Com.
Law Review Sundiang (Chammy Diamond Notes)
COMMERCIAL LAW REVIEW
Dean Sundiang
IPL
Intellectual Property consist of :
1. Copyright and related rights
2. Trademarks and Service Marks
3. Patents
4. Geographical Indications
5. Layouts design
6. Protection of undisclosed Information
7. Industrial Design
Geographical Indications – indications which identify a
good as originating in the territory or a region or
locality in that territory, where a given quality,
reputation or other characteristics of the good is
essentially attributable to tis geographical origin.
Trademark, Copyright and Patents:
Trademark
Is any visible sign capable of distinguishing the goods
or services of an enterprise and shall include a
stamped or marked container of goods.
Trade name – means the name or designation
identifying of distinguishing enterprise.
Copyright – literary and artistic works which are
original intellectual creations in the literary and artistic
domain protected from the moment of creation.
Patentable inventions – refer to any technical solution
of a problem in any field of human activity which is
new, involves inventive steps and is industrially
applicable.
Utility Model – tools of industrial product which of
practical utility.
Industrial Design – any composition of lines or colors
INTERNATIONAL LAW RELATED PROVISIONS
Reciprocity:
Any person who is a national or who is domiciled or
has a real and effective industrial establishment in a
country which is
1) A party to any convention, treaty relating to
IPR
2) Extends reciprocal rights to nationals of the
PHils laws shall be entitled to benefts to the
extent necessary to give effect to any
provisions of such convention
National Treatment – Each member of the WTO
Agreement shall accord to nationals of the other
members no less favorable than that it accords its own
nationals with regard to the protection of intellectual
property.
Most Favoured Nationa Treatment – Any advantage,
favour, privilege or immunity granted by A member to
the national of any other country shall be accorded
immediately and unconditionally to the nationals of all
other members of WTO.
Note: while registration of other intellectual properties
are with the IPO, copyrighted works are still deposited
with the National Library and the SC.
COPYRIGHT
-right over literary and artistic works which are original
intellectual creations in the literary and artistic domain
protected from the moment of creation.
Work of Applied Art – is an artistic creation with
utilitarian functions or incorporated in a useful article ,
whether made by hand or produced on a industrial
scale.
Note: Intellectual creation is one of the modes of
acquiring ownership under the CC.
Letters and other private communication 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 (copyright belongs to the author)
Who owns the copyright:
One creator – creator, his heirs or assigns own the
copyright
Joint Creation – co-authors shall be the original owner
of the copyright and in the absence of agreement,
their rights shall be governed by the rules on co-
ownership
Exception: Work of Joint authorship consist 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.
Commissioned work: the person commissioning owns
the work: ownership of copyright remains with the
creator unless there is a written stipulation to the
contrary
Audio visual work – producer for purposes of
exhibition
Pseudonym and Anonymous work – unless the author
is undisputably known , the publisher shall be
presumed to be the representative of the author.
Employers work during course of employment:
-Employer – if the result of regular functions or duties
but the employee owns it if it is not part of his duties.
Duration of Copyright:
1/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Literary and Artistic Creation :- during the lifetime of
the creator and for 50 years after his death.
(always start Jan 1st of the next year after death)
Anonymous work / pseudonymous work – 50 years
after first publication.
Work of Applied Art – 25 years
Broadcast – 20 years
COPYRIGHTABLE OBJECT:
Original
Books, pamplets, lecture, sermon, letters, musical
composition, works , painting, drawing , Audiovisual,
computer programs
Derivative:
Dramatization, translation, adaptations
Collection of literary, scholarly or artistic works
UNPROTECTED WORKS:
-any idea , procedure, system, method or operation,
concept, principle.
-the format of a television game show is not subject to
a copyright.
a. news of the day, press information
b. Any official text of a legislative , administrative or
legal nature.
c. Any work of the Govt of the Phils.
RIGHTS OF AUTHORS
a) Economic Rights
-exclusive right to
1. carry out
2. authorize
3. prevent reproduction of the work or
substantial portion of it, prevent first
publication, prevent rental, prevent public
display prevent public performance.
b) Moral Rights (imprescriptible)
-Right of authorship of the works
-right to make alterations of his work
-right to object to any distortion, mutilation
(Right of Attribution and Integrity)
Publishers Rights – right to publish granted by the
author, his heirs or assigns.
ACTS THAT DO NO INFRINGE COPYRIGHT
a. Recitation or performance of the work
1. Made to the public
2. Privately done
3. For free
4. Strictly charitable or religious
b. Making quotation from published works
-consistent with fair use, source must be named
c. reproduction or communication to the public by
mass media on current events.
d. Teaching purposes compatible with fair use.
e. recording made in school
f. use of work by other under direction of the Govt.
g. Public performance or the communication where no
admission is charged.
h. Single copy reproduction of published work by
natural person exclusively for research and private
study.
Notes:
Author is entitled to 5% proceeds of sale during
lifetime and 50 yrs after.
-neighboring rights – protection given to those who
assist creators in conveying their work to the public.
-ABS-CBN Case – must carry rule imposed by govt,
no infringement on the cable operator to include
challen 2 and 23 in its cable channel without paying
royalties.
-Judges not liable to plagiarism, not literary and not for
dispute.
FAIR USE
-Fair use of a copyrighted work for criticism, comment
, news reporting , teaching and similar purposes is not
an infringement of copyright.
Factors to consider whether fair use or not:
a. Purpose and character of the use
b. Nature of copyrighted work
c. Amount and substantiality of the portions used
d. Effect of the use upon the potential market of
the copyrighted work
Importation for Personal Purposes:
The importation of copy of a work by an individual for
his personal purposes shall be permitted without the
authorization under the ff:
a. Copies of the work not available in the PHils
and
One (1) copy at one time is imported for strict
individual
Use of Phils Govt.
Religious, Charitable or Educational copes
(not more than 3 copies)
INFRINGEMENT
When there is piracy or substantial reproduction. The
value of the original work is substantially diminished .
REMEDIES:
1. Injunction to prevent infringement
2. Action for damages (within 4 years)
3. Criminal case
Check Bar Problems page 486
TRADEMARKS:
-any visible sign capable of distinguishing the goods
or services of an enterprise and shall include a
stamped or marked container of goods.
Tradename – name or designation identifying or
distinguishing an enterprise
2/53
Com. Law Review Sundiang (Chammy Diamond Notes)
a. There must be visible sign
b. It must be capable of distinguishing the goods
of an enterprise (Distinctiveness)
Collective Mark – any visible sign, capable of
distinguishing the origin of different enterprise which
use the sign under the control of the registered owner
of the collective mark.
Note: there is no need to register trade names in order
to secure protection for them.
Functions of Trademark
a. To indicate the origin of goods
b. To guarantee standard quality
c. To advertise the goods
-The right in the mark shall be acquired through
registration with the IPO, Registration is necessary
before one can file an action for infringement.
ACTUAL USE:
-prior use in the PHils. Is not required
However, there must be actual use after registration.
-File Declaration of actual use of the mark evidence to
that effect within 3 years from the filing date of
application otherwise it may be cancelled.
-Registrant is required to file “Declaration of Actual
Use’ , show valid reason for non use within 1 year
from the 5th anniversary date of registration.
-certificate of registration of a mark shall be prima
facie evidence of the validity of the registration, the
registrants ownership of the mark and of the
registrants exclusive right to use the same.
-registration is also not important to protect the
GOODWILL that identifies in the mind of the public
-Registration of the mark is not necessary for
purposes of filing a case for unfair competition or false
designation
Unfair Competition exist:
a. There is passing off a product format of
another
b. Giving goods the appearance of goods of
another
Date of Registration is the filing date of application.
Filing of Application:
a. Express or implicit indication that registration
of mark is sought
b. Identity of the applicant
c. Indication sufficient to contact the application
or representative
d. Reproduction of the mark
e. List of goods or servies for which registration
is sought.\\
Priority Date
-subject to the rules on reciprocity, where the
application is filed in the Phils. And the same applicant
previously filed an application in the countries covered
by the reciprocity rule , the application is deemed filed
as of the day the application was first filed in the
foreign country.
MARKS THAT CANNOT BE REGISTERED
a. Immoral , deceptive or scandalous matter.
b. Consist of flag or coat of arms of the Phils.
c. Name, portrait or identify of a particular living
individual except by his written consent
d. Identical with a registered mark with earlier
filing or priority date.
e. Generic terms of goods
f. Descriptive marks
g. Customary design
h. Color, shapes
LIMITATIONS
Doctrine of Secondary Meaning;
-a generic or descriptive mark may later acquire a
characteristic of distinctiveness and can later be
registered if it acquires a meaning which is different
from its ordinary connotation.
-there must be continuous use for a period of 5 years.
e.g Ginebra rules by SC to have acquired Secondary
meaning
St. Francis – not acquired, confined to locality only.
INTERNATIONALLY WELL KNOWN MARKS
The person who may question the mark (oppose
registration, petition cancellation , sue for unfair
competition –BUT CANNT FILE INFRINGEMENT)
include person whose internationally well known mark,
whether or not registered is identical with or
confusingly similar to or constitutes a translation of a
mark that is sought to be registered or is actually
registered.
-need not be registered in the Phis, so long as the
mark is known in the Phils for similar or related goods
it will be protected.
Duration – 10 years, subject to indefinite renewal for
10 years each.
INFRINGEMENT
-infringement of tradename , need not be registered.
-trademark or tradename is reproduced, counterfeited,
copied or colorably imitated by the infringer;
-the use of the infringing mark is likely to case
confusion
-without consent of the trademark owner
Types of Confusion
1. Confusion of Goods – purchaser is induced to
purchase one product in the belief that he is
purchasing another, defendants goods are
brought as plaintiff and poor quality reflects
badly on the plaintifs.
2. Confusion of Business – goods of the parties
are different but the defendants product can
reasonably be assumed to originate from the
plaintiff, thus deceiving the public into
3/53
Com. Law Review Sundiang (Chammy Diamond Notes)
believing that there is some connection
between the plaintiff and defendant.
Test:
Dominancy test
-focuses on the similarity of the prevalent features of
the competing trademarks which might cause
confusion or deception, thus infringement.
-the question is whether the use of the marks involved
is likely to cause confusion or mistake in the mind of
the public or deceive purchasers .
-the dominancy test is the controlling test.
Exg. Mcjoy and Big Mac, Master Flavor and Master
Roast and Master Blend – there is infringement.
Holistic test
Requires that the entirety of the marks in question be
considered in resolving confusing similarity.
-comparison of words is not the only determining
factor but also other features.
Use of Identical Marks not necessarily Prohibited:
The use of identical mark does not by itself lead to a
legal conclusion that there is trademark infringement if
they are NOT used for identical , similar or related
goods.
Exg Shell for cigarettes was allowed.
Importation of Medicine
-there is no infringement of trademarks or tradenames
of imported or sold drugs and medicines which bears
marks that have not been tampered, unlawfully
modified.
Protection of Trade name – need not be registered
with the IPO, before an infringement suit may be filed
by its owner against the owner of an infringing
trademark.
UNFAIR COMPETITION
-involves employing deception or any other means
contrary to good faith by which persons passes off his
goods or business or service for those of one who has
already established goodwill.
Elements:
a. Confusing similarity in the general
appearance of goods
b. Fraud or intent to deceive the public
INFRINGEMENT of TRADEMARK vs UNFAIR
COMPETITION
1. Authority – infringement of trademark there is
unauthorized use of trademark, in UC,
involves passing of ones good as those of
another and giving ones good the appearance
of another.
2. No Fraudulent Intent – In infringement of
trademark not necessary to establish
fraudulent intent, while it is necessary in UC.
3. Registration – registration is necessary prior
to the filing of infringement of trademark and
not in UC.
4. Broader – Unfair competition is broader than
Trademark infringement.
McJoy Case – actual use pertains to territorial
jurisdiction of the PHils, not in certain region. Entity
claims first use will be given preference.
PATENTS
-patentable inventions refer to any technical solution
of a problem in any field of human activity which is
new, involves inventive step and is industrially
applicable.
Novel – does not form part of prior art.
-lost by revelation to public
Prior art – which has been made available to the
public anywhere in the world before the filing date or
the priority date of application.
Inventive step – having regard to prior art, it is not
obvious to a person skilled in the art.
In case of Drugs and Medicines – no inventive steps if
it results from:
a. Mere discovery of a new form or new property
of a known substance which does not result in
the enhancement.
b. Mere discovery of a new property
c. Mere use of known process unless such
known process results in a new product that
employs at least one new reactants.
Purpose of Patent law
a. Foster and reward invention
b. Promotes disclosures of inventions to
stimulate further innovation
c. Seek to ensure that ideas in the public domain
remain there for the free use of the public.
Classes of Patentable Inventions:
a. Machine
b. Product
c. Process
d. Improvement
e. Micro organism
Non Patentable Inventions
a. Discoveries , scientific theories and
mathematical method
b. Schemes, rules and methods of performing
mental acts
c. Methods of treatment of the human body by
surgery or therapy
d. Plant varieties or animal breeds
e. Aesthetic creations
f. Anything which is contrary to public order or
morality
Person Entitled to the Right
4/53
Com. Law Review Sundiang (Chammy Diamond Notes)
a. The right to a patent belongs to the
INVENTOR, HEIRS AND ASSIGNS
b. When two or more persons have jointly made
an invention, the right to a patent shall belong
to them JOINTLY.
First to File Rule
-if 2 or more person have made the invention
separately and independently of each other , the right
to the patent shall belong to the person who first filed
an application for such invention.
LIMITATION OF PATENTS RIGHTS
a. Using patented product which has been put
on the market by the owner.
b. Importation of drugs and medicines
-drugs and medicines even sounds alike can be
registered because of prescription, not confusingly
similar.
c. Acts done privately on a non commercial scale for
non commercial purposes. (scientific, educational)
Note: party charged must have actual knowledge of
pending application; applicant acquires right of
patentee after first publication, can file action for
infringement but such action can be filed only after the
patent is issued and within 4 years from commission
of the infringing act.
Prejudicial Disclosure
-when the inventor voluntarily discloses it such as
offering it for sale, the world is free to cpy and use it
with impunity. Ideas once disclosed to the public
without the protection of a valid patent are subject to
appropriation without significant restraint.
Non Prejudicial Disclosure
-any disclosure of the invention made within 12
months before the filing date does not prejudice the
application if the disclosure is made by
a. inventor himself
b. patent office
c. third party who obtained info from the inventor
Copyright – 50 yrs
Trademark – 10 yrs
Patent – 20 yrs
Note: for criminal liability to attach there must be
repetition of the infringing act.
-criminal action prescribes in 3 years from date of
commission of the crime.
-Civil liability for damages will prescribe in 4 years
from time of infringement.
Doctrine of Equivalents
-provides that an infringement also takes place when
a device appropriates a prior invention by
incorporating its innovative concept.
-although with some modification and change,
performs substantially the same function to achieve
substantially the same result.
-one device performs substantially the same as the
prior invention, same results
Compulsory Licensing
-is a license issued by the Dir. General to exploit a
patented invention without the permission of the
patent holder.
Grounds:
a. National emergency
b. Public interest
c. Anti competitive
d. Non commercial use
e. Demand for patented drugs and medicines
not being met
Whose Favor – should be granted to any person who
has shown his capability to exploit the invention.
Time when cannot be applied – before the expiration
of 4 yrs from the date of filing or 3 years from the date
of patent whichever period expires last.
Concept of Divisional Application
-when two or more inventions are claimed in a single
application but are of such a nature that a single
patent may not be issued for them.
-subject of separate applications
Trade Secret
-plan or process , tool , mechanism or compound
known to its owner
-it consist of formula that is used in ones business to
give an employer the opportunity to obtain an
advantage over competitors
-is protected even if it is not patentable
-court cannot issue injunction to compel such
disclosure.
****END OF IPL ***
TRANPORTATION
Common Carriers
-persons, corporations, firms or association 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.
The CC does not distinguish between a person or an
enterprise offering transportation on regular and
scheduled basis and one offering transportation
service on occasion, episodic an unscheduled basis.
Neither does the law distinguish between a carrier
offering services for the general public and one who
offers to a narrow segment of the general population.
Test to determine common carrier
5/53
Com. Law Review Sundiang (Chammy Diamond Notes)
a. He must be engaged in the business of
carrying goods for others as a public
employment
b. He must undertake to carry goods of the kind
to which his business is confined
c. He must undertake to carry by the method
which his business is conducted.
d. Transportation must be for hire
*pipeline operators are common carriers. SC held that
corporation engaged in the business of transporting
products through pipes can be considered a common
carrier. It does not provide that transportation of the
passengers or goods should be by motor vehicle.
Bareboat or Demise charter – where the charterer
mans the vessel with his own people and becomes
the owner of the voyage
-common carrier transform into private carrier
If contract of affreightment – still common carrier
Custom broker and warehouseman – declared to be a
common carrier, although offers to selected parties.
(as common carrier they are bound to exercise
extraordinary diligence)
-A common carrier need not have a fixed and
pubcliclyl known route nor does it have to maintain
terminals to issue tickets.
Common carrier
-limited clientele
-irregular basis
-ancilliary activity
 Operator beach resort that provides for tour
packages – consider as common carrier.
Common Carrier Vs Private Carrier
-lies in the character of the business
-if undertaking is a single transaction , not part of a
general business or occupation, although involving the
carriage of the goods for fee, the person offering such
service is a private carrier.
Common – to all person who choose to employ him
-bound to carry for all
-subject to regulation
-bound to exercise extraordinary diligence
-cannot stipulate that it is EXEMPT from liability for the
negligence of its agents or employees. VOID against
public policy.
Private – in some special case with some private
individual to carry for hire.
-special agreement
-not subject to regulation
-diligence of a good father of a family
-can validly enter into such stipulation (exempting
liability from negligence of its agents)
See practice Problem pg. 412
Extraordinary Diligence and Presumption of
Negligence
-in case of loss of effects of passengers or death or
injuries to passengers, the common carrier is presume
to be at fault or have acted negligently unless it had
observed extraordinary diligence.
-strict liability on contract of carriage
Prima facie case of fault or negligence
-proof of delivery in bad condition
-failure to transport passenger safely
DEFENSES OF COMMON CARRIERS
Extraordinary diligence requires that the shop which
will transport the goods is seaworthy
Common carriers are responsible for the loss,
destruction or deterioration of the goods UNLESS due
to
a. Calamity (act of God)
b. Acts of Public Enemy
c. Act or omission of the shipper
d. The character of the goods
e. Order of competent public authority
f. Exercise of extraordinary diligence
Exclusive
If for transport of Passenger – extraordinary diligence
only.
Hijacking of the carrier – carrier presumed at fault
unless proof of extraordinary diligence.
Seizure of passenger by armed men is not fortuitous
and does not excuse carrier from liability. , there was
a report and the carrier did not take steps to safeguard
the lives of properties.
Contributory Negligence on the part of the passenger
is not a defense that will excuse the carrier from
liability. It will only mitigate such liability.
Carrier having knowledge of improper packing of
goods, still accepts – liable
Duration of Liability
-duty to exercise extraordinary diligence starts from
the time the goods are unconditionally placed in the
possession of and received by the carrier for
transportation, until delivered , actually or
constructively.
Passenger
-start, the carrier is bound to exercise utmost diligence
with respect to passengers the moment the person
who purchases the ticket from the carrier himself at
the proper place and in a proper manner to be
transported.
6/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-such person must have a bonafide intention to use
the facilities of the carrier, sufficient fare and present
himself to the transportation place.
-Carrier liable for sudden starting up or jerking, there
must be reasonable time to board for passengers.
-A public utility bus, once it stops is in effect making a
continuous offer to bus riders.
Termination
-after reaching his destination, safely alighted from the
carrier conveyance or has reasonable opportunity to
leave the carriers premises.
-a person walking along the station is considered a
passenger
LIABILITY FOR ACS OF EMPLOYEES AND
PASSENGERS
Common Carriers
-are liable for the death of or injuries to passengers
through the negligence or willful acts of the formers
employees , although they may have acted beyond
the scope of their authority or in violation of the orders
of the common carriers.
-This liability 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.
-the liability of the carrier for the personal violence of
its employees extends only to those acts which the
carrier could foresee or avoid.
-the carrier is not liable for acts of the employee not on
duty or in the line of duty.
-A common carrier is responsible for injuries suffered
by a passenger on account of the willful acts or
negligence of other passenger or of strangers, if the
common carrier could have prevented or stopped the
act.
STIPULATION REDUCING DILIGENCE OR
LIMITING LIABILITY
Reduction of Diligence
Carriage of Goods
-parties may stipulate that the diligence to be
exercised by the common carrier be less than the
extraordinary diligence provided:
a. writing
b. valuable consideration
c. reasonable and not contrary to law
-The parties cannot stipulate so as to totally exempt
the carrier from exercising any degree of diligence
whatsoever; an cannot stipulate that a common carrier
shall exercise diligence less than the diligence of a
good father of a family.
Valid Stipulations
a. Agreement limiting the common carrier liability
on account of strikes and riots
b. Limited to the value of the goods appearing in
the bill of lading unless the shipper declares
greater value
c. A contract fixing the sum that may be
recovered by the owner or shipper in case of
loss
d. When a passenger is carried
GRATUITOUSLY , a stipulation limiting the
carriers liability for negligence is valid but not
for willful acts or gross negligence.
However, reduction of fare does not justify
any limitation of liability.
Carriage of Goods by Sea Act (COGSA)
-goods to be shipped from a foreign port to the Phils,
the COGSA shall apply
-liability of the carrier is US500 per package in the
absence of a shippers declaration of a higher value in
the bill of lading.
Purpose of Limiting stipulation
-to protect common carrier, obliges shipper to notify
the cc of the amount that the latter may be liable , in
order for them to take appropriate measure.
REGISTERED OWNER RULE AND KABIT SYSTEM
-the person who is the registered owner of a vehicle is
liable for any damages caused by the negligent
operation of the vehicle although the same was
already sold or conveyed to another person at the
time of the accident.
-the registered owner is liable subject to his right of
recourse against the transferee or the buyer.
-Remedy Third Party Claim
-the registered owner is also liable if the vehicle was
leased to another person.
-the registered owner is NOT LIABLE if the vehicle
was taken from his garage without his knowledge and
consent.
Kabit System
-is an arrangement whereby a person who has been
granted a certificate of public convenience allows
other persons who own motor vehicles to operate
them under his license.
-contrary to public policy, void and inexistent
May a jeepney under kabit system be levied by
creditors of the registered operators ? Yes, considered
property of the registered owner
DRIVER AND THIRD PERSON
Passenger vs CC – contract of carriage
Passenger vs Driver – Culpa Criminal, Quasi Delict
-in case the liability of the driver and third person
concurs – their liability is joint and several.
Arrastre Operator
-legal relationship between the consignee and arrastre
operator is akin to a depositor and a warehouseman.
7/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-arraster operator and the common carrier are liable in
solidum for the proper delivery of the goods to the
consignee.
PASSENGER BAGGAGES
a. Baggage in possession of passenger
- Consider as necessary deposit
- The common carrier shall be responsible for
the baggage as depositaries, provided that
notice was given to them and the passenger
took the necessary precaution.
- In case of loss due to the fault of the
passenger the carrier will not be liable.
 The act of a thief, or robber is not deemed
force majeure unless it is done with the use of
arms or through an irresistible force.
b. Baggage with the carrier
-carrier is required to observe extraordinary diligence .
in case of loss or damaged the carrier is presumed
negligent.
Successive Carrier
-the second carrier shall assume the obligation of the
first carrier but the second carrier has the right of
action against the first carrier , if the latter is directly
responsible for the fault giving rise to the claim of the
shipper or consignee.
MARITIME LAW
-system of laws which particularly relates to the affairs
and business of the sea, to ships, their crews and
navigation.
LIMITED LIABILITY RULE
-limits the liability of the shipowner to the value of the
vessel, earned freightage and proceeds of the
insurance, of any. NO VESEEL , NO LIABILITY
-the total destruction of the vessel extinguishes the
maritime lien.
When Applicable:
a. Civil liability for indemnities in favor of 3rd
person which arise from the conduct of the
captain
b. Civil liability arising from collision
c. Unpaid wages of the captain an the crew
Exceptions
1. -when the injury to or death of a passenger is
due to either to the fault of the SHIPOWNER,
or to the concurring negligence of the
SHIPOWNER and the CAPTAIN.
2. When vessel is insured
3. Workmens compensation claims
Note: Limited liability rules does not apply if the carrier
failed to overcome the presumption of negligence.
Ship owner is negligent.
-no claimant should be given preference over the
others by the simple expedient of having filed or
completed its action earlier than the rest.
-The ship owner or ship agent may exempt
themselves from liability by abandoning the vessel
with all her equipment and freightage , if there is
insurance over the vessel.
PROTEST
Maritime protest is the written statement by the master
of the vessel or any authorized officer, attested by
proper officer, or a notary to the effect that damages
has been suffered by the ship.
Collision
Doctrine of Inscrutable Fault
-the vessel at fault shall indemnify the damages
sustained or losses incurred. And if both vessel were
at fault, Each shall suffer its own damages, and both
shall be solidarily liable to others.
-where fault is established but it cannot be determined
which of the two vessel were at fault, both shall be
deemed to have been at fault.
Doctrine of Error in Extremis
3 zone of collision
a. First zone – time up to the moment when risk
of collision begins
b. Second zone – risk of collision begins up to
practical certainty
c. Third zone – time when collision certain upon
to the time of impact
GENERAL VS PARTICULAR AVERAGE
General
-includes all damages and expenses which are
deliberately caused in order to save the vessel, its
cargo or both at the same time from real and known
risk.
Requisites:
a. Common danger to ship and cargoes
b. For common safety part of the vessel or cargo
are sacrificed
c. From the expenses or damages caused,
follows the successful saving of the vessel
and cargo
d. The expenses or damages should have been
incurred or inflicted after taking legal steps
and authority.
Particular Averages
-all the expenses and damages caused to the vessel
or to her cargo which have not inured to the benefit
and common profit of all the person.
CHARTER PARTY
-is a contract by which with the entire ship, or some
principal part thereof is let by the owner to another
person for a specified period of time or use.
8/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Contract of Affreighment – use of shipping space
lased by the owner in part or as a whole to carry
goods for others.
Charter or Demise bareboat – whole vessel is let to
the charterer which transfer to him its entire command
and possession and consequent control over its
navigation, including master and crew.
-the charterer is treated as owner pro hac vice of the
vessel . Here the common carrier becomes a private
carrier.
BILL OF LADING
-it is a written acknowledgment of receipt of goods and
agreement to transport them to a specific place to a
person named or to his order..
Functions of Bill of Lading
a. Evidence of the existence of the contract of
carriage of cargo
b. Commercial document whereby , if negotiable
ownership may be transferred by negotiation
c. Receipt of cargo
Types of Bill of Lading
a. Onboard BOL- states that the goods have
been received on boar the specified vessel
b. Received Shipment – states that the goods
have been received for shipment with or
without specifying the vessel.
LOANS AND BOTTOMRY AND RESPONDENTIA
Bottomry – loan secured by the shipowner or ship
agent guaranteed by the vessel itself and payable only
upon arrival of vessel at destination.
Respondentia – loan secure by the owner of the cargo
payable upon safe arrival of cargo at destination
PRESCRIPTIVE PERIOD FOR CLAIMS
WITHIN THE PHILS
When to file claim with carrier
-claim must be filed by the shipper otherwise
barred.
-immediately if damage is apparent
--within 24 hours if damage is not apparent
When to file case in court
-within 6 yrs if no BOL has been issued
-within 10 years if BOL is issued
UNDER COGSA
(from foreign port to Phils.)
Against Carrier
-upon discharge of goods, if apparent
-if not apparent 3 days from delivery
When to file case in court
-1 year from discharge, starts the delivery of the
goods or the date the goods should have been
delivered.
-does not apply to MISDELIVERIES and
CONVERSION
-a stipulation reducing the 1 yr period is void, but a
written agreement to suspend it is valid.
-the period is not suspended by extrajudicial demand
-insurer is also bound by the 1 yr period
-damages arising from delay or late delivery is nto the
damage or loss contemplated under COGSA.
Maritime lien – akin to a mortgage lien, inspite of
transfer of ownership the lien is not extinguished.
Inseparable to the vessel until discharged it follows
the vessel.
WARSAW CONVENTION
-international transportation by air.
Damage of Injury for which the Carrier is Liable
a. On board the aircraft
b. In the course of embarking
c. Disembarking
d. Delay
Check baggage or goods – during air transportation or
when there is delay.
LIMIT OF LIABILTY OF CARRIER
Carrier of Passengers – 250,000 francs
Exception: special contract , the carrier and passenger
may agree to a higher limit of liability.
Carriage of registered baggage and cargo
250 franc per kilogram
Exception: special declaration of value
Objects of which the passenger takes charge himself
-5000 franc per passenger
Jurisdiction
-where the carrier is domiciled, carriers principal
business, court of destination
PUBLIC SERVICE ACT
Conditions must concur in the grant of certificate of
public convenience
a. The grantee must be a citizen of the Phils. Or
a corporation or entity 60% of which is owned
by such citizen
b. Must have sufficient financial capacity
c. The service will promote public interest and
convenience
Note: Overriding principle is public necessity, interest
and convenience
-A certificate of public convenience is a mere license
or a privilege and being neither a franchise nor a
contract, if confers no vested or property right or
interest on the holder. However in its purely private
aspect, it has a value and may be considered property
that can be levied upon
Certificate of Public Convenience (CPC)
9/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-authorization to operate public service issued by the
Public Service Commission for which no franchise
