions: 1 .Instrument is complete and regular upon its face; 2. Became a holder before it was overdue and without notice that it had been previously dishonored; 3 For value and in good faith; and 4. At the time he took it, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (Sec. 52) Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. The weight of authority sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a prima facie holder in due course applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003) 63 Secs. 51 and 57 64 Sec. 58

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9. Liabilities of Parties a. Maker The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.65 b. Drawer The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.66 c. Acceptor The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. d. Indorser Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.67 Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. 68
65 66

Sec. 60 Sec. 61 67 Sec. 64 68 ibid.

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e. Warranties Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.69 Every indorser who indorses without qualification, warrants to all subsequent holders in due course: a) That the instrument is genuine and in all respects what it purports to be; b) That he has a good title to it; c) That all prior parties had capacity to contract; d) That the instrument is, at the time of his indorsement, valid and subsisting; and e) He engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay. it.70

69 70

Sec. 65 Sec. 66

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10. Presentment for Payment The production of a Bill of Exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the production of a Promissory Note to the party liable for the payment of the same.71 a. Necessity of presentment for payment Presentment for payment is necessary in order to charge the drawer and indorsers. 72 b. Parties to whom presentment for payment should be made To the person primarily liable or if he is absent or inaccessible, to any person found at the place where the presentment is made.73 c. Dispensation with presentment for payment 1. In order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument.74 2. In order to charge an indorser when the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.75 d. Dishonor by non-payment76 1. Payment is refused or cannot be obtained after due presentment for payment; 2. Presentment is excused and the instrument is overdue and unpaid. 77

71 72

Sec. 70 Sec. 70, last sen. 73 Sec. 72 74 Sec. 79 75 Sec. 80 76 Effect: There is an immediate right of recourse by the holder against persons secondarily liable. However, notice of dishonor is generally required. (Sec. 84) 77 Sec. 83

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11. Notice of Dishonor Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill or by non-payment by the acceptor of a bill or by non-payment by the maker of a note.78 a. Parties to be notified Given to secondary party or his agent.79 b. Parties who may give notice of dishonor Given by holder or his agent, or by any party who may be compelled by the holder to pay.80 c. Effect of notice Immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.81 d. Form of notice 1. By bringing verbally or 2. By writing to the knowledge of the person liable the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. e. Waiver Either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied.82 As to who are affected by an express waiver depends on where the waiver is written: 1. If it appears in the body or on the face of the instrument, it binds all parties; but 2. If it is written above the signature of an indorser, it binds him only.83

78
79

Sec. 89 Sec. 97 80 Sec. 90 81 Sec. 151 82 Sec. 109 83 Sec. 110

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f. Dispensation with notice 1. When party to be notified knows about the dishonor, actually or constructively; 84 2. If waived;85 and 3. When after due diligence, it cannot be given.86 g. Effect of failure to give notice An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. 87 12. Discharge of Negotiable Instrument a. Discharge of negotiable instrument A release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated.88 b. Discharge of parties secondarily liable 1. By any act which discharges the instrument; 2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party; 4. By a valid tender of payment made by a prior party; 5. By the release of the principal debtor, unless the holders right of recourse against the party secondarily liable is expressly reserved; 6. By any agreement binding upon the holder to extend the time of payment or to postpone the holders right to enforce the instrument. 89

84 85

Secs. 114-117 Sec. 109 86 Sec. 112 87 Sec. 117 88 The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed. 89 Sec. 120

24

c. Right of party who discharged instrument Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.90 d. Renunciation by holder The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.91 13. Material alteration a. Concept Any alteration which changes: a) The date; b) The sum payable, either for principal or interest; c) The time or place of payment: d) The number or the relations of the parties; e) The medium or currency in which payment is to be made; f) Adds a place of payment where no place of payment is specified, or

In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable: a) where the extension of time is consented to by such party; b) where the holder expressly reserves his right of recourse against such party. Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him. (Sec. 121) 90 Sec. 121 91 Sec. 122

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g) Any other change or addition which alters the effect of the instrument in any respect, is a material alteration.92 b. Effect of material alteration Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. When an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.93 14. Acceptance a. Definition The signification by the drawee of his assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him. b. Manner Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money. 94 The holder of the bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored.95 c. Time for acceptance The drawee is allowed twenty-four (24) hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation.96

92 93

Sec. 125 Sec. 124 94 Sec. 132 95 Sec. 133 96 Sec. 136

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d. Rules governing acceptance The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored.97 Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.98 An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.99 Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same.100 A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by nonpayment. But when a bill payable after sight is dishonored by nonacceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment.101 An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.102 An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere.103 An acceptance is qualified which is: (a) Conditional - which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; drawn;
97 98

(b) Partial - an acceptance to pay part only of the amount for which the bill is

Sec. 133 Sec. 134 99 Sec. 135 100 Sec. 137 101 Sec. 138 102 Sec. 139 103 Sec. 140

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(c) Local - an acceptance to pay only at a particular place; (d) Qualified - as to time; (e) The acceptance of some, one or more of the drawees but not of all. 104 The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto.105 15. Presentment for Acceptance a. Time/place/manner of presentment a. Where the bill is payable after sight, or when it is necessary in order to fix the maturity of the instrument; b. Where the bill expressly stipulates that it shall be presented for acceptance; c. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.106 d. Where a bill is addressed to 2 or more drawees who are not partners, presentment must be made to all. e. Where drawee is dead, presentment may be made to his personal representative. f. Where the drawee is adjudged a bankrupt, insolvent or made an assignment to his creditors, presentment may be made to him or his trustee or assignee. b. Effect of failure to make presentment The drawer and all indorsers are discharged.107

104 105

Sec. 141 Sec. 142 106 Sec. 143 107 See sec. 144, last sen.

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c. Dishonor by non-acceptance When duly presented for acceptance acceptance is refused or cannot be obtained; or When presentment for acceptance is excused bill is not accepted.108 16. Promissory Notes109 An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.110 17. Checks a. Definition A bill of exchange drawn on a bank payable on demand. 111 b. Kinds112 Cashiers Check One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance.113 A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashiers check as to the effect and use. A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented

Managers Check

Memorandum Check

108

Sec. 149 A promise to pay money 110 Sec. 184 111 Sec. 185 112 Cesar Villanueva, Commercial Law Review, 2004 ed. 113 Tan vs. CA, 239 SCRA 310
109

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at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word memorandum, memo or mem on the check. Certified Check An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment.114 c. Presentment for payment (1) Time Within reasonable time after its issue.115 (2) Effect of delay The drawer will be discharged from liability thereon to the extent of the loss caused by the delay.116

114

Sec. 187 Sec. 186 116 Ibid.

115

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E. Insurance Code 1. Concept of Insurance An agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. 117 2. Elements of an Insurance Contract 1. The insured possesses an insurable interest susceptible of pecuniary estimation; 2. The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils; 3. The insurer assumes that risk of loss; 4. Such assumption is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks; and 5. The insured makes a ratable contribution118 to a general insurance fund. 119 3. Characteristics/Nature of Insurance Contracts Consensual It is perfected by the meeting of the minds of the parties. The parties may incorporate such terms and conditions as they may deem convenient.

Voluntary

Aleatory Unilateral

It depends upon some contingent event. Imposes legal duties only on the insurer who promises to indemnify in case of loss. It is subject to conditions the principal one of which is the happening of the event insured against.

Conditional

117 118

Sec. 2, par. 2 premium 119 A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements, it is a risk-distributing device (The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)

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Contract of indemnity

Except life and accident insurance, a contract of insurance is a contract of indemnity whereby the insurer promises to make good only the loss of the insured Each party having in view the character, credit and conduct of the other.120

Personal

4. Classes Marine121 Insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time.122 A contract by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by hostile

Fire123

120 121

ibid. Coverage: A. 1. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation; 2. Persons or property in connection with marine insurance; 3. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and 4. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99) Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 139 SCRA 596) B. Marine Protection and Indemnity Insurance 122 Sec. 99 123 Prerequisites to recovery: 1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly by the insurer 2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The determination is important for 2 reasons: 1. Rules on constructive total loss and abandonment applies only to marine insurance; 2. Rule on co-insurance applies primarily to marine insurance; 3. Rule on co-insurance applies to fire insurance only if expressly agreed upon. (Commercial Law Reviewer, Aguedo Agbayani, 1988 ed.)

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fire, including loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.124 Casualty125 Insurance covering loss or liability arising from accident or mishap, excluding those falling under other types of insurance such as fire or marine.126 An agreement whereby a surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of an obligee.128 Insurance on human lives and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities.129

Suretyship127

Life

124 125

Sec. 167 Classifications: 1. Insurance against specified perils which may affect the person and/or property of the insured. (accident or health insurance) Examples: personal accident, robbery/theft insurance 2. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to property of others. (third party liability insurance) Insurable interest is based on the interest of the insured in the safety of persons, and their property, who may maintain an action against him in case of their injury or destruction, respectively. Examples: workmens compensation, motor vehicle liability 126 Sec. 174 127 It is essentially a credit accommodation. It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally. (Sec. 20) When the contract is primarily drawn up by 1 party, the benefit of doubt goes to the other party (insured/obligee) in case of an ambiguity following the rule in contracts of adhesion. Suretyship, especially in fidelity bonding, is thus treated like non-life insurance in some respects. Nature of liability of surety: 1. Solidary; 2. Limited to the amount of the bond; 3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Sec. 176) 128 Sec. 175 129 Sec. 179

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Compulsory Motor Vehicle Liability A species of compulsory insurance that Insurance130 provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. 5. Insurable Interest The insured possess an interest of some kind susceptible of pecuniary estimation. A person has an insurable interest in the subject matter if he is so connected, so situated, so circumstanced, so related, that by the preservation of the same he shall derive pecuniary benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice. In Life/Health131 Every person has an insurable interest in the life and health: 1. of himself, of his spouse and of his children; 2. of any person on whom he depends wholly or in part for education or support; 3. of any person under a legal obligation to him to pay money or respecting property or services, of which death or illness might delay or prevent performance; and 4. of any person upon whose life any estate or interest vested in him depends.132

130

Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained (Shafer v. Judge, RTC, 167 SCRA 386). Claimants/victims may be a passenger or a 3rd party It applies to all vehicles whether public and private vehicles. It is the only compulsory insurance coverage under the Insurance Code. 131 General rule: There is no limit in the amount the insured can insure his life. Exception: In a creditor-debtor relationship where the creditor insures the life of his debtor, the limit of insurable interest is equal to the amount of the debt. If at the time of the death of the debtor the whole debt has already been paid, the creditor can no longer recover on the policy because the principle of indemnity applies. 132 Sec. 10 When it should exist: When the insurance takes effect; not thereafter or when the loss occurs.

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In Property

Every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that the contemplated peril might directly damnify the insured,133 which may consist in: 1. an existing interest; 2. any inchoate interest founded on an existing interest; or 3. an expectancy coupled with an existing interest in that out of which the expectancy arises.134

133 134

Sec. 13 Sec. 14 The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof (Sec. 17) When insurable interest should exist: It must exist at the time the policy is taken and at the time the loss incurred but it need not exist in the meantime.

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c. Double Insurance135 and Over Insurance136 Double insurance where same person is insured by several insurers separately in respect to same subject and interest.137 when the insured insures the same property for an amount greater than the value of the property with the same insurance company.

Over-insurance

135

Requisites: 1. Person insured is the same; 2. Two or more insurers insuring separately; 3. Subject matter is the same; 4. Interest insured is also the same; 5. Risk or peril insured against is likewise the same. Effects: Where double insurance is allowed, but over insurance results: (Sec. 94) 1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; 2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured; 3. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy; 4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; 5. 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. Additional or Other Insurance Clause A condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property insured. It is lawful and specifically allowed under Sec. 75 which provides that (a) policy may declare that a violation of a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it. A stipulation against double insurance. Purposes: 1. To prevent an increase in the moral hazard 2. To prevent over-insurance and fraud. To constitute a violation of the clause, there should have been double insurance. 136 Effect in case of loss: 1. The insurer is bound only to pay to the extent of the real value of the property lost; 2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the property; 137 Sec. 93

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d. Multiple or Several Interests on Same Property Several persons have insurable interests on same property. Unless each of them is named as insured in the property insurance, there would be no coverage for those not named. While they did have an insurable interest in the property, their interests were not identified. 6. Perfection of the Contract of Insurance 138 An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. a. Offer and Acceptance/Consensuality Applicant usually makes the offer to the insurer. Submission of application, even w/ payment is a mere offer on the part of the applicant, it does not bind the insurer. Approval of the application by the insurer is necessary to perfect contract. If made: - w/ payment of premium policy becomes effective - w/o payment effective upon payment of premium (1) Delay in acceptance Situation where applicant submits application for insurance, but due to negligence of company, w/c takes an unreasonably long time before processing the application, the applicant dies before the application is processed, thus, the contract is not perfected. 139 (2) Delivery of Policy The act of putting the insurance policy140 into the possession of the insured.141
138

Tort Theory What is being followed in insurance contracts is what is known as the cognition theory. Thus, an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. (Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269) 139 Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the policy, w/c is given to the estate of the deceased applicant. (not to beneficiary because contract not perfected. Also, no contractual liability also bec. no contact) 140 the physical document 141 Effects of Delivery: 1) Where delivery is conditional Non-performance of Condition precedent prevents contract from taking effect 2) Where delivery is unconditional Delivery corresponding terms of application consummates the contract and policy delivered becomes final contract bet the parties

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Actual delivery of the policy is not essential unless the parties have so agreed in clear language. Constructive delivery may be sufficient.142 b. Premium Payment143 Consideration paid an insurer for undertaking to indemnify the insured against a specified peril. c. Non-Default Options in Life Insurance Cash Surrender Value The amount the insured, in case of default, after the payment of at least three (3) full annual premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. It is the portion of reserve on a life policy Nature: Premium is uniform throughout lifetime of policy, so during the earlier years of the
3) Where premium still unpaid after unconditional delivery Policy will lapse if premium unpaid at time and manner specified in the policy, in the absence of any clear agreement that insurer will extend credit. Individual life insurance contracts usually stipulate that: 1) Premium be paid and 2) Policy be delivered to the insured while he is alive and in good health. Concurrence of both is necessary. (see Perez v CA case) 142 Vda. De Sindayen case Whether or not policy was delivered after its issuance depends not upon manual possession by the insured but rather upon the intention of the parties as manifested in their acts or agreements. Whether or not delivery to agent is delivery to insured is a question over w/c there has been many conflicting opinions. 143 Basis of the right of the insurer to collect premiums: Assumption of risk. General rule: No policy issued by an insurance company is valid and binding until actual payment of premium. Any agreement to the contrary is void. (Sec. 77) Exceptions: 1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77) 2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78) 3. Section 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462) 4. Where a credit term has been agreed upon. (UCPB vs. Masagana Telemart, 308 SCRA 259) 5. Where the parties are barred by estoppel. (id., 356 SCRA 307) Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462) Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid. (Sec. 78)

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policy, the premium charges will be more than the actual cost of the protection against the risk in order to meet the higher cost of risk during the latter years of the policy when the insured is older.144 The more premiums he has paid, the greater will be the CSV but the value is always a lesser sum than the total amt. of premiums paid. CSV is the amount company holds in trust for insured deliverable upon demand. So long as the policy remains in force, the company has practically no beneficial interest in it except as its custodian; this is the practical, though not the legal, relation of the company to this fund.145

Extended Insurance

Depends on availability of CSV.146 Either stated or equal to the amount of the cash surrender value, taken as a single premium, will purchase; the insured is given the right, upon default, after the payment of at least three full annual premiums to have the policy continued in force from the date of default for a time either stated or equal to the amount as the net value of the policy taken as a single premium, will purchase Also called term insurance, temporary insurance or paid-up extended insurance Amount of Insurance that the CSV, applied as a single premium, can purchase.147

Paid-up Insurance

144 145

Reserve Value - Surrender Charge = Cash Surrender Value Effect: Surrender policy; terminates the contract of insurance 146 Effect: Policy continues in force from date of default, for a period During extended period: If insured dies, beneficiary can recover face amount of policy. Insured can also reinstate the policy w/in this period. Beyond extended period: If he survives No benefits. He cannot even reinstate the policy by paying past premiums; has to purchase new policy Better option if insured not in good health or geriatric 147 Effect: Policy continues in force from date of default for the whole period and under the same conditions of the original contract w/o further payment of premiums. However, in case of death of

39

Better option if insured is still young and in good health because unlike extended insurance, he may later reinstate policy if he wishes Automatic Premium Loan Upon default, insurer lends/advances to the insured without any need of application on his part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy. Only applies if requested in writing by the insured either in the application or at any time before the expiration of the grace period.148 If there is still CSV, auto premium loan continues until it is exhausted. Advantageous to the insured because it helps to continue the contract and all its features in full force and effect. Insured under no legal obligation to repay loan d. Reinstatement of a Lapsed Policy of Life Insurance 149 1) Does not create a new contract, merely revives the old policy.150 2) Required by Insurance Code for every individual and industrial life policy. 3) Not required that three (3) annual premiums have been paid.
insured, he may recover only the paid-up value of the policy w/c is much less than the original amount agreed upon. (In other words, na-reduce yung original insurance contract to one with a lower value) 148 Effect: Insurance continues in force for period covered by the payment. After period, if insured still does not resume paying his premiums, policy lapses, unless there remains CSV. 149 Sec. 227 (j) Requisites: a) Exercised w/in 3 years from default b) Insured must present evidence of insurability satisfactory to the company c) Pay all back premiums and all his indebtedness to the insurance company d) CSV has not been duly paid nor the extension period expired Insurability does not mean that insured is in good health. Other factors affect insurability like nature of work, age, etc. 150 Thus, insurer cannot require higher premium than amount stipulated in the contract.

40

4) Application for reinstatement must be filed during the insureds lifetime. e. Refund of Premiums151 A person insured is entitled to a return of premium: 1) To the whole premium if no part of his interest in the thing insured be exposed to any of the perils insured against; 2) Where the insurance is made for a definite period and the insured surrenders his policy, before termination thereof152

151

There is no right to recovery of premiums in life insurance because it is not a divisible contract. It is not an insurance for any single year, w/ a privilege of renewal from year to year by paying the annual premium. It is an entire contract of insurance for life subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums. 152 such portion as corresponds w/ unexpired time, as a pro rata rate, returned (Sec. 79) Exceptions: a) Short period rate agreed upon and appears on face of policy (exception to pro rata rate). b) Life insurance (exception to applicability of this section). c) When the contract is voidable because of fraud or misrepresentations of the insurer or his agent (Sec. 81) d) When the contract is voidable because of the existence of facts of w/c the insurer was ignorant w/o his fault (ibid.); e) When the insurer never incurred any liability under the policy because of default of the insured other than actual fraud (ibid.); f) When there is over insurance (Sec. 82); g) When rescission is granted due to the insurers breach of contract

41

7. Rescission of Insurance Contracts a. Concealment153 A neglect to communicate that which a party knows and ought to communicate. 154 There is concealment where the insured has knowledge of facts material to the risk, and good faith and fair dealing requires him to reveal them, and he fails to do so. 155 b. Misrepresentation/Omissions156
153

Requisites: a. A party knows a fact which he neglects to communicate or disclose to the other. b. Such party concealing is duty bound to disclose such fact to the other. c. Such party concealing makes no warranty as to the fact concealed. d. The other party has not the means of ascertaining the fact concealed. e. Material Effects: Entitles insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter (Sec. 27). Good Faith is not a defense in concealment. Sec. 27 clearly provides that, the concealment whether intentional or unintentional entitles the injured party to rescind the contract of insurance. Test of Materiality: Determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the advantages of the proposed contract, or in making his inquiries (Sec. 31). Exception to Sec. 31: a. Incontestability clause b. Matters under Sec.110 (marine insurance) The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. (Sunlife v. Sps. Bacani, 246 SCRA 268). The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated. (Sec.33) Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot rely on those statements. He must make further inquiry. (Philamcare Health Systems vs. CA, G.R. No. 125678, March 18, 2002). 154 Sec. 26 155 Villanueva, Phil Commercial Law, 1998 Ed., p. 177 156 Requisites of a false representation (misrepresentation): a. The insured stated a fact which is untrue. b. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead. c. Such fact in either case is material to the risk. Characteristics: a. It is not a part of the contract but merely a collateral inducement to it. b. It may be oral or written. c. It is made at the same time of issuing the policy or before but not after. d. It may be altered or withdrawn before the insurance is effected but not afterwards. e. It always refers to the date the contract goes into effect. Kinds:

42

Factual statements made by the insured at the time of, or prior to, the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract. They are considered an active form of concealment. c. Breach of Warranties General rule: Violation of material warranty or of a material provision of a policy will entitle the other party to rescind the contract.157 Exceptions: a) Loss occurs before the time of performance of the warranty. b) The performance becomes unlawful at the place of the contract. c) Performance becomes impossible.158 Immaterial.159 General rule: It will not avoid the policy. Exception: When the policy expressly provides or declares that a violation thereof will avoid it.160

a. Affirmative affirmation of a fact when the contract begins; and b. Promissory promise to be performed after policy was issued. Effect of Misrepresentation: the injured party is entitled to rescind from the time when the representation becomes false. 157 Sec. 74 158 Sec. 73 159 ex. Other insurance clause 160 Sec. 75

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8. Claims Settlement and Subrogation a. Notice and Proof of Loss Notice of Loss Proof of Loss

The formal notice given the insurer by the The formal evidence given the insurance insured or claimant under a policy of the company by the insured or claimant under a occurrence of the loss insured against.161 policy of the occurrence of the loss, the particulars and the data necessary to enable the company to determine its liability and the amount. Is not tantamount to proof or evidence under the law on evidence.162 Other provisions: When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time. 163 All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived.164
161

The purpose is to apprise the insurance company so that it may make proper investigation and take such action as maybe necessary to protect its interest. It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claim Under Sec. 88, insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person entitled to the benefit without unnecessary delay. It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss already. 162 Proof of loss is distinct from notice of loss and intended to: 1. give the insurer information by which he may determine the extent of his liability 2. afford him a means of detecting any fraud that may have been practiced upon him. The law does not stipulate any requirement as to the form in which notice or proof of loss must be given. However, according to De Leon, it is advisable to give the notice in writing for the protection of the insured or his beneficiary. Notice may be an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment Nature of notice and proof of loss Although they are in the form of conditions precedent, they are in the nature of conditions subsequent the breach of which affects a right that has already accrued (before the loss, insurers liability is contingent but with the happening of the loss, his liability becomes properly fixed). These conditions are intended merely for evidentiary purposes and do not form any part of the conditions of liability and are construed with much less strictness than those conditions that operate prior to loss. 163 Sec. 89 164 Sec. 90

44

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground.165 If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.166 b. Guidelines on Claims Settlement (1) Unfair Claims Settlement; Sanctions Unfair claim settlement practices: a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; b) failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; c) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or e) compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. Sanction: Considered sufficient cause for the suspension or revocation of the company's certificate of authority.167 (2) Prescription of Action All criminal actions for the violation of any of the provisions of this Code shall prescribe after three (3) years from the discovery of such violation. Such actions shall in any event prescribe after ten (10) years from the commission of such violation. 168
165 166