either municipal or legislative is required by law
Certificate of Public Convenience and Necessity
(CPCN)
-requires franchise issued by legislative
Prior or Old Operator Rule
-the first licensee will be protected in his investment
and will not be subjected to reinous competition so
long as the prior operator is rendering sufficient,
adequate and satisfactory service
Grounds for Revocation of Certificate
a. The holder violates any order
b. Holder is mere dummy
c. Holder ceases operation or abandons the
service
Franchise
-includes not only authorization issuing directly from
Congress in the form of statute but also those granted
by administrative agencies.
A legislative franchise is a grant of privilege from the
sovereign power, whiel CPC is a form of regulation
through an administrative agency.
Is legislative franchise necessary before a public utility
can be allowed to secure certificate of public
convenience?
-No, if there is no statute requiring the same, yes if the
pertinent law requires such legislative franchise. E.g
no legislative franchise is necessary for the operation
of a domestic air transport.
Public Utility
Is a business or service engaged in regularly
supplying the public with some commodity or service
of public consequence such as electricity, gas, water.
Regulation of Public Utilities
-police power of the state
-state protect the public against arbitrary and
excessive rates while maintaining efficiency and
quality
Foreign Equity in Public utilities
“ No franchise , certificate or any other form of
authorization for the operation of a public utility shall
be granted except to citizen of the Philippines or to
corporations or associations organized under the law
of the phils at least 60% of whose capital is owned by
such citizen. 50 years of franchise.
-limit applies only to operation of public utilities and
NOT to ownership of the facilities. Ownership does not
require 60% Filipino equity.
** END of Tranpo ***
CREDIT TRANSACTIONS
Document of Title of goods – includes any BOL,
warehouse receipt, or any other document used in the
ordinary course of business in the sale or transfer of
goods as proof of possession or control of the goods,
or authorizing the possessor to transfer or receive
either by indorsement or delivery good represented by
such document.
Types:
a. BOL
b. Warehouse receipt
Functions of Document of title
a. Contract
b. Evidence of receipt of goods
c. Represents the goods , used to pass title to
the goods. It can be negotiable document of
title.
-No provision shall be inserted in a negotiable receipt
that it is non negotiable . Such provision is VOID.
Negotiation of Warehouse Receipts
Negotiation by Delivery only
a. The warehouseman undertakes to deliver the
goods to the bearer or
b. The warehouse man undertakes to deliver the
goods to the order of a specified person.
Note: a bearer document of title is NOT ALWAYS A
BEARRE DOCUMENT, in the sense that a special
indorsement has the effect of converting the bearer
instrument into an order instrument.
Ex. A or bearer - A delivered the document to B, who
in turn specially indorsed to C – C cannot negotiate
the document by mere delivery thereafter and
indorsement is necessary for its negotiation.
Indorsement coupled with Delivery
-if indorsement is necessary but the negotiable receipt
was only delivered.
Effects:
a. The transferee acquires title against the
transferer
b. No direct obligation of the warehouseman
c. Transferee can compel the transferor to
complete the negotiation by indorsing the
instrument.
-transfer of title and possession is accomplished
because the person to whom the instrument is
negotiated acquires the direct obligation of the
warehouseman.
Non Negotiable Warehouse Receipts
-if it states that the goods received will be delivered to
the depositor or to any other specified person.
Rights of Transferee of Non Negotiable Receipts
a. Title of the goods
10/53
Com. Law Review Sundiang (Chammy Diamond Notes)
b. The right to notify the warehouseman of the
transfer to him of such receipt thereby to
acquire the direct obligation of the
warehouseman.
Note: Prior to the notification of the warehouseman by
the transferee of non negotiable receipt, the right to
acquire the obligation of the warehouseman may be
defeated by levy of an attachment, or execution upon
the goods by the creditor.
Warehouseman’s Defenses for Non Delivery or
Misdelivery
a. Loss without fault
b. Failure to satisfy bailees lien
c. Failure to surrender the negotiable instrument
d. Lack of willingness to sign acknowledgment
e. Delivery to claimant with better right
f. Attachment or levy
Warehouseman’s Lien
a. Lawful charges for storage and preservation
fo the goods;
b. All lawful claims for money advanced interest,
insurance
c. All reasonable charges and expenses of
notice , advertisement etc.
Charges must be stated on the receipt otherwise no
lien.
Loss of Lien
a. By surrendering possession
b. By refusing to deliver the goods when a
demand is made with which he is bound to
comply.
Adverse Claimant – action to interplead
LETTER OF CREDIT
-an engagement by a bank or other person made at
the request of a customer that the issuer will honor
drafts or other demand for payment upon compliance
with the conditions specified in the credit.
PARTIES
3 parties
a. Buyer – procures the letter of credit and
obliges himself to reimburse the issuing bank
upon receipt of the document of title.
b. The bank issuing the letter of credit known as
issuing bank which undertakes to pay the
seller upon receipt of the draft and proper
document of title and to surrender the
document to the buyer upon reimbursement ;
c. The seller , who in compliance with the
contract of sale ships the goods to the buyer
and delivers the document of title and draft to
the issuing bank to recover payment
Independent Contracts:
3 distinct and independent contracts involved in a
letter of credit
1. The contract of sale between the buyer and
the seller
2. The contract of the buyer with the issuing
bank
3. The letter of credit proper
In the 2nd- the bank agrees to issue the letter of credit
in favor of the seller subject to reimbursement or
payment by the buyer of whatever is paid to the seller
plus proper consideration agreed upon by the parties.
3rd contract – the bank obligates itself to pay the seller
or to the order of the seller after presentation to the
bank of tender of documents stipulated upon, which
normally includes the document of title.
Independence Principle
-the bank only deals with documents and not with
goods, services or obligation to which they relate.
e.g the bank has no duty to verify whether what has
been described in the letter of credit or drafts or
shipping documents actually tallies with what was
loaded aboard the ship
Fraud Exception
-under the independence principle , the applicant
cannot enjoin the payment of the obligation of the
issuing bank under the Letter of Credit based on any
irregularity or non performance of an obligation. The
exception is when there is fraud or forgery in the
underlying transaction or the tender document.
Kinds of Letter of Credit
a. Confirmed LC – the beneficiary stipulates the
obligation of the opening bank is also the
obligation of another bank
b. Irrevocable LC – definite undertaking on the
part of the issuing bank, that the provisions for
payment , acceptance or negotiation in the
credit will be dulyl fulfilled.
c. Revolving Letter of Credit – provides for
renewed credit
d. Back to back LC – a credit with identical
documentary requirement and covering the
same merchandise as another LC.
e. Standy LC – security arrangement for the
performance of certain obigations. It can be
drawn if another business transaction is not
performed. It may be issued in lieu of a
performance bond. E.g contractor failed to
perform the secured obligation.
-the beneficiary will prove that the obligor
failed to perform the secured obligation.
TRUST RECEIPT LAW
A bank that issues a letter of credit has the right to ask
for reimbursement from the applicant buyer. This
obligation can also be secured by Trust Receipts. The
bank becomes the entruster of the goods while the
buyer importer is the entrustee . The goods will in
11/53
Com. Law Review Sundiang (Chammy Diamond Notes)
effect be released by the bank to the buyer by the
delivery of the document of title. Buyer as entrustee is
obligated to sell the goods an to apply the proceeds
thereof to the payment of the loan extended by the
entruster bank.
Entrustee – buyer- holding possession
Entruster – bank –holding title
A trust receipt is a security transaction intended to aid
in financing importers or dealers in merchandise by
allowing them to obtain delivery of goods under
certain covenants.
The entrustee may still be criminally liable under the
TRL even if the goods that were released by virtue of
the trust receipt were not resold but were used as
spare parts or machineries.
Obligations of Entruster (bank)
-release the possession of the goods to the entrustee
upon the latters execution of TR
Entrustee (importer)
-binds himself to hold the goods in trust for the
entrustor
-sell or otherwise dispose of the goods and to turn
over to the entrustor the amount still owing
-to return the goods if unsold
Note: the entrustee is still liable to pay the entruster
even if the goods were returned to the latter.
*the entrustee in a TR who failed to account for the
proceeds of the goods sold or to return the goods, is
guilty of estafa.
-there is criminal liability on the part of the responsible
officers of corporation an juridical entites
Entrusters title – security interest for the advances he
made. Ownership is vested in the bank.
*The entrustee bears the loss of the goods after
delivery to him.
*the entrustee is not the owner of the property hence
he cannot mortgaged it. (he does not have the free
disposal of the property to be mortgaged)
Novation of agreement – extinguished the obligation
under the trust receipt because it reschedule the debts
of the entrustee but it provided principal condition
which are incompatible with the trust agreement.
-the liability for breach of nature and no criminal
liability under the TR can be imposed.
BULK SALES LAW
Sale in Bulk
a. There is a sale, transfer mortgage or
disposition other than in the ordinary course of
trade and the regular prosecution of the
business;
b. The sale is of all or substantially all of the
business or trade;
c. When the sale is of all or substantially all of
the fixtures and equipment used in business
Purpose:
It seeks to prevent the defrauding of creditors by the
secret sale or disposal in bulk of all or substantially all
of a merchant stock of goods.
Formalities:
a. Sworn statement of the vendor listing the
names and addresses and amounts owing to
creditors
b. Sworn statement shall be furnished to buyer
c. The seller is required to prepare an inventory
of stock to be sold
d. The seller is required to notify the creditors of
projected sale at least 10 days before such
sale.
Formalities not required;
a. Sale is made in ordinary course of business
b. There is waiver from all the creditors
c. Sale is by judicial order
d. Those sold by assignee in insolvency or those
beyond the right of creditors
Effects of the Violation of BSL?
Violation of BSL makes the sale in bulk valid between
the parties, void as to affected creditors.
a) Sale in bulk is void as to creditors
b) Purchaser hold property in trust for seller
c) Purchaser is liable to sellers creditors for
properties forming part of bulk, and already
disposed by him
MORTGAGE
-to secure the principal obligation
-the mortgagor must be the absolute owner of the
thing mortgaged
-the mortgagor must have free disposal of the property
-a third person who is not a party to the principal
obligation , may mortgage his property to secure the
obligation of the debtor. It is not required he benefited.
REAL ESTATE MORTGAGE
-A REM must be registered with the Register of Deeds
where property is located in order to affect third
persons
-an unregistered mortgage is valid between the parties
Mortgagee in GF
-a mortgagee will be considered in Good faith if he
relies on the face of the Torrens Title.
Exception:
12/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Banks cannot rely merely on the title , they are
required to exercise highest diligence. They are
required to investigate the title of the property.
-the registered mortgage follows the property even if
there is a change of ownership.
-right of possession and disposal is not included.
-the first registered mortgagee has superior right over
junior mortgagee or attaching creditors.
After Acquired Properties
-the parties may stipulate that after acquired property
are automatically included in the mortgage. Thus the
parties may stipulate that all buildings, machineries
and equipment attached to the mortgaged property
shall be subject to the mortgage.
-the Deed of REM may expressly provide that it may
secure future advancement. In the absence of
stipulation, the general rule is that the mortgage must
be limited to the amount mentioned in the mortgage.
Foreclosure of Mortgage
a. Extrajudicial foreclosure
b. Judicial
c. Ordinary Execution sale
Ordinary execution under Rule 39 is the result of
personal action for collection of debt or specific
performance. This remedy is alternative to foreclosure
If the mortgagee opts to foreclose the real estate
mortgage, either judicially or extrajudicially , he
thereby waives the action for collection of the debt .
EXTRAJUDICIAL FORECLOSURE (3135)
-available only if there is an express authority in the
REM
-filing petition to the Executive Judge through Clerk of
Court
-one filing fee regardless of the number of properties
to be foreclosed
-venue is each where the property is located.
Requirements:
a. Posting in 3 public places
b. Publication in gen circulation
*Non compliance with the posting and publication
requirement will render the sale NULL AND VOID.
-Not necessary posted in the mortgaged property
-if original date of the sale stated is changed in
another date, there must be another posting and
publication for the new date.
-personal notice to the mortgagor is not required
The fact that mortgaged property is sold in an amount
lesser in its actual market value is not a ground to
invalidate the sale so long as the price is not shocking
to the conscience.
-the mortgage creditor can recover deficiency
Possession after Foreclosure
-the mortgagor shall remain in possession of the Real
Property after foreclosure. The winning bidder can file
for writ of possession before the expiration of the
redemption period.
Right of Redemption – 1 year from date of certificate
of sale is registered with the Registry of Deeds
-there must be tender of the whole redemption price
plus interest.
Note: if the mortgagee is a bank or juridical entity , the
mortgagor can redeem the property within 3 months
from foreclosure but not later than the registration of
the certificate of sale.
CHATTEL MORTGAGE
-an accessory contract by virtue of which personal
property is recorded in the Chattel Mortgage Registry
as security for the performance of an obligation.
-shares of stock and movable properties
Shares of stock – need not be registered in the stock
and transfer book .
-Machinery installed by the lessee on the leased
premises may be the subject of chattel mortgage. But
if installed by owner (immovable)
Buildings are real properties not subject to chattel
mortgage
Exception: if considered by parties, but valid between
parties only on the basis of estoppel but not against
3rd person.
After Acquired Properties
-covers only the property described threin and not like
or substituted property thereafter acquired
-does not apply to stores that are open to the public.
After Incured Obligations
-can only cover obligations existing at the time the
mortgage is constituted. It cannot cover after incurred
obligations.
Formalities:
-must be registered in the Chattel mortgage Register
of the Register of Deeds where the mortgagor resides
or he resides in the PHils. In the place where the
property is situated.
-if place of residence and location of property is
different, must be registered to both province or city
-unregistered mortgage is binding between parties but
not to 3rd person.
Affidavit of Good faith
-subscribed statement of chattel mortgage wherein
parties severally swear that the mortgage is made for
the purpose of securing obligation specified condition,
for no other purpose the same is just and valid
obligation and one not entered for the purpose of
fraud.
13/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-gives the mortgage a preferred status
Even in the absence of the affidavit, the chattel
mortgage is valid as between the parties. However,
not valid to 3rd person.
-No right of redemption
Deficiency after Foreclosure
-mortgagee can recover any deficiency
Exception: RECTO law
RECTO LAW
In a contract of sale of personal property on
installment basis ,the vendor ma exercise any of the
following remedies
a. Exact fulfillment of the obligation
b. Cancel the sale
c. Foreclose the chattel mortgage
When applicable:
-sale of property in installment
-applies to financial lease – with option to buy. Eg
mobile equipment with option to buy.
-remedies are alternative and not cumulative –the
exercise of one bars the other
e.g filing of collection case bars foreclosure
Effect of Foreclosure on Deficiency
-the seller cannot recover any deficiency
Waiver: if the seller opts to exercise the remedy of
exact fulfillment , he shall be deemed to have waived
his right as a mortgagee but may still levvy on the
mortgaged property.
FRIA
Suspension Order
Upon motion filed by the individual debtor , the court
may issue an order suspending any pending
execution against the individual debtor.
a. Properties held as security by secured
creditor shall not be the subject of such
suspension order
b. The suspension order shall lapse when 3
months shall have passed without the
proposed agreement being accepted by the
creditors.
c. No creditor shall sue or institute proceedings
to collect his claim from the debtor from the
time of filing of petition for suspension of
payment and for as long as the proceeding
remain pending.
Exception:
The following are not affected by the stay order:
a. Those creditors having claims for personal
labor, maintenance, expense of last illness
and funeral of the wife or children of the
debtor incurred in the 6 days immediately
prior to the filing of the petition.
b. Secured creditors.
Suspension of Payments
-the debtor has sufficient properties to cover all his
debts but he foresees the impossibility of meeting his
debts when they respectively fall due
-The purpose is to suspend or delay the payment of
debts
** End of Credit ***
GENERAL BANKING LAWS
Banks
-required that banks are stock corporations and that is
funds are obtained from the public meaning deposit of
20 or more persons
-an investment company that is engaged in solely
investing , reinvesting or trading in securities is not
engaged in banking. However an investment company
which loans out the money of its customers , collects
the interest and charges a commission to both the
lender and borrower is engaged in banking
Quasi bank
-entities engaged in the borrowing of funds through
the issuance , endorsement or assignment with
recourse or acceptance of deposit substitutes for
purposes of relending or purchasing of receivables
and other obligations.
Deposit substitutes
-are alternative form of obtaining funds from the public
other than deposits through the issuance,
endorsement or acceptance of deb instruments.
Nature of Business
-Banking is fiduciary in nature that requires high
standard of integrity and performance .
-subject to heavy supervision of banko sentral
-require exercise of utmost diligence in handling
deposits
-there are special rules of strikes and lockouts-any
strike or lockout unsettled in 7 days shall be reported
by the BSP to the Sec of Labor who has 2 options
a. he may assume jurisdiction over and decide the
case
b. certify the same to the NLRC for compulsory
arbitration
the law also allows the pres of the phil to intervene.
Notes:
Citibank Manila and Citibank Geneva – no legal
compensation. Foreign branches of banks are
considered as separate legal entities.
-Estafa cannot lie against bank officer of bank under
receivership. A bank is a contract of mutuum,
ownership passes to the bank, cannot misappropriate
what he owns.
14/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-a banking corporation cannot be incorporated without
the authority from the BSP. The AOI shall be filed with
SEC but should accompanied by favorable
recommendation of the BSP.
Classification of Banks
1. Universal Banks –
a. Power of commercial bank
b. Power of investment house
c. Power to invest in non allied enterprise
2. Commercial Banks
-banks given such power necessary to engage in
commercial banking in addition to general corporate
powers (ie power to issue drafts, LC, demand deposits
etc.)
3.Rural Banks
-needed for credit available and readily accessible in
the rural areas for the purpose of promoting
comprehensive rural development
4.Thrift bank
-include savings and mortgage bank, private
development banks, and stock savings and loan
association
5.Cooperative Banks
-provide financial, banking and credit services to
cooperative organization and their members
Distinction:
-only universal and commercial banks can create and
accept demand deposits without separate authority
from the Monetary Board while other banks must
secure authority from the MB;
-only universal bank may act as an investment house
-only universal bank and quasi bank may be involved
in quasi banking functions.
-Public officers can be directors of Rural Banks-
prohibited to others
-Incorporators of banks are natural persons, Rural
banks which can be organized or established by
cooperatives and corporations primarily organized to
hold equities , in rural banks
-A rural bank must be wholly owned by Filipinos while
other banks require 40% Filipino ownership of their
voting stock.
Functions of Banks
a.. Deposit Function
b. Loan Function
Prohibited Acts
a. Banks are prohibited from engaging in
insurance business
b. Outsourcing of function are generally
prohibited
Deposit Function
a. Simple loan – the bank is the debtor while the
depositor is the creditor
-the bank can make use of the money deposited.
-3rd person who may have right to the money
deposited cannot hold the bank responsible unless
there is a court order or garnishment.
-officers of the bank cannot be held liable for estafa if
they authorized the use of the money deposited by the
depositor.
-the bank has the right to compensation . it can set off
the deposit with the indebtedness of the depositor that
are due and demandable
Depositors
- At least 7 yrs of age
- Able to read and write
- It should be savings or time deposit
-married women are allowed to open bank accounts
without the assistance of their husbands
Kinds of Deposits
a. Demand deposits
-liabilities of banks which are denominated in
the Philippine currency and are subject to
payment in legal tender upon demand by
presentation of checks
-only a commercial and universal bank can
accept
-cannot accept except upon approval of the
MB
b. Saving Account
-most common type
-banks prohibited from accepting withdrawal without
presenting passbook
-a bank is negligent if it allows the withdrawal without
requiring the presentation of a passbook
c. Negotiable Order of Withdrawal Accounts
(NOW)
-interest bearing deposit accounts that
combine the payable on demand feature of
checks and investment feature of savings
account.
d. Time Deposit – account with fixed terms
e. Interest – Demand, savings, NOW accounts ,
time deposits and deposit substitutes
-anonymous accounts are prohibited
-joint accounts may be the subject of a survivorship
agreement whereby the co-depositor agree to permit
either of them to withdraw the whole deposit during
their lifetime and transferring the balance to the
survivor upon the death of one of them.
SECRECY OF BANK DEPOSITS
Peso Deposit
-All deposit of whatever nature with bank or banking
institution in the Philippines including investment in
bonds are considered absolutely confidential and may
15/53
Com. Law Review Sundiang (Chammy Diamond Notes)
not be examined, inquired or looked into by any
person, government , official , bureau or office.
Exception
1. Written permission of the depositor
2. Impeachment cases
3. Order of competent court where the money is
subject of litigation
4. Anti Graft and Corrupt Practices
5. Inquiry of Commissioner of BIR for purposes
of determining net estate of a deceased
depositor
6. Anti money laundering Council where there is
probable cause of money laundering and in
some instances even without court order
7. Disclosure to the Treasurer of the Philippines
for dormant deposits for at least 10 years.
8. Report of Anti Money Laundering Council
covering suspicious transactions
9. Order of CA on terrorist cases under Human
Security Act
Note: investigation of Ombudsman , 1405 will not
apply, must be subject of pending litigation.
-if primary issue of litigation is specific performance –
1405 will not apply
-information obtained illegally, exclusionary rule does
not apply – can still be used as evidence.
FOREIGN CURRENCY DEPOSIT
-the above enumerated exceptions do not apply to
foreign currency deposits.
Exceptions
1. Written consent of depositor
2. Anti Money Laundering Act (authority of
AMLA with court order)
3. Under Human Security Act
Under the AMLA
-may inquire into deposit upon order of the court when
there is PROBABLE CAUSE that the deposit are
related to the crime of unlawful activities .
Court Order not necessary:
a. Kidnapping for ransom
b. Comprehensive Dangerous Drugs Acts
c. Hi Jacking, Arson, Murder
Garnishment
-bank accounts may be garnished by the creditors of
the depositors. There is no violation of the law on
Secrecy of Bank Deposit if the accounts are
garnished.
Deposits that are exempt from garnishment
a. Foreign Currency Deposit
Exception: American tourist , raping 12 year
old child is subject to garnishment
b. Those exempt under the Rules on Civil
Procedure like provision for family for 4
months
Deposit Insurance
-All deposit of any bank are insured with the PDIC
Amounts:
-not exceed 500k.
-if the depositor has 2 or more accounts with the same
bank, the max coverage is 500k.
-deposit in a branch outside the PHils is not covered.
a. Joint account (and /or) “or” “and” shall be
insured separately form any individual
account
b. Joint account belonging to juridical joined with
natural shall be presumed to belong to the
juridical person.
-Payment is made by the PDIC to the depositor
whenever the insured bank is closed on account of
insolvency. Upon ordered by the MB of the BSP.
-the claim must be filed within 2 years from actual
takeover by the receiver.
UNCLAIMED BALANCES
-deposit that have become dormant for a period of 10
years may be escheated in favor of the government
-report to Treasurer of the PHils, inform SolGen.
-Publication
LOAN FUNCTION OF BANKS
Basic Rules/ Restrictions
a. Shall grant loans only in amounts for the
periods of time essential for the effective
completion of the operations to be financed
b. Shall be consistent with safe and sound
banking practices
c. A must ascertain that the debtor is capable of
fulfilling his commitments to the bank
Payments
a. Amortization schedule
SINGLE BORROWERS LIMIT
-the total amount of loans, credit accommodations and
guarantees that may be extended by a bank to any
person, partnership , association or other entity
SHALL AT NO TIME EXCEED 25% OF THE NET
WORTH OF SUCH BANK
-may be increased by additional 10% percent of the
net worth of such bank provided additional liabilities of
any borrower are adequately secured by trust
receipts.
DOSRI ACCOUNTS
-Restrictions are imposed on borrowings and security
arrangement by directors, officers and stockholders of
the bank directors , officers , stockholders and their
related interest.
-first degree
16/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Requisites: under NCBA
1. The borrower is a director or officer
2. He contracts a loan or any financial
accommodation
3. The loan or financial accommodation is from
a. His bank
b. A bank that is subsidiary
c. A bank in which a controlling proportion of
the shares is owned by the same interest
d. The loan or financial accommodation of
the director, officer is in excess of 5% of
the capital and surplus of the lending bank
Restriction under the GBL
Procedural Requirements
1. The account should be upon written approval
of the majority of the directors of the lending
bank
2. The account should be upon terms not less
favorable to the bank than those offered to
others (arms length rule)
3. Reportorial Requirements – the resolution
approving the loan shall be entered in the
records of the bank and copy furnished to
BSP.
4.Aggregate Ceiling
-the Manual of Regulation for bank provide that the
aggregate is 15% of the total loan portfolio of the bank
or 100% of the combined capital accounts whichever
is lower.
5.Individual Ceiling.
Up to amount of encumbered deposit, book value of
paid up capital.
Note: wife of the President may borrow wherein the
husband is the president of the bank.
Restriction under the NCBA
1. Waiver of secrecy of bank deposit
2. The account is subject to examination
Collaterals
Value of Collaterals
-Real property shall not exceed 75% of the appraised
value or 60% of the appraised value of improvement
FORECLOSURE OF MORTGAGE
Redemption Period for Natural person
-1year after the sale of the real estate to redeem the
property, from registration of the certificate of sale.
Redemption Period of Juridical Person
-shall not be more than 3 months after foreclosure ,
but not after the registration of the certificate of
foreclosure sale with the proper Register of Deeds.
Injunction and Bond
-any petition in court to enjoin or restrain the conduct
of foreclosure proceeding shall be given due course
only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay
all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure
proceeding.
Ownership of Banks
Foreign Ownership
a. Individual and Non banks
Foreign Individual and non banking institution may
own or control up to 40% of the voting stock of
domestic banks
b. Foreign Banks
-the law prescribes 605 as the max foreign bank
equity. However, the GBL allows the acquisition
beyond the 605 limit within a period of 7 years from
the effectivity of the GBL.
DIRECTORS AND OFFICERS
Composition of the Board
-5 and max of 15 directors
-2 of whom shall be independent directors
-incase of merger and consolidation, the max number
of directors shall be 21
-the law provides that no appointive or elective public
official whether full time or part time shall at the same
time serve as officer of any private bank.
Qualification
Fit and Proper Rule
-MB is authorized to pass rules providing for the
qualification and disqualification of individual elected
or appointed bank directors or officers and to
disqualify those found unfit after due notice
Regulation to Maintain Liquidity of Banks
1. The law imposes limits on loans and credit
accommodation
2. Limit to DOSRI accounts
3. Limit on value of collateral loans
4. Restriction on dividend declaration
Dividend Declaration is Prohibited
a. If its greater than accumulated profits
b. Clearing account with the Bangko sentral is
overdrawn
c. If it does not comply with the liquidity standard
ratios
d. If it has committed a major violation
Ownership of Real Property
-Any bank may acquire real estate in the conduct of its
business
However, total investment shall not exceed 50% of
combined capital account
A bank may hold, acquire , convey real properties
under the ff: circumstances
17/53
Com. Law Review Sundiang (Chammy Diamond Notes)
a. Shall be mortgaged to it in good faith by way
of securing debts
b. Shall be conveyed to it in satisfaction of debts
previously contracted in the course of its
dealings
-any real property acquired or held under
circumstances enumerated shall be disposed of by the
bank within a period of 5 days or as may be
prescribed by the Monetary Boar
-After said period, the bank may continue to hold the
property for its own use.
-the investment should not be 50% of the combined
capital account.
Bangko Sentral
-the BSP may extend loans and advances to banking
institution for a period of not more than 7 days without
any collateral for the purpose of providing liquidity.
-may also grant emergency loans or advances in the
amount not exceeding 50% of its total deposit and
deposit substitutes
CONSERVATORSHIP:
Grounds
-whenever that a bank or quasi bank is in state of
continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the
interest of depositors and creditors , the monetary
board may appoint a conservator with such powers as
the Monetary Board shall deem necessary .
-shall not exceed 1 year
-a conservator has no more to rescind a contract only
courts.
Power of Conservator
a. Take charge of the assets , liabilities and the
management
b. To reorganize the management of the subject
bank
c. To collect all monies and debts due
d. To exercise all powers necessary to restore
its viability
-if conservatorship failed, MB pursue receivership or
liquidity
RECEIVERSHIP AND LIQUIDATION:
Grounds
PDIC as statutory receiver
a. The bank is unable to pay its liabilities as they
become due in the ordinary course of
business
b. The bank has insufficient realizable asset
c. The bank cannot continue in business without
involving probable cause to its depositor or
creditors
d. The bank has willfully violated a cease and
desist order
Other entity – c/o RTC
Banks – Monetary Board
-no injunction against BSP except put a bond and
when in bad faith
How BSP combat inflation
a. Interest rates
b. Reserve requirement
Duties of receiver
a. Gather and take charge of assets and
liabilities
b. Exercise general powers
c. May deposit and place funds in non
speculative investment
d. Determine whether institution may be
rehabilitated
Close Now Hear Later Scheme
No prior hearing is necessary in appointing a receiver
and in closing the bank. It is enough that subsequent
judicial review is provided for.
Inflation – high price of goods, low value of money
Deflation – low price of goods , resulting recession
Effect of Receivership and Liquidation
a. Asset shall be placed under custodial egis
and shall be exempt from any order of
garnishment, levy or attachment
b. After declaration of insolvency, the remedy of
the depositor is to intervene in the liquidation
proceedings
c. The bank can sue and be sued but the case
should be prosecuted through the liquidator
d. Bank under liquidation retain their legal
personality
e. Bank can still foreclose mortgage
f. Not liable to pay interest on deposits
Remedy under the NCBA
-the action by the MB shall be final and executory and
may not be strained or set aside except PETITION
FOR CERTIORARI.
-can only be filed by the stockholder of record
representing the majority of the capital stock within 10
days from receipt of the board of directors directing
receivership or liquidation.
-the power of the MB to close bank and liquidate them
is a police power
Trust Operation of Banks
-may be authorized by the MB to engage in trust
business and act as trustee .
BANGKO SENTRAL NG PILIPINAS
Primary Objective
-to maintain price stability conducive to a balanced
and sustainable growth of the economy. It shall
promote and maintain monetary stability and the
convertability of the peso.
18/53
Com. Law Review Sundiang (Chammy Diamond Notes)

Bank Function Freezing of Monetary Instrument

a. Policy direction -CA
b. Supervision -upon application ex parte by AMLA
c. Regulator powers -after determination of probable cause
d. Financial advisor of govt -freeze order effective immediately
e. Banker of the govt. -freeze order shall be for 20 days up to 6 months
f. To engage in foreign exchange transaction in extension
order to maintain price stability
Foreign Currency Deposit are exempt from
ANTI MONEY LAUNDERING ACT garnishment, attachment or execution
Money laundering Except: to prevent injustice
-a crime whereby the proceeds of an unlawful activity
are transacted thereby making them appear to have Secrecy of Bank Deposits
originated from legitimate sources -covers disclosure of name of drawer, any
information concerning bank account
Committed Covers investment in bonds issued by the govt.
a. Involves or relates to any unlawful activity , -covers trust account
transact or attempt to transact
b. Perform or fails to perform any at as a result AMLA may inquire into deposit upon ORDER of
of which he facilitates (a) the Court, when there is probable cause that the
c. Fail to disclose if required to do so. deposit is related to unlawful activity.
Court order not necessary:
Jurisdiction: a. Kidnapping for ransom
-RTC . b. Drugs
-those committed by public officers and private person c. Hi jacking
who are in conspiracy with such public officers shall
be under jurisdiction of the Sandiganbayan TRUTH IN LENDING ACT
Disclosure Requirement
Covered Transactions -the law assures full disclosures by requiring the
-transaction in case or equivalent monetary instrument lender to give the borrower all the details regarding
involving total amount in excess of 500k within one the transaction.
banking day. Information in writing about
-cash prie
Covered Entities Charges
-bank, non banks , quasi banks, trust entities Total amount financed

Suspicious Transactions The imposition of interest and finance charge is VOID

a) There is no underlying legal obligation if not disclosed in the disclosure agreement
b) The client is not properly identified
c) Related to unlawful activity Escalation Clause – may also be violated if the
d) Amount involve does not commensurate with agreement provides for an escalation clause on intrest
the business or financial capacity of the client which is dependent soley on the will of the bank.
-subsequent compliance with the disclosure cannot be
Unlawful Activities – heinous crimes deemed in substantial compliance with the Truth in
a. Kidnapping for ransom Lending Act.
b. Drugs -Prescription period – 1 year from the date of the
c. Plunder demand
d. Jueteng
e. Piracy CONSUMER ACT
f. Qualified Theft -requires disclosure for consumer credits
g. Swindling -any creditor extending a consumer loan or in a
h. Hi jacking transaction which is neither consumer credit nor under
an open end consumer credit plan shall disclose the ff
Prevention of Money Laundering information
a. Customer identification a. the amount of credit which the debtor will have the
b. Record keeping – 5 years actual use
c. Reporting of covered and suspicious b. all charges
transactions. c. the amount to be financed
-covered institution shall report within 5 working d. interest rates
days any suspicious transactions.

19/53
Com. Law Review Sundiang (Chammy Diamond Notes)

Exempted Transaction -property will be subjected to civil forfeiture

-those involving extension of credits for business or proceedings.
commercial purposes or to the government and
government agencies. *** End of Banking ***

NEGOTIABLE INSTRUMENTS LAW

HUMAN SECURITY ACT
-the CA designated as special court to handle
terrorism cases may authorize in WRITING any police
or member of the Anti terrorism council to:
a. to examine the deposit, trust account assets in a
bank
b. to gather or cause the gathering of any relevant
information
What is a Negotiable Instrument
-it is a written contract for the payment of money
which is intended as a substitute for money and
passes from one person to another as money in such
manner as to give a holder in due course the right to
hold the instrument free from defenses available to
prior parties.

Grounds:
-after probable cause in a hearing called for that
purpose that
a. person is suspected of crime of terrorism
b. judicially declared outlawed
effective period – 30 days from the date of receipt of
the written order of the authorizing division of the CA
Definition of Terrorism
-committed by any person who commits an act
punishable under any of the following provisions of the
RPC, creating a condition of widespread and
extraordinary fear and panic among the populace, in
order to coerce government to give in to an unlawful
demand.
Requisites:
a. Must be in writing and signed by the maker or
drawer
b. Must contain an unconditional promise or
order to pay a sum certain in money
c. Must be payable on demand or at fixed or
determinable future time.
d. Must be payable to order or bearer
e. When the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
WUPOA
Assignee – no better right than the assignor
-defenses can be raised to assignee can be raised to
assignor

Meaning of Sequestration – shall be deemed as Iron Clad Rule – prohibits countermanding of payment
property held in trust by the bank for such person and of certified check but the holder must be a holder in
the government during the pendency of the due course.
investigation of the person suspected. Use or
disposition shall be subject to the order of the court. Incidents in the Life of A Negotiable Instruments
1. Preparation and signing
Authority of te AMLC to Investigate 2. Issue
-the AMLC is authorize to investigate any property or 3. Negotiation
funds that are in any way related to financing terrorism 4. Presentment for Acceptance
or acts of terrorism b) property or funds whom there is 5. Acceptance
probel cause to believe that such person or persons 6. Dishonor by non acceptance
are committing or financing terrorism. 7. Presentment for payment
8. Dishonor by non payment
-The AMLC is authorized to inquire into or examine 9. Notice of Dishonor
bank deposit and investment with any banking 10. Protest
institution WITHOUT A COURT ORDER 11. Discharge

AUTHORITY TO FREEZE Fictitious Payee Rule

-The AMLC, either upon its own initiative or at the -if an actual, existing payee is not the intended
request of the ATC is authorized to issue an EX recipient of the proceeds of the check, the payee is
PARTE order to freeze without delay; property or considered “ Fictitious” and the check is a bearer
funds that are related to terrorism instrument , drawer is relieved from liability.