Sec. 91 Sec. 92 167 See Sec. 241 (1) & (3) 168 Sec. 420

45

(3) Subrogation169 It is a process of legal substitution where the insurer steps into the shoes of the insured and he avails of the latters rights against the wrongdoer at the time of loss. 170

169

There can be no subrogation in cases: a. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage; b. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insureds claim for loss; c. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company v. CA, 184 SCRA 54) d. In life insurance e. For recovery of loss in excess of insurance coverage 170 The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan Insurance Co., Inc. v. CA, 165 SCRA 536; see also Art. 2207, NCC)

46

F. Transportation Law171 1. Common Carriers Persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.172 a. Diligence Required of Common Carriers Common carriers are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.173
171 172

The articles mentioned are under the Civil Code Art. 1732 The said article avoids any distinction between one whose principal business activity is the carrying of persons or goods or both and one who does such carrying only as an ancillary activity (sideline). It also avoids a distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does the law distinguish between a carrier offering its services to the general public that is the general community or population and one who offers services or solicits business only from a narrow segment of the general population. A person or entity is a common carrier even if he did not secure a Certificate of Public Convenience (De Guzman vs. CA, 168 SCRA 612). It makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation should be by motor vehicle. (First Philippine Industrial Corporation vs. CA) One is a common carrier even if he has no fixed and publicly known route, maintains no terminals, and issues no tickets (Asia Lighterage Shipping, Inc. vs. CA). 173 Art. 1733 The law requires CC to exercise extra-ordinary diligence which means that they must render service with the greatest skill and utmost foresight. The extra-ordinary diligence required of carriers in the handling of the goods of the shippers and consignees last from the time the cargoes are loaded in the vessels until they are discharged and delivered to the consignees. Rendition of service with the greatest skill and utmost foresight (Davao Stevedore Co. v. Fernandez) Coverage: 1. Vigilance over goods (Arts. 1734-1754); and 2. Safety of passengers (Arts. 1755-1763). Passenger: A person who has entered into a contract of carriage, express or implied, with the carrier. They are entitled to extraordinary diligence from the common carrier. The following are not considered passengers, and are entitled to ordinary diligence only: a. One who has not yet boarded any part of a vehicle regardless of whether or not he has purchased a ticket; b. One who remains on a carrier for an unreasonable length of time after he has been afforded every safe opportunity to alight; c. One who has boarded by fraud, stealth, or deceit; d. One who attempts to board a moving vehicle, although he has a ticket, unless the attempt be with the knowledge and consent of the carrier; e. One who has boarded a wrong vehicle, has been properly informed of such fact, and on alighting, is injured by the carrier;

47

b. Liabilities of Common Carriers Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the carriers employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. The liability does not cease even upon proof that they exercised diligence in the selection and supervision of their employees.174 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 carriers employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission.175 2. Vigilance over goods a. Exempting Causes (1) Requirement of Absence of Negligence The extra-ordinary diligence required of common carriers in the handling of the goods of the shipper and the consignees lasts from the time the cargoes are loaded in the vessels until they are discharged and delivered to the consignees. To comply with this obligation, the common carrier should be afforded a wide discretion in the selection and supervision of persons who will handle the goods. (2) Absence of Delay The common carrier must not be in delay. If the common carrier incurs in delay, a natural disaster shall not free it from responsibility.176

f. Invited guests and accommodation passengers. (Lara vs. Valencia) g. One who rides any part of the vehicle which is unsuitable or dangerous or which he knows is not designed or intended for passengers. 174 Art. 1759 175 Art. 1763 A common carrier is responsible for injuries suffered by a passenger on account of the lawful acts/negligence of other passengers or of strangers provided that the employees could have prevented the act or omission through the exercise of a good father of a family. Common Carrier is liable for damages for defects of its equipment. Common Carrier is liable for the misconduct of its employees done in their own interest. Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he is not put in that flight. Carrier liable only for damages that are natural and probable consequence and breach of contract which includes medical, hospital and other expenses. 176 Art. 1740

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(3) Due diligence to prevent or lessen the loss The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the occurrence of flood, storm, or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods. b. Contributory negligence If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced. 177 c. Duration of liability (1) Delivery of goods to common carrier From the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee or to the person who has the right to receive them.178 (2) Actual or constructive delivery179 (3) Temporary unloading or storage It remains in full force and effect even when they are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu.180 It continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination until the consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them.181

Under Art. 1165, par. 3, if the obligor incurs delay, he shall be responsible for any fortuitous event until he has effected delivery. 177 Art. 1741 178 Art. 1736 179 See (1), supra 180 Art. 1737 181 Art. 1738

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d. Stipulation for limitation of liability (1) Void stipulations a) The goods are transported at the risk of the owner or shipper; b) The carrier will not be liable for any loss, destruction or deterioration of the goods; c) The carrier need not observe any diligence in the custody of the goods; d) The carrier shall exercise a degree of diligence less than that of a good father of a family over the movable transported; e) The carrier shall not be responsible for the acts or omissions of his or its employees; f) The carriers liability for acts committed by thieves or robbers who do not act with grave or irresistible threat, violence or force is dispensed with or diminished; g) The carrier is not responsible for the loss, destruction or deterioration of the goods on account of the defective condition of the car, vehicle, ship or other equipment used in the contract of carriage.182 (2) Limitation of liability to fixed amount 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. 183 (3) Limitation of liability in absence of declaration of greater value A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.184 e. Liability for baggage of passengers (1) Checked-in baggage The carrier who has in his custody the baggage of a passenger to be carried, like any other goods, is required to observe extraordinary diligence. In case of loss or damage, the carrier is presumed negligent.185
182 183

Art. 1745 Art. 1750 184 Art. 1749 185 Under Arts. 1733 to 1753, Civil Code

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(2) Baggage in possession of passengers The baggage in transit will be considered as necessary deposit. The common carrier shall be responsible for the baggage as depositaries, provided that notice was given to them or its employees. And the passenger took the necessary precaution, which the carrier has advised them relative to the care and vigilance of their baggage. In case of loss due to fault of the passenger, the carrier will not be liable.186 3. Safety of Passengers a. Void stipulations Dispensing with or lessening the extraordinary responsibility of a common carrier for the safety of passengers imposed by law, by stipulation, by posting of notices, by statements on tickets or otherwise.187 b. Duration of liability (1) Waiting for carrier or Boarding of carrier It is the duty of common carriers of passengers to stop their conveyances a reasonable length of time in order to afford passengers an opportunity to enter, and they are liable for injuries suffered from the sudden starting up or jerking of their conveyances while doing so. The duty which the carrier of passengers owes to its patrons extends to persons boarding the cars as well as to those alighting therefrom. 188 (2) Arrival at destination The duty of a common carrier to provide safety to its passengers so obligates it not only during the course of the trip, but for so long as the passengers are within its premises and where they ought to be in pursuance to the contract of carriage.189

186

The act of the thief or robber, who has entered the common carriers vehicle is not deemed force majeure, unless it is done with the use of arms or through an irresistible force (Art. 1754, id.) 187 Art. 1757 188 Dangwa Trans Co., Inc. vs. CA, 202 SCRA 574 189 LRTA v. Navidad, [2003] All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and includes a reasonable time to see after his baggage and prepare for his departure. (La Mallorca v. CA, 17 SCRA 739 ; Abiotiz Shipping Corporation v. CA, 179 SCRA 95)

51

c. Liability for acts of others (1) Employees Tort; however, the employee must be on duty at the time of the act.190 (2) Other passengers and strangers Not absolute; limited by Art. 1763.191 d. Extent of liability for damages Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former's employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees.192 The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise.193 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. 194

190 191

Maranan v. Perez rd See d), 3 par., infra 192 Art. 1759 193 Art. 1760 194 Art. 1763

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4. Bill of Lading The written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or to his order. a. Three-fold character 1. It is a receipt for the goods shipped 2. It is a contract by which the three parties, namely, the shipper, carrier and consignee undertake specific responsibilities and assume stipulated obligations; and 3. It is a legal evidence of the contract between the shipper and the carrier. As evidence, its contents shall decide all disputes which may arise with regard to their execution and fulfillment.195 b. Delivery of goods (1) Period for delivery Stipulated in Contract/Bill of Lading: Carrier is bound to fulfill the contract and is liable for any delay; no matter from what cause it may have arisen. No stipulation: 1. Within a reasonable time. 2. Carrier is bound to forward them in the 1st shipment of the same or similar goods which he may make to the point of delivery.196 (2) Delivery without surrender of bill of lading In case the consignee, upon receiving the goods, cannot return the bill of lading subscribed by the carrier, because of its loss or of any other cause, he must give the latter a receipt for the goods delivered, this receipt producing the same effects as the return of the bill of lading.197

195

In the absence of a bill of lading, their respective claims may be determined by legal proofs which each of the contracting parties may present in conformity with law. 196 Art. 358, Code of Commerce 197 rd Art. 353, 3 .par., Code of Commerce

53

(3) Refusal of consignee to take delivery Instances include the following:: 1) Goods sought to be transported are dangerous objects, or substances including dynamite and other explosives 2) Goods are unfit for transportation 3) Acceptance would result in overloading 4) Contrabands or illegal goods 5) Goods are injurious to health 6) Goods will be exposed to untoward danger like flood, capture by enemies and the like 7) Goods like livestock will be exposed to disease 8) Strike 9) Failure to tender goods on time.198 In case of carriage by railway, the carrier is exempted from liability if carriage is insisted upon by the shipper, provided its objections are stated in the bill of lading. However, when a common carrier accepts cargo for shipment for valuable consideration, it takes the risk of delivering it in good condition as when it was loaded. 199 d. Period for filing claims200 Patent damage Shipper must file a claim against the carrier immediately upon delivery201 Shipper should file a claim against the carrier within 24 hours from delivery.

Latent damage

198

Notes and Cases on the Law on Transportation and Public Utilities, Aquino, T. & Hernando, R.P. 2004 ed. p.68 199 PAL vs. CA 200 These rules does not apply to misdelivery of goods. (Roldan vs. Lim Ponzo) 201 it may be oral or written The filing of notice of claim is a condition precedent for recovery. Purpose of notice: To inform the carrier that the shipment has been damaged, and it is charged with liability therefore, and to give it an opportunity to make an investigation and fix responsibility while the matter is fresh. Shorter period may be stipulated by the parties because it merely affects the shippers remedy and does not affect the liability of the carrier. (PHILAMGEN vs. Sweetlines, Inc.)

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e. Period for filing actions Not provided by Article 366.202 No bill of lading was issued Bill of lading was issued: within 6 years within 10 years.

5. Maritime Commerce203 a. Charter Parties204 Bareboat/Demise Charter The charterer provides crew, food and fuel. The charterer is liable as if he were the owner, except when the cause arises from the unworthiness of the vessel. The shipowner leases to the charterer the whole vessel, transferring to the latter the entire command, possession and consequent control over the vessels navigation, including the master and the crew, who thereby become the charters servants. It

202

Thus, in such absence, Civil Code rules on prescription apply. If despite the notice of claim, the carrier refuses to pay, action must be filed in court. 203 Articles mentioned are under the Code of Commerce Maritime/admiralty law It is the system of laws which particularly relates to the affairs and business of the sea, to ships, their crews and navigation, and to maritime conveyance of persons and property. (Notes and Cases on the Law on Transportation and Public Utilities, Aquino & Hernando, citing Francisco, p.254) Maritime laws apply only to maritime trade and sea voyages. (Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed.) Arrastre service is not maritime in character. It refers to a contract for the unloading of goods from a vessel. (ICTSI vs. Prudential Guarantee, 320 SCRA 244) 204 Charter party A contract by virtue of which the owner or agent binds himself to transport merchandise or persons for a fixed price. A contract by which an entire ship, or some principal part thereof is let/leased by the owner to another person for a specified time or use. (Planters Products, Inc. vs. CA, 226 SCRA 476) Parties: 1. Ship owner or ship agent 2. Charterer

55

transforms a common carrier into a private carrier.205 Time Charter206 Vessel is chartered for a fixed period of time or duration of voyage. The vessel is leased for one or series of voyages usually for purposes of transporting goods for charterer

Voyage/Trip Charter207 .

b. Liability of Shipowners and Shipping Agents Shipowner208 Ship agent209

Person who has possession, control and Person entrusted with provisioning and management of the vessel and the representing the vessel in the port in which it consequent right to direct her navigation and may be found; also includes the shipowner. 210 receive freight earned and paid, while his possession continues. (1) Liability for acts of captain All contracts of the captain, whether authorized or not, to repair, equip and provision the vessel.211 a.. Damages to vessel and to cargo due to lack of skill and negligence; b. Thefts and robberies of the crew; c. Losses and fines for violation of laws; d. Damages due to mutinies;
205

The charterer becomes the owner of the vessel pro hac vice, just for that one particular purpose only. Because the charterer is treated as owner pro hac vice, the charterer assumes the customary rights and liabilities of the shipowner to third persons and is held liable for the expense of the voyage and the wages of the seamen. 206 A kind of contract of affreightment whereby the owner of the vessel leases part or all of its space to haul goods for others. The shipowner retains the possession, command and navigation of the ship, the charterer merely having use of the space in the vessel in return for his payment of the charter hired. 207 ibid. 208 proprietario 209 naviero 210 Not a mere agent under civil law; he is solidarily liable with the ship owner. 211 Art. 586

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e. Damages due to misuse of power; f. For deviations; g. For arrivals under stress; h. Damages due to non-observance of marine regulations.212 (2) Exceptions to limited liability a. When the shipowner is at fault b. Insurance c. Liability under the Labor Code d. Chattel Mortgage of ship213 c. Accidents and Damages in Maritime Commerce General Average214 Damages or expenses deliberately caused in order to save the vessel, its cargo or both from real and known risk.215 Impact of two vessels both of which are moving.216

Collisions

212 213

Art. 618 Villanueva, Phil. Commercial Law, 1998 ed., pp. 28-31 214 Average - an extraordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both, and all damages or deterioration suffered by the vessel from departure to the port of destination, and to the cargo from the port of loading to the port of consignment. (Art. 806) The person whose property has been saved must contribute to reimburse the damage caused or expense incurred if the situation constitutes general average. 215 Art. 811 Goods not covered by general average even if sacrificed: 1. Goods carried on deck. (Art.855) 2. Goods not recorded in the books or records of the vessel. (Art. 855 (2)) 3. Fuel for the vessel if there is more than sufficient fuel for the voyage. (Rule IX, York-Antwerp Rule) 216 Allision - impact between a moving vessel and a stationary one.

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d. Carriage of Goods by Sea Act217 Application The transportation must be: a. water/maritime transportation; b. for the carriage of goods; and c. overseas/international/foreign218 Notice of Loss or Damage219 a. Patent damage: immediately upon delivery. b. Latent damage: within three (3) days from delivery.220 Within one (1) year221 after: a. Delivery of the goods;222 or b. The date when the goods should have been delivered.223 Limitation of liability
217 218

Period of Prescription

The liability limit is set at $500 per package

C.A. No. 65 from foreign port to Philippine port It can be applied in domestic sea transportation if agreed upon by the parties (Clause paramount or paramount clause) 219 Loss or Damage as applied to the COGSA contemplates a situation where no delivery at all was made by the shipper of the goods because the same had perished, gone out of commerce, or disappeared in such a way that their existence is unknown or they cannot be recovered. Thus, it is inapplicable in case of misdelivery or conversion. (Ang vs. American Steamship Agencies Inc.) and damage arising from delay or late delivery (Mitsui O.S.K. Lines Ltd. vs. CA). In such instance the, Civil Code rules on prescription shall apply. 220 Sec. 3(6) The filing of a notice of claim is not a condition precedent. 221 The one-year prescriptive period is suspended by: 1. The express agreement of the parties (Universal Shipping Lines, Inc. vs. IAC, 188 SCRA 170) 2. The filing of an action in court until it is dismissed. (Stevens & Co. vs. Nordeutscher Lloyd, 6 SCRA 180) The one-year period shall run from delivery of the last package and is not suspended by extrajudicial demand. (Dole Phils.,Inc. vs. Maritime Co., 148 SCRA 118) The one-year period shall run from delivery to the arrastre operator and not to the consignee. (Union Carbide Phils, Inc. vs. Manila Railroad Co., SCRA 359) The insurer exercising its right of subrogation is bound by the one-year prescriptive period. However, it does not apply to the claim against the insurer for the insurance proceeds. (Fil. Merchants Ins. Co. vs. Alejandro; Mayer Steel Pipe Corp. vs. CA) 222 delivered but damaged goods 223 non-delivery (Sec. 3[6])

58

or customary freight unit unless the nature and value of such goods is declared by the shipper.224 6. Public Service Act a. Definition of Public Utility A business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. b. Necessity for certificate of public convenience 225 (1) Requisites (a) Citizenship Filipino citizen or corporation sixty percent (60%) of which is owned by Filipino citizens. (b) Promotion of public interests The service will promote public interest and convenience. (c) Financial capability The grantee must have sufficient financial capability to undertake the service.

224

Sec. 4(5) This is deemed incorporated in the bill of lading even if not mentioned in it (Eastern Shipping vs. IAC, 150 SCRA 463) 225 Certificate of Public Convenience (CPC) - an authorization issued by the commission for the operation of public services for which no franchise either municipal or legislative is required by law. Unless otherwise exempt, no public service shall operate without having been issued a certificate of public convenience (no franchise is required by law) or a certificate of public convenience and necessity (a prior franchise is required by law).

59

(2) Prior operator rule (a) Meaning Before permitting a new operator to invade the territory of another already established, the prior operator must be given an opportunity to extend its service to meet the public needs in the matter of transportation. (b) Exceptions 1. Operator fails/ neglects to make improvement or effect the increase in service when given the opportunity. 2. When Prior operator offers to meet increases in demand only when another operator offered to render additional service 3. Abandonment of operation 4. Prior operators did not oppose application 5. Prior operator cannot satisfy needs of the public 6. When opportunity to improve service is raised by prior operator only on appeal. 7. CPC granted to the applicant is a maiden franchise covering a new route, albeit overlapping with that of the old operator 8. Expiration of corporate existence of prior operator. 9. Monopoly 10. Passage through private subdivision which granted permit to another (c) Ruinous competition The law contemplates that the first licensee will be protected in his investment and will not be subjected to a ruinous competition. It is not therefore the policy of the law to issue a CPC to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service, and who, in all things and respects, is complying with the rules and regulations of the commission. The old operator must be given the opportunity to improve and extend his lines.226 c. Fixing of rate A legislative and governmental power over which the government has complete control. But it has no power to fix rates which are unreasonable or to regulate them arbitrarily and that as to whether a given rate is fair and reasonable is a judicial question over which the courts have complete control.227 Before the Commission can fix rates, there must first be a notice and hearing.
226 227

Batangas Trans Co. v Orlanes, 52 Phil 455 There is a legal presumption that the rates are reasonable and it must be conceded that the fixing of rates by the government through its authorized agent, involves the exercise of reasonable discretion and unless there is an abuse of that discretion.

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However, the Commission, in its discretion, can provisionally approve rates proposed by public services without notice and hearing provided that within thirty (30) days thereafter a hearing must be held upon previous publication and notice to the concerns operating in the territory affected.228 (1) Rate of return Rates are submitted by the public carriers but are subject to approval by the PSC which is not limited in the selection of the old or the new rates but could NOT establish such rates as are proper under the evidence presented. The maximum rate fixed in a franchise, which its holder is authorized to collect, is always subject to a revision and regulation by the PSC. (2) Exclusion of income tax as expense d. Unlawful arrangements (1) Boundary system Under this system, the authorized operator of a common carrier is liable for the conduct of the driver, there being an employer-employee relationship between the operator and the driver. (2) Kabit system One whereby a person who has been granted a certificate of public convenience allows other persons who own vehicles to operate them under such license, for a fee or percentage of the earnings. This is contrary to public policy, and therefore, void and inexistent; "this is a pernicious system that cannot be too severely condemned; it constitutes an imposition upon the good faith of the govt." e. Approval of sale, encumbrance or lease of property CPC if: The Commission229 has the power and authority to approve a sale or transfer of a 1. There are just and reasonable grounds for making the transfer 2. The sale or transfer is not detrimental to the public interest.230
228

E.g. ERB has authority to issue an order granting provisional increase of prices even without notice and hearing. 229 now regulatory boards, commissions and councils 230 Sec. 20(g) This provision, it is believed is applicable to all regulatory boards, commissions and councils, as a result of the transfer of powers and functions. The jurisdiction and supervision and control over all public

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7. The Warsaw Convention231 a. Applicability232 The transportation must be: 1. International transportation;233 2. Air transportation;234 and 3. Carriage of passengers, baggage or goods. The WC shall also apply to fortuitous transportation by aircraft performed by an air transportation enterprise. b. Limitation of liability235 (1) Liability to passengers General rule: Limited to 250,000 francs per passenger Exception: Agreement to a higher limit

services originally vested in the Public Service Commission have been distributed among the various regulatory boards, commissions and councils 231 As much a part of Philippine law as the Civil Code, Code of Commerce and other municipal special laws, and the provisions therein contained, specifically on the limitation of carriers liability, are in operation in the Philippines but only in appropriate situation (PAL vs. CA, 255 SCRA 48) 232 When inapplicable: 1. When public policy is contradicted; 2. If the requirements under the Convention are not complied with. 233 any transportation in which the place of departure and the place of destination are situated either: 1. Within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or transshipment, or 2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though that power is not a party to the Convention. (round trip, Am. Jur.) Transportation to be performed by several successive air carriers shall be deemed to be one undivided transportation, if it has been regarded by the parties as a single operation, whether it has been agreed upon under the form of a single contract or of a series of contracts, and it shall not lose its international character merely because one contract or a series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party. (Art. 1 Sec.3) 234 The period during which the baggage or goods are in the charge of the carrier, whether in an airport or on board an aircraft, or, in case of a landing outside an airport, in any place whatsoever. It includes any transportation by land or water outside an airport if such takes place in the performance of a contract for transportation by air, for the purpose of loading, delivery, or transshipment. 235 Art. 22, as amended by Guatemala Protocol, 1971; Alitalia vs. IAC

62

(2) Liability for checked baggage General rule: limited to 250 francs per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. (3) Liability for hand-carried baggage Limited to 5,000 francs per passenger. c. Willful Misconduct The War Convention denies to the carrier availment of the provisions which exclude or limit the carriers liability if the damage is caused by his willful misconduct or by such default on his part, as, in accordance with the law of the court seized of the case, is considered to be equivalent to willful misconduct, of if the damage is similarly caused by any agent of carrier acting within the scope of his management.236

236

Under domestic law and jurisprudence, the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonable attributed, although unforeseen, to the non-performance of the obligation, including exemplary damages.