Period of Effectivity of Freeze Order Shelter Rule:

-20 days. Extendible by the CA up to a period not
exceeding 6 months upon petition by AMLC
-Remedy of aggrieved party, file with CA a petition to
determine the basis of the freeze order according to
the principle of effective judicial protection
A holder not in due course who derives title from a
HDC and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of a
HDC.
20/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Negotiation
-transfer of an instrument from one person to another
in such a manner as to constitute the transferee a
holder thereof. A holder is a payee, indorsee of a bill
or note who is in possession of it, or bearer
Negotiable instrument – instrument is negotiable
Civil Code – if non negotiable
Functions of NI
a. It operates as substitute for money
b. It means of creating and transferring credit
c. Facilitates the sale of goods
d. Increases the purchasing medium in
circulation
Not Legal tender
-only notes and bills issued by the Bangko sentral are
considered legal tender
-check are not legal tender
“ checks representing demand deposit do not have
legal tender power and their acceptance in the
payment of debts both public and private , is at the
option of the creditor. Provided however, that a check
which has been cleared and credited to the account of
the creditor shall be equivalent to delivery to the
creditor of cash”
Coins as Legal tender
a. 1,000 - 1 peso, 5 peso, and 10 Peso
b. 100 – 1 cent, 5 cent, 10 cent, 25 cents
What are the important Features of a Negotiable
Instrument?
Negotiability – attribute or property whereby a bill or a
note or check may pass from hand to hand similar to
money, so as to give the holder in due course the right
to hold the instrument and to collect the sum payable
for himself free from defenses
Accumulation of Secondary Contracts
-secondary contracts are picked up and carried along
with them as they are negotiated from one person to
another, or in the course of negotiation of a negotiable
instrument, a series of juridical ties between the
parties thereto arise either by law or privity
Kinds of Negotiable Instrument
a. Bill of Exchange – is 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 the sum certain in money to order or
bearer.
b. Promissory Notes – 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 .
Kinds of BOE
a. Draft – LC
b. Inland and Foreign Bill – drawn and payable
in the Phils
c. Time Draft – payable at fixed date
d. Sight or demand draft- payable when
presented
e. Trade acceptance- used in contract of sale
f. Bankers acceptance-
g. Check- drawn on a bank , payable on demand
Kinds of Promissory Notes
a. Certificate of Deposit – a form of promissory
note which is a written acknowledgement of a
bank of its receipt of a certain sum with a
promise to repay the same.
b. Bonds – a certificate of evidence of a debt on
which the issuing company or governmental
body promises to pay the bondholders a
specified amount of interest, for a specified
length of time and to repay the loan.
c. Debenture – a PN or bond backed by the
general credit of a corporation and usually not
secured by a mortgage or lien on any specific
property.
When can a BOE be treated as a Promissory Note?
a. The drawer and the drawee are the same
person
b. The drawee is a fictitious person
c. The drawee has no capacity to contract
d. The instrument is so ambiguous that there is
doubt whether it is a bill or note.
Promissory Notes vs BOE
Promissory note
-unconditional promise
-involve 2 parties
-maker primarily liable
BOE
-unconditional order
-involves 3 parties
-drawer secondarily liable
Drawee /Acceptor– a drawee who accepts the order to
pay made by the drawer. It is only when a drawee
becomes an acceptor that he is primarily liable.
BOE vs Check
BOE
-not drawn on a deposit
-it is not necessary that a drawer, should have funds
in the hands of drawee
-death of the drawer of a BOE, does not revoke the
authority of the bank to pay
21/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Check
-it is necessary that a check is drawn on a deposit
-death of drawer of a check, revokes the authority of
the banker to pay
Commercial Papers
a. Crossed Check – negotiable
-can be issued only once, complies under Sec
1 appear
b. Trade Acceptance – negotiable
-Sec 1 must be complied with
c. Money Order – non negotiable
-gov by postal rules and regulations which is
inconsistent with NIL
d. Warehouse Receipt/Bill of Lading – not
negotiable
-same reason as BOL
-it represents good not money
e. Pawn Ticket – non negotiable
-it does not represent money
f. Treasury warrant – non negotiable
-payable at a particular fund
g. Trust Receipt – non negotiable
-evidence of ownership of goods
Distinction between a Negotiable and Non Negotiable
instrument
a. Only negotiable instruments are governed by
NIL
b. Negotiable instrument can be transferred by
negotiation or by assignment. Non negotiable
instrument can be transferred only by
assignment
c. The transferee of a non negotiable instrument
can never be a HDC but remains to be an
assignee. A transferee of a NI can be a HDC
if all req in Sec 52 are complied with.
d. Since the transfer of a non negotiable
instrument cannot be a HDC, All defenses
available to prior parties may be raised
against the last transferee.
Distinguish Negotiability and Assignability
-one who takes an instrument by assignment takes
the instrument subject to the defenses obtaining
among the original parties, whereas a person, who
takes the instrument by negotiation, takes it free from
personal defenses available among the parties.
IN WRITING AND SIGNED BY THE MAKER OR
DRAWER
-so long as they are adopted as the signature of the
signer. What is important is that the maker or the
drawer used what he affixed as his own signature for
authentication.
IT MUST CONTAIN AN UNCONDITIONAL PROMISE
OR ORDER TO PAY A SUM CERTAIN IN MONEY
a. The word “promise” or “order” need not
in the instrument to satisfy the
requirements of Sec 1.
e.g payable , payable on a given day payable
on demand, Due A B.
b. Promise or Order to Pay must be
Unconditional
Unconditional although coupled with
-an indication of a particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount
-a statement of the transaction which gives
rise to the instrument. Ig. Per contract of sale
dated Jan 1, 2013
c. Conditional
-An order or promise to pay on a particular
fund
-an instrument payable upon contingency
Fund for Reimbursement
-the drawee pays the payee from his own funds
afterwards
-the drawee pays himself from the particular fund
indicated
-particular fund is not the direct source of payment
Indicating Particular Fund
-there is only one act – the drawee pays directly from
the particular fund indicated.
-particular fund is the direct source of payment
Q: is a promissory note “ as soon as his means permit
him to do so” negotiable?
NO. renders the promise conditional.
PAYABLE IN SUM CERTAIN IN MONEY
-money need not be “ legal tender” . An instrument is
still negotiable although the amount is in currency that
is not legal tender so long as it is expressed in money.
Ie payable in Yen
Under RA 8183 – the agreement to pay in foreign
currency is valid.
If the obligor like maker is given the option to deliver
something in lieu of money the instrument is non
negotiable.
e.g. “ promise to deliver 1,000 or a sack of rice” at his
option.
If the instrument gives the HOLDER an election to
require something to be done in lieu of payment , the
22/53
Com. Law Review Sundiang (Chammy Diamond Notes)
instrument is still negotiable. E.g maker promises to
pay 1000 or a sack of rice at the option of the holder.
THE SUM PAYABLE IS SUM CERTAIN within the
meaning of this act although it is paid
a. With interest
b. By stated installment
c. By stated installment , with a provision that ,
upon default in payment of any installment or
of interest, the whole shall become due
d. With exchange, whether at a fixed date or at
the current rate
e. With cost of collection or an attorney fee in
case of payment shall not be made at
maturity.
STATED INSTALLMENT –
-the date of each installment must be fixed
-the amount to be paid for each installment must be
stated
e.g non negotiable if “ payable in 5 installment in the
amount of 1,000 per installment” without stating the
dates of each installment.
PAYABLE ON DEMAND OR AT A FIXED OR
DETERMINABLE FUTURE TIME.
A. Payable on Demand – the instrument should
be paid the moment it is presented for
payment
PAYABLE ON DEMAND
a. When it is so expressed to be payable on
demand or sight or on presentation
b. In which no time for payment is expressed
c. Where an instrument is issued , accepted or
indorsed when overdue
Payable at a Determinable Future Time
a. At a fixed period, after date, or sigh
Eg “twenty days after date”
b. On or before a fixed or determinable future
time specified therein.
e.g payable on or before Jan 5, 2006
c. On or at a fixed period after the occurrence of
a specified event which is certain to happen,
thought the time of happening be uncertain.
“ payable within 5 days from death of Mr X “.
Acceleration Clauses
-the negotiability of the instrument is not affected even
if it so to be paid by stated installment with a provision
that upon default in payment of any installment or
interest, the whole shall become due.
Insecurity Clauses
-Provision in the contract which allows the holder to
accelerate payment if he deems himself insecure. The
instrument is rendered non negotiable.
Extention Clauses
-an instrument is payable at a definite time, subject to
extension at the option of the holder, maker or
acceptor .
e.g “two year from date subject to extension for
another 1 year at the option of the maker “ negotiable.
PAYABLE TO ORDER OR BEARER
a) Payable to a specified person or entity is not
negotiable- because the NIL requires that it
should be payable to order or bearer.
Is a certified time deposit “ this is to certify that bearer
has deposited xxx” negotiable?
It is negotiable being payable to bearer, however,
where the Certificate of Time Deposit were delivered
but not endorsed as security, there is no negotiation at
most the holder would be a holder for value up to the
extent of his lien.
PAYABLE TO BEARER
a. When it is expressed to be payable
b. When it is payable to a person named therein
or bearer
c. Payable to the order of a fictitious person or
non existing person
d. When the name of the payee does not purport
to be the name of any person “ pay to cash”
e. When the only or last indorsement is an
indorsement in blank.
Order instrument
-payable to the order of a specified person “ pay to the
order of Juan dela Cruz” or
-To a specified person on his order “ pay to Juan dela
ruz or order”
DESIGNATED AS PAYEES. An instrument may be
payable to the order of;
a. A payee who is not the maker, drawer or
drawee
b. Drawer or maker
c. Drawee
d. Two or more payees jointly
e. One or some several payees
f. The holder of an office for the time being
IDENTIFICATION OF A DRAWEE
-where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
-the holder must know to whom he should present if
for acceptance and for payment
A bill may be addressed to “ more than one drawee
jointly “ whether they are partners or not but not to two
or more drawees in the ALTERNATIVE OR IN
SUCCESSION.
E.g “ to Juan Dela Cruz and Pedro Santos but not “
Juan de la Cruz or Pedro Santos”
23/53
Com. Law Review Sundiang (Chammy Diamond Notes)
OMISSIONS AND PROVISION THAT DO NOT
AFFECT NEGOTIABILITY
The validity and negotiable character of an instrument
are not affected by the fact that
1. It is not dated
2. Does not specify the value given
3. Does not specify the place where it is drawn
or the place where it is payable
4. Bears seal
5. Designates a particular fund of current money
in which payment is to be made
6. Addressed to more than one drawee jointly
When Date may be inserted by the holder?
-when date is necessary in order to determine the
maturity date of the instrument
Note:
Where the instrument is dated, such date is deemed
prima facie to be the true date of the making, drawing,
acceptance or indorsement.
ADDITIONAL PROVISIONS
An instrument is negotiable even if the following are
present
a. Authorizes the sale of collateral securities in
case instrument is not paid at maturity
b. Authorizes a confession of judgment
c. Waives the benefit of any law intended for the
advantage or protection of the obligor
d. Gives the holder an election to require
something to be done in lieu of payment of
money
TRANSFER AND NEGOTIATION
-if instrument is negotiable, transfer can be effected
through NEGOTIATION AND ASSIGNMENT
If the instrument is merely assigned the transfer does
not become a holder and he merely steps into the
shoes of the transferor. Any defense available against
the transferor is available against the transferee. E.g “
delivered without indorsement”.
ISSUANCE
-Issue is the first delivery of the instrument complete in
form to a person who takes it as a holder
a) Issuance to the payee is negotiation because
the transfer constitutes the payee the holder
of the instrument .
The payee may even be a HDC if he has
acquired the note from another holder or he
has not directly dealt with the maker thereof.
b) Delivery is the transfer of possession of the
instrument by the maker or drawer with the
intention to transfer title to the payee and
recognize him as holder thereof
NEGOTIATION
-if payable to bearer , it is negotiated by delivery
-if payable to order, it is negotiated by indorsement of
the holder completed by delivery.
BEARER INS. ALWAYS A BEAR INS. –where an
instrument , payable to bearer is indorsed specially, it
may nevertheless be further negotiated by delivery ,
but any person indorsing specially is liable as indorser
to only such holders as make title through his
indorsement.
INCOMPLETE NEGOTIATION OF ORDER
INSTRUMENT
-where the holder of an instrument payable to his
order transfers if for value without indorsing it, the
transfer vest in the transferee such title as the
transferor had therein and the transferee acquires in
addition , the right tot have the indorsement of the
transferor
INDORSEMENT
Indorsement should be placed
a. On the instrument itself
b. Separate piece of paper attached to the
instrument
c. Indorsement must be for the ENTIRE
INSTRUMENT . e.g 5,000 cannot be indorsed
for less like 1,000. Exception : there was
previous payment
d. Disallows negotiation to two or more
indorsees severally
e.g 20,000 note “ pay to jose, 15,000 and
pedro 5,000” is not considered negotiation,
although considered as assignment.
Kinds of Indorsement
a. Blank indorsement – no indrosee is specified,
done by affixing indorsers signature
b. Special Indorsement – designates the
indorsee “ Pay to X “
Note: A holder may convert a blank indorsement into a
special indorsement by writing over the signature of
the indorser in blank any contract consistent with the
character of indorsement.
c. Qualified Indorsement – constitutes the
indorser a mere assignor of title to the
instrument. It may be made by adding to the
indorser signature the words “ without
recourse”
d. Conditional Indorsement – the party required
to pay the instrument may disregard the
condition and make payment to the indorsee
or his transferee whether the condition has
been fulfilled or not.
24/53
Com. Law Review Sundiang (Chammy Diamond Notes)
e. Restrictive Indorsement
a. Prohibits further negotiation of the
instrument “Pay to X only or
b. Constitutes the indorsee the agent of the
indroser “ Pay to X for collection”
c. Vest the title in the indorsee in trust for
(pay to x in trust for Y” )
Rights of Restrictive Indorsee
a. To receive payment of the instrument
b. To bring any action thereon that the indorsee
could bring
c. To transfer rights
Negotiation by Prior Parties
-where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate .
but he is not entitled to enforce payment against any
intervening party to whom he was personally liable.
-he may strike out the intervening indorsement
because they are not necessary for his title and he is
liable to them because of his initial indorsement
A – B- C- D = D back to B
B can further negotiate it. He may also strike out the
indorsement of C and D.
HOLDERS
Holder – the payee or indorsee of a bill or note who is
in possession of it or the bearer thereof
-the payee or indorsee is the holder of an order
instrument
While the payee or the bearer is the holder of bearer
instrument
Requisites:
a. That it is complete and regular upon its face
b. That he became the holder before it was
overdue and without notice that it has been
previously dishonored
c. That he took it in GOOD FAITH and for value
d. That at the time tit was negotiated to him, he
head no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
Even a holder not in due course may sue thereon in
his own name and payment to him in due course
discharges the instrument.
A PAYEE – can be a holder in due course. Holder as
the payee or indorsee of a bill or note, who is in
possession of it or the bearer thereof.
Demand Instrument
-where an instrument payable on demand is
negotiated after an unreasonable length of time after
its issue, the holder is not deemed a holder in due
course.
Notice of Infirmity in the instrument
-means any irregularity in the instrument e.g forgery
and alteration
-defective when he obtained the instrument by fraud,
duress or force and fear .
GOOD FAITH
-good faith on the part of the holder is presumed, such
presumption is destroyed if eh payee or indorsee
“acquired possession of the instrument under
circumstances that should have put him to inquiry as
to the tile of the holder who negotiated the instrument”
.
-burden of proof now on the part of the holder
-A person who takes a crossed check without making
further inquiries is not a holder in due course.
Holder for Value
-the holder is a holder for value only to the exent that
the consideration agreed upon has been paid
delivered or performed .
RIGHTS OF A HOLDER IN DUE COURSE
-a HDC is free from personal defenses
-a HDC is not free from real defenses
-a HNDC I subject to personal and real defenses
Exception: a Holder who is not a HDC but he derived
his title from a holder in due course (Shelter Rule)
May one who fails to inquire as to an infirmity in a NI
and defect in the holders title be a HDC?
Yes, the law does not impose on a holder the
obligation to inquire into the infirmity of the instrument.
However, failure to make inquiry when the
circumstances indicate defect render the holder not a
HDC . Gross negligence may amount to legal absence
of good faith.
REAL AND PERSONAL DEFENSES
Real Defenses
1. Minority
2. Forgery
3. Non delivery incomplete instrument ( blank
check stolen)
4. Material alteration
5. Ultra vires
6. Fraud in Factum (Esse Contractus)
7. Illegality
8. Vicious Force or Violence
9. Want of Authority
10. Prescription
11. Discharge
Personal Defenses
1. Failure or absence of consideration
2. Illegal consideration
3. Non delivery of complete instrument
4. Conditional delivery of complete instrument
25/53
Com. Law Review Sundiang (Chammy Diamond Notes)
5. Fraud in inducement
6. Filling up blank not within authority
7. Duress or intimidation
8. Filling up blank beyond reasonable time
9. Transfer in breach of faith
10. Mistake
11. Insertion of wrong date
Distinguish Real Defenses from Personal Defenses
Real or absolute defenses attach to the instrument are
available against ALL HOLDERS.
Personal or equitable defenses are available only
against the holder who stands in privity with the party
who is entitled to set up or those who are not or do not
have the rights of a holder in due course.
FORGERY
Effects of Forgery?
-it is wholly inoperative and no right to retain the
instrument or to give discharge therefor or enforce
payment unless the party is precluded from setting up
forgery or want of authority.
Rules in Relation to Forgery
a. Only the forged signature is wholly inoperative
not the instrument itself
b. Forgery of indorsement payable to order, it is
not only the person whose signature was
forged who would not be liable but also the
parties prior to such person. Payment under a
forged instrument is not to the drawers order
(Cut off rule)
c. There may be parties who may be precluded
from setting up forgery:
a. Those who warrants like acceptors,
indorsers
b. Those who ratified forgery
c. Those who were negligent
d. the general rule is that in case of forgery
of “ the indorsement of the payee of the
check. The drawee bank cannot debit the
drawers account and that loss shall be
borne by the drawee bank. The depositary
or collecting bank is liable to the drawee
in case of forged indorsement because it
guarantees all prior indorsement.
Note: if drawee is not negligent
e. if the signature of the drawer in a check is
forged the drawee cannot charge the
account of the drawer and the drawee
cannot recover from the collecting bank.
Effects of the ff: instruments
a. Incomplete but delivered instrument (Blank
check)
Where the instrument is wanting in any material
particular the person in possession thereof, is prima
facie presumed authorized to complete it.
The instrument must be filled up strictly in accordance
with the authority given and within reasonable time in
order that it may be enforced against any person.
A holder in due course may enforce the instrument as
if it had been strictly filled up in accordance with the
authority given.
b. Complete but Undelivered Instrument
Delivery is essential to the validity of any negotiable
instrument. If the instrument is in the hands of HDC ,
valid delivery to him is conclusively presumed
The defense of want of delivery of complete
instrument is only a personal defense
c. Incomplete Undelivered instrument
-real defense
UNDATED INSTRUMENT
-the insertion of a wrong date will not avoid the
instrument in the hands of subsequent holder in due
course, but as to him the date so inserted is to be
regarded as the true date.
Material Alteration
-any alteration that changes the date, sum payable,
time or place of payment number or relation of parties
or medium of currency or which alters the effect of the
instrument.
Effect:
AVOIDS the instrument except as against the party
who made, authorized, or assented to the alteration
an subsequent indorsers . HDC can enforce it
according to its original tenor
FRAUD
Fraud in execution (fraud in factum )
-present when a person is induced to sign an
instrument not knowing its character as notes or a bill
-real defense
Fraud in Inducement
-the person who intends to sign was induced to do so
because of fraud.
-personal defense
MINORITY AND INCAPACITY OR WANT OF
AUTHORITY
a. Minority or incapacity may be invoked by the
minor or incapacitated as real defense
However, parties who are capacitated cannot
invoke such defense. The defense is only
personal to the minor or incapacitated only
Transfer of title by the minor is effective
negotiation.
26/53
Com. Law Review Sundiang (Chammy Diamond Notes)
PERSONS WITH SECONDARY AND PRIMARY
LIABLITY
Maker – primary liability
a. Engages to pay according to the tenor of the
instrument
b. Admits the existence of the payee and his
capacity to indorse
Acceptor – primary liability
a. Engages to pay according to the tenor of his
acceptance
b. Admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument
c. Admits the existence of the payee and his
capacity to indorse.
Drawer – secondarily liable
a. Admits the existence of payee and his
capacity to indorse
b. Engages that the instrument will be accepted
or paid by the party primarily liable
c. Engages that if the instrument is dishonored
and proper proceedings are brought, he will
pay to the party entitled to be paid.
The warranty of person negotiating by mere delivery
extends to the immediate transferee only.
General Indorser –
a. That the instrument is genuine
b. That he has good title to it
c. That all prior parties had capacity to contract
d. That the instrument is at the time of the
endorsement , valid and subsisting
The general indorser also engages that on due
presentment, it shall be accepted or paid or both as
the case may be, according to its tenor and if
dishonored, the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the
holder.
Who is an Accommodation Party
-is one who has signed the instrument as maker,
drawer, acceptor or indorser without receiving value
therefor and for the purpose of lending his name to
some other person. An accommodation party is liable
to holder for value notwithstanding such holder , at the
time of taking the instrument knew him to be an
accommodation party.
-can receive payment for lending his name
-act as surety entitled to reimbursement
-must lend his name to maker not to holder
A corporation cannot act as an accommodation party.
Ultra vires act.
Irregular Indorser
-a person not a party to the instrument who places his
signature threin in blank before delivery..
-always makes blank indorsement
-indorses before delivery
-liable to payee and subsequent parties
General Indorser
-makes special and blank indorsement
-indorses the instrument after delivery
-liable to subsequent parties
Presentment for Acceptance
When Mandatory:
a. When the bill is payable within a fixed period
after sight
b. When the bill expressly stipulates that it shall
be presented for acceptance
c. Where the bill drawn is payable elsewhere
than the residence or place of business of the
drawee.
Note: it is not necessary to present a check for
acceptance because it is not one of those required to
be presented for acceptance.
ACCEPTANCE
-is the signification of the drawee of his assent to the
order of the drawer.
a. writing
b. signed by drawee
c. drawee must assent to the promise to pay sum
certain in money
Right to Unqualified Acceptance
-the holder may refuse to take a qualified acceptance
and if he does not obtain an unqualified acceptance ,
he may treat the bill as dishonored by non
acceptance.
-where a qualified acceptance is taken, drawer and
indorsers are discharged from liability unless they
expressly authorized the holder ot take a qualified
acceptance.
-Acceptance is presumed to be unqualified.
NOTICE OF DISHONOR
Who should give:
a. Agent
b. Holder
c. Any party who may be compelled to pay like
indorsers
Benefit
a. Given by holder – inures to the benefit of all
subsequent holder and all prior parties who
have a right of recourse
b. Given by Indorser – benefit of the holder and
all parties subsequent to the party to whom
notice is given.
Effects;
Upon valid notice of dishonor, immediate right of
recourse against the indorsers arises it is as if the
indorser are primarily liable in the sense that the
27/53
Com. Law Review Sundiang (Chammy Diamond Notes)
holder need not claim payment from the person
primarily liable.
Protest
-is a formal declaration drawn and signed by a notary
that the foreign bill has been presented for acceptance
or payment and that the acceptance or payment is
refused.
BILL IN SET
-it is only one bill that is composed of several parts,
each part being numbered and containing a reference
to the other parts.
Purpose – usually availed of in cases where a bill had
to be sent to a distance place through some
conveyance. If each pat is sent by different means of
conveyance, the chance that at least one part of the
set would reach its destination would be greater.
DISCHARGE
a. By payment in due course by the principal
debtor
b. By payment in due course by the party
accommodated
c. By the intentional cancellation by the holder
d. Any other act which will discharge a simple
contract
e. When the principal debtor becomes the holder
of the instrument
Payment in due Course
-payment made after maturity
-to the holder in good faith
-without notice of any defect or infirmity
CHECK
-must be presented within a reasonable time after its
issue or the drawer will be discharge
- a check on itself does not operate as an assignment
of funds to the credit of the drawer with the bank, and
the bank is not liable to the holder unless and until it
accepts or certifies the check
KINDS
Cashiers check – drawn by the bank itself and is
accepted by its issuance. E.g managers check
Certified Check – one drawn by a depositor upon
funds to his credit in a bank which a proper officer of
the bank certifies will be paid when duly presented for
payment
Certification is equivalent to acceptance.
Where a check is accepted or certified, the drawer
and all indorsers are discharged from liability
Crossed Check
Effects
a. The check may not be encashed but only
deposited in the bank
b. The check may be negotiated only once
c. Serves as a warning to the holder that the
check has been issued for a definite purpose.
Memorandum Check
-in the form of ordinary check, with the word
memorandum. That the maker or drawer engages to
pay the bonafide holder absolutely without any
condition concerning the presentment.
Travellers Check- purchased from bank, can be used
like cash upon second signature by purchaser. It has
characteristics of cashiers check.
STOPPING PAYMENT
-a drawer may countermand payment if he has valid
defense against holder of the check.
*** End of Nego ***
INSURANCE
Contract of insurance – is an agreement whereby one
undertakes for a consideration to indemnify another
against loss, damage or liability arising from an
unknown or contingent event.
Mutual insurance companies – an entity owned by a
policy holders that caters only to the insurance needs
of the same policyholders . no capital stock and the
contributions of members are the only sources of
funds.
CHARACTERISTICS
a. Risk Distributing Device – distribute the risk of
economic loss among as many as possible to
those who are subject to the same kind of
risk.
b. Contract of Adhesion or Fine Print Rule –
terms of the contract do not result from mutual
negotiations between the parties as they are
prescribed by the insurer in printed form to
which the insured may adhere. In case of
doubt, contract should be strictly interpreted
against the insurer.
If terms are clear, courts are bound to adhere
to the insurance contract.
c. Aleatory – the obligation of the insurer to pay
the proceeds of the insurance arises only
upon the happening of an event which is
uncertain.
d. Contract of Indemnity – it means that the
insured who has insurable interest over a
property is only entitle to recover the amount
of actual loss sustained and the burden is
28/53
Com. Law Review Sundiang (Chammy Diamond Notes)
upon him to establish the amount of such
loss.
Life insurance is not a contract of indemnity .
There is no over insurance in life insurance.
There is over insurance only in property.
e. Uberrimae Fides Contract – is one of perfect
good faith not for the insured alone, but
equally so for the insurer; that is contract of
utmost good faith. It requires the parties to the
contract of insurance to disclose conditions
affecting the risk of which he is aware of
material fact, which the applicant knows, and
those , which he ought to know.
f. Personal Contract – the insurer considers the
personal qualifications of the insurer in
approving the insurance application.
Note: Bank Assurance is partnership of the bank
and the insurance company.
ELEMENTS OF INSURANCE
1. Existence of an insurable interest
2. Risk of loss
3. Assumption of risk
4. Scheme to distribute losses
5. Payment of premium
Considered as insurance business – a contract which
a corporation in consideration of stipulated amount
agrees at its own expense to defend physician against
suit for damages for malpractice.
PERFECTION
-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.
-Cognition theory being followed
-the insured is the one making the offer by submitting
an application to the insurer application. Thus, mere
submission of the application without the
corresponding approval of the policy does not result in
the perfection of the contract of insurance.
COVER NOTES
-person who wished to be insured may get protection
before the perfection of the insurance contract.
-the cover note issued by te insurer shall be deemed
an insurance contract , conditions:
1. the cover note shall be issued or renewed only
upon prior approval of the Insurance Commission
2. the cover note shall be valid and binding not more
than 60 days
3. No separate premium is required for the cover note
4. the cover note may be cancelled by either party
upon prior notice.
5. the policy should be issued within 60 days after the
issuance of the cover note
6. The 60 days period may be extended upon written
approval of the Insurance Commission.
7. The written approval of the Insurance Commission
shall be dispensed upon the certification of the
president , vice Pres or GM of the insurer that the risk
involved have as not yet determined and the renewal
is not contrary to the purpose of ICP.
THE POLICY
-is a written instrument where the terms and
conditions of the contract of insurance are set forth.
-the policy is not necessary for the perfection of the
contract.
-no policy of insurance shall be issued or delivered
unless in the form previously approved by the
Insurance Commission.
Rider – an attachment to an insurance policy that
modifies the conditions of the policy by expanding or
restricting its benefits or excluding certain conditions
from the coverage.
-Riders should be countersigned by the insured
-the rider containing “ automatic increase clause “ one
that increases the coverage subject to the attainment
of a certain age of the insured - is not a separate
contract.
CANCELLATION OF NON LIFE POLICY
Grounds:
Cancellation by the insurer of an insurance policy
other than life requires:
a. Prior notice to the insured
1. Non payment
2. Conviction of a crime
3. Fraud or material misrepresentation
4. Willful reckless acts
5. Physical changes in the property
6. Violation of the Insurance Code.
Requisites for Cancellation
1. Prior notice of cancellation to insured
2. Notice must be based on occurrence
3. Notice must be writing , mailed or delivered to
the insured
4. Notice must state the ground relied upon
Kinds of Policies:
Property Insurance
1. Open Policy – value of thing insured is not
agreed upon, but left to be ascertained at time
of loss.
2. Valued policy – definite valuation is agreed by
both parties , and written on the face of policy.
3. Running policy – contemplates successive
insurances and which provides that the
subject of the policy may from time to time be
defined.
Reinstatement of the Policy
29/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-does not give the insured absolute right to such
reinstatement by the mere filing of an application. The
insurer has the right to deny the reinstatement.
TYPES OF INSURANCE CONTRACT
a. Life Insurance
1. Individual Life – insurance on human lives
2. Group life – a blanket policy covering a
number of individuals. Employees for a single
employer.
3. Industrial Life – the premium are payable
either monthly or oftener.
b. Non Life Insurance
1. Marine
2. Fire
3. Casualty
c. Contract of Suretyship
PARTIES TO INSURANCE CONTRACT
Insurer – the person who undertakes to indemnify
another.
Insurers may only be partnership, associations or
corporations who are duly authorized by the Insurance
Commission to engage in insurance business.
Insurance Corporation
-it must have sufficient capital and assets required
under the IC.
-it must have a certificate of authority to operate
issued by the IC which should be renewed every year.
Foreign Insurance Corporation
-may be authorized by the Commission to engage in
insurance business provided
a. appointment of resident of the Philippines as
general agent.
b. possess paid up unimpaired assets or capital not
less that required by Domestic Corp.
c. it must deposit for the benefit and security of
policyholders
d. the investment should not exceed 20% of the net
worth of the FC.
INSURED
-the person with capacity to contract and having an
insurable interest in the life or property of the insured.
a. A public enemy may not be insured . A public
enemy is a nation, including the citizen or subject, with
whom the Philippines is at war.
-With respect to the corporation, the nationality is
determined by the controlling stockholders irrespective
of the place of incorporation.
-the property insurance entered into before the war
automatically loses its binding effect the moment the
insurer becomes a public enemy.
b. Minors cannot enter into an insurance
contract.
c. Married women can enter into insurance
contracts without the assistance of their
husbands.
Beneficiary – a person designated to receive
proceeds of policy when risk attaches.
Designation of Beneficiary.
-When one insures his own life, he may designate any
person as the beneficiary, whether or not the
beneficiary has an insurable interest in the life of the
insured.
Exception: Cannot be designated
1.Those made between person who were guilty of
adultery or concubinage at the time of donation
2.Those made between persons found guilty of the
same criminal offense
3.Those made to a public officer or his wife,
descendants or ascendants by reason of his office.
(conviction not a condition precedent)
-a life insurance policy is no different from a donation
insofar as beneficiary is concerned. Founded on
liberality.
Note: designation of person mentioned is VOID but
the policy is binding. The estate will get the proceeds.
2.If a person will insure the life of another payable to
himself, he must have insurable interest on the life of
the person whose life he is insuring.
3.In property insurance, the beneficiary must have
insurable interest on the property.
4.The designation if REVOCABLE unless the right to
revoke is expressly waived in the policy. Family code
allows the innocent spouse to revoke the designation
of the other spouse as irrevocable beneficiary after
legal separation.
A. The insured cannot assign the policy if the
designation of the beneficiary is irrevocable.
The beneficiary has vested rights.
B. If there is no WAIVER of the right to revoke
under , assignment of the policy may be
deemed an implied revocation.
C. If the insured refuses to pay the premium, the
designated irrevocable beneficiary may
continue the policy by paying premiums that
are due.
5.If premiums are paid out of the conjugal funds, the
proceeds are considered conjugal.
6.If the insured or beneficiary is a minor and the
amount involved does not exceed 50k , the father, in
30/53
Com. Law Review Sundiang (Chammy Diamond Notes)
the absence of judicial guardian, or the mother, may
exercise the minors right under the policy, without the
need of a court authority.
7.Teh designation of the illegitimate children as
beneficiaries in the deceased father insurance policy
is valid because no legal prescription exist in naming
as beneficiaries the children of illicit relationships by
the insured.
INSURANCE INTEREST
a. Life Insurance
Every person has an insurable interest in the
life and health
1. Of himself, his spouse and of his children
(mere relationship is sufficient)
2. Of any person on whom he depends
wholly or in part for education or support
or in whom he has a pecuniary interest
3. Of any person under a legal obligation to
him for payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance
4. Of any person upon whose life any estate
or interest vested in him depends
2-,3, 4 – there should be pecuniary interest
Notes: the test is whether or not the person is
interested in the preservation of the insured life
despite the insurance
B. What does insurable interest in property
consist?
1)-insurable interest in property is any interest therein
or liability in respect and may consist
a.existing interest
b inchoate interest
c.expectancy coupled with an existing
interest.
2)-in general , a person has an insurable interest in
the property, if he derives pecuniary benefit or
advantage from its preservation or would suffer
pecuniary loss, damage or prejudice by its destruction
whether he has or has not title in or lien upon, or
possession of the property.
3)Existence of insurable interest is matter of public
policy.
Insurable Interest in Property vs Insurable Interest in
life.
As to extent – insurable interest in life is unlimited ,
insurable interest in property is limited to the value of
the interest therein.
As to time when insurable interest must exist – In life
insurance, it is enough that the insurable interest exist
at the time the policy takes effect and need not exist at
the time of the loss; while in property insurance, it is
necessary that the insurable interest exist when the
insurance takes effect and when the loss occurs but
need not exist in the meantime.
As to expectation of benefit to be derived – In life
insurance, the expectation of the benefit to be derived
need not have any legal basis; in property insurance,
there must be a legal basis.
As to the beneficiary interest – the beneficiary must
have insurable interest over the thing insured in
property insurance. In life insurance, the beneficiary
need not have insurable interest over the life of the
insured if the insured himself secured the policy. If
obtained by beneficiary , the latter must have
insurable interest over the life of the insured.
Insurable Interest of Mortgagor and mortgagee over
the mortgaged property.
Both the mortgagor and mortgagee have an insurable
interest in the property mortgaged and this interest is
separate and distinct from the other. They may take
out separate policies at the same or at separate time.
Mortgagor
-the mortgagor of property, as owner has an insurable
interest to the extent of its value even though the
mortgagee debt equals such value. The reason is that
the loss or destruction of the property insured will not
extinguish his mortgage debt.
SC held that when the mortgagor secures the
insurance, the mortgagee may be made beneficial
payee : as assignee of the policy, pledgee.
Mortgagee
-the mortgagee has an insurable interest in the
mortgaged property to the extent of the debt secured,
such interest continues until the mortgage debt is
extinguished.
Standard or Union Mortgage Clause vs Open or Loss
Payable Mortgage Clause.
In standard mortgage clause the subsequent act of
the mortgagor cannot affect the rights of the
mortgagee
Open or Loss Payable mortgage clause – the
mortgagor does not cease to be a party to the contract
. here the mortgagee is only a beneficiary under the
contract, but not made a party to the contract itself.
When Interest retained by mortgagor
-where a mortgagor of property effects insurance in
his own name providing that the loss shall be payable
to the mortgagee or assign a policy of insurance to a
mortgagee, the insurance is deemed to be upon the
interest of the mortgagor, who does not cease to be a
31/53
Com. Law Review Sundiang (Chammy Diamond Notes)
party to the original contract. But any act to be
performed by the mortgagor , may be performed by
the mortgagee therein named, with the same effect as
if it had been performed by the mortgagor.
Insurable Interest of the Beneficiary and Assignee of
the Policy.
a.Property Insurance – the beneficiary and the
assignee must have insurable interest. Consent of the
insurer must be secured before the assignment.
Life Insurance – if the insured takes the insurance on
his own life, he can designate anybody who does not
have insurable interest. If a third person takes the
policy, the beneficiary must have insurable interest. IN
case of assignment the assignee need not have
insurable interest.
Expectancy not insurable unless coupled with an
interest in the thing from which it shall arise.
Exg. An owner of a business may insure against
contingency which may cause the loss of profits
resulting from the cessation or interruption of his
business.
Effect of Change of Interest in thing insured
unaccompanied by a change of interest in insurance:
Exceptions:
Gen Rule – a change of interest in any part of the
thing insured unaccompanied by a corresponding
change of interest in the insurance suspends the
insurance to an equivalent extent , until the interest in
the thing, and the interest in the insurance are vested
in the same person.
Exceptions:
a. In life , health and accident insurance
b. Change of interest in the thing insured after
the occurrence of an injury
c. Separately insured by one policy
d. By will or succession or death
Note: when there is an express prohibition against
alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended but
AVOIDED.
RISK INSURED AGAINST
-the risk insured against maybe any contingency or
unknown event the happening of which will damnify a
person having insurable interest or will create liability
against him. Even fortuitous event may be insured
against.
Gen. Rule: A future event is the only event that can be
covered by the insurance contract.
Exception: a past event may be covered by a marine
insurance – if the loss of the vessel in the past could
not have been known by ordinary means of
communication.
PREMIUM
Premiums are consideration paid to an insurer for
undertaking to indemnify the insured against a
specified peril.
Gen. Rule: No insurance policy issued or renewed is
valid and binding until actual payment of the premium.
Any agreement to the contrary is void.
Exceptions: that the insurance policy is not valid and
binding until actual payment of premium.
1. In case of grace period
2. There is an acknowledgment in the contract of
policy that premium had already been paid.
3. Payment of premium in installment agreed
upon by both parties and partial payment has
been made at the time of the loss.
4. Where a credit term was agreed upon like the
agreement.
5. Where parties are barred by estoppel.
Note: SC Held: where the insurer authorizes an
insurance agent to deliver the policy to the insured, it
is deemed to have authorized said agent to receive
the premium in its behalf. The insurer is also bound
by its agent acknowledgment of receipt of payment of
premium.
What is the effect of the payment of the premium by a
post dated check?
-the payment of a premium by a post dated check at a
stated maturity subsequent to the loss is insufficient to
put the insurance into effect. Payment by means of
check, accepted by insurer, bearing a date prior to the
loss , assuming availability of funds, would be
sufficient even if it remains unencashed at the time of
the loss . The subsequent effect of encashment would
retroact toe the date of the instrument and its
acceptance by the creditor.
When the insured is Entitled to Return of Premium
Paid
1. Never exposed to the risk insured against
2. Contract is voidable due to the fraud or
misrepresentation
3. Insurer never incurred liability
4. Insured surrenders
5. Contract is voidable because of existence of
facts of which the insured was ignorant
6. Over insurance
7. Rescission is granted due to the insurers
breach of contract
Suretyship
-Premium is also necessary in order for the contract of
suretyship or bond to be binding.
Exception: where the oblige has accepted the bond it
is bindng even if the premium has not been paid
subject to the right of the insurer to recover the
premium from its principal.
32/53
Com. Law Review Sundiang (Chammy Diamond Notes)
TRANSFER OF POLICY
May the policy be transferred without the consent of
the insurer?
Yes, in life insurance btu NO in property insurance.
The property insurance cannot be transferred without
the consent of the insurer because the insurer
approved the policy based on the personal
qualification and the insurable interest of the insured.
What is the effect of the transfer of the property
insurance policy without the consent of the insurer?
-the insurance policy is suspended and will not be
avoided until the interest in the thing and the interest
in the insurance are vested in the same person.
DEVICES USED FOR ASCERTAINING AND
CONTROLLING RISK AND LOSS
4 Primary Concern of Insurer
a. Correct estimation of risk
b. Delimitation of risk
c. Control of risk to guard against increase of
risk
d. Determine if loss occurs
DEVICES
a. Concealment
b. Warranty
c. Representation
d. Condition
e. Exception
Concealment
-neglect to communicate that which a party knows and
ought to communicate
Representation
-factual statements made by the insured at the time of
or prior to the insurance policy to give information to
the insurer and otherwise induce him to enter into the
insurance contrac
Warranties
-statement or promise by the insured set forth in the
policy itself or incorporated in its by proper reference,
the untruth or non fulfillment of which is any respect
and without reference to whether the insurer was in
fact prejudiced by such untruth or non fulfillment
render the policy VOIDABLE by the insurer
Condition
-the insurer must also protect himself against
fraudulent claims or loss, inserting in the policy
various conditions precedent or subsequent. E.g proof
of loss, notice of loss
Exceptions
-make more definite the coverage indicated by the
general description of the risk by excluding certain
specified risks .
Note: the burden of proving that the loss was caused
by an excepted peril rest with the insurer.
CONCEALMENT
Test of Materiality
-materiality is 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 disadvantages of the
proposed contract or in making his inquiries or in fixing
the premium rate.
-matters of opinion or judgment are called for ,
answer made in good faith and without intent to
deceive will not avoid the policy even thought they are
untrue.
Effect of Concealment
-it vitiates the contract and entitles the insurer to
rescind , even if the death or loss is due to a cause
not related to the concealed matter.
Cause of Loss – matters concealed need not be the
cause of the loss.
The insured need not die of the disease he had failed
to disclose to the insurer. If is sufficient that his non
disclosure misled the insurer in forming his estimates
of the risks of the proposed insurance policy or in
making inquiries.
Is Good Faith a defense in concealment?
No. Good Faith is no defense. The concealment
whether intentional or unintentional entitles the injured
party to rescind the contract of insurance. Indeed, the
materiality of the facts concealed does not depend on
the state of mind of the insured but rather to eth
probable and reasonable influence of the facts upon
the party to whom communication should have been
made.
WAIVER AND ESTOPPEL
-an insurer may be deemed stooped raising
concealment if it accepts the premium payments and
issued the policy even if the insured already supplied
the insurer such facts or information which could
hardly be overlooked in the application form .
-if there was connivance between the insured and
agent or medical examiner – insurer not estopped.
REPRESENTATION
-Is an oral written statement of fact or condition
affecting the risk, made by the insured to the insurer,
tending to induce insurer to assume risk.
Kinds:
1 Affirmative and promissory
Test of Materiality
-is determined by the probable and reasonable
influence of the facts on the party on whom
33/53
Com. Law Review Sundiang (Chammy Diamond Notes)
communication is due, in forming his estimate of the
contract , risks and premium.
Effect of Misrepresentation
-the injured party is entitled to rescind from the time
when the representation becomes false.
WARRANTY
-is a statement or promise set forth in the policy , the
untruth or non fulfillment of which renders the policy
VOIDABLE.
Distinction Warranty vs Representation
A warranty is part of the contract while representation
is a collateral inducement
A warranty is written on the policy while
representation need not be written
A warranty presumed material while representation
should be established to be material
The fact warranted must be strictly complied with
while representation requires only to be substantially
true.
OTHER INSURANCE CLAUSE
-a clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer.
-purpose is to prevent over insurance and thus avert
the possibility of perpetration of fraud
-entitled the insurer to rescind in case of breach
-Over insurance “ may be subject of a WAIVER but
waiver must express or implied from the conduct
indicative of a clear intent to waive such right. There
must be a clear showing that the insurer knew about
the violation of the law.
INCONTESTABILITY CLAUSE
Requisites:
a. The insurance is a life insurance policy
payable on the death of the insured
b. It has been enforced during the lifetime of the
insured for at least 2 years from its date of
issue or its last reinstatement. The period of 2
years may be shortened but it cannot be
extended by stipulation.
Defenses not barred by incontestability Clause
a. Lacked insurable interest
b. Cause of death is excepted risk
c. Premium has not been paid
d. Conditions violated
e. Fraud of vicious type
f. Beneficiary failed to furnish proof of death
g. Action prescribed
DOUBLE INSURANCE AND REINSURANCE
Double Insurance
-it exist where the same person is insured by several
insurers separately in respect to same subject and
interest. It is not prohibited by law but it may be
prohibited by other insurance clause.
Requisites of Double Insurance
a. Person insured is the same
b. Two or more insurers
c. Subject matter is the same
d. Interest insured is also the same
e. Risk or peril insured against is likewise the
same.
a
Effect of Double Insurance and Over Insurance
-the insured can claim in case of loss only up to the
agreed valuation or up to the full insurable value from
any, or some of all insurers without prejudice to the
insurer ratably apportioning the payments.
-Insured can also recover before or after the loss from
both insurers the excess premium he has paid.
REINSURANCE
-it is a contract through which the insurer procures a
3rd person to insure him against loss or liability by
reason of such original insurance.
-in every reinsurance, the original contract of
insurance and the contract of reinsurance are
separate and distinct from each other and covered by
separate policies.
Double Insurance vs Reinsurance
Involves the same interest
Insurer remains in such capacity
Subject of insurance is property
Insured has to give his consent
Reinsurance
Insurance of different interest
Insurer becomes an insured in relation to reinsurer
Original insured has no interest in reinsurance
contract
Subject of insurance is the original insurers risk
Consent of original insured, not necessary
LOSS AND CLAIMS SETTLEMENT
Proximate Cause and Immediate Cause
The insurer is liable
a. Loss, the proximate cause of which is the peril
insured against
b. Loss, the immediate cause of which is the
peril insured against except where the
proximate cause is an excepted peril
c. Loss through negligence of insured except
where there was gross negligence amounting
to willful act.
34/53
Com. Law Review Sundiang (Chammy Diamond Notes)
d. Loss caused by efforts to rescue the thing
from peril insured against
The insurer is NOT liable:
1. Loss by insured willful act or gross negligence
2. Loss due to connivance of the insured
3. Loss where the excepted peril is the
proximate cuase
Liability of Insurer if insured was committing a felony
Liabilities arising out of acts of negligence, which are
also criminal, are also insurable on the ground that
such acts are accidental.
Ex/ homicide through reckless imprudence,
But liability consequences of deliberate criminal acts
are not insurable.
NOTICE AND PROOF IN FIRE INSURANCE
Notice – should be given without unnecessary delay ,
otherwise, the insurer is exonerated.
Proof – it is sufficient that the insured give the best
evidence he has in his power to present and need not
submit proof that is necessary in court
Substantial compliance is deemed sufficient
Notice of Settlement – is a stipulation in a policy of
insurance requiring that the consent of the insurer
must first be obtained before any payments by the
person responsible for the loss in the settlement of the
claim against the insured can be made valid?
Yes, the purpose is to avoid collusion between the
insured and the claimant.
CLAIM SETTLEMENT
Life Insurance
-proceeds shall be paid immediately upon the maturity
of the policy
-60 days after filing of proof and claim
Property Insurance
-30 days after proof of loss
Effect of Delay of Insurer
Interest for the duration of the delay at the rate of
twice the legal interest
Attorney fees
Damages
PERIOD OF PRESCRIPTION
-10 years in the absence of written contract
-the parties may validly agree on a shorter period
provided not less than 1 year from the time the cause
of action accrues.
-the cause of action accrues from the final rejection of
the claim of the insured and not from the time of loss.
When should the period of 1 year commence to run if
the insured files a MR upon the initial denial of his
claim?
-it shall commence to run from the denial of the claim
and not from the resolution of the MR, otherwise it can
be used by the insured as a device to waste time until
the evidence which may be used against him is
destroyed.
Note:
Notice of claim must be filed within 6 months from the
date of accident otherwise the claim shall be deemed
waived. Action or suit must be brought in proper
cases, with the Commission or the courts within 1 year
from the denial of the claim.
RIGHT OF SUBROGRATION
The principle of subrogation is a normal incident of
indemnity property 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. Payment to the insurer makes the insurer
an assignee in equity.
-legal effect of payment
-the insurer can only recover from the 3rd person what
the insured could have recovered
-the insured can no longer recover from the offending
party what was paid to him by the insurer but he can
recover any deficiency. Deficiency not covered
Cases when there is no Right of Subrogation
a. The insured by his own act released the
wrong doer , third person
b. The insurer pays the insured for a loss or risk
not covered by the policy
c. In life insurance
d. For recovery of loss in excess of insurance
coverage
MARINE INSURANCE
Coverage
-includes policies that covers risk connected with the
navigation to which a ship, cargo, freightage, profits
insurable in movable property may be exposed during
a certain voyage for a fixed period of time.
Implied Warranty in Marine Insurance
a. That the ship is seaworthy at the inception of
the insurance
b. That the ship will not deviate from the agreed
voyage unless deviation is property
c. That the ship will not engage in an illegal
venture
d. Warranty of possession of documents of
neutrality that the ship will carry the requisite
document of nationality or neutrality of the
ship.
Insurable Interest in Marine Insurance
Shipowner
-over the value of the vessel
-if the ship is hypothecated bottomry loan, the
insurable interest is only up to the excess of the value
of the vessel over the loan
35/53
Com. Law Review Sundiang (Chammy Diamond Notes)
2.Over expected freightage
Cargo owner/ shipper – over the cargo and expected
profits
Charterer:
Over the vessel up to the extent of the amount he is
liable tot eh shipowner, if the ship is lost or damaged
during the voyage.
Over his expected profits or freightage if he accepts
cargoes from other person for a fee
Perils of the Sea vs Perils of the Ship
Perils of the Sea or perils of navigation
-include only those casualties due to the unusual
violence or extraordinary causes connected with
navigation.
-causes which cannot be guarded against by the
ordinary exertion of human skill or prudence, as
distinguished from the ordinary wear and tear of the
voyage and from injuries suffered by the vessel in
consequence of her not being sea worthy.
Peril of the ship is a loss which in the ordinary course
of events. Results:
1. From the ordinary , natural and inevitable
action of the sea
2. From ordinary wear and tear of the ship
3. From the negligent failure of the ship owner to
provide the vessel with the proper equipment
to convey the cargo under ordinary condition
-in the absence of stipulation, the risk insured against
are only peril of the sea . Thus, the insured is bound to
prove that the cause of the loss is a peril of the sea.
-however in an “ALL RISK POLICY” , all risk are
covered unless expressly excepted . the burden rest
on the insurer to prove that the loss is caused by a
risk that is excluded.
Barratry
-willful misconduct on the part of the master or crew in
pursuance of some unlawful or fraudulent purpose
without the consent of owners, and to the prejudice of
owner’s interest . This may be expressly covered by
the policy. When so covered, proof of willful and
intentional act is necessary.
Concealment
Opinion and Beliefs
-Belief and expectations of a 3rd person in reference to
a material fact is material and must be disclosed in
marine insurance.
-Ordinarily the matters concealed need not be the
cause of the loss. Although concealed will not vitiate
the contract except when they are caused of the loss
a. national character of the insured
b. liability of insured thing to capture or detention
c. liability to seizure from breach of foreign laws
d. want of necessary document
e. use of false or simulated papers
GENERAL AVERAGE LOSS VS PARTICULAR
AVERAGE LOSS
-The insurer of the vessel or cargo that are saved is
liable for general average contribution and not for
particular average. Only the insurer of the damaged
cargo or vessel is liable for particular average if
covered by the policy.
GENERAL AVERAGE LOSS
-includes damages and expenses which are
deliberately caused by the master of the vessel or
upon his authority in order to save the vessel, her
cargo or both at the same time from a real or unknown
risk. It must be borne equally by all of the interest
concerned.
Requisites:
a. Common danger to the vessel and cargo
b. Part of the vessel or cargo was sacrificed
c. The sacrifice must be for the common safety
for the benefit of all
d. It must be made by the master or upon his
authority
e. It must be successful
f. It must be necessary
PARTICULAR AVERAGE LOSS
-includes all damages and expenses caused to the
vessel or to her cargo which have not inured to the
common benefit and profit of all person interested in
the vessel and her cargo.
-it refers to those losses which occur under such
circumstances as do not entitle the unfortunate owner
to receive contribution from other owners.
CO-INSURANCE
-where the property is insured for less than its value,
the insured is considered a co insurer for the
difference between the amount of insurance and the
value of the property.
Requisites:
The loss is partial
The amount of insurance is less than the value of the
property insured.
SEAWORTHINESS
-a ship is seaworthy when reasonably fit to perform
the service , and to encounter the ordinary perils of
the voyage, contemplated by te parties to the policy.
36/53
Com. Law Review Sundiang (Chammy Diamond Notes)
There should be due consideration to the nature of the
ship, the voyage and the service to be performed.
-a warranty of seaworthiness extends not only to the
condition of the structure of the ship itself, but requires
that it be properly laden and provided with competent
master, sufficient number of competent officers and
seamen and proper equipment.
When Ship should be Seaworthy
-an implied warranty of seaworthiness is complied with
if the ship be seaworthy at the time of the
commencement of the risk, except in the ff; cases
Time policy
-when the insurance is made for specified length of
time, the implied warranty is not complied with unless
the vessel is seaworthy at the commencement of
every voyage.
Applicability of Implied Warranty of seaworthiness to
cargo owners
-it becomes the obligation of a cargo owner to look for
a reliable common carrier which keeps its vessel in
sea worthy condition. The shipper may have no
control over the vessel but he has full control in the
choice of the common carrier that will transport his
goods.
If the vessel is unseaworthy, is the insurer of the cargo
liable even if the owner of the cargo was not even
aware of the unseaworthiness of the vessel?
NO, the insurer is not liable. It is the obligation of the
cargo owner to look for common carrier which keeps
its vessel in seaworthy conditions.
Effect of Payment
-payment made by the insurer to the insured for the
latters lost cargo operates as waiver of the insurer
right to enforce the implied warranty of seaworthiness.
The insurer can still claim payment from the carrier for
breach of contract based on the insurer’s right of
subrogation.
Deviation
-departure of vessel from course of voyage, or an
unreasonable delay in pursuing voyage or the
commencement of an entirely different voyage.
Deviation is proper when
1. Due to circumstances outside the control of
the ship captain
2. If done to comply with a warranty
3. If made in good faith to avoid a peril
4. If made to save human life or another
distressed vessel
LOSS AND ABANDONMENT
Actual Total Loss
a. Total destruction
b. Loss by sinking
c. Damage rendering the thing valueless
d. Total deprivation of owner of possession of
thing insured
Constructive Total Loss
1. Actual loss of more than ¾ of the value of the
object.
2. Damaged reducing the value by more than ¾
3. Expenses of shipment exceed ¾ of the value
of the cargo.
Abandonment
-is the act of the insured by which, after a constructive
total loss , he declares the relinquishment to the
insurer of his interest in the thing insured.
Requisites:
a. There must be an actual relinguishment by
the person insured of his interest in the thing
insured
b. There must be a constructive total loss
c. The abandonment be neither partial nor
conditional
d. It must be made within a reasonable time after
receipt of reliable information of the loss
e. It must be factual
f. It must be made by giving notice thereof to the
insurer which may be done orally or in writing
g. The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment
FIRE INSURANCE
-it is a contract by which the insurer for a
consideration agrees to indemnify the insured against
loss of or damage to property by fire, but may include
loss by lightning, windstorm, tornado or earthquake
and other allied risks.
Extent of liability of an insurer under an OPEN Policy?
-the actual loss as determined will represent the total
indemnity due the insured except only that the total
indemnity shall not exceed the total value of the
policy.
ALTERATION
-An alteration in the use or condition of a thing insured
from that to which it is limited by the policy made
without the consent of the insurer, by means within the
control of the insured, and increasing the risks, entitles
the insurer to rescind a contract of fire insurance.
Requisites
a. The use or condition of the thing insured is
specially limited or stipulated in the policy
b. Such use or condition is altered
c. The alteration is made without the consent of
the insurer
d. The alteration is made by means within the
control of the insured
e. The alteration increases the risk
37/53
Com. Law Review Sundiang (Chammy Diamond Notes)
f. There must be a violation of a material policy
provision
Friendly Fire vs Hostile Fire
Friendly fire – fire that burns in a place where it is
supposed to burn
Hostile Fire – fire that escapes and burns in a place
where it is not supposed to be. It may start as a
friendly fire but escapes from its original place and
becomes out of control
CASUALTY INSURANCE
-is an insurance covering loss or liability arising from
accident or mishap excluding those falling under other
types of insurance such as fire or marine.
Intentional vs accidental
-intentional as used in an accident policy excepting
international injuries inflicted by the insured or any
other person implies the exercise of the “reasoning
facilities, consciousness and volition”. Where a
provision of the policy excludes intentional injury, it is
the intention of the person inflicting the injury that is
controlling. If the injuries suffered by the insured
clearly resulted from the intentional act of third person,
the insurer is relieved from liability as stipulated
The term accident, and accidental as used in
insurance contracts , have not acquired any technical
meaning. They are construed by the courts in the
ordinary and common acceptation. Thus the term
have taken to mean that which happens by chance or
fortuitously, without intention or design, which is
unexpected, unusual and unforeseen.
THIRD PARTY LIABILITY
-third party may directly sue the insurer upon the
occurrence of the loss. However, the insurer is not
solidarily liable with the insured or the tortfeasor for
the latters obligation. If the insurer pays the third
person, the right of subrogation operates.
If there is no stipulation in favor of third person, any
third person who might be injured may not sue the
insurer. Only the insured can recover from the insurer.
Liability of insurer if insured was committing a felony.
-liabilities arising out of acts of negligence, which are
also criminal, are also insurable on the ground that
such acts are accidental. But the liability consequence
of deliberate criminal acts are not insurable.
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
Mandatory Insurance
-the IC makes it unlawful for any land transportation
operator or owner of a motor vehicle to operate the
same in public highways unless there is an insurance
or guaranty to indemnify the death or bodily injury of a
third party or passenger arising from the use thereof.
Registration of any vehicle will not be made or
renewed without complying with the requirements
-the protection may be complied with using any a)
insurance policy b) surety bond c) cash bond.
Purpose of Third Party Liability:
-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 .
NO FAULT CLAUSE
-the injured third party or passenger is given the
option to file a claim for death or injury without the
necessity of proving fault or negligence of any kind
under the ff; conditions;
a. it shall not exceed 15,000k (check update)
b. proof of loss ie police report, death, medical report
c. claim may be made against one motor vehicle only.
From whom should the injured recover?
In the case of an occupant of a vehicle , claim shall lie
against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting
If not an occupant, claim shall lie against the insurer of
the directly offending vehicle.
In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible
for the accident shall be maintained.
TIME TO FILE AND PROCESS CLAIM UNDER CTPL
Period to File Notice
-the written notice of claim must be presented within 6
months from the date of accident otherwise deemed
waive.
Prescriptive Period
-the action must be filed in court or IC within one 1
year from denial of the claim
If there is an agreement – the insurance company
shall pay within 5 working days.
If no agreement is reached – the insurance company
shall pay the “no fault” indemnity without prejudice to
the claimant from pursuing his claim further, he shall
not be required or compelled by the insurance
company to execute any quit claim or document.
May a third person sue the Insurer directly?
It depends, if the policy provides for indemnity against
liability, the insurer can be sued directly by a third
person. However, if the policy provides for
“reimbursement after actual payment by the insured or
38/53
Com. Law Review Sundiang (Chammy Diamond Notes)