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G. Corporation Law 1. The Corporation Code237 a. Corporation, defined An artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence. 238 b. Classification of corporations 1. As to organizers Public By State only 2. As to functions Public Government of a portion of the territory; 3. As to governing law Public Special Laws 4. As to legal status De jure De facto By estoppel Group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction By prescription One which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power.241 Private Law on Private Corporations Private Usually for profit-making Private By private persons alone or with the State

Organized in Organized with a accordance with the colorable compliance requirements of law. with the requirements of a valid law. Its existence cannot be inquired collaterally.
237 238

B.P. 68 Sec. 2 241 e.g. Roman Catholic Church

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Such inquiry may be made by the Solicitor General in a quo warranto proceeding.239

with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction.240 It is neither de jure nor de facto.

5. As to existence of shares of stock: Stock A corporation 1) whose capital stock is divided into shares and 2) which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held.242 Non-stock Does not issue stocks nor distribute dividends to their members.

239

Sec. 20 Requisites: 1. The existence of a valid law under which it may be incorporated; 2. A bona fide attempt in good faith to incorporate under such law; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued good faith. The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist. 240 Sec. 21 242 Sec. 3

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6. As to relationship of management and control Holding One which controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. Subsidiary One which is so related to another corporation that the majority of its directors can be elected directly or indirectly by such other corporation.243 Affiliate Company which is subject to common control of a mother holding company and operated as part of the system. Parent and Subsidiary Separate entities with power to contract with each other. The board of directors of the parent company determines its representatives to attend and vote in the stockholders meeting of its subsidiary. The stockholders of the parent company demand representation in the board meetings of its subsidiary.

7. As to place of incorporation Domestic Formed, organized, Philippine laws. or existing Foreign under Formed, organized, or existing under any laws other than those of the Philippines.244

243
244

The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed. Sec. 123

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c. Nationality of corporations (1) Control test Determined by the nationality of the controlling stockholders or members. This test is applied in times of war.245 (2) Grandfather rule Applied in determining the nationality of a corporation. It traces the nationality of the stockholders of investor corporations so as to ascertain the nationality of the corporation where the investment is made.246 The application of the test is limited however to resolving issues on investments. By the Foreign Investments Act, the grandfather rule is merely an ancillary rule to the main method of determining nationality, wherein corporations that are 60% owned by Filipinos are automatically considered as 100% Filipino-owned. Only when a corporation is less than 60% owned shall the grandfather rule be applied. d. Corporate juridical personality (1) Doctrine of separate juridical personality A corporation has a juridical personality separate and distinct from that of its stockholders or members.247
245 246

also known as the wartime test. Ex: MV Corporation and AC Corporation have equal interest in XYZ Company. MV Corporation is 60% owned by Filipinos, while AC Corporation is 50% owned by Filipinos. By the grandfather rule, MV Corporation would have a 30% Filipino interest in XYZ Company (60% of 50%), while AC Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Hence, the total Filipino interest is only 55%. 247 Used for purposes of convenience and to subserve the ends of justice. Consequences/significance: 1. Liability for acts or contracts obligations incurred by a corporation, acting through its authorized agents are its sole liabilities. (Creese vs. CA, 93 SCRA 483) 2. Right to bring actions may bring civil and criminal actions in its own name in the same manner as natural persons. (Art. 46, Civil Code) 3. Right to acquire and possess property property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art. 44(3), Civil Code) 4. Acquisition of court of jurisdiction service of summons may be made on the president, general manager, corporate secretary, treasurer or in-house counsel. (Sec. 11, Rule 14, Rules of Court). 5. Changes in individual membership remains unchanged and unaffected in its identity by changes in its individual membership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) 6. Entitlement to constitutional guaranties: a. Due process (Albert vs. University Publishing, 13 SCRA 84) b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136) c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20 SCRA 383) A corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard vs. PCGG)

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(a) Liability for tort and crimes Liability for torts A corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body.248 Liability for crimes Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable.249

(b) Recovery of damages A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses.250 In one case,251 though, the Supreme Court recognized that corporations can be entitled to moral damages if their financial reputation had been harmed. The Court held that in all cases of libel, corporations can be awarded moral damages. The Court, through Justice Antonio Carpio said:
A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages. However, the Courts statement in Mambulao that a corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages is an obiter dictum. Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Moreover, where the broadcast is libelous per se, the law implies damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent

248

PNB vs. CA, 83 SCRA 237r People vs. Tan Boon Kong, 54 Phil.607 250 ABS-CBN vs. Court of Appeals 251 Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine, January 17, 2005
249

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to the recovery of some damages. In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

(2) Doctrine of piercing the corporate veil It means that while the corporation cannot be generally held liable for acts or liabilities of its stockholders or members, and vice versa because a corporation has a personality separate and distinct from its members or stockholders, however, the corporate existence is disregarded under this doctrine when the corporation is formed or used for illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat public convenience, justify wrong, evade a just and valid obligation or defend a crime. (a) Grounds for application of doctrine 252 1. The parent corporation owns all or most of the capital of the subsidiary. 2. The parent and subsidiary corporations have common directors or officers. 3. The parent company finances the subsidiary 4. The parent company subscribed to all the capital stock of the subsidiary or otherwise causes its incorporation. 5. The subsidiary has grossly inadequate capital. 6. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. 7. The papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporations own. 8. The parent corporation uses the property of the subsidiary as its own. 9. The directors or executives of the subsidiary do no act independently in the interest of the subsidiary but take their orders from the parent corporation. 10. The formal legal requirements of the subsidiary are not observed. 253

252

Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital stock of the corporation does not justify the application of the doctrine. There must be other circumstances that must be present. 253 Phil. National Bank v. Ritratto Group, Inc., 362 SCRA 216 [2001]

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(b) Test in determining applicability Control not mere stock control but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence or existence of its own.254 e. Capital structure (1) Number and qualifications of incorporators 255 1. Natural persons; 2. Not less than 5 but not more than 15; 3. Of legal age; 4. Majority must be residents of the Philippines; and 5. Each must own or subscribe to at least one share. (2) Minimum capital stock and subscription requirements a. At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation; b. At least twenty-five per cent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors; and c. In no case shall the paid-up capital be less than five thousand (P5,000.00) pesos. 256

254

Such control must have been used by the defendant to commit a fraud or wrong to perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest and an unjust act in contravention of the plaintiffs legal right, and, The said control and breach of duty must have proximately caused the injury or unjust loss complained of. (PNB v. Andrada Electric & Engineering Company, 381 SCRA 244 [2002], Child Learning Center Inc. v. Tagario (November 25, 2005) 255 Incorporators - are those mentioned in the Articles of Incorporation as originally forming and composing the corporation, having signed the Articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. General rule: Only natural persons can be incorporators. Exception: When otherwise allowed by law, e.g., Rural Banks Act of 1992, where incorporated cooperatives are allowed to be incorporators of rural banks. Note: However, it is undeniable that corporations can be corporators. 256 Sec. 13

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(3) Corporate term Shall not exceed fifty (50) years in any one instance.257 (4) Classification of shares Common shares The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. Those issued with par value, and preferences either with respect to (a) assets after dissolution, (b) distribution of dividends, or both, and other preferences.258 Redeemable shares Permits the issuing corporation to redeem or purchase its own shares.259

Preferred shares

257

The amendment is effected before the expiration of corporate term, for after dissolution by expiration of the corporate term there is no more corporate life to extend. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons as determined by the SEC. 258 Limitations: a. If deprived of voting rights, it shall still be entitled to vote on matters enumerated in Section 6 paragraph 6. b. Preference must not be violative of the Code. c. May be issued only with a stated par value. d. The board of directors may fix the terms and conditions only when so authorized by the articles of incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. 259 Limitations: a. Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; c. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock.

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Treasury shares

Shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, and redemption or through some lawful means.260 Shares issued to organizers and promoters of a corporation in consideration of some supposed right or property.261 With a right to vote. Without right to vote.262

Founders' share

Voting shares Non-voting shares

260

Sec. 9 If purchased from stockholders: The transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital. If acquired by donation from the stockholders: The act would amount to a surrender of their stock without getting back their investments that are instead, voluntarily given to the corporation. Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable. When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares. Treasury shares have no voting rights as long as they remain in treasury (uncalled and subject to reissue). Reason: A corporation cannot in any proper sense be a stockholder in itself and equal distribution of voting rights will be effectively lost. Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself. 261 Shares classified as such in the articles of incorporation which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. 262 The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters: a. amendment of Articles of Incorporation b. adoption and amendment of by-laws; c. sale or disposition of all or substantially all of corporate property; d. incurring, creating or increasing bonded indebtedness; e. increase or decrease of capital stock f. merger or consolidation of capital stock g. investments of corporate funds in another corporation or another business purpose; and h. corporate dissolution

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Escrow stock

Deposited with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of full subscription price. Stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance is considered null and void. A stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. 263 With a value fixed in the certificates of stock and the articles of incorporation. Have no par value but have issued value stated in the certificate or articles of incorporation.264 A stock certificate endorsed by the registered holder in blank and transferee can command its transfer to his name from the issuing corporation

Over-issued stock

Watered stock

Par value shares

No par value shares

Street certificate

263

Water in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks. It includes stocks: a. Issued without consideration. b. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value. c. Issued for a consideration other than actual cash, the fair valuation of which is less than its par or issued value. d. Issued as stock dividend when there are no sufficient retained earnings to justify it. 264 Limitations: a. No par value shares cannot have an issued price of less than P5.00; b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c. They cannot be issued as preferred stocks; d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; e. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; f. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

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Convertible share

Changeable by the stockholder from one class to another at a certain price and within a certain period. With a value of less than one (1) full share. f. Incorporation and organization (1) Promoter

Fractional share

A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (a) Liability of promoter He is liable to contracts entered by him in behalf of proposed corporation.265 (b) Liability of corporation for promoters contracts Contracts by the promoter for and in behalf of a proposed corporation generally bind only him, subject to and to the extent of his representations, and not the corporation, unless and until after these contracts are ratified, expressly or impliedly, by its Board of Directors/Trustees. Without ratification by a corporation after its due incorporation, a contract entered into in behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation.266 (2) Subscription contract Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed.267 The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting of the minds of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable.
265 266

A promoter is an agent of the incorporators but not of the corporation. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223[1937] 267 Sec. 60 A person agreed to take and pay for original and unissued shares of a corp. formed or to be formed

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(3) Pre-incorporation subscription agreements 268 Subscription of shares of stock of a corporation still to be formed. unless: Shall be irrevocable for a period of at least 6 months from date of subscription, 1. All of the other subscribers consent to the revocation; 2. The incorporation of said corporation fails to materialize with said period or within a longer period as may be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC.269 (4) Consideration for stocks Stocks shall not be issued for a consideration less than the par or issued price thereof. May be any or a combination of any two (2) or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.270
268

Under Sec 60 any contract for the acquisition of unissued stock in a corporation still to be formed shall be deemed a subscription within the meaning of the Corporation Code. Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of 6 mos. from the date of subscription, unless all of the other subscriber consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription. However, no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to SEC 269 Sec. 61 270 Sec. 62 Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service (ibid)

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(5) Articles of Incorporation The document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Code. It defines the charter of corporation & the contractual relationship between state and corporation, shareholders and state, corporation and shareholders. (a) Contents 1. name of corporation; 2. purpose/s, indicating the primary and secondary purposes; 3. place of principal office; 4. term of existence; 5. names, citizenship and residences of incorporators; 6. number, names, citizenship and residences of directors or trustees; 7. names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified; 8. if a stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share; 9. names, residences, number of shares, and the amounts subscribed and paid by each of the original subscribers which shall not be less than 25% of authorized capital stock; 10. if non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; 11. name of treasurer elected by subscribers; and 12. if the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum.271

271

Sec. 14

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(b) Non-amendable items Those matters referring to facts existing as of the date of the incorporation such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; 3. Treasurer elected by the original subscribers; 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the articles of incorporation; 6. Witnesses to the signing and acknowledgment of the articles. (6) Corporate name -- limitations on use of corporate name No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.272 (7) Registration and issuance of Certificate of Incorporation Gives juridical personality to a corporation and places it under SEC jurisdiction. (8) Election of directors or trustees a. In any form; or b. Must be by ballot when requested by any voting stockholder or member; a. Voting may be in person or by proxy.

272

Sec. 18

77

(9) Adoption of By-Laws273 (a) Requisites of valid by-laws a. Must not be contrary to law nor with the Corporation Code b. Must not be contrary to morals and public policy; c. Must not impair obligations and contracts; d. Must be general and uniform; e. Must be consistent with the charter or articles of incorporation; and f. Must be reasonable, not arbitrary or oppressive. (b) Binding effects a. As to members and corporation They have the force of contract between the members themselves. They are binding only upon the corporation and on its members and those having direction, management and control of its affairs. b. As to third persons They are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. 274 (c) Amendments By a majority vote of the Board of Directors and majority vote of outstanding capital stock or a majority of the members in non-stock corporation.275

273

By-laws - rules of action adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. Functions: a. Supplement the articles of incorporation b. Provide for details not important enough to be stated in the articles of incorporation c. Continuing rule for the government of the corporation and the individuals composing it d. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves e. Source of authority for corporate officers and agents of the corporation 274 By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. 275 Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non-stock corporation

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g. Corporate powers (1) General powers, theory of general capacity 1. To sue and be sued in its corporate name;276 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use of corporate seal; 4. To amend its Articles of Incorporation; 5. To adopt its by-laws not contrary to law, morals, or public policy, and to amend or repeal the same; 6. For stock corporations: issue and sell stocks to subscribers and treasury stocks; for non-stock corporations: admit members; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds 8. To enter into merger or consolidation with other corporations; 9. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan political activity. 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
276

This power (Section 36(1)) is an incident to corporate existence. (De Leon 2006 at 319) As a rule, suits are to be brought by or against the corporation in his own name. Corporation de facto may sue or be sued but a corporation which has been dissolved after the expiration of 3-year winding-up period ceases to exist de jure or de facto. Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the corporations behalf. (Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp v. CA, 2006) Where the corporation is real party-in-interest, neither administrator or a project manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. (Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 [1988]). When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993) For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. (BP Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003), Metro Drug Distribution Inc. v. Narciso,(2006 )

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11. To exercise other powers essential or necessary to carry out its purposes as stated in the articles of incorporation.277 (2) Specific powers, theory of specific capacity (a) Power to extend or shorten corporate term Requites: a. Approved by a majority vote of the board of directors or trustees b. Ratified by at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members. c. Written notice of the proposed action and of the time and place of the meeting addressed to each stockholder or member at his place of residence. In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right.278 (b) Power to increase or decrease capital stock or incur, create, increase bonded indebtedness Requisites: a. Majority vote of the members of the BoD b. Ratification by 2/vote of the outstanding capital stock, in a meeting duly called for that purpose with notice previously given c. Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders meeting d. Certificate must be accompanied by the Treasurers Affidavit certifying compliance with the 25%-25% requirements as to stock corporation.279

277

Sec. 36 Enumerates some of the express powers of corporations (many of which even if not expressly provided for by law would constitute implied powers of every entity. (p. 794 of CLVs CLR, 2007) Enumerates 10 powers that a corporation enjoys in addition to the special powers that may be provided for in the purpose clause of the articles of incorporation, which would also constitute express powers. (ibid., p. 795) 278 Sec. 67 279 The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. (SEC Opinion no. 05-10, July 12, 2005) A corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value.

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(c) Power to deny pre-emptive rights All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto. Such pre-emptive right shall not extend to: 1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or 2. Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. 280 (d) Power to sell or dispose of corporate assets Requisites: a. The sale, etc. must be approved by the board of directors or trustees; b. The action of the board of directors or trustees must be authorized by the vote of stockholding representing 2/3 of the outstanding capital stock including holders of nonvoting shares or 2/3 of the members as the case may be; and

SEC has limited the term bonded indebtedness to cover only indebtedness of the corporation which are secured by mortgage on real or personal property. Debentures are issued on the basis of the general credit of the corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not require approval of the stockholders. (Page 243 of CLVs Textbook) A corporate bond is an obligation to pay a definite sum of money at a future time at a fixed rate of interest. (Page 347 of De Leon, 2006) 280 Sec. 39 A pre-emptive right is the shareholders right to subscribe to all issues or disposition of shares or any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. (p. 832 of CLVs CLR, 2007) Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new issue must be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is known as the right of pre- emption or pre-emptive right of stockholders (Page 355 of De Leon, 2006) The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. (p. 356 of De Leon, 2006)

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c. The authorization must be done at a stockholders or members meeting duly called for that purpose after written notice.281 (e) Power to acquire own shares Instances: a. To eliminate fractional shares out of stock dividends b. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale and to purchase delinquent shares sold during said sale c. To pay dissenting stockholders d. To acquire treasury shares e. Redeemable shares regardless of existence of retained earnings f. To effect a decrease of capital stock g. In close corporations, when there is a deadlock in the management of the business282 (f) Power to invest corporate funds in another corporation or business Requisites: a. Approved by a majority of the board of directors or trustees; and b. Ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of nonstock corporations; c. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member. Any dissenting stockholder shall have appraisal right. 283

281

No ratificatory vote needed: a. If it is necessary in the usual and regular course of business b. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business 282 In letters a-c, there must be unrestricted retained earnings 283 The other purposes for which the funds may be invested must be among those enumerated as secondary purposes and must further comply with the requirements of Section 42.

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(g) Power to declare dividends General rule: Dividends can only be declared and paid out of actual and bona fide unrestricted retained earnings.284 Special rules: a. Where a corporation sold its real property, which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution. b. Increase in the value of a fixed asset as a result of its revaluation is not retained earnings. However, increase in the value of fixed assets as a result of revaluation 285 may be declared as cash or stock dividends provided that the company: 1. Has sufficient income from operations from which the depreciation on the appraisal increase was charged 2. Has no deficit at the time the depreciation on the appraisal increase was charged to operations; and 3. Such depreciation on appraisal increase previously charged to operations has not been impaired by losses. c. Dividends can be declared out of the amount received in excess of the par value of shares286 when: 1. Declared only as stock dividends and not cash;

284

Dividends - corporate profits set aside, declared, and ordered to be paid by the directors for distribution among shareholders at a fixed time. Forms: a. Cash b. Property c. Stock While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance, stock dividends cannot be applied as payment for unpaid subscription. General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Except: a. When justified by definite corporate expansion projects approved by the board of directors b. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its/his consent and such consent has not yet been secured c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. 285 Revaluation surplus 286 paid-in surplus Unlike par value shares, when no par value shares are sold at a premium, the entire consideration paid is considered capital; hence the same cannot be declared as dividends.

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2. No creditors are prejudiced; and 3. There is no impairment of capital. d. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable. e. No dividends can be declared out of capital except only in two instances: 1. liquidating dividends; and 2. dividends from investments in wasting asset corporation.287 f. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. g. Money cannot be borrowed for the payment of dividends because indebtedness is not a retained earnings of the corporation. h. Corporate earnings which have not yet been received even though they consist in money which is due, cannot be included in the profits out of which dividends may be paid. (h) Power to enter into management contract 288 Requisites: a. Approved by majority of the Board, by majority of the stockholders, of both the managed and managing corporation. b. If a stockholder of the managed corporation owns more than 1/3 of the managing corporation, the management contract must be approved by at least 2/3 of the stockholders of the managed corporation.

287

It permits corporations solely or principally engaged in the exploitation of wasting assets to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion. 288 1. Express power of a corporation 2. Management company must always be subject to the superior power of the board to give specific directions from time to time or to recall the delegation of managerial power. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) Management contract - any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation. A management contract should not be valid for more than 5 years for any one term. You can just keep renewing it provided, that it is not for more than 5 years at any one time

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(i) Ultra vires acts An act which is beyond the conferred powers of a corporation or the purposes or objects for which it is created as defined by the law of its organization. 289 An act done by a corporation outside of the express and implied powers vested in it by its charter and by the law.290 1. Applicability of ultra vires doctrine The ultra vires doctrine typically applies to a corporate body so that any act done by the body which is beyond its capacity to act will be considered invalid. 2. Consequences of ultra vires acts a. Executed contract courts will not set aside or interfere with such contracts; b. Executory contracts no enforcement even at the suit of either party291 c. Part executed and part executory principle of no unjust enrichment at expense of another shall apply; and d. Executory contracts apparently authorized but ultra vires the principle of estoppel shall apply. (j) Doctrine of individuality of subscription A subscription is one entire and indivisible whole contract. It cannot be divided into portions (k) Doctrine of equality of shares Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.292 (l) Trust fund doctrine The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latters unpaid subscription.293
289 290

Republic vs. Acoje Mining Co., Inc. 7 SCRA 361 Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed. 291 void and unenforceable 292 Sec. 6 293 Application of the TFD:

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(3) How exercised (a) By the shareholders They have residual power of fundamental corporate changes. (b) By the Board of Directors Board must act as a body in a meeting.294 (c) By the Officers Via authority from (1) law, (2) corporate by-laws; and (3) authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. 295

1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2. Where it had released the subscribers to the capital stock from their subscriptions; 3. Where it has transferred the corporate property in fraud of its creditors; and 4. Where the corporation is insolvent. Coverage of the TFD: 1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporations legal capital. 2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its property and assets. Exceptions to the TFD: 1. Redemption of redeemable shares (Sec. 8) 2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value of the stockholders share. (Sec. 104) 294 Generally, the Board of Directors alone exercises the powers of the corporation. It is responsible for corporate policies and the general management of the business and affairs of the corporation. Requisites of board meetings: 1) Meeting of the Board duly assembled 2) Existence of quorum 3) Decision of the majority of the quorum duly assembled (Exception: Election of directors requires a vote of majority of all the members of the board) 295 In theory, execute the policies laid down by the board. In practice, often have wide latitude in determining the course of business operations.

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h. Stockholders and members (1) Fundamental rights of a stockholder 296 Managerial rights a. Voting rights; and b. Right to remove directors a. Right to dividends; b. Right to issuance of stock certificate for fully paid shares; c. Proportionate participation in the distribution of assets in liquidation; d. Right to transfer of stocks in corporate books; e. Right to recover stocks unlawfully sold for delinquent payment of subscription f. Preemptive right Remedial rights Individual suit a suit instituted by a shareholder for his own behalf against the corporation; Representative suit shareholder in his likewise of other situated and with a the corporation; and a suit filed by a behalf and in behalf stockholders similarly common cause against

Proprietary rights

Derivative suit a suit filed in behalf of the corporation by its shareholders297 upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation.298

296 297

Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed. not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana 298 Requisites: (i) An existing cause of action in favor of the corporation

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(2) Participation in management (a) Proxy It must be in writing and signed by the stockholder or member 299 and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time.300 (b) Voting trust An agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights301 over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement.302

(ii) The stockholder/member must first make a demand upon the corporation or the management to sue unless such a demand would be futile (iii) The stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious (iv) The action must be brought in the name of the corporation The number of shares of the stockholder is immaterial since he is not suing in his own behalf The mere trustee of shares registered in his name cannot file a derivative suit for he is not a stockholder in his own right. (Bitong vs. CA, 292 SCRA 304) 299 as principal 300 Sec. 58 The right to vote by proxy may be exercised in any of the following instances: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in its by-laws. Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); directors cannot do so. Directors must always act in person. (Sec. 25). 301 and/or any other rights 302 Limitations: a. Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan agreement or for the purpose of circumventing the law against monopolies and illegal combinations b. The agreement must not be used for purposes of fraud c. It must be in writing and notarized and specify the terms and conditions thereof d. A certified copy of the agreement must be filed with the corporation and with the SEC e. The agreement shall be subject to examination by any stockholder of the corporation f. Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period

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(c) Cases when stockholders action is required i. By a majority vote absent; a. To enter into management contract if any of the two (2) instances stated 303 are b. To adopt, amend or repeal the by-laws. ii. By a two-thirds vote a. Power to extend or shorten corporate term; b. Increase/Decrease Corporate Stock; c. Incur, Create Bonded Indebtedness; d. To deny pre-emptive right; e. Sell, dispose, lease, encumber all or substantially all of corporate assets; f. To invest in another corporation, business other than the primary purpose; g. To declare stock dividends h. To enter into management contract if (1) a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital entitled to vote of the managing corporation; or (2) a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of the managed corporation; i. To amend the articles of incorporation. iii. By cumulative voting A system of voting designed to increase the voting power of minority stockholders in the election of corporate directors when more than one director is to be elected. 304
303 304

infra A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. Cumulative voting is allowed for election of members of the Board in a stock corporation. Members of the Board in a Non-stock Corporation shall not be voted cumulatively unless specifically provided for in the By-laws. The total number of votes cast by a stockholder shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected. Gives the minority an opportunity to elect a representative to the BOD. Cannot itself give the minority control of corporate affairs but may affect and limit the extent of majoritys control. Theoretically, this allows the minority block to dominate the election of BOD. However, the minority still needs the majority in order to constitute a quorum.