for the indemnity against loss, a third person has no
cause of action against the insurer.
Is the insurer solidarily liable with the insured?
No. the insurer liability is based on contract; that of the
insured is based on tort. The insurer’s liability is
limited for to the amount of the insurance coverage.
May the proceeds of a third party liability insurance be
garnished?
Yes. In a third party liability insurance, the insurer
assumes the obligation of paying the injured party to
whom the insured is liable. The insured acquired
interest in the insurance contract, which interest may
be garnished just like any other credit.
-it is not necessary that summons may be served
upon the insurer, the writ of garnishment is enough.
OTHER RULES CONCERNING MOTOR VEHICLES
Authorized Driver Clause
-a stipulation in a motor vehicle insurance which
provides that the driver other than the insured owner,
must be duly licensed to drive the motor vehicle,
otherwise the insurer is excused from liability.
That clause means that the insurer indemnifies the
insured owner against loss or damage to the car but
limits the use of the insured vehicle to the insured
himself or any person who drives on his order or with
his permission.
-the insured need not prove he has a driver’s license
at the time of the accident.
-if the claimant was able to present a driver’s license
the same is presumed to be genuine.
-a driver who holds an expired license is not an
authorized driver.
THEFT CLAUSE
-if the vehicle was unlawfully taken, the insurer is
liable under the theft clause and the authorized driver
clause does not apply.
-when the motor vehicle is unlawfully taken and
wrongfully taken without the owners consent or
knowledge , such taking constitute theft and therefore
it is the theft clause and not the authorized driver
clause that should apply.
-this is also true when the employee of a repair shop
took the car that is being repaired for a joy ride.
SURETYSHIP
-an agreement whereby the surety guarantees the
performance by another of an undertaking or an
obligation in favor of a 3rd party.
a) a suicide was committed after the policy has been
in force for a period of 2 years from the date of its
issue or its last reinstatement , unless the policy
provides a shorter period.
-suicide committed in a state of insanity; it shall make
the insurer liable regardless of the date of the
commission of the suicide.
Kinds
a. Ordinary Life
b. Limited Payment Policy- if outlives does not
pay
c. Endowment Policy-if outlives , he is paid
d. Term Insurance
e. Industrial Life
VARIABLE CONTRACT
-any policy or contract on either a group or individual
basis issued y an insurance company providing for
benefits or other contractual payments or value
thereunder to vary so as to reflect investment results
of any segregated portfolio of investment.
POWER OF THE INSURANCE COMMISSIONER
Concurrent Jurisdiction
-cases where the claim does not exceed 5m involving
liability arising from insurance contract, reinsurance,
suretyship.
-Primary and exclusive jurisdiction – claims for pre
need plans where the amount of benefits does not
exceed (100k) verify
Does the IC have jurisdiction to decide the legality of a
contract of agency into between an insurance
company and its agents?
NO. the same is not covered by the term “doing or
transacting insurance business” .
REVOCATION OF CERTIFICATE OF AUTHORITY
-The certificate of Authority issued to the domestic or
foreign company by the IC may be revoked or
suspended by the IC for any of the ff:
1) the company is in an unsound condition
2) that it has failed to comply with the provision of law
or regulation
3)method of business is hazardous to the public
4)Paid up capital is impaired
**** End of Insurance ****
BUSINESS ORGANIZATION