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(3) Proprietary rights (a) Right to dividends General rule: As soon as the same have been lawfully declared by the BOD, becomes a debt owing to the SH. No revocation can be made. Exceptions: 1) not yet announced or communicated to the public, revocable before announcement to SHs; 2) when stock dividends are declared since these are not distributions but merely represent changes in the capital structure, may be revoked prior to actual issuance. 305 (b) Right of appraisal The right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure.306
By-laws cannot provide against cumulative voting since this right is mandated in Sec. 24 (mandatory in a stock corporation statutory right of SHs). 305 The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto anyone else. 306 Instances wherein appraisal right may be exercised: 1. Extension or reduction of corporate term; 2. Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder; 3. Corporation authorized the board to invest corporate funds in another business or purpose; 4. Corporation decides to sell or dispose of all or substantially all assets of corporation; 5. Merger or consolidation. Exercise of appraisal right: 1. The stockholder must be a dissenting stockholder; 2. The stockholder must made a written demand on the corporation within 30 days after the vote was taken; 3. The proposed action is any one of the instances supra; 4. The price to be paid is the fair value of the shares on the date the vote was taken; 5. The fair value shall be agreed upon but in case there is no agreement within 60 days from the date the vote was taken, the fair value shall be determined by a majority of the 3 distinguished persons one of whom shall be named by the stockholder another by the corporation and the third by the two who were chosen; 6. The right of appraisal is extinguished when: a. He withdraws the demand with the corporations consent; b. The proposed action is abandoned; c. The SEC disapproves the action.

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(c) Right to inspect 1. The demand for inspection should cover only reasonable hours on business days; 2. The stockholder, member, director or trustees demanding the exercise of the right is one who has not improperly used any information secured through any previous examination of the records of the corporation or any other corporation; 3. The demand must be accompanied with statement of the purpose of the inspection, which must show good faith or legitimate purpose; and, 4. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same. (d) Preemptive right It is the shareholders preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings.307 (e) Right to vote Limitations: 1. Where the Articles of Incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as other provided in the said section. 2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided.
307

Purpose: to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. Extends to treasury shares in case of their reissuance. If the shares preferentially offered to a stockholder are not subscribed or purchased by him, it does not follow that said shares shall again be re-offered on a pro rata basis to stockholders who already exercised their preemptive rights. There is no preemptive right with respect to the share to be re-offered. In case additional issues of originally authorized shares: General rule: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. Exception: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion thus offered for subscription. When pre-emptive right not available: a. When denied by the article of incorporation b. Shares requiring stock offering or minimum stock ownership by the public c. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt

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share.

3. Fractional shares of stock cannot be voted unless they constitute at least one full 4. Treasury shares have no voting rights as long as they remain in treasury. 5. Holders of stock declared delinquent by the board for unpaid subscription.

6. A transferee of stock if his stock transfer is not registered in the stock and transfer book of the corporation. 7. A stockholder who mortgages or pledges his shares and gives authority for creditor to vote. (4) Remedial rights308 (5) Obligation of a stockholder a. Liability to the corporation for unpaid subscription; b. Liability to the corporation for interest on unpaid subscription if so required by the by- laws; c. Liability to the creditors o the corporation for unpaid subscription; d. Liability for watered stock; e. Liability for dividends unlawfully paid; f. Liability for failure to create corporation. (6) Meetings (a) Regular309 or special310 i. When and where Regular meetings Annually on a date fixed in the by-laws; if not fixed, on any date in April of every year.311 At any time deemed necessary or as provided in the by-laws.312

Special meetings

308 309

see Fundamental Rights of a stockholder, supra Fixed in the by-laws at regular intervals (like monthly, weekly, quarterly, etc.). Generally, no notice is required except if required by law. 310 Called specially at a date other than the regular meeting. Notice is required. 311 as determined by the board of directors or trustees

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Meetings, whether regular or special, are held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation.313 ii. Notice Regular meetings Written notice shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. At least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws.314 (b) Who calls the meetings When there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer.315 (c) Quorum Consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.316 (d) Minutes of meetings Formal records of business. They can be legal documents. In other cases, the minutes of the meeting are more like a summary of what happened at the meeting.
312 313

Special meetings

Sec. 50 st Sec. 51, 1 par. 314 Ibid. Notice is required for both regular and special meetings but such notice may be waived, expressly or impliedly. 315 Sec. 50 316 unless otherwise provided for in the Code or in the by-laws (Sec. 52)

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i. Board of directors and trustees317 (1) Repository of corporate powers The board of directors or trustees is responsible for corporate policies and general management of the business affairs of the corporation. Unless otherwise provided in the Corp. Code, the Board of Directors control and exercise the corporate powers of corporation, all business conducted and all property of such corporation.318 The board exercises almost all corporate powers, lays down all business policies and is responsible for the efficiency of management. The stockholders have no right to interfere with the boards exercise of its powers and functions except where the law expressly gives them the final say, like in cases of removal of a director, amendment of articles of incorporation, and other major changes.319 (2) Tenure, qualifications and disqualifications of directors Tenure Qualifications: Shall hold office for one (1) year until their successors are elected and qualified.320 1. Stock Corp. - must own at least one (1) share capital stock of the corporation in his own name; Non-stock Corp. - must be a member 2. Majority of the corporate directors/trustees must be residents of the Philippines.321 3. He must be of legal age. Disqualifications: 1. Convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or 2. Violation of this Code committed within five (5) years prior to the date of his election or appointment. 322
317

responsible for corporate policies and the general management of the business and affairs of the corporation 318 Sec. 23 319 Secs. 6, 42 & 43 320 Ibid. 321 Ibid.

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(3) Elections (a) Cumulative voting Allowed for election of members of the board in a stock corporation. Members of the board in a non-stock corporation shall not be voted cumulatively except if otherwise provided in the articles of incorporation or by-laws.323 (b) Quorum The owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. 324 (4) Removal By a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of 2/3 of the members entitled to vote.325 (5) Filling of vacancies By a vote of at least a majority of the remaining directors or trustees, if still constituting a quorum. In the following cases, the stockholders or members shall fill the vacancy: a. When the remaining directors or trustees do not constitute a quorum; b. If the vacancy is caused by the removal of a director or trustee c. If the vacancy is caused by the expiration of term; and d. In case of increase in the number of directors or trustees as a result of an amendment of the articles authorizing such increase
322

Sec. 27 By-laws may provide for additional qualifications/disqualifications as long as such additional qualifications/disqualifications shall not modify requirements as prescribed in the corporation code or be in conflict with such prescribed requirements. 323 See also cumulative voting under Stockholders and members, supra 324 st Sec. 24, 1 sen. 325 with or without cause Such removal shall take place either at a regular meeting or at a special meeting called for the purpose of removal of Directors or Trustees, with previous notice of the time and place of such meeting, as well as the intention to propose such removal. If the officers refuse to call a meeting to consider the removal of the Director, it may be called at the instance of any stockholder or member, but with due notice. Removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled to under Section 24. The board cannot remove a director or trustee as member of the board.

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(6) Compensation In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems. Any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year.326 (7) Disloyalty Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least twothirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. 327 (8) Business judgment rule Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the BOD.328 The rule has two (2) consequences: a) The resolution, contracts and transactions of the BOD, cannot be overturned or set aside by the SHs or members and not even by the courts under the principle that the business of the corp. has been left to the hands of the BOD; and b) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment.329
326 327

Sec. 30 Sec. 34 328 see Sec. 23 329 Exceptions: a. When the Corp Code expressly provides otherwise; b. When the directors or officers acted with fraud, gross negligence or in bad faith; and c. When directors or officers act against the corp. in conflict-of-interest situation General rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corp. & courts will not interfere. Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority. Board of Directors has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting partiesThe test to be applied is whether the act in question is the direct and immediate furtherance of the corporations business, fairly

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(9) Solidary liabilities for damages Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.330 (10) Liability for watered stocks Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.331 (11) Personal liabilities Corporate officers are not personally liable for their corporate acts unless: a) They have exceeded their authority; or b) Acted with bad faith or malice. (12) Responsibility for crimes Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case, the responsible officers would be criminally liable.332 While it is true that a criminal case can only be filed against the officers and not against the corporation itself, it does not follow that the corporation cannot be a real partyin-interest for the purpose of bringing a civil action for malicious prosecution for the
incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise not. [Montelibano v. Bacolod MurciaMilling Co. (1962) Questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. The directors are also not liable to the stockholders in performing such acts (Phil. Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232 (1997)) 330 st Sec. 31, 1 par. 331 Sec. 65 332 People vs. Tan Boon Kong, 54 Phil. 607 (1930); Sia vs. CA, 121 SCRA 655 (1983); Times, Inc. vs. Reyes, 39 SCRA 303 (1971)

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damages incurred by the corporation for the criminal proceedings brought against its officer.333 (13) Special fact doctrine Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances of acts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud.334 Director takes advantage of an information by virtue of his office to the disadvantage of the corporation. (14) Inside information The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest. The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stockholder Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation.335 (15) Contracts (a) By self-dealing directors with the corporation A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and
333 334

Cometa vs. CA Strong v Repide, 1909 335 Secs. 3.8, 23.2, 27,61, 71.2, Securities Regulation Code General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with them at arms length. No duty to disclose facts known to the director or officer.

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4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose, provided: (1) full disclosure of the adverse interest of the directors or trustees involved is made at such meeting; and (2) the contract is fair and reasonable under the circumstances. 336 (b) Between directors corporations with interlocking

Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. If the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of Section 32 337 insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. 338 (16) Executive committee (a) Creation The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board.339

336 337

Sec. 32 supra 338 Sec. 33 339 st Sec. 35, 1 sen.

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(b) Limitations on its powers Powers that cannot be delegated to the executive committee: 1. Approval of any action requiring concurrence of stockholders; 2. Filling of vacancies in the board; 3. Adoption, amendment or repeal of by-laws; 4. Amendment or repeal of board resolution which by its terms cannot be amended or repealed; 5. Distribution of cash dividends.340 (17) Meetings (a) Regular or special i. When and where Regular meetings Shall be held monthly, unless the by-laws provide otherwise. May be held at any time upon the call of the president or as provided in the by-laws.

Special meetings

Meetings may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.341 ii. Notice Must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.342 (b) Who presides The president, unless the by-laws provide otherwise.343
340 341 nd

Ibid., 2 sen. Sec. 53 342 Ibid. 343 Sec. 54

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(c) Quorum A majority of the number of directors or trustees as fixed in the articles of incorporation.344 (d) Rules on abstention When it comes time for directors to vote on an issue, a director may vote "yes" or "no." If a director abstains from voting, that means the director has not voted. An abstention is a non-vote, a decision not to make a decision.345 The president votes on all motions, not just to break ties. An abstention may have the practical effect of a "no" vote since the motion may fail for lack of sufficient "yes" votes. Unless a greater number is called for in the articles or bylaws, a matter is deemed "approved" by the board if at any meeting at which a quorum is present at least a majority of the required quorum of directors votes in favor of the action. 346 When the chair calls for a vote, abstentions are not called for, only the ayes and nays.347 The burden is on an abstaining director to speak up if he/she wants to be recorded as an abstention. If the vote is called for and one of the directors fails or refuses to indicate "yes," "no" or "abstain," and the chair of the meeting deems the director to have voted "yes" and the silent director does not object, the vote is counted as a "yes" vote. Whenever a director believes he/she has a conflict of interest, the director should abstain from voting on the issue and make sure his/her abstention is noted in the minutes. 348 The other reason a director might abstain is that he/she believes there was insufficient information for making a decision. Otherwise, directors should cast votes on all issues put before them. Failure to do so could be deemed a breach of their fiduciary duties.

Some by-laws provide that the Chairman of the board of directors or trustees presides at board meetings. 344 nd unless the articles of incorporation or the by-laws provide for a greater majority (Sec. 25, 2 par.) 345 Robert's Rules of Order, 10th ed., p 43 346 For example, if five directors are present (out of five) and there is a motion to close the pool each day at 8:00 p.m. (from the current 10:00 p.m.) and two directors vote "yes," two directors vote "no," and one abstains, the motion fails. The vote needed a majority of three yes votes to pass and it only received two. Accordingly, the pool remains open to 10:00 p.m. each night. Under limited circumstances, a director may change his/her vote or the matter may be reconsidered at a later date. 347 ibid. 348 ibid., p. 394

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j. Capital affairs (1) Certificate of stock (a) Nature of the certificate Evidences of ownership of stock in a corporation. They are transferable in the manner provided for349 but the transfer shall bind the parties only when recorded in the books of the corporation. Shares of stock being personal property can also be pledged. (b) Uncertificated shares Mutual fund shares which are maintained on the transfer agent's records, but for which stock certificates have not been issued, also called book shares. 350 (c) Negotiability i. Requirements for valid transfer of stocks No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.351 (d) Issuance i. Full payment No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.352 ii. Payment pro-rata General rule: Entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed. 353

349 350

See Sec. 63 investorwords.com 351 See Sec. 63 352 Sec. 64 353 Nava v Peers Mktg Corp and Fua Cun v Summers

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Exception: In the Baltazar vs. Lingayen Gulf Electric Power Co case, it was the practice of the corp. to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid. (e) Stock and transfer book354 i. Contents (1) All stocks in the names of the stockholders alphabetically arranged; (2) The installment paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; (3) A statement of every alienation, sale or transfer of stock made; and (4) Such other entries as the by-laws may prescribe.355 ii. Who may make valid entries The corporate secretary is the officer who is duly authorized to make entries on the stock and transfer book.356 (f) Lost or destroyed certificates Procedure for re-issuance in case of loss, stolen or destroyed certificates: 1. The registered owner of certificates of stock or his legal representative shall file with the corporation an affidavit setting forth as far as possible: a) the circumstances as to how the certificates were lost, stolen or destroyed; b) the number of shares represented by each certificate, the serial numbers of the certificates; c) the name of the corp. which issued the same; d) such other information and evidence which he may deem necessary.

354

The stock and transfer book is the best evidence of the transactions that must be entered or stated therein. However, the entries are considered prima facie evidence only and may be subject to proof to the contrary (Lanuza v. Court of Appeals, 454 SCRA 54) 355 Gokongwei v. SEC, 278 SCRA 793 (1997) 356 Garcia v. Jomouad, 323 SCRA 424 (2000)

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2. The corp. shall publish a notice in a newspaper of general circulation published in the place where the corp. has its principal office, once a week for 3consecutive weeks at the expense of the owner of the certificate of stock, which has been lost, stolen or destroyed. 3. After the expiration of one (1) year from the date of the last publication and if no contest has been presented, the corp. shall cancel in its books the certificate of stock and issue in lieu thereof new certificates of stock. The right to make such contest shall be barred after the expiration of the one-yearperiod.4. Even before the one year period expires, the new certificates may be issued if the registered owner files a bond or other security, running for a period of one (1) year for a sum and in such form and with such sureties as may be satisfactory to the BOD. Provided, that if there is a pending contest regarding the ownership of said certificates, the issuance of new certificates shall be suspended until the final decision of the court regarding the ownership of the certificate of stock. 357 (g) Situs of the shares of stock Generally at the domicile of the owner.358 (2) Watered stocks (a) Definition Stocks issued gratuitously, money/property less than par value, services less than par value, dividends where no surplus profits exist. (b) Liability of directors for watered stocks Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.359

357

Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corp. which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure. 358 For purposes of execution, attachment and garnishment, the situs of shares of stock is the domicile of the corporation. For the purpose of registering the chattel mortgage over the shares of stock, the situs of shares shall be the province in which the corporation has its principal business or office. For purposes of taxation, it is the domicile of the corporation that is generally controlling. 359 Sec. 65

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(c) Trust fund doctrine for liability for watered stocks "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. 360 A corporation has no power to release an original subscriber to its capital stock form the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock and take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary. 361" Likewise, under Sec. 65 of the Corporation Code, no distinction is made as to creditors whether they become such prior to or subsequent to the issuance of the watered stock and fraud is not made an element. In any event, Sec. 65 is by itself sufficient basis to hold a stockholder liable to any corporate creditor. The legal standing of corporate creditors against guilty stockholders and officers for watered stock is clear in a situation when the corporation is insolvent since then all corporate assets would be held for the satisfaction of the claims of the creditors, before any distribution is made to the stockholders. But when the corporation is still a "going concern" and the watering of the stock does not actually render it insolvent, does Sec. 65 actually grant corporate creditors the legal standing to bring at that point a suit against the involved stockholder and the guilty officers? In the payment of property for subscribed shares, Sec. 62 of the Corporation Code provides that "the valuation thereof shall initially be determined incorporators or the board of directors subject to approval by the Securities and Exchange Commission." In actual practice the watering of stock is not supposed to happen because property consideration for subscription is always evaluated by the Securities and Exchange Commission which often conducts an examination of the involved properties and appraisal reports are submitted to establish the fair value of such properties. When the Securities and Exchange Commission approves the valuation it may be difficult to sustain an assertion later on that there has been watering of the shares.362

360 361

Velasco vs. Poizat, 37 Phil., 802 14 C.J., 498,620 362 Cesar L. Villanueva, The Trust fund doctrine under Philippine corporate setting

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(3) Payment of balance of subscription (a) Call by board of directors363 The board of directors of any stock corporation364 may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case, with accrued interest, if any, as it may deem necessary.365 (b) Notice requirement Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. 366 (4) Sale of delinquent shares (a) Effect of delinquency367 Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number
363

Call is a declaration by the board of directors that the unpaid subscriptions are due and payable to the corporation. The word call is capable of three meanings, namely: (a) a resolution of the BoD for the payment of unpaid subscriptions; (b) notification of such resolution made on the stockholders; or (c) the time when subscriptions become payable. (CLVs Textbook. P. 392) 364 subject to the provisions of the contract of subscription 365 st Sec. 67, 1 par. While the board may call for payment of the subscription at any time, if the subscription contract specifies a date for payment thereof, the board must respect said contract. Thus, unpaid subscription plus interest is payable on a date agreed upon, or upon call by the board of directors. 366 nd Id., 2 par. 367 (1) Deprives the stockholder the right: a) To be voted for; or b) To be entitled to vote; or c) To representation at any stockholders meeting (2) Delinquent stockholder shall not be entitled to any of the rights of a stockholder but he shall still be entitled to receive dividends. (3) Delinquent stocks shall be subject to delinquency sale

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of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.368 (b) Call by resolution of the board of directors The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. 369 (c) Notice of sale Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.370 (d) Auction sale Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.371 (5) Alienation of shares (a) Allowable restrictions on the sale of shares It must appear in the 1. Articles of incorporation 2. By-laws 3. Certificate of stock Otherwise, the same shall not be binding on any purchaser in good faith. 372
368 369

Sec. 68, 3 par. st Id., 1 par. 370 nd Id., 2 par. 371 Id., last par. 372 Sec. 98

rd

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(b) Sale of partially paid shares There can be no stock certificate on which an indorsement may be made. Shares are thus not transferable on the books. (c) Sale of a portion of shares not fully paid Stockholder cannot transfer part of his subscriptionindivisibility of subscription of contract.373 (d) Sale of all of shares not fully paid Entire subscription not fully paid may be transferred to a single transferee.374 (e) Sale of fully paid shares Shares of stock issued with stock certificates become personal property and may be transferred by delivery of the certificate endorsed by the owner.375 (f) Requisites of a valid transfer a) Delivery of the certificate or certificates; and b) indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. (g) Involuntary dealings Involuntary Alienation - alienation against the wishes of the transferor, as by attachment.376

Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. 373 Nava and Fua Cun Difficult to determine whether or not partial payments made should be applied as full payment. 374 Must secure the consent of the corporation since the transfer contemplates a novation of contract. But cannot be forced upon the corporation 375 See Sec. 63 376 Blacks Law dictionary

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k. Dissolution377 and liquidation378 (1) Modes of dissolution (a) Voluntary i. Where no creditors are affected a. A meeting must be held on the call of directors or trustees; b. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting; c. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place; d. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members; e. A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary; f. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution.379 ii. Where creditors are affected a. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members in a meeting called for the purpose; b. Filing a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by President or Secretary or Director. Claims and demands must be stated in the petition; c. If Petition is sufficient in form and substance, the SEC shall issue an Order fixing a hearing date for objections;

377
378

Extinguishment of the franchise of a corporation and the termination of its corporate existence. Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. (PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001) Process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. (Reburiano v. Court of Appeals, 301 SCRA 342 (1999) If full liquidation can only be effected after the 3-year period and there is no trustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication. 379 Sec. 118

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d. A copy of the Order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation or if there is no newspaper in the municipality or city of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient; e. Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order; f. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections; g. Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver.380 iii. By shortening of corporate term This is done by amending the Articles of Incorporation. (b) Involuntary rules. By filing a verified complaint with the SEC based on any ground provided by law or i. By expiration of corporate term When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. 381 ii. Failure to organize and commence business within two (2) years from incorporation382 Its corporate powers cease and the corporation shall be deemed dissolved. 383 iii. Legislative dissolution Through appropriate laws passed by Congress.