LIFE INSURANCE a. Sole Proprietorship

-insurance on human life , endowment , annuities b. Partnership
c. Joint Account or Cuentas en participation
Effect of death of insured through suicide d. Business Trust
-the insurer in a life insurance contract shall be liable e. Joint Venture
in case of suicide by the insured if: f. Cooperative
g. Corporation
39/53
Com. Law Review Sundiang (Chammy Diamond Notes)
INDIVIDUAL AND SOLE PROPRIETORSHIP
-a person personally conducts business under his
name
-composed of proprietor himself and his employees
-has no personality separate and distinct from the
proprietor
A sole proprietorship does not possess a juridical
personality and has no legal personality to file or
defend an action in court
BUSINESS NAME
-a proprietor is required to register his business name
other than his true name with the DTI and Consumer
Protection.
If not registered he cannot;
a. Use or sign the business name in connection
with his business
b. He cannot exhibit the business name or sign
thereof in plain view
c. Juridical person need not register the names
that are registered with the SEC
Note:
-there must be separate registration of a Business
Name for a branch or satellite office. The business
name of the branch or satellite office should be the
same as the registered Business Name for the main
office.
Merchants
-as to individual, they are those who having capacity
to engage in commerce , habitually devote themselves
to it.
-Corporation and Partnership are also called
merchants
Qualification
a. At least 18 yrs old
b. Free disposition of his property
c. Habitually involve themselves in commerce
Habituality
-repetition and continuation of commercial acts in such
manner that they are related to each other by reason
of the commercial purpose or end which they tend to
have, which is the exchange or circulation of products.
When habituality is Presumed
-the moment a person who tends to engage in
commerce announce through circulation or
newspapers , to the public , an establishment which
has for its object some commercial acts.
Disqualification to Engage in Commerce
Absolute disqualification
a. Civil interdiction
b. Insolvent
c. Disqualified under special law
Relative Disqualification
a. Justices
b. Military heads
c. Administration of funds of the state
d. Stock or commercial broker
e. Those disqualified under special law
Note:
A judge is enjoined to refrain from financial and
business dealing that tend to reflect adversely on the
courts impartiality , interference with the proper
performance of judicial activities or increase
involvement with lawyers or person likely to come
before the court.
Disqualification Under the Constitution
a. Senators and Congressman
b. President, Vice and Members of the cabinet
c. Member of the Constitutional Commission
-prohibition on the practice of profession and be
interested financially in any contract with the
government.
-foreigners are disqualified to practice profession here,
it is limited to Filipinos.
PARTNERSHIPS
-two ore more persons binds themselves to contribute
money , property or industry to a common fund, with
the intention of dividing the profits among themselves.
REGISTRATION
-registration with SEC is necessary where the capital
of the partnership is P 3000k.
Note – registration with SEC is not necessary for a
partnership to acquire juridical personality . Een an
unregistered partnership has a personality separate
and distinct from its partners.
JOINT ACCOUNT
-An arrangement whereby merchants may interest
themselves in the transaction of other merchants
contributing thereto the amount of capital they may
agree upon, and participating in the favorable and
unfavorable results thereof. “Common called
Accidental Partnership”
-only the ostensible partner is conducting the
business.
DISTINGUISHED FROM PARTNERSHIP
Partnership
-A joint account is no juridical personality
-no commercial name can be adopted
-the general partners are all managers of the
partnership
-all general partners may be liable up to the extent of
their personal properties
Partnership
-has a personality separate and distinct from the
partners
40/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-partnership can adopt a partnership name
-only the ostensible partners manages and transact
business
-only the ostensible partners can be sued
BUSINESS TRUST
It is a legal relation whereby one person, called the
trustor, conveys a property to another for the benefit of
a person called the beneficiary. The person in whose
confidence is reposed as regards the property is
called the trustee.
JOINT VENTURE
An association of persons or companies, jointly
undertaking some commercial enterprise, generally all
contribute assets and share risks.
-a joint venture is actually a form of partnership and
should thus be governed by the law sof partnership
-Corporations can enter into joint venture agreement
-Joint ventures may result in a formation of joint
venture corporation.
COOPERATIVES
-a corporation is an autonomous and duly registered
association of persons , with a common bond of
interest, who have voluntarily joined together to
achieve their social, economic, and cultural needs and
aspirations by making equitable contributions to the
capital required patronizing their products and
services and accepting a fair share of the risks and
benefits of the undertaking in accordance with the
universally acceptive cooperative principles.
CORPORATION CODE OF THE PHILIPPINES
What is a corporation
-is an artificial being, created by operation of law,
having the right of succession and the person
attributes and properties expressly authorized by law
or incident to its existence.
What are the attributes of a corporation?
DISCUSSION OF ATTRIBUTES
1.Property
-it is entitled to own properties in its own name and its
properties are not the properties of its stockholders.
The interest of the stockholder over the properties of
the corporation is merely inchoate.
Obligation
-it can incur obligations and its obligations are not the
obligation of its stockholders, directors and officers
Rights
-Rights belonging to the corporation cannot be
invoked by the stockholders. The constitutional right of
the individual is personal to him and cannot be
invoked by the corporation . Tax exemptions in favor
of the corporation cannot likewise be used by its
stockholders.
Constitutional Rights
-Corporations are entitled to certain constitutional
rights. Ex. Right against unreasonable search and
seizure. (it is also considered a person under the due
process clause. However, not entitled to right against
self incrimination particularly production of corporate
documents.
Torts
-liable for torts . it is liable when the act committed by
the officer or agent under express direction or
authority from the stockholders or members acting as
a body or generally from the directors as the
governing body.
Nationality
-considered a national of the country where it was
incorporated.
Public Enemy – in times of war the nationality of the
corporation is determined by the nationality of the
controlling stockholders.
Investment Purpose – The Phil Investment act.
Defines Corporation as
a. Corporation organized under Phils laws of
which 605 of the capital stock outstanding
held by Filipino citizens.
b. A corporation organized abroad and
registered as doing business in the
Philippines under the Corp Code of which
100% of the capital stock entitled to vote
belongs to Filipinos.
Grand Father Rule
-is a method of determining the nationality of a
corporation which in turn is owned by another
corporation by breaking down the equity structure of
the shareholders of the corporation. The percentage
of shares held by the second corporation in the first is
multiplied by the latters own Filipino equity, and the
product of these percentage is determined to be the
ultimate Filipino ownership of the subsidiary
corporation.
-This applies if the Filipino equity is less than 60% of
the outstanding capital of a corporation that owns
shares in a partly nationalized enterprise-at least 60%
owned by Phil Nationals.
Artificial Being
-it exist by fiction of law only, hence, it is subject to
limitations that are inherent because of its nature.
Actions. It can only through its directors, officers and
employees
Criminal Liability
-corporation are incapable of intent, hence they
cannot commit felonies that are punishable under the
RPC, because crimes are personal in nature.
41/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-however, the corporation may be dissolved for
violations of one corp. code.
-if a crime is committed by a corporation, the directors,
officers and employees responsible for the offense
shall be charged and penalized for the crime
-a law may be passed to specifically provide that a
corporation is criminally liable. There can be a criminal
statue imposing fine.
Moral Damages
-cannot be awarded in favor of the corporation
because they do not have feelings and mental state.
Filipinas vs Ago – that a corporation can recover
moral damages under Art. 2219 if it was the victim of
defamation.
Doctrine of Piercing the Veil of Corporate Entity?
The doctrine that a corporation is a legal distinct from
the person composing it. For purposes of convenience
and to serve the ends of justice. But when the veil of
corporate fiction is used as a shield to perpetuate
fraud, to defeat public convenience , justify a wrong
or defend a crime, this fiction shall be disregarded and
the individuals composing it will be treated identically.
Obligation of the Directors , Officers etc.
-the piercing the veil of corporate fiction, cannot be
used to support an action for the enforcement of the
personal obligation of the directors , officers and
incorporations.
-the SC rejected this move ruling that the doctrine
cannot be applied to make the corporation liable for
the personal obligation of directors, officers or
shareholders.
Circumstances that may be considered to justify the
application of the doctrine to make the parent
corporation liable for the obligation of its subsidiary?
a. The parent corporation owns all or most of the
capital stock of the subsidiary
b. The parent and subsidiary corporation have
common directors or officers
c. The parent company finances the subsidiary
d. The parent company subscribed to all the
capital stock of the subsidiary or otherwise
cause of incorporation
e. The subsidiary has grossly inadequate capital
f. The subsidiary has substantially no business
except with the parent corporation
g. The subsidiary is described as a department
or division of the parent corporation
h. The parent corporation uses the property of
the subsidiary as its own.
i. The directors or executives of the subsidiary
do not act independently in the interest of the
subsidiary but take orders from parent
corporation.
j. The formal legal requirements of the
subsidiary are not observed.
Examples of cases when doctrine was applied.
The separate personality may be disregarded if such
personality is
a. Used to evade obligation
b. Used to evade lawful obligations or a money
judgment
c. Dominated by officers or stockholders or other
person or entity to the extent that the
corporation is a mere alter ego, adjunct or
business conduit.
d. Used to defeat public convenience
e. Used to justify a wrong
f. Protect fraud
g. Defend crime
h. Confuse legitimate legal or judicial issues or
i. Used to perpetrate deception or otherwise
circumvent the law..
Is ownership of substantial portion of the outstanding
capital in a corporation enough justification to apply
the doctrine?
NO, mere ownership by a single stockholder or by
another corporation of all or nearly all the capital stock
of the corporation does not justify the application of
the doctrine. There must be other circumstance that
must be present
The mere fact that a corporation owns all of the stock
of another corporation, taken alone, is not sufficient to
justify their being treated as one entity. If the
subsidiary is used to perform legitimate functions , a
subsidiary’s separate existence shall be respected.
What are the elements that must be present to justify
the piercing of veil of corporate fiction on the ground
that the corporation is a mere alter ego?
Control
a)not mere stock control but the complete domination
–not only of the finances, but of policy and business
practice in respect to the transaction attacked and
must appear that the corporate entity at the time has “
no separate mind of its own”
b)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.
c)The said control and breach of duty must have
proximately caused the injury or unjust loss
complained of.
In one case, the corporation was considered mere
alter ego of the other corp. because the stockholders
are the same, manager is the same, same customers,
42/53
Com. Law Review Sundiang (Chammy Diamond Notes)
and the business operations of the two corporations
are merged.
CREATED BY OPERATION OF LAW
Concession Theory
-the life of the corporation is a concession made by
the state through SEC.
Franchises of Corporation
a. Primary – corporate or general franchises, -
the franchise to exist as a corporation. The
primary franchise is the right to exist vested
in the individuals who compose the
corporation and not in the corporation itself.
-cannot be transferred without approval of
Congress
b. Special or Secondary Franchises – certain
rights and privileges conferred upon existing
corporation, such as the right to use streets
etc.
-the special or secondary franchise of a corp.
are vested in the corp. and may ordinarily be
conveyed or mortgaged under a general
power granted to a corp.
-is subject to levy and sale on execution
HOW CREATED
General Law - private corporation are generally
created under the provisions of the Corp. Code. This
is done by filing the appropriate AOI with the SEC; the
life of the corporation starts from the issuance of the
Certificate of Incorporation
Special Law - public corporation are created through
special laws. Private corporation cannot be created by
special laws.
Exceptions – Government owned or controlled corp.
which are actually private corporations.
RIGHT OF SUCCESSION
-capacity to have continuity of existence despite the
changes on the person who compose it. Thus the
personality continues despite the change of
stockholders members, board members or officers.
POWER, ATTRIBUTES AND PROPERTIES
THEORY OF LIMITED CAPACITY
-no corporation under this code, shall process or
exercise any corporate powers, except those
conferred by law, its AOI , those implied from express
powers and those as are necessary or incidental to
the exercise of the powers so conferred. The
corporations capacity is limited to such express,
implied and incidental powers.
If the act of the corp is not one of those express,
implied or incidental powers, the act is ULTRA VIRES.
CLASSIFICATION AND DISTINCTIONS
Classes of Corporations
As to organizers
a. Public – state only
b. Private – private person alone
Functions
Public - public purpose
Private – profit making functions
Governing Law
Public – special law
Private – Corpo Code
Legal Status
De jure Corporation – corporation organized in
accordance with requirements of law
De Facto Corporation – a corporation where there
exist a flaw in its incorporation. The requisites are:
a. The existence of a valid law, under which it
may be incorporated
b. An attempt in good faith to incorporate
c. Use of corporate powers
Note: Issuance of certificate of incorporation by the
SEC is a minimum requirement of continued good
faith.
-if there is substantial compliance, de jure corporation
results, only colorable compliance results in de facto
corporation.
Corporation by Estoppel
-a group of person which hold itself out as a corp and
enters into a contract with a 3rd person on the strength
of such appearance cannot be permitted to deny its
existence in an action under said contract. This is
actually not a real corporation.
-those who assume to act as a corporation knowing it
to be without authority to do so shall be liable as
general partners up to their personal properties.
Those who were not aware of the defect are liable
only up to their investment.
SC Held: that all those who derived benefit from the
transaction made by the ostensible corporation ,
despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took
advantage of .
Corporation by Prescription – corporation that was not
formally organized as such but has been duly
recognized by immemorial usage as a corporation,
with rights and duties maintainable at law.
As to Existence of stocks
a. Stock Corporation – a corporation in which
capital stock is divided into shares and is
43/53
Com. Law Review Sundiang (Chammy Diamond Notes)
authorized to distribute to holders thereof of
such shares dividends or allotments of the
surplus profits on the basis of the shares held.
SC Held: - even if there is a statement of capital stock,
the corporation is still not a stock corporation if
dividends are not supposed to be declared, that is
there is no distribution of retained earnings.
b. Non Stock Corporation- a corporation which
does not issue stocks and does not distribute
dividends to their members.
As to laws of incorporations:
Domestic Corporation – corporation formed ,
organized or existing under Philippines laws.
Foreign Corporation – a corporation formed,
organized under any other laws than those of the
Phils.
Other Corporations
a. Close
b. Special
c. Educational
d. Religious
a. Corporation sole
b. Religious societies
Corporations going public vs Corporation going private
A corp. is deemed to be going public when it decides
to list it shares in the stock exchange. There is initial
public offering of its shares.
A corporation is said to be going private when it would
restrict the shareholders to a certain group. Includes
close or closely held corporations.
DISTINGUISHED FROM PARTNERSHIP
As to manner of creation – Partnership is created by
mere agreement while the existence of the corporation
commences only form the issuance of a Certificate of
Incorporation by the SEC or in proper cases, passage
of a special law.
As to number of organizers – even 2 persons may
form a partnership while a corporation needs at least 5
incorporators
As to powers – a corporation is more restricted in its
powers because of its limited personality while a
partnership is subject only to what may be agreed
upon by the partners.
Authority of those who compose – there is mutual
agency in partnership and each general partners can
represent and bind the partnership while stockholders
are not agents of the corporation in the absence of
express authority.
Transfer of Interest – Corporate shares are freely
transferable without the consent of other stockholders
while interest in partnership cannot be transferred
without the consent of the other partners.
Succession – there is no right of succession in
partnership as death of a general partner dissolves
the partnership
De Facto vs De Jure Corporation
De Jure
-one created in strict or substantial conformity with the
statutory requirements
-right to exist cannot be successfully attacked even in
a direct proceeding
De Facto
-one which actually exist for all practical purposes as a
corporation but which has no legal right to corporate
existence
Right to exist can be successfully attached even in a
direct proceeding by the state.
ADVANTAGES AND DISADVANTAGES
a. Capacity to act as legal unit
b. Limitation of individual liability
c. Continuity of existence
d. Transferability of shares
e. Centralized management of board of directors
f. Standard method of organization and finance
DISDAVANTAGES
a. More complicated in formation and
management
b. Higher cost of formation and operation
c. Lack of personal element
d. Greater governmental control and regulation
e. Management and control are separate from
ownership
f. Stockholders have little voice in the conduct of
business
COMPONENT OF A CORPORATION
Incorporators – those mentioned in the AOI as
originally forming and composing the corporation,
having signed the articles and acknowledged the
same before a notary public.
a. They must be natural persons
b. At least 5
c. They must be legal age
d. Majority must be residents of the Philippines
e. Each must own or subscribe to at least one
share.
CORPORATION
-all the stockholders and members of a corporation
including the incorporators who are still stockholders.
STOCKHOLDERS AND MEMBERS
44/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-stockholders are persons who hold or own shares in
a stock corporation while members are those who
compose the non stock corporation.
DIRECTORS AND TRUSTEES
-the Board of Directors is the governing body in a
stock corporation while Board of Trustees is the
governing body in a non stock corporation. They
exercise the powers of the corporation.
CORPORATION OFFICERS – they are the officers
who are identified as such in the Corporation Code,
AOI or the By laws of the corp.
PROMOTER - a self constituted organizer who finds
an enterprise or venture and helps to attract investors
, forms or corporation and launches it in business.
Differentiate Corporators from Incorporators
Incorporators
Signatory to AOI
Do not cease to be such
Number is limited to 5 or 15
Must have contractual capacity
Corporators
Stockholder of stock corporation or member of non
stock corporation
--Cease to be such if they are no longer stockholders..
-No restriction as to number
-may be such through his guardian
FOREIGN STOCKHOLDERS
Can all the stockholders in a corporation be
foreigners?
Yes, except in fully or partly nationalized corporations.
Ex. A manufacturer that exports all its products can be
wholly owned by foreigners.
What are the fully or partly nationalized corporations?
Where no foreign stockholder is allowed:
Mass Media
Retail Trade Enterprises
Private Security Agencies
Small Scale Mining
20% Foreign Equity
Private Radio Communications
25% Foreign Equity
Private recruitment
Construction and repair
Construction of defense related structure
40% Foreign Equity
Exploration
Realty Companies
Public Facilities
60% Foreign Equity
Financing Corp.
Investment House
FORMATION OF CORPORATION
-the life of corporation commences from the issuance
of the Certificate of Registration by the SEC upon
filing of the AOI and other.
ARTICLES OF INCORPORATION
a. Name of corporation
b. Purpose
c. Place of principal office
d. Terms shall not be more than 50 yrs
e. Names, citizenship and residences of
incorporators
f. Amount of ACS
g. Number of shares and amounts of
subscription of subscribers which shall not be
less than 25% of ACS
h. Amount paid in which shall not be less than
25% of subscribed capital and shall not be
less than 5000.
i. If the corporation is engage 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.
DOCUMENTS FIELD WITH SEC for purposes of
securing certificate of registration
a. AOI
b. Treasurers Affidavit stating that 25% of ACS
had been subscribed and 25% have been
fully paid in case or property.
c. Bank Certificate covering paid up capital
d. Letter of Authority authorizing SEC to
examine the bank deposit
e. Undertaking to change the corporate name
f. Certificate of authority from proper
government agency
What Corporation Name cannot be used?
1) Names which are identical , deceptively or
confusingly similar to that of any existing corporation
including internationally known foreign corporation
though not used in the Phils.
2)name already protected by law
3)name which is contrary to law, morals or public
policy.
Note: A corporation which seeks to prevent another
from using its name must show that it (a) acquired
prior right to use the name and (b) the name is either
of 3 mentioned above.
Remedy: Suit for Injunction to prevent its use.
What is the importance of the principal place of
business stated in AOI?
45/53
Com. Law Review Sundiang (Chammy Diamond Notes)
The principal place may determine the venue of court
cases involving corp. it may also determine if service
of summons and notices was properly made.
What is the maximum term of a corporation? Can it
be extended?
A corporation has a maximum term of fifty (50) yrs. It
may be extended for a period not exceeding fifty (50)
years in any single instance . However, no extension
can be made earlier than five (5) years prior to the
expiration of the term.
Authorize Capital Stock – the amount fixed in the
articles of incorporation to be subscribed and paid by
the stockholders of the corporation.
Subscribed Capital – that portion of the authorized
capital stock that is covered by subscription
agreements whether fully paid or not.
Paid Up Capital – the portion of the authorized capital
stock which has been subscribed and actually paid.
Outstanding Capital Stock – the total shares of stock
issued to subscribers or stockholders , whether or not
fully or partially paid except treasury shares so long as
there is a binding subscription agreement.
Capital – properties and assets of the corporation that
are used for its business or operation.
AMENDMENT OF ARTICLES OF INCORPORATION
Procedure : Majority vote of direction or trustees and
written assent of the stockholders representing 2/3 of
membership of non stock corporation.
When Effective: Upon approval of SEC or if not acted
upon by SEC within 6 months from the date of filing
provided that delay cannot be attributed to eth
corporation.
Congress – the passage of statues amending the
Corporation Code or special laws may result in the
amendment of the AOI provided that no vested right is
impaired.
WHEN CAN SEC SUSPEND OR CANEL
CERTIFICATE OF REGISTRATION
a. Fraud in procuring registration
b. Serious misrepresentation
c. Lawful order
d. Continuous inoperation for at least 5 years
e. Failure to file by laws within required period
f. Failure to file reports
g. Other similar grounds
BY LAWS
-relatively permanent and continuing rules of action
adopted by the corporation for its own government
and that of the individual composing it and those
having the direction, management and control of its
affairs, in whole or in part, in the management and
control of its affairs and activities.
REQUISITES OF VALID BY LAWS
a)-It must be consistent with Corp Code other
pertinent laws and regulations.
b)it must be consistent with the AOI. Hence in case of
conflict the AOI prevails
c)it must be reasonable and not arbitrary
d)it must not disturb vested rights , impair contract or
property rights of stockholders or members
ADOPTION AND AMENDMENT
Original By Laws:
-may accompany the AOI and SEC will approve it
together with.
-filed within (1) month from notice of issuance of
certificate of incorporation
Note: Non –filing within one (1) month is a ground to
forfeit franchise and will not result in automatic
dissolution.
Amendment
-may be made by:
a. stockholders together with the board
b. Board only
Stockholder together with the board : majority of board
plus majority of outstanding capital stock.
By the Board as delegated by 2/3 of outstanding
capital stock or 2/3 of members.
BINDING EFFECT OF PROVISIONS OF BY LAWS
As to the corporation and its components – binding
not only upon the corporation but also on its
stockholders , members and those having direction,
management and control of its affairs.
As to Third Person – not binding unless there is actual
knowledge. Third person are not even bound to
investigate the content because 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.
The provisions in the By Laws enumerating the
contract signatory is not binding on third persons who
signed a contract with the corporation as represented
by the Chairman who is not one of those enumerated.
POWERS OF A CORPORATION
KINDS
Express – those expressly authorized by the Corp
Code and other laws, and its AOI or Charter.
46/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Implied Powers – those that can be inferred from or
necessary for the exercise of the express powers.
Incidental Powers – those that are incidental to the
existence of the corporation
Note: There are express powers that are incidental
powers like the power to acquire properties.
EXPRESS POWERS UNDER THE CORPORATION
CODE.
General Powers
1. Sue an be sued in its corporate name
2. Succession
3. Adopt and use a corporate seal
4. Amend AOI
5. Adopt, amend or repeal by laws
6. For stock corporation – issue stocks to
subscribers and to sell treasury stocks; for
non stock corporations – admit members
7. Purchase , receive, take or grant hold convey,
sell, lease deal with real and personal
property, pursuant to its lawful business.
8. Enter into merger or consolidation
9. To make reasonable donation. Prohibited for
partisan political activity;
10. To establish pension, retirement and other
plans for the benefit of directors, trustees,
officers and employees.
11. Other powers essentially necessary to carry
out its powers.
SPECIFIC POWERS
a. Power to extent or shorten corporate term
b. Increase/ Decrease Corporate stock
c. Incur Create Bonded Indebtedness
d. Deny pre emptive right
e. Sell, dispose, lease , encumber
f. Purchase or acquire own shares
g. Invest in another corporation
h. Declare dividends
i. Enter into management contract
j. Amend the AOI
ULTRA VIRES ACT
Ultra Vires acts of the corporation
-an ultra vires act is one committed outside the object
for which a corporation is created as defined by the
law of its organization and therefore beyond the power
conferred upon it by law.
Ultra Vires act vs illegal Act - the term ultra vires is
distinguished form an illegal ac for the former is
merely voidable which may be enforced by
performance, ratification, or estoppel , while the latter
is void and cannot be validated.
Effects of Ultra Vires Act.
a) Executed contract – court will not set aside or
interfere with such contracts
b) Executory contracts – no enforcement even at
the suit of either party
c) Part executed and part executory – principle
against unjust enrichment shall apply.
Distinguished from Acts that do not comply with
formalities.
If certain procedures or formalities are prescribed in
the AOI, or By laws and the same are not complied
with , the resulting act is not ultra vires act of the
corporation.
-the contract may even be valid to third person who
are not familiar with the By laws.
Distinguished from Unauthorized Acts
-the act may be within the powers of the corporation
but not within the powers of the particular officer. –
ultra vires acts of the officer.
-hence if there is no written authority from the BOD to
sell the land in the form of a Resolution, the sale of the
realty by an officer shall be void.
EXERCISE OF POWERS
Who may exercise the powers of the corporation?
The BOD exercises the powers of the corporation.
The BOD without the concurrence of the stockholders
may exercise the powers.
1)When not exercised by the board – the powers are
not exercised by the board directly
a. there is a management contract
b. the powers of the board are delegated by majority
vote
c.to an executive committee
2)What are the powers that cannot be exercised by or
cannot be delegated to the executive Committee?
The executive committee cannot exercise any of the
following;
a. Approval of action requiring concurrence of
stockholders
b. Filing of vacancies in the board
c. Adoption, amendment or repeal of by laws
d. Amendment or repeal of board resolution
e. Distribution of cash dividends
Notes: the executive committee is composed of at
least (3) members of the board and must be created
under the by laws. It helps managing the affairs of the
corporation.
3)Corporate officers like the President can also bind