380 381

Sec. 119 PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992) 382 non-use of charter 383 automatic

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iv. Dissolution by the SEC on grounds under existing laws 1. Fraud or misrepresentation as to the paid-up capital of the corporation384 2. Misrepresentation 3. Ultra vires mala prohibita, but too numerous infractions, which are persistent despite SEC earnings.385 4. Continuous inactivity of the corporation for at least five (5) years 5. Refusal to adopt or approve by-laws.386 (2) Methods of liquidation (a) By the corporation itself Liquidation by the corporation itself through its Board of directors who have only three (3) years to finish its work of liquidation.387 (b) Conveyance to a trustee within a 3-year period Conveyance of all corporate assets to trustees who will take charge of liquidation. Unless the trusteeship is limited in its duration by the deed of trust, the 3-year limitation will not apply as long as the designation of trustees is made within said period. The Board who cant finish liquidating in time may let trustees take over the job. 388

384 385

25%-25% requirement Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58 (1967) 386 P.D. 902-A 387 After the dissolution of the corporation, it continues to exist as a body corporate, but only for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. 388 Anytime during the 3 year period, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of shareholders and other persons in interest. If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as trustees to complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including the shareholders and the creditors of the corporation, acting for and in its behalf, might make proper representations with the appropriate body for working out a final settlement of the corporate concerns. (Clemente v. Court of Appeals, 242 SCRA 717 (1995)) In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as trustees. Under Sec. 145 No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. This provision safeguards the

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(c) By management committee or rehabilitation receiver Liquidation by a receiver who may decreeing the dissolution of the corporation. the corporation is substituted by the receiver. without anything more, does not result in the the exercise of its corporate rights. have been appointed by the SEC upon its Three (3) year period does not apply because However, the mere appointment of a receiver, dissolution of the corporation nor bar it from

(d) Liquidation after three (3) years There is nothing in Sec. 122389 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. Is immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation. 390

rights of a corporation which is dissolved pending litigation. (Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002). 389 Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. 390 Republic v. Marsman Dev. Co., 44 SCRA 418 (1972)

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l. Other corporations (1) Close corporations A special kind of stock corporation: 1. whose articles of incorporation should provide that: a. the number of stockholders shall not exceed 20; b. issued stocks are subject to transfer restrictions, with a right of preemption in favor of the stockholders or the corporation; and c. the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; and 2. At least 2/3 of the voting stocks or voting rights should not be owned or controlled by another corporation which is not a close corporation.391 (a) Characteristics of a close corporation 1. Stockholders may act as directors without need of election and therefore are liable as directors; 2. Stockholders who are involved in the management of the corporation are liable in the same manner as directors are. 3. Quorum may be greater than mere majority; 4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid; 5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others; 6. Preemptive right extends to all stock issues; 7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and 8. Stockholder may withdraw and avail of his right of appraisal.392

391 392

Sec. 96 Special rules are provided for close corporations because it is essentially an incorporated partnership (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)

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(b) Validity of restrictions on transfer of shares Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.393 (c) Issuance or transfer of stock in breach of qualifying conditions Effects: 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.
393

Sec. 98

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6. The term "transfer" is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied.394 (d) When board meeting is unnecessary or improperly held Any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. 395 If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.396 (e) Preemptive right Shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.397 (f) Amendment of articles of incorporation Any amendment to the articles of incorporation which seeks to delete or remove any provision required to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may
394 395

Sec. 99 unless the by-laws provide otherwise 396 Sec. 101 397 Sec. 102

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be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. 398 (g) Deadlocks When the directors or stockholders are so divided respecting the management of the corporations business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally.399 (2) Non-stock corporations (a) Definition A corporation organized for an eleemosynary purpose, and no part of whose income is, during its existence, distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution. 400 (b) Purposes Charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural. 401 (c) Treatment of profits Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which it was organized.

398 399

Sec. 103 st Sec. 104, 1 par. Powers of the SEC in case of deadlock in close corporations: 1. Cancel or alter any provision in the articles of incorporation or bylaws 2. Cancel, alter or enjoin any resolution of the corporation 3. Direct or prohibit any act of the corporation 4. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. 5. Appoint a provisional director 6. Dissolve the corporation 7. Granting such other relief as the circumstances may warrant. (id.) 400 Sec. 87 401 Sec. 88 They are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features.

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(d) Distribution of assets upon dissolution 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged or adequate provision shall be made therefor 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of dissolution, shall be returned, transferred or conveyed in accordance with such requirements 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes but not held upon a condition requiring return, transfer or conveyance by reason of dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution 4. Other assets, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution. The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of the members having voting rights at a meeting.402 (3) Religious corporations A corporation composed entirely of spiritual persons and which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. It is different from an ordinary nonstock corporation organized for religious purposes. (a) Corporation sole A special form of corporation, usually associated with the clergy, consisting of one person only and his successors, who is incorporated by law to give some legal capacities and advantages.

402

Sec. 94

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i. Nationality No nationality.403 A corporation sole does not have any nationality but for purposes of applying our nationalization laws, nationality is determined not by the nationality of its head but by the nationality of the members constituting the sect in the Philippines even if it is headed by the Pope.404 ii. Religious societies A non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons. 405 (4) Foreign corporations A corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state.406 (a) Bases of authority over foreign corporations i. Consent The legal standing of foreign corporations in the host state is founded on international law on the basis of consent. 407 Consent, as a requisite for jurisdiction over foreign corporations, is founded on considerations of due process and fair play. As held in Pennoyer v. Neff,408 the jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant's person. Therefore, his presence within the territorial jurisdiction of a court is prerequisite to its rendition of judgment personally binding him. International Shoe Co. v. State of Washington409 expanded the coverage by stating that due process requires only that in order to subject a defendant to a judgment in personam, if he not be present within the territory of the forum, he must have certain minimum contacts with it such that the
403

Republic vs. Iglesia ni Kristo, cited in the case of Rafael Albano. Et al. vs. Court of Appeals, et al., G.R. No. 144708, August 10, 2001 404 Roman Catholic Apostolic Church v. LRC, 1957 405 e.g. religious order, diocese, synod, sect, etc. 406 Sec. 123 The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. It is not permitted to transact or do business in the Philippines until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. 407 Salonga, Private International Law, 1979 ed., p. 344. 408 95 U.S. 714, 733, 24 L. Ed. 565 (1877) 409 326 U.S. 310, 66 S.Ct. 154, 90 L. Ed. 95 (1945).

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maintenance of the suit does not offend "traditional notions of fair play and substantial justice."410 ii. Doctrine of "doing business" The Corporation Code does not define the phrase doing or transacting business. Jurisprudential Tests:411 1. Twin characterization test a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another;413 and Statutory Tests412 Acts constituting doing business: a) Soliciting orders, service contracts, opening offices, whether called liaison offices or branches;

b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period b) Whether there is continuity of or periods totaling 180 days or more; commercial dealings and arrangements, contemplating to some extent the c) Participating in the management, performance of acts or works or the exercise supervision or control of any domestic of some functions normally incident to and business, firm or entity or corporation in the in progressive prosecution of, the purpose Philippines;415 and and object of its organization.414 d) Any other act or acts that imply a 2. Contract Test continuity of commercial dealings or arrangements, and contemplate to that extent Whether the contracts entered into by the performance of acts or works, or the the foreign corporation, or by an agent exercise of some of the functions normally acting under the control and direction of the incident to, and in progressive prosecution foreign corporation, are consummated in the of, commercial gain or of the purpose of the Philippines. business organization

.
410

Cesar L. Villanueva, Foreign Corporations and the Concept of Doing Business in the Philippines Philippine Corporate Law, Cesar Villanueva, 2001 ed. 412 Foreign Investment Act of 1991 (R.A. No. 7042) 413 Substance Test 414 Continuity Test 415 as defined under R.A. 7042
411

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(b) Necessity of a license to do business i. Requisites for issuance of a license If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. 416 ii. Resident agent An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. 417 (c) Personality to sue No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines. 418 (d) Suability of foreign corporations Such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. 419

416 417

Sec. 126 Sec. 127-128 418 Lorenzo Shipping Corp. v. Chubb & Sons, Inc., et al., 431 SCRA 266 (2004) 419 Ibid.

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(e) Instances when unlicensed foreign corporations may be allowed to sue - Isolated transactions420 1. To seek redress for an isolated business transaction; 2. To protect its corporate reputation, name, and goodwill; 3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the Philippines; 4. When the parties have contractually stipulated that Philippines is the venue of actions; and 5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation. (f) Grounds for revocation of license 1. Failure to file annual reports required by the Code; 2. Failure to appoint and maintain a resident agent; 3. Failure to inform the SEC of the change of residence of the resident agent; 4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5. A misrepresentation in material matters in reports; 6. Failure to pay taxes, imposts and assessments; 7. Engage in business unauthorized by SEC; 8. Acting as dummy of a foreign corporation; and 9. Not licensed to do business in the Philippines. 421

420

Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. (Eriks Pte.Ltd vs. CA, 267 SCRA 567) 421 Sec. 134

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m. Merger and consolidation422 (1) Definition and concept Merger Consolidation

A union whereby one or more existing The union of two or more existing corporations are absorbed by another corporations to form a new corporation corporation which survives and continues called the consolidated corporation. the combined business.

One of the constituent corporations remains as an existing juridical person, whereas the other corporation shall cease to exist. Merger is the disappearance of one of the corporations with the other corporation acquiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation.423

If there is consolidation, there will be disappearance of both the constituent corporations with the emergence of a new corporate entity, called the consolidated corporation, which shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities. Also, the number of shares that will be issued to each of the stockholders under the new corporation is determined by the ration between the assets of the two (2) corporations.424

(2) Constituent v. consolidated corporation Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.425

422

Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required. 423 Of course, there is an arrangement as to the shares of stocks that will be issued to the former stockholders of the two (2) corporations which were merged. Said stockholders are now stockholders of the corporation which survives. The proportion between the two (2) corporations will be the basis of the shares of stocks that will be issued to the stockholders under the surviving corporation 424 In a merger or consolidation: 1. Sale of assets is always involved 2. There is automatic assumption of liabilities 3. There is continuance of the enterprise and of the stockholders 4. Title to the assets are transferred by operation of law 5. The constituent corporations are automatically dissolved 425 Sec. 76

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(3) Plan of merger or consolidation The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; effect; 2. The terms of the merger or consolidation and the mode of carrying the same into

3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.426 (4) Articles of merger or consolidation After the approval by the stockholders or members, articles of merger or articles of consolidation shall be executed by each of the constituent corporations: 1) to be signed by the president or vice-president and 2) certified by the secretary or assistant secretary of each corporation The articles of merger or consolidation shall set forth: 1) The plan of the merger or the plan of consolidation; 2) As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; and3) As to each corporation, the number of shares or members voting for and against such plan, respectively The articles of merger or consolidation shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval.

426

Ibid.

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(5) Procedure a. The board of directors or trustees of each corporation shall approve a plan of merger or consolidation b. The plan shall be submitted for approval by the stockholders or members of each of such corporation at separate corporate meetings duly called for the purpose c. The articles of merger or consolidation shall be executed by each of the constituent corporations d. Submission to the SEC for approval e. The SEC may or may not conduct a hearing f. Issuance of certificate of merger or consolidation by the SEC (6) Effectivity Upon issuance by the SEC of the certificate of merger and consolidation. 427 (7) Limitations a. Should not create monopolies b. Should not eliminate free and healthy competition c. Act 3518, Sec 20 inhibits illegal combinations. (8) Effects 1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation and, in the case of consolidation, shall be the consolidated corporation; 2. The separate existence of the constituent corporation shall cease, except that of the surviving corporation; 3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and subject to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations;

427

Sec. 79, 2 sen.

nd

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5. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; 6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations; 7. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations; and 8. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. 428

428

Sec. 80

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H. Securities Regulation Code429 1. State policy Purposes: 1. To establish a socially conscious, free market that regulates itself 2. To encourage the widest participation of ownership in enterprises 3. To enhance the democratization of wealth 4. To promote the development of the capital market 5. To protect investors 6. To ensure full and fair disclosure about securities 7. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. 430 2. Powers and functions of the SEC a. Regulatory 1. Supervision over corporations, partnerships, and grantees of primary franchise; 2. Approve, reject registration statements/licensing applications; 3. Suspend, revoke, after notice and hearing primary franchise on grounds; 4. Regulate/supervise activities of persons to ensure compliance; 5. Supervise monitor, suspend or take over, exchanges, clearing agencies and SROs; 6. Recommend policies, advise, propose legislation to Congress on securities market; 7. Prepare, approve, amend or repeal rules, regulations, issue opinions 8. Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government as well as any private institution, corporation, firm, association or person in the implementation of its powers.431

429 430

R.A. No. 8799 Sec. 2 431 Sec. 5

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b. Adjudicative 1. Issue cease and desist orders to prevent fraud or injury; 2. Punish for contempt of the Commission; 3. Compel the officers of any registered corporation or association to call meetings of stockholders or members; 4. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission; and 5. Exercise such other powers as may be provided by law which are necessary or incidental to the carrying out its express powers. 432 3. Securities required to be registered General rule: A registration statement duly filed and approved by the SEC is necessary before securities may be sold and offered for sale or distribution within the Philippines. Prior to any sale, information on the securities, in such form and substance prescribed by the SEC, shall be made available to each prospective purchaser.433 Exceptions: 1. Exempt securities; and 2. Exempt transactions. a. Exempt securities 1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled by and acting as an instrumentality of said Government. 2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision or agency thereof on the basis of reciprocity. 3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

432 433

ibid. Sec. 8

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4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and land Use Regulatory Board, or the Bureau of Internal Revenue. 5. Any security issued by a bank except its own shares of stock. 6. Any securities added by the SEC by rule or regulation after public hearing.434 b. Exempt transactions 1. Judicial sale by executor, administrator, guardian/receiver in insolvency or bankruptcy. 2. Sale of pledged or mortgaged security to liquidate a bona fide debt. 3. Sale on isolated transactions by owner. 4. Distribution of stock dividends. 5. Sale of capital stock exclusively to stockholders where no commission is paid. 6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage are sold to a single purchaser at a single sale. 7. Issuance of security in exchange of any security from same issuer pursuant to right of conversion. 8. Brokers transactions ACS. 9. Pre-incorporation subscription and subscription pursuant to an increase of the 10. Exchange of securities by issuer with existing security holders exclusively 11. Sale to less than 20 persons during any 12- month period 12. Sale of securities to banks, registered investment house, insurance companies, pension fund or retirement plan maintained by the government or other persons authorized by the BSP to engage in trust functions. 435

434 435

Sec. 9 Sec. 10

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4. Procedure for registration of securities All securities required to be registered under Subsection 8.1436 shall be registered through the filing by the issuer in the main office of the Commission, of a sworn registration statement with the respect to such securities, in such form and containing such information and document as the Commission prescribe. The registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 437 8.3,438 and 8.4.439 In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annex thereto), the Commission may require the registration statement to contain such information or documents as it may, by rule, prescribe. It may dispense with any such requirements, or may require additional information or documents, including written information from an expert, depending on the necessity thereof or their applicability to the class of securities sought to be registered. The information required for the registration of any kind, and all securities, shall include, among others, the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership. The registration statement shall be signed by the issuers executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration statement shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall be filed. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered. The Commission shall prescribe by the rule diminishing fees in inverse proportion the value of the aggregate price of the offering.

436

Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. 437 The Commission may conditionally approve the registration statement under such terms as it may deem necessary. 438 The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section 439 A record of the registration of securities shall be kept in Register Securities in which shall be recorded orders entered by the Commission with respect such securities. Such register and all documents or information with the respect to the securities registered therein shall be open to public inspection at reasonable hours on business days.

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(b) Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe, reciting that a registration statement for the sale of such securities has been filed, and that aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe. Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto, is on its face complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. Upon affectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated herein or necessary to make the statement therein not misleading shall constitute fraud. 440 5. Prohibitions on fraud, manipulation and insider trading a. Manipulation of security prices It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market: (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership.
440

Sec. 12

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(b) To affect, alone or with others, a securities or transactions in securities that: (i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (ii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. (c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. (d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section. 441 b. Short sales A sale of a security that the seller does not own or has not contracted for at the time of sale, and that the seller must borrow to make the delivery. Such a sale is usually made when the seller expects the securitys price to drop. If the price does not drop, the seller can make a profit on the difference between the price of the shares sold and the lower price of the shares bought to pay back the borrowed share.442

441 442

Sec. 24 Blacks Law Dictionary

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c. Fraudulent transactions It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: (1) Employ any device, scheme, or artifice to defraud; (2) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (3) Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person. 443 d. Insider trading The selling or buying of a security by an insider while in possession of material nonpublic information with respect to the issuer or the security. It is considered unlawful unless: 1. The insider proves that the information was not gained from such relationship, or 2. If the other party selling to or buying from the insider444 is identified, the insider proves: a. that he disclosed the information to the other party, or b. that he had reason to believe that the other party otherwise is also in possession of the information.445

443 444

Sec. 26 or his agent 445 Sec. 27.1

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6. Protection of investors a. Tender offer rule446 A publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. It is mandatory to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances: a. The person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers; b. The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; or c. The person intends to acquire shares that would result in ownership of more than 50% of the equity shares of a public company.447 b. Rules on proxy solicitation Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission; Proxies must be in writing, signed by the stockholder or his duly authorized representative and filed with the corporate secretary before the scheduled meeting; 448 unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended; no proxy shall be valid and effective for a period longer than 5 years at one time; 449 and a broker or dealer cannot give a proxy in respect of any security it carries for the account of a customer without the express written authorization of such customer.450 The issuance and solicitation of proxies are regulated to minimize, if not avoid, the abuse and misuse of the proxy device that may lead to the self-perpetuation and irresponsibility of management. Management has innate advantages in the solicitation of
446

Tender offer is made: 1. By filing with the SEC a declaration to make a tender offer; 2. By furnishing the issuer or the originator of the security a statement containing such information required under Sec. 17 of the SRC: i. Annual Report (includes balance sheet, profit and loss statement); and ii. Periodical reports for interim fiscal periods; and 3. By publishing all requests or invitations for tender, or materials, making a tender offer or requesting or inviting letters of such a security. 447 Rule 19, SRC 448 Sec. 20.2 449 Sec. 20.3 450 Sec. 20.4

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proxies; it has the stockholders list; it benefits from the usual inertia of stockholders; and it has access to corporate funds for the normally substantial costs of solicitation. 451 c. Disclosure rule It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained from such relationship; or proves: (b) If the other party selling to or buying from the insider452 is identified, the insider (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information.453 It shall be unlawful for any insider to communicate material nonpublic information 454 about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8,455 where the insider communicating the information

451

Fundamentals of Securities Regulation, p. 432 No solicitation of proxy shall be made unless each person solicited is furnished, concurrently or earlier, with a written proxy statement containing the information required by the SEC (SRC Rule 20, par. 3). The form of proxy, shall be made unless each person solicited or given to stockholders at least 15 business days prior to the meeting date (SRC Rule 20, par. 4.f). 452 or his agent 453 Sec. 27.1 A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insiders spouse or relatives by affinity or consanguinity within the second degree, legitimate or commonlaw, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the purchase or sale. 454 Information is "material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. 455 "Insider" means (a) the issuer; (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any forgoing insiders.

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knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information. 456 for: It shall be unlawful where a tender offer has commenced or is about to commence

(i) Any person457 who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and (ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, 458 and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27.4 (a)(i).459 7. Civil liability Any person acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statements not misleading, and who suffers damage, may sue and recover damages from the following enumerated persons, unless it is proved that at the time of such acquisition he knew of such untrue statement or omission: (a) The issuer and every person who signed the registration statement: (b) Every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted; (c) Every person who is named in the registration statement as being or about to become a director of, or a person performing similar functions, or a partner

456 457

Sec. 27.3 other than the tender offeror 458 shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities 459 Sec. 27.4 (a) (i) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer.

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in, the issuer and whose written consent thereto is filed with the registration statement; (d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus. (e) Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared or certified by him. (f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him. (g) Every underwriter with respect to such security. If the person who acquired the security did so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement, but such reliance may be established without proof of the reading of the registration statement by such person. 460 Any person who: (a) Offers to sell or sells a security in violation of Chapter III, 461 or (b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the use of any means or instruments of transportation or communication, by means of a prospectus or other written or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

460 461

Sec. 56 Registration of securities

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Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person who, not knowing that such statement was false or misleading, and relying upon such statement shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading.462 Any person who engages in any act or transaction in violation of Sections 19.2, 463 20464 or 26,465 or any rule or regulation of the Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case may be, for the damages sustained by such other person as a result of such act or transaction.466 Any person who willfully participates in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue to recover the damages sustained as a result of such act or transaction. 468
467

Any person who engages in any act or transactions in willful violation of any rule or regulation promulgated by the Commission under Section 11 469 or 16,470 which the Commission denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation, fictitious transactions, undue
462 463

Sec. 57 It shall be lawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made in the light of the circumstances under which they are made, not misleading, or to engaged to any fraudulent, deceptive or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation for any security holders in opposition to or in favor of any such favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, define and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive and manipulative. 464 On Proxies, supra 465 On Fraudulent transactions, supra 466 Sec. 58 467 On Manipulation of Security Prices, supra 468 Sec. 59 469 Commodity Futures Contracts. - No person shall offer, sell or enter into commodity futures contracts except in accordance with the rules, regulations and orders the Commission may prescribe in the public interest. The Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market. 470 Pre-Need Plans. No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans.

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speculation, or other unfair or abusive practices with respect to commodity future contracts, shall be liable to any other person sustaining damages as a result of such act or transaction. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the elements of proof required for recovery and any limitations on the amount of damages that may be imposed.471 Any insider who violates Subsection 27.1472 and any person in the case of a tender offer who violates Subsection 27.4 (a)(i),473 or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him. An insider who violates Subsection 27.3474 or any person in the case of a tender offer who violates Subsection 27.4 (a),475 or any rule or regulation thereunder, by communicating material nonpublic information, shall be jointly and severally liable under Subsection 61.1 476 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 477 by reason of his purchase or sale of a security.478

471 472

Sec. 60 supra 473 id. 474 id. 475 id. 476 Any insider who violates Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him. 477 supra 478 Sec. 61

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I. Banking Laws 1. The New Central Bank Act479 a. State policies 1. Maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. 2. The central monetary, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy.480 b. Creation of the Bangko Sentral ng Pilipinas (BSP) An independent central monetary authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas, hereafter referred to as the Bangko Sentral. The capital of the Bangko Sentral shall be Fifty billion pesos (P50,000,000,000), to be fully subscribed by the Government of the Republic, Ten billion pesos (P10,000,000,000) of which shall be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for within a period of two (2) years from the effectivity of this Act in such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine.481 c. Responsibility and primary objective Responsibilities Primary objectives

1. To provide policy directions in the areas 1. To maintain price stability conducive to a of money, banking, and credit; balanced and sustainable growth of the economy. 2. To supervise bank operations 2. To promote and maintain monetary 3. To regulate the operations of finance stability and the convertibility of the peso. companies and non-bank financial institutions performing quasi-banking functions, and similar institutions. 482

479 480

R.A. No. 7653 Sec. 1 481 Sec. 2 482 Sec. 3

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d. Monetary Board - Powers and functions 1. To adopt, alter and use a corporate seal which shall be judicially noticed 2. To enter into contracts 3. To lease, own, sell property 4. To sue and be sued 5. To acquire and hold such assets and incur such liabilities in connection with its operations or as are essential to the proper conduct of operation 6. To compromise condone or release any claim of or settled liability to the BSP 7. To do and perform such other necessary powers e. How the BSP handles banks in distress (1) Conservatorship Whenever on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors; shall appoint a conservator. (2) Closure Mandatory requirements for bank closure: a. Examination by the appropriate BSP department as to the condition of the bank b. Examination shows that the condition of the bank is one of insolvency c. Director shall inform the MB in writing of such fact d. MB shall find the statement of the department to be true.483 (3) Receivership Receivership is equivalent to an injunction to restrain the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects.484
483 484

Banco Filipino v. MB Villanueva v. CA

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(4) Liquidation a. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. b. A determination by the MB that the bank cannot be rehabilitated.485

Effects of appointment of receiver/ liquidation: 1. Suspension of operation 2. The assets under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment, levy, attachment or execution (Sec. 30). 3. Bank is not liable to pay interest on deposits during the period of suspension of operation (Overseas Bank v. CA) 4. The corporation retains its legal personality (Teal Motor Co. v CFI) 5. Deposits do not become preferred credits. (CB v. Morfe) Grounds: A. Under NCBA 1. Inability to pay liabilities as they become due in the ordinary course of business, but not including inability to pay caused by extraordinary demands induced by financial panic in the banking community; 2. Insufficiency of realizable assets to meet its liabilities; 3. Inability to continue business without involving probable losses to its depositors or creditors; or 4. Willful violation of a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. (Sec. 30) B. Under GBL 1. Notification to the BSP or public announcement of a bank holiday (Sec. 53, GBL) 2. Suspension of payment of deposit liabilities continuously for more than 30 days (Sec. 53, GBL) 3. Persistence in conducting business in an unsafe or unsound manner. (Sec. 56, GBL) 485 Grounds: 1. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. 2. A determination by the MB that the bank cannot be rehabilitated. Procedure: 1. Receiver shall file ex parte, with the proper RTC, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. 2. He shall convert the assets of the institution to money for the purpose of paying the debts of the institution. (Sec. 30) 3. Payment shall be in accordance with the rules on concurrence and preference of credits

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f. How the BSP handles exchange crisis (1) Legal tender power Legal tender All notes and coins issued by the Bangko Sentral are fully guaranteed by the Republic and shall be legal tender in the Philippines for all debts, both public and private. 486 Legal tender power of coins 1. 25 centavos and above: In amounts not exceeding P50.00 2. 10 centavos or less: In amounts not exceeding P20.00 BSP Authority to Replace 1. Notes for any series or denomination More than 5 years old 2. Coins More than 10 years old487 (2) Rate of exchange The Monetary Board shall determine: 1. The exchange rate policy of the country; 2. The rates of which the Bangko Sentral shall buy and sell spot exchange; 3. Establish deviation limits from the effective exchange rate(s) as it may deem proper; and 4. The rates for other types of foreign exchange transactions by the Bangko Sentral including purchases and sales of foreign notes and coins.

486 487

Sec. 52 Rules: 1. Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of call. 2. After that period, they shall cease to be legal tender during the following year or for such longer period as MB may determine. 3. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of BSP and shall be demonetized (Sec. 57).

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2. Law on Secrecy of Bank Deposits488 a. Purpose 1. To encourage people to deposit in banks 2. To discourage private hoarding so that banks may lend such funds and assist in the economic development. b. Prohibited acts 1. Examination and inquiry or looking into all deposits of whatever nature with the banks in the Philippines including investments in bonds issued by the Government. 2. Any disclosure by any official or employee of any bank to any unauthorized person of any information concerning the said deposits. c. Deposits covered The deposits covered by law are considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, governmental, bureau, or office. d. Exceptions From R.A. No. 1405 From other laws

1. Upon written permission of the 1. Anti-Graft and Corrupt Practices Act depositor; cases490 2. In cases of impeachment; 2. Inquiry by the Commissioner of Internal Revenue into bank deposits of:

3. Upon order of a competent court in cases of bribery or dereliction of duty of public a. A decedent to determine his gross officials; estate; 4. In cases where the money deposited or b. A taxpayer who has filed an invested is the subject matter of the application for compromise of his tax litigation.489 liability by reason of financial incapacity to pay his tax liability. He must file a written waiver of his privilege under RA 1405 or other general or special laws.491
488 489

R.A. No. 1405, as amended Sec. 2 490 R.A. No. 3019; added by analogy in PNB vs. Gancayco 491 Sec. 6[f], NIRC

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3. Inquiry or examination by the Anti-Money Laundering Council (AMLC) of any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the Anti-Money Laundering Law, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense, except that no court order shall be required in the following unlawful activities: a. Kidnapping for ransom under Art. 267 RPC; b. Comprehensive Dangerous Drugs Act of 2002;492 c. Hijacking and other violations under RA 6235; destructive arson and murder under RPC. Including those perpetrated by terrorists against noncombatant persons and similar targets.493 4. Disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years under the Unclaimed Balances Act.494 e. Garnishment of deposits, including foreign deposits Garnishment of bank deposit of judgment debtor does not violate RA 1405. Its purpose is merely to secure information as to the name of the depositor and whether or not the defendant had a deposit in said bank, only for purposes of garnishment. 495 f. Penalties for violation Imprisonment of not more than five (5) years or a fine not more than P20,000 or both, in the discretion of the court.
492 493

R.A. No. 9165 Sec. 11, R.A. No. 9160, as amended by Sec. 8 of R.A. No. 9194 494 Act No. 3936 495 China Banking Corporation v. Ortega

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3. General Banking Act 496 a. Definition and classification of banks Banks - entities engaged in the lending of funds obtained in the form of deposits. 497 Entities duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained regularly from the public through the receipt of deposits of any kind. Classification: Universal banks Primarily governed by the General Banking Law (GBL), can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement. Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises. These are a) Savings and mortgage banks; b) Stock savings and loan associations; c) Private development banks, which are primarily governed by the Thrift Banks Act.498 Rural banks Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992.499 Those banks organized whose majority

Commercial banks

Thrift banks

Cooperative banks
496 497

R.A. No. 8791 Sec. 2 498 R.A. 7906 499 R.A. 7353

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shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. They are governed primarily by the Cooperative Code.500 Islamic banks Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Sharia, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by R.A. 6848.

Other classification of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.501 b. Distinction of banks from quasi-banks and trust entities Banks502 Quasi-banks 1. Entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes. 2. Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions. Trust A popular type of business arrangement for small business but, unlike a company, is not a legal entity and cannot contract in its own name.

500 501

R.A. 6938 Sec. 3 502 supra

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c. Bank powers and liabilities (1) Corporate powers Commercial Banks: In addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as Universal Bank:

Shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29,504 the powers of an investment house as provided in existing laws and the power to invest in non1. accepting drafts and issuing letters of allied enterprises. credit; 2. discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; 3. accepting or creating demand deposits; 4. receiving other types of deposits and deposit substitutes; 5. buying and selling foreign exchange and gold or silver bullion; 4. acquiring marketable bonds and other debt securities; and 5. extending credit subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.503

503 504

Sec. 29 supra

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(2) Banking and incidental powers 1. Receive in custody funds, documents and valuable objects; 2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; 3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; 4 Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and 5. Rent out safety deposit boxes.505 d. Diligence required of banks - relevant jurisprudence 1. The appropriate standard of diligence must be very high, if not the highest, degree of diligence; highest degree of care.506 2. Subject to reasonable regulation under the police power of the state.

505 506

Sec. 53 PCI Bank v. CA, 350 SCRA 446; PBCom v. CA This applies only to cases where banks are acting in their fiduciary capacity, that is, as depository of the deposits of their depositors. (Reyes v. CA) While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title, in case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. Reason: Before a loan is approved, representatives are sent to the premises offered as collaterals and investigate who the real owners are. (DBP vs. CA, 331 SCRA 267)The business of a bank is one affected by public interest for which reason the bank should guard against loss due to negligence and bad faith. It is expected to ascertain and verify the identities of the persons it transacts business with. (UCPB vs. Ramos, G.R. No. 147800, November 11, 2003, Callejo, J.) Due diligence required of banks extend even to persons, or institutions like the GSIS, regularly engaged in the business of lending money secured by real estate mortgages. (GSIS vs. Eduardo Santiago, G.R. No. 155206. October 28, 2003)

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e. Nature of bank funds and bank deposits 507 1. As debtor-creditor a. Savings b. Time c. Demand508 2. As lessor-lessee a. Safety deposit boxes 3. As trustee-trustor a. Trust account 4. As bailee-bailor a. Deposit strictly for safekeeping and for specific purposes 5. As agent-principal: a. Deposit of check for collection b. Deposit for specific purpose c. Deposit for safekeeping f. Stipulation on interests Allowed provided it is within the limits or ceiling provided for by the Act.

507

Types of deposit accounts 1. Individual 2. Joint a. And account - Co-ownership The signature of both co-depositors are required for withdrawals. b. And/or account Either one of the co-depositors may deposit and withdraw from the account without the knowledge, consent and signature of the other. And upon the death of one, the survivor may withdraw the entire balance on deposit. (Handbook on Bank Deposits, A. Viray, 1998 ed.) It may be deemed a survivorship agreement depending on the intention of the parties; aleatory contract supported by a lawful consideration which is valid unless when made as a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir. (Rivera v. Peoples Bank) 508 Characteristics: a. In the nature of irregular deposits (Serrano vs. Central Bank, 96 SCRA 96)

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g. Grant of loans and security requirements Before granting a loan, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Rules: 1. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information. 2. Should such statements prove to be false or incorrect, the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation.509 (1) Ratio of net worth to total risk assets Risk-based capital: The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its total risk assets which may include contingent accounts. However, the Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year; that such ratio shall be applied uniformly to banks of the same category.510 (2) Single borrowers limit 1. The total amount of loans extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 20% of the net worth of such bank. 2. The total amount of loans may be increased by additional 10% of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or

509 510

Sec. 40 Sec. 34 Effect of non-compliance with the prescribed minimum ratio: 1. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met; or 2. Acquisition of major assets and making of new investments may be restricted, except: purchases of evidence of indebtedness guaranteed by the Government (Sec. 34). 3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio.

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securing title covering readily marketable, non-perishable goods which must be fully covered by insurance.511

511

The prescribed ceiling shall include: The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discount paper with or sells paper to such banks; a. In the case of an individual who owns or controls a majority interest in a corporation, b. partnership, association or any other entity, the liabilities of the said entities to the bank; c. In a case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and d. In the case of a partnership, association, or other entity, the liabilities of the member thereof to such bank. Exclusions from the limits: a. Loans secured by obligations of the Bangko Sentral or the Philippine Government; b. Loans fully guaranteed by the government; c. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines; d. Loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and e. Other loans or credit accommodations which the MB may specify as non-risk items.

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(3) Restrictions on bank exposure to DOSRI (directors, officers, stockholders and their related interests)512 a. No director or officer of any bank shall, directly or indirectly, borrow from such bank nor shall be guarantor, endorser or surety for loans from such bank to others, or in any manner be obligor or incur any contractual liability to the bank, except with the written approval of the majority of all the directors of the bank, excluding the director concerned. The written approval shall not be required for loans granted to officers under a fringe benefit plan approved by the Bangko Sentral. b. Dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the bank than those offered to others.513

512

Who are covered (BSP Circular No. 170): 1. Directors Directors of the lending bank 2. Officers Either identified in the by-laws or are generally known as such 3. Stockholders those whose stockholdings, individually and/or together with any of the following persons, amount to 2% or more of the total subscribed capital stock of the bank: a. His spouse or relative within the first degree of affinity/consanguinity or relative by legal adoption. b. A partnership in which the stockholder or his spouse or any of his relatives mentioned above is a general partner. c. A co-owner with the stockholder or the stockholders spouse or relative mentioned above of property/right/interest (mortgaged, pledged or assigned to secure the loan or credit accommodations, except when the mortgage, pledge or assignment covers only said co-owners undivided interest. 4. Related Interest a. Spouse, relatives within first degree of consanguinity or affinity, or relative by legal adoption of a DOS. b. Partnerships of which a DOS or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner. c. Co-owner with the DOS or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property/interest/ right mortgaged, pledged, assigned to secure the loans or credit accommodations, except when the mortgage, pledge or assignment covers only said coowners undivided interest. d. Corporation with inter-locking directors. e. Corporation wherein 20% of the capital stock is owned by the DOS and/or their spouses or relatives mentioned above. f. Corporation wholly or majority owned or controlled by any related entity or a group of related entities in items (b), (d), and (e). Requisites: a. The borrower is director, officer, or any stockholder of a bank and related interest. b. He contracts a loan or any form of financial accommodation c. The loan or financial accommodation is from (1) his bank or (2) a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries, (3) a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and d. The loan or financial accommodation of the DOS, singly or with that of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower.(BSP Circular No. 170) 513 Arms length rule

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c. Loans extended to DOSRI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank.514 d. The resolution approving the loan shall be entered in the records of the bank and transmitted to the BSP e. Waiver of secrecy of deposits of whatever nature in all banks in the Philippines by the borrower. No waiver is required if the related interests are the borrower f. Information obtained from examination is strictly confidential. h. Penalties for violations (1) Fine, imprisonment Shall be subject to Sections 34, 35, 36 and 37515 of the New Central Bank Act.516
514

Except i. Loans, credit accommodations, and guarantees secured by assets considered as non-risk by the Monetary Board. ii. Loans, credit accommodations, and advances to officers in the form of fringe benefits. iii. Cooperative bank with regard to its cooperative shareholders 515 Section 34. Refusal to Make Reports or Permit Examination. - Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by the Bangko Sentral within the purview of this Act who, being required in writing by the Monetary Board or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such institution shall be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P100,000) or by imprisonment of not less than one (1) year nor more than five (5) years, or both, in the discretion of the court. Section 35. False Statement. - The willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished by a fine of not less than One hundred thousand pesos (P100,000) nor more than Two hundred thousand pesos (P200,000), or by imprisonment of not more than (5) years, or both, at the discretion of the court. Section 36. Proceedings Upon Violation of This Act and Other Banking Laws, Rules, Regulations, Orders or Instructions. - Whenever a bank or quasi-bank, or whenever any person or entity willfully violates this Act or other pertinent banking laws being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board, the person or persons responsible for such violation shall unless otherwise provided in this Act be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than Two hundred thousand pesos (P200,000) or by imprisonment of not less than two (2) years nor more than ten (10) years, or both, at the discretion of the court. Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Board may, without prejudice to the penalties provided in the preceding paragraph of this section and the administrative sanctions provided in Section 37 of this Act, take action under Section 30 of this Act. Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their directors and/or officers, for any willful violation of its charter or by-laws, willful delay in the submission of reports or publications thereof as required by law, rules and regulations; any refusal to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the Board or the appropriate supervising and

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(2) Suspension or removal of director or officer If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer. (3) Dissolution of bank If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General.
examining department or its examiners; any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board, the following administrative sanctions, whenever applicable: (a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank; (b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities; (c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) suspension of interbank clearing privileges; and/or (e) revocation of quasi-banking license. Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions. The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer of a bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the Bangko Sentral within a period of one hundred twenty (120) days after the date of suspension, said director or officer shall be reinstated in his position: Provided, further, That when the delay in the disposition of the case is due to the fault, negligence or petition of the director or officer, the period of delay shall not be counted in computing the period of suspension herein provided. The above administrative sanctions need not be applied in the order of their severity. Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers concerned continue with or otherwise persist in the commission of the indicated practice or violation, the Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct the conditions resulting from such practice or violation. The cease and desist order shall be immediately effective upon service on the respondents. The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary Board or any committee chaired by any Monetary Board member created for the purpose, upon request made by the respondents within five (5) days from their receipt of the order. If no such hearing is requested within said period, the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records, after which the Monetary Board may either reconsider or make final its order. The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to comply with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal. 516 Sec. 66

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4. Philippine Deposit Insurance Corporation Act 517 a. Basic policy To insure the deposits of all banks which are entitled to the benefits of insurance under this Act. To promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits. b. Concept of insured deposits The term "insured deposit" means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of date of closure, but not to exceed Five hundred thousand pesos (P500,000.00). In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefits either in his own name or in the name of others.518 c. Liability to depositors (1) Deposit liabilities required to be insured with PDIC The deposit liabilities of any bank engaged in the business receiving deposits are required to be insured with the PDIC.519 (2) Commencement of liability When an insured bank is closed by the Monetary Board pursuant to Sec. 30 520 of R.A. 7653.

517 518

R.A. No. 3591, as amended Sec. 3 (g), R.A. 9576 (April 29, 2009), amending Sec. 4 (g), R.A. 3591 519 Sec. 4 520 Proceedings in Receivership and Liquidation. - 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 Bangko Sentral, to meet its liabilities; or (c) cannot continue in business without involving probable losses to its depositors or creditors; or (d) has willfully 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 Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver.

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(3) Deposit accounts not entitled to payment a) Investment products such as bonds and securities, trust accounts, and other similar instruments; b) Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent; c) Deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s, as determined by the Corporation, in consultation with the

The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the institution. (2) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this section shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver.

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BSP, after due notice and hearing, and publication of a cease and desist order issued by the Corporation against such deposit accounts or transactions; and d) Deposits that are determined to be the proceeds of an unlawful activity as defined under Republic Act No. 9160, as amended.521 (4) Extent of liability Liability covers the amount due to any depositor for deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed P500,000.00.522 (5) Determination of insured deposits The Corporation shall commence the determination of insured deposits upon its actual takeover of the closed bank. In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. A deposit as defined in Section 3(f),523 may be constituted only if money or the equivalent of money is received by a bank. (6) Calculation of liability (a) Per depositor, per capacity rule The PDICs liability is up to P500,0000 per depositor / per capacity.524 (b) Joint accounts A joint account regardless of whether the conjunction and, or or and/or is used, shall be insured separately from an individually-owned deposit account.
521 522

Sec. 4 (f) Under R.A. No. 9576 523 The term deposit means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit, printed or issued in accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank: Provided, That any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit: Provided, further, That, subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. (As amended by P.D. 1940, 27 June 1984; R.A. 7400, 13 April 1992; R.A. 9302, 12 August 2004) 524 Ibid.

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If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit. Document of deposit referred to in the preceding paragraph pertains to joint account agreements, account ledgers, certificate of time deposits, passbooks or other evidence of deposits, specimen signature cards, corporate resolutions, contracts or similar instruments, copies of which must be in the custody or possession of the bank upon takeover by PDIC. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to the juridical person or entity. The aggregate of the interests or total share of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P500,000.00. The amount of insurance due to any depositor for deposits in an insured bank shall be net of any matured or unmatured obligation of the depositor to the insured bank as of date of closure. In case of joint deposit accounts where only one of the co-depositors has an obligation to the closed bank, the following shall apply: a) Where the deposit is a joint and/or or or account which is covered by a holdout agreement, the obligation secured by the hold-out agreement shall be deducted from the balance of the joint account, regardless of the fact that only one of the co-depositors in the joint account is indebted to the closed bank. b) When the deposit is a joint and account which is covered by a hold-out agreement, the obligation secured by the hold-out agreement shall be deducted only from the share in the joint account of the depositor who is indebted to the closed bank, unless his co-depositor is himself a co-signatory to the hold-out agreement. c) Where the deposit is either a joint and, or or and/or account which is not covered by a hold-out agreement, the obligation of the depositor who is indebted to the closed bank shall be deducted only from his share in the balance of the joint deposit account. (c) Mode of payment a. Cash b. Transferred deposit A deposit in an insured bank made available to a depositor by the PDIC as payment of the insured deposit of such depositor in a closed bank and assumed by another insured bank.
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(d) Effect of payment of insured deposit 1. PDIC is discharged from obligations Payment of an insured deposit to any person by the Corporation shall discharge the Corporation. Payment of a transferred deposit by the new bank or by an insured bank in which a transferred deposit has been made available shall discharge the Corporation and such new bank or other insured bank. 2. PDIC is subrogated to depositors rights The Corporation, upon payment of any depositor shall be subrogated to all rights of the depositor against the closed bank. But the depositor shall retain his claim for any uninsured portion of his deposit. All payments by the Corporation of insured deposits in closed banks partake of the nature of public funds, and must be considered a preferred credit similar to taxes due to the National Government. (e) Payments of insured deposits as preferred credit under Art. 2244, Civil Code All payments by the Corporation of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code. This preference shall be effective upon liquidation proceedings where no distribution of assets have been made.525 (f) Failure to settle claim of insured depositor Failure to settle the claim, within 6 months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall subject the directors, officers or employees responsible to imprisonment from 6 months to 1 year. The period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency.

525

Sec. 15, 3 par.

rd

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(g) Failure of depositor to claim insured deposits 526 All rights of the depositor against the Corporation shall be barred. However, all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the Corporation may have become subrogated, shall revert to the depositor.527 i. Examination of banks and deposit accounts The Corporation shall have the power: xxx To conduct examination of banks with prior approval of the Monetary Board: Provided, That no examination can be conducted within twelve (12) months from the last examination date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral, conduct a special examination as the Board of Directors, by an affirmative vote of a majority of all of its members, if there is a threatened or impending closure of a bank; Provided, further, That, notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the Corporation and/or the Bangko Sentral, may inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice; Provided, finally, That to avoid overlapping of efforts, the examination shall maximize the efficient use of the relevant reports, information, and findings of the Bangko Sentral, which it shall make available to the Corporation.528

526

within 2 years from actual takeover of the closed bank by the receiver, or within 2 years after the two-year period to file a claim 527 Sec. 16 (e) 528 th Sec. 8, 8 par., as amended by R.A. 9302, 12 August 2004, R.A. 9576, April 29, 2009

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ii. Prohibition against splitting of deposits 529 The penalty of prision mayor or a fine of not less than P50,000 but not more than P2,000,000 or both shall be imposed upon any director, officer, employee or agent of a bank for : xxx 5) splitting of deposits or creation of fictitious loans or deposit accounts. xxx iii. Prohibition against issuances of TROs, etc. No court, except the Court of Appeals, shall issue any temporary restraining order, preliminary injunction or preliminary mandatory injunction against the Corporation for any action under this Act. This prohibition shall apply in all cases, disputes or controversies instituted by a private party, the insured bank, or any shareholder of the insured bank. The Supreme Court may issue a restraining order or injunction when the matter is of extreme urgency involving a constitutional issue, such that unless a temporary restraining order is issued, grave injustice and irreparable injury will arise. The party applying for the issuance of a restraining order or injunction shall file a bond in an amount to be fixed by the Supreme Court, which bond shall accrue in favor of the Corporation if the court should finally decide that the applicant was not entitled to the relief sought. 530

529

Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two (2) or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names within one hundred twenty (120) days immediately preceding or during a bank- declared bank holiday, or immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage; (As added by R.A. 9302, 12 August 2004; as amended by R.A. 9576, June 1, 2009) 530 Sec. 22

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J. Intellectual Property Law 1. Intellectual Property Rights in general a. Intellectual property rights The term "intellectual property rights" consists of: 1. Copyright and Related Rights; 2. Trademarks and Service Marks; 3. Geographic Indications; 4. Industrial Designs; 5. Patents; 6. Layout-Designs531 of Integrated Circuits; and 7. Protection of Undisclosed Information 532 b. Differences between copyrights, trademarks and patent Trademark, copyright and patents are different intellectual property rights that cannot be interchanged with one another. A trademark is any visible sign capable of distinguishing the goods533 or services534 of an enterprise and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable.535 c. Technology transfer arrangements Refers to contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market.
531 532

Topographies Sec. 4.1 533 trademark 534 service mark 535 Kho v. CA, et al., 379 SCRA 410 [2002]

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2. Patents a. Patentable inventions Any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. 536 b. Non-patentable inventions The following shall be excluded from patent protection: 1. Discoveries, scientific theories and mathematical methods; 2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; 3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; 4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes. 537 5. Aesthetic creations; and 6. Anything which is contrary to public order or morality.538 c. Ownership of a patent (1) Right to a patent Belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. 539 (2) First-to-file rule If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. 540
536 537

Sec. 21 Provisions under this subsection shall not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and animal breeds and a system of community intellectual rights protection. 538 Sec. 22 539 Sec. 28 540 Sec. 29

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(3) Inventions created pursuant to a Commission The person who commissions the work shall own the patent, unless otherwise provided in the contract. In case the employee made the invention in the course of his employment contract, the patent shall belong to: (a) The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. (b) The employer, if the invention is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary.541 (4) Right of priority An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application. Provided: (a) the local application expressly claims priority; (b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and (c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. 542 d. Grounds for cancellation of a patent: (a) That what is claimed as the invention is not new or patentable; (b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or (c) That the patent is contrary to public order or morality. Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only.543

541 542

Sec. 30 Sec. 31 543 Sec. 61

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e. Remedy of the true and actual inventor Such person may, within three (3) months after the decision has become final: (a) Prosecute the application as his own application in place of the applicant; (b) File a new patent application in respect of the same invention; (c) Request that the application be refused; or (d) Seek cancellation of the patent, if one has already been issued.544 f. Rights conferred by a patent (a) Subject matter of a patent is a product To restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product; (b) Subject matter of a patent is a process To restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. Patent owners shall also have the right (a) to assign, or transfer by succession the patent, and (b) to conclude licensing contracts for the same. 545 g. Limitations of patent rights The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in Section 71546 hereof in the following circumstances: 1. Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market; 2. Where the act is done privately and on a non-commercial scale or for a noncommercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent;

544 545

Sec. 67 Sec. 71 546 supra

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3. Where the act consists of making or using exclusively for the purpose of experiments that relate to the subject matter of the patented invention; 4. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared; 5. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally: Provided, That such invention is used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines. 547 (1) Prior user Notwithstanding Section 72548 hereof, any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect. The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made.549 (2) Use by the government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: (a) the public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or (b) A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive. The use by the Government, or third person authorized by the Government shall be subject, mutatis mutandis, to the conditions set forth in Sections 95 to 97550 and 100 to 102.551

547 548

Sec. 72 supra 549 Sec. 73 550 Sec. 95. Requirement to Obtain a License on Reasonable Commercial Terms. 95.1. The license will only be granted after the petitioner has made efforts to obtain authorization from the patent owner on reasonable commercial terms and conditions but such efforts have not been successful within a reasonable period of time. 95.2. The requirement under Subsection 95.1 shall not apply in the following cases:

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(a) Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anti-competitive; (b) In situations of national emergency or other circumstances of extreme urgency; (c) In cases of public non-commercial use. 95.3. In situations of national emergency or other circumstances of extreme urgency, the right holder shall be notified as soon as reasonably practicable. 95.4. In the case of public non-commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly. Sec. 96. Compulsory Licensing of Patents Involving Semi-Conductor Technology. - In the case of compulsory licensing of patents involving semi-conductor technology, the license may only be granted in case of public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive. Sec. 97. Compulsory License Based on Interdependence of Patents. - If the invention protected by a patent, hereafter referred to as the "second patent," within the country cannot be worked without infringing another patent, hereafter referred to as the "first patent," granted on a prior application or benefiting from an earlier priority, a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention, subject to the following conditions: 97.1. The invention claimed in the second patent involves an important technical advance of considerable economic significance in relation to the first patent; 97.2. The owner of the first patent shall be entitled to a cross-license on reasonable terms to use the invention claimed in the second patent; 97.3. The use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent; and 97.4. The terms and conditions of Sections 95, 96 and 98 to 100 of this Act. 551 Sec. 100. Terms and Conditions of Compulsory License. - The basic terms and conditions including the rate of royalties of a compulsory license shall be fixed by the Director of Legal Affairs subject to the following conditions: 100.1. The scope and duration of such license shall be limited to the purpose for which it was authorized; 100.2. The license shall be non-exclusive; 100.3. The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited; 100.4. Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided, That this limitation shall not apply where the grant of the license is based on the ground that the patentees manner of exploiting the patent is determined by judicial or administrative process, to be anti-competitive. 100.5. The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided, That adequate protection shall be afforded to the legitimate interest of the licensee; and 100.6. The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization, except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process, to be anti-competitive, the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration. Sec. 101. Amendment, Cancellation, Surrender of Compulsory License. 101.1. Upon the request of the patentee or the licensee, the Director of Legal Affairs may amend the decision granting the compulsory license, upon proper showing of new facts or circumstances justifying such amendment. 101.2. Upon the request of the patentee, the said Director may cancel the compulsory license: (a) If the ground for the grant of the compulsory license no longer exists and is unlikely to recur;

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h. Patent infringement 552 1) Tests in patent infringement (a) Literal infringement Resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements.553 (b) Doctrine of equivalents Under this doctrine, an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result.554 (2) Civil and criminal action Civil Action The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the Criminal Action If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the institution of a civil action

(b) If the licensee has neither begun to supply the domestic market nor made serious preparation therefor; (c) If the licensee has not complied with the prescribed terms of the license; 101.3. The licensee may surrender the license by a written declaration submitted to the Office. 101.4. The said Director shall cause the amendment, surrender, or cancellation in the Register, notify the patentee, and/or the licensee, and cause notice thereof to be published in the IPO Gazette. Sec. 102. Licensees Exemption from Liability. - Any person who works a patented product, substance and/or process under a license granted under this Chapter, shall be free from any liability for infringement: Provided however, That in the case of voluntary licensing, no collusion with the licensor is proven. This is without prejudice to the right of the rightful owner of the patent to recover from the licensor whatever he may have received as royalties under the license. 552 Only the patentee or his successor-in-interest may file an action for infringement. Moreover, there can be no infringement of a patent until a patent has been issued, since whatever right one has to the invention covered by the patent arises alone from the grant of patent. In short, a person or entity who has not been granted letter of patent over an invention and has not acquired any rights or title thereto either as an assignee or a licensee, has no cause of action for infringement because the right to maintain an infringement suit depends upon the existence of a patent. (Creser Precision Systems, Inc. v. CA, et al., 286 SCRA 13 [1998]) 553 Godines v. CA, 226 SCRA 576 [1993] 554 Ibid.

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patentee constitutes patent infringement. Any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before a court of competent jurisdiction, to recover from the infringer such damages sustained thereby, plus attorneys fees and other expenses of litigation, and to secure an injunction for the protection of his rights. If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty. The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained: Provided, That the award does not exceed three (3) times the amount of such actual damages. The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation. Anyone who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing the patented invention and not suitable for substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and severally liable with the infringer.555

for damages, be criminally liable therefor and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime.556

555 556

Sec. 76 Sec. 84

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(3) Prescriptive period No damages can be recovered for acts of infringement committed more than four (4) years before the institution of the action for infringement.557 (4) Defenses in action for infringement In an action for infringement, the defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought under Section 61558 hereof.559 i. Licensing (1) Voluntary The following provisions shall be included in voluntary license contracts: a. That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office; b. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement; c. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and d. The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor.560

557 558

Sec. 79 Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds: (a) That what is claimed as the invention is not new or Patentable; (b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or (c) That the patent is contrary to public order or morality. Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. 559 Sec. 81 560 Sec. 88

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(2) Compulsory If the invention protected by a patent, referred to as the "second patent," within the country cannot be worked without infringing another patent, referred to as the "first patent," granted on a prior application or benefiting from an earlier priority, a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention, subject to the following conditions: 1. The invention claimed in the second patent involves an important technical advance of considerable economic significance in relation to the first patent; 2. The owner of the first patent shall be entitled to a cross-license on reasonable terms to use the invention claimed in the second patent; 3. The use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent; and 4. The terms and conditions of Sections 95, 96 and 98 to 100 of this Act. 561 j. Assignment and transmission of rights An assignment may be of the entire right, title or interest in and to the patent and the invention covered thereby, or of an undivided share of the entire patent and invention, in which event the parties become joint owners thereof. An assignment may be limited to a specified territory.562 The assignment must be in writing, acknowledged before a notary public or other officer authorized to administer oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer. 563

561 562

Sec. 97 Sec. 104 563 Sec. 105; Sec. 52, id.

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3. Trademarks a. Definitions of marks, collective marks, trade names Mark Any visible sign capable of distinguishing the goods564 or services565 of an enterprise and shall include a stamped or marked container of goods; Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark;566 The name or designation identifying or distinguishing an enterprise.567 b. Acquisition of ownership of mark The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law.568 c. Acquisition of ownership of trade name Prior use is the basis for ownership of trade names. d. Non-registrable marks A mark cannot be registered if it: (a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute;
564 565

Collective mark

Trade name

trademark service mark 566 Sec. 40 567 Sec. 121 568 Sec. 122

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(b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof; (c) Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the widow; (d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: 1) The same goods or services, or 2) Closely related goods or services, or 3) If it nearly resembles such a mark as to be likely to deceive or cause confusion; (e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be wellknown internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark; (f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use;

(g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; (h) Consists exclusively of signs that are generic for the goods or services that they seek to identify; (i) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice; Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical
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(j)

origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; (k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; (l) Consists of color alone, unless defined by a given form; or

(m) Is contrary to public order or morality.569 e. Prior use of mark as a requirement The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director.570 f. Tests to determine confusing similarity between marks (1) Dominancy test Infringement is determined by the test of dominancy rather than by differences or variations in the details of one trademark and of another. Similarity in size, form and color, while relevant, is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion is likely to result, infringement takes place.571 (2) Holistic test To determine whether a trademark has been infringed, we must consider the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. The court therefore should be guided by its first impression, for the buyer acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the court assumed to analyze carefully the respective features of the mark.572 g. Well-known marks Identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large,
569 570

Sec. 123.1 Sec. 124.2 571 Asia Brewery v. CA and San Miguel, 224 SCRA 437 [1993] 572 Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990]

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including knowledge in the Philippines which has been obtained as a result of the promotion of the mark.573 Identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use.574 The exclusive right of the owner of a well-known mark defined in Subsection 123.1(e)575 which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of which the mark is registered: Provided, That use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark: Provided, further, That the interests of the owner of the registered mark are likely to be damaged by such use.576 h. Rights conferred by registration The owner of a registered mark shall have the exclusive right to prevent all third parties not having the owners consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion shall be presumed. The exclusive right of the owner of a well-known mark which is registered in the Philippines shall extend to goods and services which are similar to those in respect of which the mark is registered; provided that use of the mark in relation to those goods or services would indicate a connection between those goods and services and the owner of the registered mark; provided further that the interest of the owner of the registered mark are likely to be damaged by such use.577 i. Use by third parties of names, etc. similar to registered mark Any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public, shall be deemed unlawful.578

573 574

Sec. 123.1(e) Id.,(f) 575 supra 576 Sec. 147.2 577 Sec. 147 578 Sec. 165 (b)

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j. Infringement and remedies Any person who shall, without the consent of the owner of the registered mark: 1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; 579 or 2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts stated in Subsection 155.1.580 or this subsection are committed regardless of whether there is actual sale of goods or services using the infringing material. 581 (1) Trademark infringement To establish trademark infringement, the following elements must be shown: [1] the validity of the mark; [2] the plaintiffs ownership of the mark; and [3] the use of the mark or its colorable imitation by the alleged infringer results in likelihood of confusion. Of these, it is the element of likelihood of confusion that is the gravamen of trademark infringement. Two types of confusion arise from the use of similar or colorable imitation marks, namely, confusion of goods582 and confusion of business. 583 While there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion of affiliation.584 A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or deceit as to the identity, source or origin of the goods or identity of the business as a consequence of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly according to the particular585 circumstances of each case.
579 580

Sec. 155.1 supra 581 Id., (2) 582 product confusion 583 source or origin confusion 584 McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., 437 SCRA 10 [2004] 585 and sometimes peculiar

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In determining likelihood of confusion, the court must consider: [a] the resemblance between the trademarks; [b] the similarity of the goods to which the trademarks are attached; [c] the likely effect on the purchaser; and [d] the registrants express or implied consent and other fair and equitable considerations.586 (2) Damages The owner of a registered mark may recover damages from any person who infringes his rights, and the measure of the damages suffered shall be either the reasonable profit which the complaining party would have made, had the defendant not infringed his rights, or the profit which the defendant actually made out of the infringement, or in the event such measure of damages cannot be readily ascertained with reasonable certainty, then the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party.587 (3) Requirement of Notice In any suit for infringement, the owner of the registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words "Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration.588

586 587

Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473 [2004] Sec. 156.1. 588 Sec. 158

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k. Unfair competition589 A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights.590 Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor.591 The following shall be deemed guilty of unfair competition: (a) Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose;

589

Del Monte Corporation, et al. v. CA, 181 SCRA 410 [1990] The following are the distinctions between infringement of trademark and unfair competition: 1. Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of ones goods as those of another. 2. In infringement of trademark, fraudulent intent is unnecessary, whereas in unfair competition fraudulent intent is essential. 3. In infringement of trademark the prior registration of the trademark is a prerequisite to the action, whereas in unfair competition registration is not necessary. The law on unfair competition is broader and more inclusive than the law on trademark infringement. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitors unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another (Mighty Corporation v. E. & J. Gallo Winery, 434 SCRA 473 [2004]) The elements of an action for unfair competition are: [1] confusing similarity in the general appearance of the goods, and [2] intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown. (McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., 437 SCRA 10 [2004]) 590 Sec. 168.1 591 Id., 2

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(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; or (c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another. 592 l. Trade names or business names A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name. 593 Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties.594 m. Collective marks (a) An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark. (b) The registered owner of a collective mark shall notify the Director of any changes made in respect of the agreement referred to in paragraph (a). In addition to the grounds provided in Section 149, 595 the Court shall cancel the registration of a collective mark if the person requesting the cancellation proves that only the
592 593

Id., 3 Sec. 165.1 594 Id., 2 (a) 595 Assignment and Transfer of Application and Registration. An application for registration of a mark, or its registration, may be assigned or transferred with or without the transfer of the business using the mark. (n) Such assignment or transfer shall, however, be null and void if it is liable to mislead the public, particularly as regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or services to which the mark is applied. The assignment of the application for registration of a mark, or of its registration, shall be in writing and require the signatures of the contracting parties. Transfers by mergers or other forms of succession may be made by any document supporting such transfer. Assignments and transfers of registration of marks shall be recorded at the Office on payment of the prescribed fee; assignment and transfers of applications for registration shall, on payment of the same fee, be provisionally recorded, and the mark, when registered, shall be in the name of the assignee or transferee. Assignments and transfers shall have no effect against third parties until they are recorded at the Office.

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registered owner uses the mark, or that he uses or permits its use in contravention of the agreements referred to in Subsection 166.2 or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned. The registration of a collective mark, or an application therefor shall not be the subject of a license contract.596 n. Criminal penalties for infringement, unfair competition, false designation of origin, and false description or misrepresentation A criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging from Fifty thousand pesos (P50,000) to Two hundred thousand pesos(P200,000), shall be imposed on any person who is found guilty of committing any of the acts mentioned.597 4. Copyrights a. Basic principles 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. 598 Notwithstanding the provisions of Sections 172 and 173,599 no protection shall extend, under this law, to any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work.600 The copyright is distinct from the property in the material object subject to it. Consequently, the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright.601

596 597

Sec. 167 Sec. 170 598 Sec. 172.2 Protection extends only to the expression of an idea, not the idea itself. 599 infra 600 Sec. 175 601 Sec. 181

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b. Copyrightable works (1) Original works Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) Books, pamphlets, articles and other writings; Periodicals and newspapers; Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; Letters; Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; Musical compositions, with or without words; Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; Drawings or plastic works of a scientific or technical character; Photographic works including works produced by a process analogous to photography; lantern slides; Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; Pictorial illustrations and advertisements; Computer programs; and Other literary, scholarly, scientific and artistic works.602

(m) (n) (o)

602

Sec. 172.1.

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(2) Derivative works (a) (b) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents.603

The works referred to in paragraphs (a) and (b) of Subsection 173.1 604 shall be protected as a new works: Provided however, That such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof, or be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works.605 c. Non-copyrightable works No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character.606 The Author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works. 607 Notwithstanding the foregoing provisions, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or republication by the government in a public document of any work in which copy right is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owners.608

603 604

Sec. 173.1. supra 605 Sec. 173.2. 606 Sec. 176.1 607 id., 2 608 Id., 3

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d. Rights of copyright owner Subject to the provisions of Chapter VIII, 609 copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: 1. Reproduction of the work or substantial portion of the work; 2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work; 3. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; 4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; (n) 5. Public display of the original or a copy of the work; 6. Public performance of the work; and 7. Other communication to the public of the work610 e. Rules on ownership of copyright 1. In the case of original literary and artistic works, copyright shall belong to the author of the work; 2. In the case of works of joint authorship, the co-authors shall be the original owners of the copyright and in the absence of agreement, their rights shall be governed by the rules on co-ownership. If, however, a work of joint authorship consists of parts that can be used separately and the author of each part can be identified, the author of each part shall be the original owner of the copyright in the part that he has created; 3. In the case of work created by an author during and in the course of his employment, the copyright shall belong to: (a) The employee, if the creation of the object of copyright is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. (b) The employer, if the work is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary.
609 610

Limitations on Copyright Sec. 177

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4. In the case of a work-commissioned by a person other than an employer of the author and who pays for it and the work is made in pursuance of the commission, the person who so commissioned the work shall have ownership of work, but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary; 5. In the case of audiovisual work, the copyright shall belong to the producer, the author of the scenario, the composer of the music, the film director, and the author of the work so adapted. However, subject to contrary or other stipulations among the creators, the producers shall exercise the copyright to an extent required for the exhibition of the work in any manner, except for the right to collect performing license fees for the performance of musical compositions, with or without words, which are incorporated into the work; and 6. In respect of letters, the copyright shall belong to the writer subject to the provisions of Article 723611 of the Civil Code.612 f. Limitations on copyright Notwithstanding the provisions of Chapter V,613 the following acts shall not constitute infringement of copyright: (a) the recitation or performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or if made strictly for a charitable or religious institution or society; The making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose, including quotations from newspaper articles and periodicals in the form of press summaries: Provided, That the source and the name of the author, if appearing on the work, are mentioned; The reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are delivered in public if such use is for information purposes and has not been expressly reserved: Provided, That the source is clearly indicated; The reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose;

(b)

(c)

(d)

611

Letters and other private communications in writing are owned by the person to whom they are addressed and delivered, but they cannot be published or disseminated without the consent of the writer or his heirs. However, the court may authorize their publication or dissemination if the public good or the interest of justice so requires. 612 Sec. 178 613 Copyright or Economic Rights

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(e)

The inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use: Provided, That the source and of the name of the author, if appearing in the work, are mentioned; The recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of such schools, universities or educational institutions: Provided, That such recording must be deleted within a reasonable period after they were first broadcast: Provided, further, That such recording may not be made from audiovisual works which are part of the general cinema repertoire of feature films except for brief excerpts of the work; The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast; The use made of a work by or under the direction or control of the Government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use; The public performance or the communication to the public of a work, in a place where no admission fee is charged in respect of such public performance or communication, by a club or institution for charitable or educational purpose only, whose aim is not profit making, subject to such other limitations as may be provided in the Regulations; Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process: Provided, That either the work has been published, or, that original or the copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor in title; and Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner.

(f)

(g) (h)

(i)

(j)

(k)

The provisions of this section shall be interpreted in such a way as to allow the work to be used in a manner which does not conflict with the normal exploitation of the work and does not unreasonably prejudice the right holder's legitimate interest. 614

614

Sec. 184

185

(1) Doctrine of fair use The fair use of a copyrighted work for criticism, comment, news reporting, teaching including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright. Decompilation, which is understood here to be the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs may also constitute fair use. In determining whether the use made of a work in any particular case is fair use, the factors to be considered shall include: (a) (b) (c) (d) The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit education purposes; The nature of the copyrighted work; The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and The effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors.615 (2) Copyright infringement Infringement consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. The act of lifting from anothers book substantial portions of discussions and examples and the failure to acknowledge the same is an infringement of copyright. For there to be substantial reproduction of a book it does not necessarily require that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work is appropriated. It is no defense that the pirate did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril. In cases of infringement, copying alone is not what is prohibited. The copying must produce an injurious effect.616

615 616

Sec. 185 Habana, et al., v. Robles, et al., 310 SCRA 511 [1999]

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(a) Remedies 1. Civil Action Any person infringing a right protected under this law shall be liable: (a) To an injunction restraining such infringement. The court may also order the defendant to desist from an infringement, among others, to prevent the entry into the channels of commerce of imported goods that involve an infringement, immediately after customs clearance of such goods. Pay to the copyright proprietor or his assigns or heirs such actual damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement, and in proving profits the plaintiff shall be required to prove sales only and the defendant shall be required to prove every element of cost which he claims, or, in lieu of actual damages and profits, such damages which to the court shall appear to be just and shall not be regarded as penalty. Deliver under oath, for impounding during the pendency of the action, upon such terms and conditions as the court may prescribe, sales invoices and other documents evidencing sales, all articles and their packaging alleged to infringe a copyright and implements for making them. Deliver under oath for destruction without any compensation all infringing copies or devices, as well as all plates, molds, or other means for making such infringing copies as the court may order. Such other terms and conditions, including the payment of moral and exemplary damages, which the court may deem proper, wise and equitable and the destruction of infringing copies of the work even in the event of acquittal in a criminal case.

(b)

(c)

(d)

(e)

In an infringement action, the court shall also have the power to order the seizure and impounding of any article which may serve as evidence in the court proceedings.617 2. Criminal Action Any person infringing any right secured by provisions of Part IV 618 of this Act or aiding or abetting such infringement shall be guilty of a crime punishable by: (a) Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the first offense.

617 618

Sec. 216 Works Not Protected

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(b) Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from One hundred fifty thousand pesos (P150,000) to Five hundred thousand pesos (P500,000) for the second offense. (c) Imprisonment of six (6) years and one (1) day to nine (9) years plus a fine ranging from Five hundred thousand pesos (P500,000) to One million five hundred thousand pesos (P1,500,000) for the third and subsequent offenses. (d) In all cases, subsidiary imprisonment in cases of insolvency. In determining the number of years of imprisonment and the amount of fine, the court shall consider the value of the infringing materials that the defendant has produced or manufactured and the damage that the copyright owner has suffered by reason of the infringement. Any person who at the time when copyright subsists in a work has in his possession an article which he knows, or ought to know, to be an infringing copy of the work for the purpose of: (a) Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article; (b) Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work; or (c) Trade exhibit of the article in public, shall be guilty of an offense and shall be liable on conviction to imprisonment and fine as above mentioned. 619

619

Sec. 217

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K. Special Laws 1. The Chattel Mortgage Law 620 a. Essential requisites (1) constituted to secure the fulfillment of a principal obligation; (2) that the mortgagor be the absolute owner of the thing mortgage; (3) the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 621 It is also of the essence that when the principal obligation becomes due, the thing in which mortgage consists may be alienated for the payment to the creditor.622 Mortgagor may be a third person. It is not necessary that the principal debtor should always be the mortgagor.623 b. Formal requisites Registration Requirements to Make Chattel Mortgage Binding Against Third Parties Under Sec. 4, a chattel mortgage leaves the property in the possession of the debtor. Hence, this section lays down the requisites which must be complied with in order to make a chattel mortgage affect third parties for the protection of the creditor. Affidavit of Good Faith It is an oath wherein the parties severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud.624 Under Sec. 5,625 the absence of the affidavit vitiates a mortgage as against third parties without notice, like creditors and subsequent lienholders; but not as between the parties thereto, which remains valid as to them.626

620 621

Act 1508 in rel. to Arts. 1484, 1485, 2140 and 2141 of the Civil Code Art.2085 622 Art. 2087 623 Art. 2085, par. 2 624 Sec. 5 625 supra 626 Lilius v. Manila Railroad Co., 62 [1935]

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Where a corporation is a party, the affidavit of good faith must be subscribed by an authorized officer.627 c. Registration, when and where General Rule: The chattel mortgage must be registered with the Register of Deeds where the debtor resides in order to bind third persons.628 located. If mortgagor resides abroad, must be registered in the province where the property is (a) Share of Stock: 1. Must be registered with the Register of Deeds where the debtor resides: and 2. Must also be registered with the Register of Deeds where the corporation has its principal office.629 (b) Motor Vehicles: 1. Register with the Register of Deeds where the debtor resides; 2. Register with the Register of Deeds where the motor vehicle is located; and 3. Register with the Motor Vehicle Commission, now Land Transportation Office.630 (c) Vessels 1. Register with the Philippine Coastguard 2. Must also be registered in the Bureau of Customs in Manila631or in the Office of the Collector of Customs in the port of entry 632
627 628

Sec. 6 Sec. 4 Art 2125 of the Civil Code says that a chattel mortgage is binding between the mortgagor and mortgagee even if not registered (Filipinas Marble Corp vs. IAC, 142 SCRA 180, 1986) 629 Registration in the stock and transfer book of the corporation is not necessary. (Chua Guan v. Samahang Magsasaka, 62 Phil. 472 [1935]) 630 Borlough v. Fortune Enterprises, 100 Phil. 1063 [1957] Otherwise, the failure of the mortgagee to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase in the motor vehicle office. 631 if in Manila 632 if outside Manila

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(d) Motor vehicle which is public utility and loan is not repayable within one (1) year Register with the Land Transportation Franchising and Regulatory Board. d. After-acquired property The chattel mortgage shall cover only the property described in the deed and not any other like or substituted property.633 e. After-incurred obligation A chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Therefore, although a promise expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with form prescribed by the Chattel Mortgage Law. This ruling is due to the requirement in the Affidavit of Good Faith which must contain an oath that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud which makes it obvious that the debt referred to in the law is current, not an obligation that is yet merely contemplated.634 f. Right of junior mortgagee 1. Before payment of debt After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of a second mortgage. As between the first and second mortgages, therefore, the latter can only recover the property from the former by paying him the mortgage debt. 2. After payment of debt If the only leviable or attachable interest of a chattel mortgagor in a mortgaged property is his right of redemption, it follows that the judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption. He is not entitled to the actual possession and delivery of the property without first paying the mortgaged debt.

633 634

Sec. 7 Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 73 SCAD 410, 260 SCRA 714 [1996]

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g. Foreclosure procedure 1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court who is also Ex-Officio Sheriff. 2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the Clerk of Court to: (a) receive and docket said application and to stamp thereon the corresponding file number, date and time of filing; (b) collect the filing fees therefor pursuant to Rule 141, Section 7 (c), as amended by A.M. No. 00-2-01-SC, and issue the corresponding official receipt; (c) examine, in case of real estate mortgage foreclosure, whether the applicant has complied with all the requirements before the public auction is conducted under the direction of the sheriff or a notary public, pursuant to Sec. 4 of Act 3135, as amended; (d) sign and issue the certificate of sale, subject to the approval of the Executive Judge, or in his absence, the Vice-Executive Judge. No certificate of sale shall be issued in favor of the highest bidder until all fees provided for in the aforementioned sections and in Rule 141, Section 9(1) as amended by A.M. No. 002-01-SC, shall have been paid: Provided, that in no case shall the amount payable under Rule 141, Section 9(1), as amended, exceed P100,000.00; (e) after the certificate of sale has been issued to the highest bidder, keep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deeds concerned, after which the records shall be archived. Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall, apart from the official receipt of the fees, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, which certificate shall serve the purpose of having the application with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial foreclosures to proceed thereat. 3. The notices of auction sale in extrajudicial foreclosure for publication by the sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section I, Presidential Decree no. 1079, dated January 2, 1977. Non-compliance therewith shall constitute a violation of Section 6 thereof.

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4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle applications for extrajudicial foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs IV assigned in the branches. 5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale to the Clerk of Court before the issuance of the certificate of sale.635 h. Redemption Redemption is before the sale, when the condition of the chattel mortgage is broken.636 i. Claim for deficiency (1) General rule Creditor shall always be entitled to collect the deficiency judgment.637 When the proceeds of the sale are insufficient to cover the debts in an extra-judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor.638 (2) Exception If the property was sold in installments, the mortgagee can no longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void.639 (3) Article 1484 The Recto law640 provides that in a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies: (a) Exact fulfillment of the obligation, should the vendee fail to pay; 641 (b) Cancel the sale, should the vendee's failure to pay cover two or more installments;642
635 636

A.M. NO. 99-10-05-0 [March 1, 2001] Sec. 13, Act 1508 637 Ablaza v. Ignacio, 103 Phil. 1151 [1958] 638 State Investment House, Inc. v. CA, 217 SCRA 32 [1993] Prescriptive Period: Ten (10) years under Art, 1142 of the Civil Code. (DBP v. Tomeldan, 101 SCRA 171 [1980]). 639 Art. 1484, Civil Code, a.k.a. the Recto Law 640 which is now reflected in Articles 1484-1485 of the Civil Code 641 specific performance

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(c) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two (2) or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contract is void.643 2. Real Estate Mortgage Law 644 a. Coverage Governs sales made under a special power inserted in or attached to any real-estate mortgage, which is made as security for the payment of money or the fulfillment of any other obligation. The Act will govern the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. 645 b. Remedies available to mortgagee upon default of the mortgagor The mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The mortgagee may (i) foreclose the mortgage or (ii) file an ordinary action to collect the debt. When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings.646 On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on

642

This is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract 643 These remedies are alternative, not cumulative. (Pacific Commercial Co. v. Dela Rama, 72 Phil. 380) The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. 644 Act 3135, as amended by RA 4118 645 Sec 1 The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale and redemption of the property if and when the mortgagee is given a special power or express authority to do so in the deed itself or in a document annexed thereto. 646 Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101

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the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor. 647 c. Need for special power of attorney Under Section 1 of Act No. 3135, a special power of attorney must be inserted in or attached to any Real-Estate Mortgage. Without proof of petitioner's special authority to foreclose, the Clerk of Court as ExOficio Sheriff is precluded from acting on the application for extrajudicial foreclosure. 648 d. Authority to foreclose extrajudicially A mortgage may be foreclosed extrajudicially where there is inserted in the contract a clause giving the mortgagee the power upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property.649 e. Procedure (1) Where to file All applications shall be filed with the Executive Judge through the Clerk of Court, who is also the Ex-Officio Sheriff. 650 (2) Where to sell Province where the property is situated.651 (3) Posting requirement Notice of the sale is posted in at least three (3) public places of the municipality or city where the property is situated652 for not less than twenty (20) days and published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city.653
647 648

Caltex Phils. vs. IAC, August 25, 1989 Office of the Court Administrator v. Pardo, RTJ-08-2109, April 30, 2008; Casano v. Magat, 425 Phil. 356, 360-361 (2002); Paguyo v. Gatbunton, A.M. No. P-06-2135, May 25, 2007, 523 SCRA 156, 161. 649 The authority to sell is not extinguished by the death of the mortgagor (or mortgagee) 650 Sec. 1, Circular No. 7-2002, Guidelines for the enforcement of Supreme Court Resolution of December 14, 1999 in A.M. no. 99-10-05-0 (re: Procedure in extra-judicial foreclosure of mortgage), as amended by the Resolutions dated January 30, 2001 and August 7, 2001 651 Sec. 2, R.A. 3135, as amended Sale cannot be made legally outside of the province in which the property sold is situated. If venue is subject to stipulation, such sale shall be made in said place (i.e., the place so stipulated) or in the municipal building of the municipality in which the property or part thereof is situated. (ibid.) 652 Sheriffs Office, Assessors Office and Register of Deeds 653 Sec. 3, ibid. Posting of notice on mortgaged property not required.

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(4) Publication requirement (a) Sufficiency of newspaper publication Notice shall also be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation654 in the municipality or city where the property is located.655 (b) Need for republication in case of postponement Republication is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale. The last paragraph of the prescribed notice of sale656 allows the holding of a rescheduled auction sale without reposting or republication of the notice. In the event the public auction should not take place on the said date, it shall be held on ___________,______ without further notice. However, the rescheduled auction sale will only be valid if the rescheduled date of auction is clearly specified in the prior notice of sale. The absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication.657 (c) Personal notice to the mortgagor when and when not needed Unless otherwise stipulated by the parties to the mortgage contract, the debtormortgagor need not be personally served a copy of the notice of the extra- judicial foreclosure.658 f. Possession by purchaser of foreclosed property Upon failure of the debtor to redeem the property within one (1) year after the date of the registration of the certificate of sale, winning bidder becomes the absolute owner.

Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale. A substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale. (PNB v. Nepomuceno, 394 SCRA 405, 2002) 654 The newspaper need not have the largest circulation so long as it is of general circulation. To be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; and that it is published at regular intervals. The newspaper must not be devoted to the interests or entertainment of a particular class, profession, trade, calling, race or religious denomination. The newspaper need not have the largest circulation so long as it is of general circulation (Perez vs. Perez (2005)) 655 Metrobank v. Peafiel, G.R. No. 173976 Feb. 27, 2009 656 under SC Circular 7-2002 General Rule: Personal notice to the mortgagor is not generally required. Exception: Unless required in the mortgage contract, the lack of personal notice to the mortgagor is not a ground to set aside a foreclosure sale. 657 DBP vs. Emerald Resorts Hotel 658 SC Circular 7-2002

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g. Remedy of debtor if foreclosure is not proper Within thirty (30) days after the purchaser is given possession of the property, the debtor may petition that the sale be set aside on the ground that the mortgage was not violated or the sale was not made in accordance with the provisions of Act 3135. 659 h. Redemption Right of Redemption is the right of the mortgagor to redeem the mortgage property within a certain period660 after it was sold for the satisfaction of the mortgage debt. 661 (1) Who may redeem a. The debtor; b. The debtor's successors-in-interest; c. Any judicial creditor or judgment creditor of the debtor; d. Any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold662 (2) Amount of Redemption price a. Limited to the winning bid price plus twelve percent (12%) interest per annum. b. Purchase price if judgment obligor. Sum paid on last redemption if redemptioner.663

659

Sec. 8 This may be done in the proceedings in which possession was requested. 660 1 year 661 Requisites for valid redemption: 1. Redemption within 1 year from registration of sale; 2. Payment of purchase price plus 1% interest per month thereon if any, paid by purchaser; and 3. Written notice of redemption served on officer who made the sale. 662 Redemption price to be paid by accommodation mortgagors 663 Rule 39, Sec. 28, RoC The redemptioner should make an actual tender in good faith of the full amount of the purchase price (Hi-Yield Realty vs. CA (2002)

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(3) Period for redemption Natural persons Juridical persons:

Within 1 year from and after the date Until but not after the registration of the of the sale.664 certificate of foreclosure sale with the applicable Register of Deeds, which in no case shall be more than 3 months after foreclosure, whichever is earlier.665 (4) Effect of pendency of action for annulment of sale The filing of court action to enforce redemption has effect of preserving the redemptioners rights; and freezing the expiration of one year period to redeem. 666 i. Writ of possession (1) Ministerial duty of the court The duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. Any question regarding the regularity and validity of the sale is to be determined in a subsequent proceeding.667 Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte.668 After the consolidation of title in the buyers name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right (2) Enforcement against third parties The purchaser or last redemption shall be entitled to possession of the property upon the finality of the order of confirmation or upon the expiration of the period of redemption, unless a third party is actually holding the same adversely to the judgment debtor.

664 665

Sec. 6 Sec. 47, R.A. 8791 666 Banco Filipino v CA 667 Sec. 8 Mandamus will lie. The judge to whom an application for writ of possession is filed need not look into the validity of the mortgage or the manner of its foreclosure. In the issuance of a writ of possession, no discretion is left to the Trial Court. Any question regarding the cancellation of the writ in respect to the validity/regularity of the foreclosure sale or the mortgage should be determined in a subsequent proceeding (PNB v. Sanao). 668 Samson vs Rivera (2004)

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(3) Pendency of action for annulment of sale The pendency of a separate civil suit questioning the validity of the sale of the mortgaged property cannot bar the issuance of the writ of possession. 669 j. Annulment of sale670 3. Truth in Lending Act 671 a. Purpose To protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.672 b. Obligation of creditors to person to whom credit is extended Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (1) the cash price or delivered price of the property or service to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2); (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.673

669 670

DBP vs Spouses Gatal (2005) See g. Remedy of debtor if foreclosure is not proper, supra 671 R.A. No. 3765 672 Sec. 2 673 Sec. 4

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c. Covered and excluded transactions Covered Transactions 1. Any loans, mortgages, deeds of trust, advances and discounts 2. Any conditional sales contract, any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract 3. Any rental-purchase contract 4. Any contract or arrangement for the hire, bailment, leasing of property 5. Any option, demand, lien, pledge or other claim against, or for delivery of, property or money 6. Any purchase, or other acquisition of, or any credit upon the security of any obligation or claim arising out of any of the foregoing. 7. Any transaction or series of transaction having a similar purpose or effect d. Consequences of non-compliance with obligation Non-compliance with the law would authorize the debtor to recover any interest payment made and subject the creditor to penal sanction for double finance charges plus attorneys fees. The transaction, however, is valid.675 Excluded transactions: 1. credit transactions which do not involve the payment of any finance charge by the debtor 2. In which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.674

674 675

Sec. 3, CB Circular 158 See Sec. 6

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4. Anti-Money Laundering Law676 a. Policy of the law 1. To protect and preserve the integrity and confidentiality of bank accounts, to ensure that the Philippines shall not be used as a site for unlawful money laundering activities; and 2. To pursue States foreign policy to extend cooperation in transnational investigations and prosecution on money laundering activities. b. Covered institutions a. Banks b. Non-banks c. Quasi-banks d. Trust entities; and e. All other institutions, their subsidiaries and affiliates supervised or regulated by the BSP c. Obligations of covered institutions To report transactions being coursed through them that may have tell-tale signs of money laundering, which transactions are called "covered transactions. 677 d. Covered transactions Transaction, in cash or other equivalent monetary instrument in excess of P500,000, within one banking day.

676

R.A. 9160, as amended by R.A. 9194 Anti-Money Laundering A crime whereby the proceeds of an unlawful activity are translated thereby making them appear to have originated from legitimate sources. 677 See Sec. 9

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e. Suspicious transactions Transactions with covered institutions regardless of the amounts involved, where any of the following circumstances exists: a. There is no underlying legal or trade obligation. b. Client is not properly identified c. Amount involved is not commensurate with the business or financial capacity d. Taking into account all known circumstances, it may be perceived that the clients transaction is structured in order to avoid being the subject of reporting requirements under the Act. e. Any circumstances relating to the transaction which is observed to deviate from the profile and/ or the clients past transactions with the covered institution. f. Transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed. g. Analogous transactions to any of the foregoing.678 f. When is money laundering committed Crime of money laundering: 1. Knowledge that any monetary instrument or property represents, involved or relates the proceeds of any unlawful activity, transact or attempts to transact said monetary instrument or property 2. Knowledge that any monetary instrument or property involves proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering 3. Knowledge that any monetary instrument or instrument is required to be disclosed and filed with AMLC679 fails to do so.

678 679

Sec. 2, R.A. 9194 infra

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g. Unlawful activities or predicate crimes 1. drug trafficking or violation of RA No. 9165680 2. kidnap for ransom 3. anti-graft and corrupt practices act 4. plunder 5. robbery and extortion 6. jueteng and masiao ( illegal gambling) 7. piracy on the high seas 8. qualified theft 9. swindling 10. smuggling681 11. violations of E-commerce Act of 2000 12. hijacking h. Anti-Money Laundering Council (AMLC) Composition: 1. Governor of Bangko Sentral ng Pilipinas as Chairman 2. Insurance Commissioner 3. Chairman of Security & Exchange Commissioner AMLC is a collegial body where Chairman & members of AMLC are entitled to one vote each.682

680 681

Comprehensive Dangerous Act of 2002 under RPC and R.A. Nos. 455 & 1937 682 General Rule: AMLC acts unanimously in discharge of functions. Exception: In case of incapacity, absence or disability, any member to discharge his functions, the officer designated shall act in his stead. General Rule:

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i. Functions 1. To require and receive covered or suspicious transaction reports from covered institution 2. All covered transactions and suspicious transactions shall be reported to AMLC within 5 working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding 10 working days. 3. To issue orders addressed to the appropriate supervising authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for assistance from a foreign state, or believed by the council, on the basis of substantial evidence, to be in whole or in part, wherever located representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity. 4. To institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General. 5. To cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses. 6. To investigate suspicious transactions deemed suspicious after an investigation by the AMLC, money laundering activities, and other violations of this Act. 7. To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity. 683 8. To implement such measures as may be necessary and justified under the law to counteract money laundering. 9. To receive and take action in respect to any request from foreign states for assistance in their own anti-money laundering operations.684

Members of AMLC, Executive Director, all members of Secretariat, on detail, on secondment shall not reveal in any manner any information by reason of their office Exception: Under any orders of the court, Congress, or any government offices authorized by law. 683 effective immediately upon determination of probable cause shall be for a period of 20 days unless extended by the court 684 through conventions, resolutions & other directives of any organizations of which Philippines is a member. However, AMLC may refuse to comply with such request, when: a. it contravenes provision of Constitution b. it prejudices national interest of the Philippines Requirements for requests for mutual assistance from foreign sates: a. investigation/prosecution b. grounds

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10. To develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offender. 685 11. To enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government including government-owned and controlled corporations in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offense and prosecution of offenders 12. To impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions. j. Freezing of monetary instrument or property686 k. Authority to inquire into bank deposits Inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the law, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense except that no court is needed for cases qualified by the law.

c. identity of said person d. covered institution believed to have been any information which may be of assistance to the investigation e. all particulars necessary for the issuance of the order/processes f. other information 685 through nationwide information campaigns to heighten awareness of the public of their civic duty 686 See i. Functions, No. 7, supra

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5. Foreign Investments Act 687 a. Policy of the law It is the policy of the State to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. Foreign investments shall be encouraged in enterprises that significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services. Foreign investments shall be welcome as a supplement to Filipino capital and technology in those enterprises serving mainly the domestic market. As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list. Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by taking in Filipino partners, electing Filipinos to the board of directors, implementing transfer of technology to Filipinos, generating more employment for the economy and enhancing skills of Filipino workers. 688 b. Definition of terms (1) Foreign investment Equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange.689 (2) "Doing business" in the Philippines Include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not
687 688

R.A. No. 7042 Sec. 2 689 Sec. 3

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be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. 690 (3) Export enterprise An enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistently export at least sixty percent (60%) thereof.691 (4) Domestic market enterprise An enterprise which produces goods for sale, or renders service or otherwise engages in any business in the Philippines.692 c. Registration of investments of non-Philippine nationals Without need of prior approval, a non-Philippine national, as that term is defined in Section 3 a),693 and not otherwise disqualified by law may upon registration with the Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of single proprietorships, do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its capital, unless participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or limited to a smaller percentage by existing law and/or under the provisions of this Act. The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in this Act: Provided, however, That any enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investments (BOI), which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code: Provided, finally, That a non-Philippine national intending to engage in the same line of business as an existing joint venture in his
690 691

Ibid. Ibid. 692 Sec. 1 (k), Implementing Rules & Regulations of the Foreign Investments Act of 1991 693 The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that the corporations shall be considered a Philippine national;

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application for registration with SEC. During the transitory period as provided in Section 15 hereof, SEC shall disallow registration of the applying non-Philippine national if the existing joint venture enterprise, particularly the Filipino partners therein, can reasonably prove they are capable to make the investment needed for they are competing applicant. Upon effectivity of this Act, SEC shall effect registration of any enterprise applying under this Act within fifteen (15) days upon submission of completed requirements. 694 d. Foreign investments in export enterprises Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership. Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than forty percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in Section 14 hereof.695 e. Foreign investments in domestic market enterprises Non-Philippine nationals may own up to one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List. A domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.696 f. Foreign Investment Negative List C: The Foreign Investment Negative List shall have three (3) component lists: A, B, and

a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws. b) List B shall contain the areas of activities and enterprises pursuant to law:

694 695

Sec. 5 Sec. 6 696 Sec. 7

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1) Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or 2) Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics. Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of five hundred thousand US dollars (US$500,000) are reserved to Philippine nationals, unless they involve advanced technology as determined by the Department of Science and Technology. Export enterprises which utilize raw materials from depleting natural resources, with paid-in equity capital of less than the equivalent of five hundred thousand US dollars (US$500,000) are likewise reserved to Philippine nationals. Amendments to List B may be made upon recommendation of the Secretary of National Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, indorsed by the NEDA, or upon recommendation motu proprio of NEDA, approved by the President, and promulgated by Presidential Proclamation. c) List C shall contain the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments, as determined by NEDA applying the criteria provided in Section 9697 of this Act, approved by the President and promulgated in a Presidential Proclamation. 698 INCLUDE: Pertinent Supreme Court decisions promulgated up to January 31, 2012.

697

Determination of Areas of Investment for Inclusion in List C of the Foreign Investment Negative List. Upon petition by a Philippine national engage therein, an area of investment may be recommended by NEDA for inclusion in List C of the Foreign Investment Negative List upon determining that it complies with all the following criteria: a) The industry is controlled by firms owned at least sixty percent (60%) by Filipinos; b) Industry capacity is ample to meet domestic demand; c) Sufficient competition exists within the industry; d) Industry products comply with Philippine standards of health and safety or, in the absence of such, with international standards, and are reasonably competitive in quality with similar products in the same price range imported into the country; e) Quantitative restrictions are not applied on imports of directly competing products; f) The leading firms of the industry substantially comply with environmental standards; and g) The prices of industry products are reasonable. 698 Sec. 8

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