the corporation. The authority of such individual to
bind the corporation is generally derived form
a. law
b. corporate by laws
c. authorization from the board
47/53
Com. Law Review Sundiang (Chammy Diamond Notes)
4)A corporate officer or agent may represent and bind
the corporation in transactions with 3rd person to the
extent that the authority to do so has been conferred
upon him these includes:
a. powers in the usual course of business
b. powers that may be implied from the powers
intentionally inferred.
c. powers added by custom and usage
d. such apparent powers
5)An officer may also bind the corporation if he has
apparent authority.
a. the general manner in which the corporation holds
out an officer or agent as having the power to act.
b. the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof.
In what instances is concurrence of the stockholders
necessary for the exercise of the powers of the
corporation?
1) Approval of the majority of the board and
concurrence of the stockholders representing
2/3 fo the OCS is necessary in the exercise of
the following powers
a. Power to extend or shorten corporate terms
b. Increase or Decrease Corporate Stock
c. Incur, Create, Bonded Indebtedness
d. To deny pre –emptive rights
e. Sell, dispose , lease , encumber all or
substantially all of the corporate assets.
f. To invest in another corporation, business
g. To declare stock dividends
h. To enter into management contract
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
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 AOI
2) Approval of the stockholders representing
majority of the OCS is necessary together
with board approval in the following instances:
a) To enter into management contract
b) To adopt, amend or repeal the by laws
3) Without board resolution, the SH may:
a) 2/3 of the OCS –Delegate to the board the
power to amend the by laws
b) Majority of OCS-Revoke the power of the
board to amend the by laws which was
previously delegated.
Instances when corporation may acquire its own
shares:
a) The corporation has unrestricted retained
earnings in its books to cover the shares
b) For a legitimate corporate purpose including
but not limited to :
a. To eliminate fractional shares arising out
of dividends
b. To collect or compromise an
indebtedness to the corporation arising
out of unpaid subscription
c. To pay dissenting or withdrawing
stockholders entitled to payment of their
shares.
DIVIDENDS
Who may declare dividends
A. Board of Directors alone – cash, property
dividends.
B. Board of Directors with the approval of
stockholders representing not less than 2/3 of
OCS – stock dividends
What are the conditions that must be present to
declare dividends?
a. Unrestricted retained earnings
b. Resolution of the board or if stock dividends ,
the board with the concurrence of 2/3
outstanding capital.
Can the board be compelled to declare dividends
every year?
No. Declaration of dividends is discretionary upon the
board. Dividends are payable only when there are
profits earned by the corporation.
Exception: stock corporation are prohibited from
retaining surplus profits in excess of 100% paid in
capital
Exception to the Exception:
a) Justified by definite corporate expansion
b) The corporation is prohibited under any loan
agreement
c) For contingencies purposes.
Dividends cannot be declared out of the capital .
Exception: Wasting Asset Corporation
The Trust Fund Doctrine will be violated if dividends
are declared out of capital except only in two
instances.
a) Liquidating dividends and
b) Dividends from investment in wasting asset
corporation
What can be included in URE?
48/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-URE shall only include accumulated profits and gains
realized out of the normal and continuous operations
of the company.
a) not appropriated by its BOD for corporate
expansion project programs
b)not covered by a restriction for dividend declaration
under a loan agreement
c)not required for contingencies
What items cannot be used for dividend distribution?
Unrealized foreign exchange gains
Paid up surplus
Reduction surplus
Can gain from sale of real property be considered
party of unrestricted retained earnings?
Yes. But there must be surplus of profits. The
corporation cannot distribute gains from sale of real
properties as dividends if the value of the remaining
assets after distribution is less than the amount of
legal or stated capital and liabilities.
Can treasury shares be distributed by way of
dividends?
Yes, but only as property dividends . Treasury shares
cannot be declared as stock dividend or cash dividend
because they are not considered part of earned or
surplus profits
Other rules Concerning Dividends
a) Stockholders are entitled to dividends pro rata
based on the total number of shares and not
on the amount paid for the shares
b) Dividends declared before the transfer of
shares belong to the transferor and those
declared after the transfer belong to the
transferee.
c) The stockholders right to be paid dividends
accrues as son as the declaration is made .
From the time, the stockholders can already
demand payment thereof.
d) Stock dividends can be declared at a premium
e) Even unpaid subscribers are entitled to
dividends
SALE OF ALL OR SUBSTANTIALLY ALL
PROPERTIES
Requisites
a. Approval of majority of the directors or
trustees
b. Assent of SH representing 2/3 of OCS or 2/3
member in a meeting duly called for the
purpose after written notice.
c. It must comply with the formalities of the Bulk
Sales law
When Covered:
-deemed to cover substantially all corporate property
and assets if thereby the corporation would be
rendered incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
Effects on Creditors
-buyer will not be liable for the debts of the transferee
Exceptions;
a. Express assumption of liabilities
b. Consolidation or merger
c. Purchase was in fraud of creditors
d. If the purchaser becomes a continuation of
the seller
INCREASE OR DECREASE OF CAPITAL
What are the ways of increasing the capital stock?
1. Increasing the number of shares and retaining
the par value
2. Increasing the par value of existing shares
without changing the number of shares
3. Increasing the number of shares and
increasing the par value
What are the ways of decreasing the capital stock?
a. By decreasing the number of shares and
retaining the par value
b. By decreasing the par value of existing shares
without changing the number of shares
c. By decreasing the number of shares and
decreasing the par value.
DIRECTORS AND OFFICERS
Qualification of Directors
a)Stock Corp – must own at least 1 share capital stock
of the corporation in his own name ; Non stock
corporation – must be a member. He must be a
member in his own right. It must be legal title not
beneficial title.
Ex. The SH trustor in a VTA cannot be a director
because he only has beneficial title; the trustee can be
elected as directors because he has legal title.
b)A majority of the directors / trustees must be
residents of the Philippines
C)he must not have been convicted by final judgment
of an offense punishable by imprisonment for a period
exceeding 6 years or a violation of the Corp. Code,
committed within 5 years before the date of his
election
d)He must be of legal age
e)he must possess other qualification as may be
prescribed in the by laws
BUSINESS JUDGMENT RULE
-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 BOD
49/53
Com. Law Review Sundiang (Chammy Diamond Notes)
; the BOD is the business manager of the corporation
and so long as its acts in GF its orders are not
reviewable by the courts or the SEC.
WHEN DIRECTORS LIABLE
a) If he willfully and knowingly vote for and
assent to patently unlawful acts of the
corporation
b) Is guilty of gross negligence or bad faith in
directing the affairs of the corporation
c) Will acquire any personal or pecuniary interest
in conflict of duty
METHODS OF VOTING
a) Straight Voting- may vote such number of
shares for as many person as there are
directors
b) Cumulative Voting for one candidate- give one
candidate as many votes, multiplied by the
number of his shares
c) Cumulative Voting by Distribution-distribute
his vote to as many candidates as he shall
see fit.
Note: election of directors in a stock corporation
should be by the SH constituting a quorum. All SH
holding voting shares have the right to vote. There can
be no voting by district or region in a stock corporation
Non Stock Corporation –there can be election by
region in non stock corporation, because the right to
vote in a non stock corporation may be limited ,
broadened or denied in the AOI.
REMOVAL AND VACANCIES IN THE BOARD
Requisites of Removal
a) It must take place either at a regular meeting
or special meeting of the SH or members
called for the purpose
b) There must be previous notice
c) The removal must be by a vote of SH
representing 2/3 of OCS or 2/3 of members
d) The director may be removed with or without
cause unless he was elected by the minority
in which case, it is required that there is cause
for removal
b)Filing of vacancies in the Board
10 By stockholders or members – if vacancy results
because of
a. Removal
b. Expiration of term
c. The ground is other than removal or expiration
of term (death, resignation, abandonment0
where the remaining directors do not
constitute a quorum ; increase in the number
of directors
d. By board if remaining directors constitute a
quorum
Replacement of Hold Over Directors
The loss of right of the directors is automatic upon the
expiration of their term. If election is not held, the
director whose term expired can continue to function
in a holdover capacity
The power of the remaining members of the board to
fill in a vacancy applies only if a director resigns
before the expiration of his term
DOCTRINE OF CORPORATE OPPORTUNITY
-if there is presented to a corporate officer or director
a business opportunity which:
a. corporation is financially able to undertake;
b. is in line with corporation business an is of practical
advantage to it
c. one in which the corporation has an interest or a
reasonable expectancy.
-Hence, the law does not permit him to seize the
opportunity even if he will use his own funds in the
venture.
-if he seizes the opportunity thereby obtaining profits
to the expenses of the corporation, he must account
all the profits by refunding the same to the corporation
unless the act has been ratified by a vote of the SH
owning or 2/3 fo the OCS.
Who is an interlocking Directors
There is an interlocking director in a corporation when
one of the directors in one corporation a director in
another corporation.
*if the interest of the interlocking director in the
corporations are both substantial (exceeding 20% of
OCS)
Gen. Rule: a contract between two or more
corporations having interlocking directors shall NOT
invalidated on that ground alone.
Exception: if the contract is fraudulent or not fair and
reasonable.
If the interest of the interlocking director in one of the
corporations is nominal while substantial in the other
the contract shall be valid provided the following
conditions are present:
a. The presence of such director in the board
meeting in which the contract was approved
was NOT necessary to constitute a quorum
for such meeting.
b. That the vote of such director was not
necessary for the approval of the contract.
c. That the contract is fair and reasonable under
the circumstances
50/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Where any of the first two is absent , the contract can
be ratified , by the vote of the stockholders
representing at least 2/3 of the OCS or by the vote of
the stockholders representing at least 2/3 of the
members in a meeting called for the purpose
Provided that:
1. Full disclosure of the adverse interest of the
directors involved is made on such meeting
2. The contract is fair and reasonable
Are corporate agents such as directors , trustees or
officers solidarily liable with the corporation they
represent?
As a Rule NO, acting as such corporate agents, are
not their but the direct accountabilities of the
corporation they represent.
However, the following cases, solidarily personal
liabilities may be incurred:
a. Votes or assents to a patently unlawful acts
b. Act in bad faith or in gross negligence
c. Are guilty of conflict of interest
b)when a director has consented to the issuance of
watered stocks or who,
c)stipulated to hold himself personally and solidarily
liable with the corporation
c)when a director, trustee or officer is made, by
specific provisions of law, personally liable for his
corporate actions.
Who are self –dealing directors ?
a) Self dealing directors – those who “personally
contract” with the corporation in which they
are directors . it is discouraged because the
directors have fiduciary relationship with the
corporation and there can be no real
bargaining where the same is acting on both
sides of the trade.
The contract between the corporation and the
self dealing directors is VOIDABLE unless :
-The presence of such director in the board
meeting in which the contract was approved
was NOT necessary to constitute a quorum
for such meeting.
-That the vote of such director was not
necessary for the approval of the contract.
-That the contract is fair and reasonable under
the circumstances
-there was previous authorization by the
board of directors or trustees.
-However, even if the requirements are not present. It
can be RATIFIED by a vote of the SH representing 2/3
of OCS
Provided that:
Full disclosure of the adverse interest of the
directors involved is made on such meeting
The contract is fair and reasonable
WHO ARE THE CORPORATE OFFICERS
The corporate officers are the
-President (who shall be the director),
-Treasurer (who may or may not be a director),
-Corporate Secretary (who shall be a resident and
citizen of the Philippines)
and such others officer as may be provided by law
Note: The By laws may provide that the BOD is
authorized to create corporate officers and appoint
corresponding corporate officers.
*When the defendant is a corporation, partnership, or
association, service of summon may be made on the
President, Managing Partner, GM, Corporate
Secretary, Treasurer or IN house Counsel
WHO CAN APPOINT AND REMOVE THE OFFICERS
The BOD shall appoint the officers , they may also
remove or discharge those that they appointed.
TRUST FUND DOCTRINE
-The capital stock, property and other assets of the
corporation are regarded as equity in trust for the
payment of the corporate creditors.
-the subscribed capital stock is a trust fud for the
payment of debts which the creditor have the right to
look up to satisfy their credits.
-Corporation may not dissipate this and the creditors
may sue stockholders directly for the unpaid
subscription.
a)Money received for subscription of increase of
authorized capital are not covered by the trust fund
doctrine prior to the approval of such increase by the
SEC.
Give examples of cases where the trust fund doctrine
is violated
a. Where the corporation release or condones
payment of the unpaid subscription
b. When there is payment of dividends without
URE
c. When properties are transferred in fraud of
creditors
d. When properties are disposed or undue
preference is given to some creditors even if
the corporation is insolvent.
The procedure for the distribution of capital assets
embodied in the Corporation Code, which allows the
distribution of corporate capital only in 3 instances
a. Amendment of the AOI to reduce the
authorized capital stock
51/53
Com. Law Review Sundiang (Chammy Diamond Notes)
b. Purchase of redeemable shares regardless of
presence of URE
c. Dissolution and eventual liquidation of the
corporation
STOCKHOLDERS AND SHARES
Subscription Contract
-any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be
formed
How does one become a shareholder in a
corporation?
A person becomes a SH the moment he
a. Enters into a subscription contract
b. Purchases treasury shares form the
corporation
c. Acquires shares form existing shareholders
by sale or any other contract or acquires
shares by operation of law like succession
What are the Kinds of Subscription Contract?
Pre incorporation subscription
-entered into before the corporation and irrevocable
for a period of 6 months unless all the subscribers
consent or if the corporation failed to materialize . It
cannot also be revoked after filing the AOI..
Post Incorporation Subscription –entered into after
incorporation.
What are the valid consideration for subscription
agreements?
a. Cash
b. Property
c. Labor or services
d. Prior corporate obligations
e. Amount transferred from URE to stated capital
f. Outstanding shares in exchange for stocks
Note: PN or future services are not
considerations.
SHARES OF STOCK
-interest or right which an owner has in the
management of the corporation and its surplus profits
on dissolution , all of its assets remaining after the
payment of its debt. The SH may own the share even
if he is not holding a certified stock.
Distinction Shares of Stock vs Certificate of Stock
1. Unit of interest in a corporation
2. It is an incorporeal or intangible property
3. It may be issued by the corporation even if the
subscription is not fully paid
Certificate of Stock
1. Evidence of the holders ownership o the stock
and of this right as shareholder and up to the
extent specified therein
2. It is concrete and tangible
3. May be issued only if the subscription is fully
paid.
Classification of Shares
a. Common Shares – the most common type of
shares which enjoy no preference
b. Preferred Shares – par value shares which
enjoy preference as to dividends or assets
upon dissolution as sated in the AOI
Cumulative – the shareholder is entitled to recover
dividends in arrears. While dividend declaration may
not be compelled, once it is declared , the shareholder
is entitled to the said arrears.
Non Cumulative – not entitled to arrears only to
present dividends
Participating – participates with common shares after
receiving its dividends at preferred rate.
Non Participating – where there is no such participant.
Note: Preferred shares must have par value
Preferred Shares – cannot have as its preference
fixed demandable annual interest because they
represent investment to rather than debt.
-Preference do not give them lien upon the property
nor make them creditors of the corporation.
-Preferred shares are not entitled to payment of
dividends as a matter of right.
The BOD cannot be given blanket authority to fix the
term, conditions and rights of preferred shares unless
the guidelines are spelled out in the AOI
Redeemable Shares –are those which permit the
issuing corporation to redeem or purchase its own
shares.
valid
Limitations on the issuance of redeemable shares:
a. Redeemable shares may be issued only when
expressly provided for in the AOI
b. The terms and conditions affecting said
shares must be stated both in the AOI and in
the certificate of stock representing such
share.
c. Redeemable shares may be deprived of
voting rights in the AOI
d. The Corporation is required to maintain a
sinking fund to answer for redemption price
e. The Redeemable shares are deemed retired
upon redemption
f. URE is not necessary before shares can be
redeemed but there must be sufficient assets
to pay the creditors and to answer for
operations.
52/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Redemption cannot made if such redemption
will result in insolvency or inability of the
corporation to meet its obligations.
4)Treasury Shares – shares which have been earlier
issued as fully paid and have thereafter been acquired
by the corporation by purchase, donation, redemption
or through some lawful means
5)Par value and no par value shares – Par value
shares have a nominal value in the certificate of stock
while no par value share are those which do not have
nominal value.
(1)Both par value shares and no par value shares
have issued values. .The issued value may be higher,
but not lower than the par value.
(2)The issued value of no par value shares may be
fixed in the AOI or fixed by the board.
Founders Share – which be given certain rights and
privileges not enjoyed by others. If the right is the
exclusive right to ote and be voted for a director, it
must be for a period not exceeding 5 years counted
from the approval of the SEC
Escrow Shares – shares subjected to an agreement
by virtue of which the shares are deposited by the
grantor or his agent with a 3rd person to be held by the
latter undtil the performance of a certain condition.
The beneficiary of the agreement is not yet a
stockholder until the performance of such condition
and is not therefore entitled to the right of a
shareholder.
What is your understanding of “Treasury Shares?
A. Are they issued
B. Full paid
C. Outstanding
D. Entitled to dividends
E. May such shares be distributed to SH by way
of dividends
Treasury shares are shares of stock which have been
issued fully paid for but subsequently reacquired by
the issuing corporation by purchase, redemption
donation to through some other lawful means
1) Yes, they are issued
2) Yes, they are fully paid
3) No, they are not considered outstanding
shares as they are held by corp
4) NO, they are not entitled to dividend or to vote
until they are reissued. A corp cannot declare
dividend for itself.
5) Generally, treasury shares being unrealized
income are not part of earned or surplus
profits, and therefore are not distributable as
dividends either in cash or stocks . If they are
URE, it may be distributed as PROPERTY
Dividends not stock dividends
What are instances when non voting shares may vote
a. Amendment of AOI
b. Adoption and amendment of By laws
c. Increase or decrease of bonded indebtedness
d. Increase or decrease of capital stock
e. Sale or disposition of all or substantially all of
the corporate property
f. Merger or consolidation of corp.
g. Investment of funds in another corp.
h. Corporate dissolution
What are the limitation on the issuance of “no par
value” shares?
1) No par value shares cannot have an issued
price of less than P5.
2) The entire consideration for its issuance
constitutes capital so that no part of its should
be distributed as dividends
3) They cannot be issued as preferred shares
4) They cannot be issued by banks, trust,
insurance corp.
5) The AOI must state the fact that it issued no
par value shares
6) Once issued, they are deemed fully paid and
non assessable.
Doctrine of Equality of Shares
-provides that where the AOI do not provide for any
distinction of shares of stock all shares issued by the
corp are presumed to be equal and enjoy the same
right and privileges and are also subject to the same
liabilities.
WATERED STOCKS
-those issued not in exchange for the equivalent either
in cash, property share , stock dividend, or services.
Thus, the issuance of such stocks are prohibited.
1) Issued without consideration (bonus share)
2) Issued as fully paid when the corp. has
received lesser sum of money than its par or
issued value (discounted shares)
3) Issued for consideration other than actual
cash (prop or services the value is less than
its par or issued value
4) Issued as stock dividends when there are no
sufficient retained earnings or surplus to
justify it.
53/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Note: Directors or officers who consented to its
issuance is solidarily liable to the corp for the
difference in value
CERTIFICATE OF STOCK
-it is a written evidence of the shares of stock but it is
not the share itself
a)it is a prima facie evidence of ownership and
evidence can be presented to determine the real
owner of the shares
b)Delivery is also essential for its issuance
FORMALITY
-the certificate of stock must be signed by the
President or Vice and countersigned by the Corp.
Secretary or the Assistant Sec otherwise it is not
deemed issued
When Certificate of stock my be issued
-only until the full amount of his subscription together
with interest and expenses if due has been paid.
TRANSFER OF SHARES
How are shares of stock transferred?
If represented by certificate , the ff: must be strictly
complied with:
a. Delivery of the certificate
b. Indorsement by the owner or his agent
c. To be valid to third parties, the transfer must
be recorded in the books of the corp.
If not represented by the certificate
a. By means of deed of assignment
b. Such is duly recorded in the books of the
corp.
Note: Registration in the stock and transfer book is not
necessary if the conveyance is by way of chattel
mortgage.
However, there must be due registration with the
Register of Deeds. Registration is also necessary if
the heirs acquire the shares of a deceased SH.
May a SH bring a suit to compel the corporate
secretary to register valid transfer of shares?
Yes, it is the corp. secretary duty and obligation to
register transfer of stocks.
NO attachment or mortgage of share of stock need
not be registered in the corporation stock and transfer
books inasmuch as a chattel mortgage over shares of
stock does not involve a “transfer of shares” and that
only absolute transfer of shares of stock are required
to be recorded in the corporation stock and transfer
book in order to have “ force and effect” as against 3 rd
person.
Basic Rights of SH
a. Direct or indirect participation in the mngt
b. Voting rights
c. Proprietary rights
What are the obligations of SH
a. Liability for unpaid share
b. Liability to creditors for unpaid subscription
c. Liability for watered stock
SUIT BY SH MEMBERS
Derivative Actions
-those brought by one or more SH in the name of the
corp. to redress wrongs committed against it or protect
vindicate corporate rights whenever the officials of the
corp. refuse to sue, or the ones to be sued has control
of the corp.
Requisites of Derivative Action
a. He was a SH at the time the acts or
transaction subject of the action occurred
b. He exerted all reasonable efforts and alleges
the same with particularity in the complaint to
exhaust all REMEDIES
c. No appraisal right are available for the act or
acts complained
d. The suit is not a nuisance or harassment suit
Individual Actions
-those brought by the SH in his own name against the
corporation when a wrong is directly inflicted against
him
Representative action – those brought by the SH in
behalf of himself and all other Sh similarly situated
when a wrong is committed against a group of SH.
What is Pre-emptive Right
-is a SH right to subscribe to all issues or disposition
of shares of ANY CLASS in proportion to his present
stock holdings, the purpose being to enable the SH to
retain his proportionate control in the corporation and
to retain his equity in the surplus.
Pre-emptive right is not available in the ff:
a. Shares issued to comply with laws requiring
stock offering or minimum stock ownership by
the public.
b. Shares issued in GF in exchange for property
needed for corporate purpose
c. Shares issued in payment of previously
contracted debt
d. In case the right is denied in the AOI
e. If one SH does not want to exercise his pre-
emptive right, the other SH are not entitled to
purchase the corresponding share of the SH
who declined.
RIGHT TO VOTE
Proxy
-SH or members may vote in person or by proxy in all
meetings of SH.
54/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Proxy form
-in writing, signed by the SH or member and filed
before the scheduled meeting with the corporate
secretary.
Period of Validity
-unless otherwise provided, it should be valid only for
the meeting for which it is intended. No proxy shall be
valid and effective for a long period than 5 years.
VOTING TRUST
One or more SH may create a voting trust for the
purpose of conferring upon trustee or trustees the
right to vote and other rights pertaining to the shares
for a period not exceeding 5 years at anyone time.
However, the trustee can also be voted as directors
-if Trust is required for a loan agreement, period may
exceed 5 years but shall automatically expire upon full
payment of the loan
Limitation on right to vote
a) Non voting shares are not entitled to vote
except as provided for in sec 6.
b) Preferred or redeemable shares may be
deprived of the right to vote unless otherwise
provided
c) Fractional shares of stock cannot be voted
unless they constitute at least one full share
d) Treasury shares have no voting rights as long
as they remain in the treasury
e) Holders of stock declared delinquent by the
BOD for unpaid subscription are not entitled to
vote
f) A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corp.
g) A SH is still entitled to vote even if the shares
are mortgaged or pledged unless he
authorizes the creditor in writing to vote.
APPRAISAL RIGHT
-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.
Upon demand all right accruing to the shares shall be
suspended
Instances where it may be exercised
a. Extension or reduction of corporate term
b. Change in the right of Sh authorize preference
superior to those SH or restrict the right of any
SH
c. Corporation authorized the board to invest
corporate funds in another business
d. Corporation decides to sell or dispose of all or
substantially all assets of corporation
e. Merger or consolidation
Rules for the exercise of Appraisal Right
a. The SH must be a dissenting SH
b. The SH must make a written demand on the
corp. within 30 days after vote was taken
c. The price to be paid is the FMV of the shares
on the date before the vote was taken
d. The FMV shall be agreed upon , in case no
agreement within 60 days, the FMV shall be
determined by a majority of 3 disinterested
person
e. The right of appraisal is extinguished when
a. He withdraws the demand
b. The proposed action is abandoned
c. The SEC disapproves the action
COLLECTION OF UNPAID SUBSCRIPTION
What are the REMEDIES of corporation to enforce
payment of stocks
a) Extra Judicial Sale at Public Auction – remedy
is available upon failure of the SH to pay the
unpaid subscription or balance thereof within
the grace period of 30 days from date
specified in the contract of subscription
b) Judicial action
c) Collection from cash dividend and withholding
of stock dividend
What does the term unpaid claim mean?
-it refers to any unpaid subscription and not to any
indebtedness which a subscriber or Sh may owe the
corp. arising from any other transaction
CALL
-a declaration by the BOD that the unpaid subscription
are due and payable to the corp.
a) A call is necessary if no time to make
payment is stated in the subscription
agreement. A call is not necessary if
a) There is time fixed in the agreement for
payment
b) If the corporation is insolvent
PROCEDURE FOR COLLECTION AND
DELINQUENCY SALE
a. Call whenever required must be made by the
board
b. Notice of Call – the SH are given notice of the
board resolution by the corporate secretary,
either personally or by registered mail.
c. If the SH concerned do not pay within 30 days
from the date specified in the contract of
subscription or in the call, all the Sh covered
shall be declared delinquent
d. Notice of Delinquency – served on the
subscribers either personally , registered mail
and publication
55/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-notice shall state the amount due on each
subscription plus accrued interest, date , time and
place of sale which shall not be less than 30 days nor
more than 60 days from date of stock becomes
delinquent.
e. Sale – such number of shares as may be
necessary to pay the amount due on
subscription, plus interest and other amounts
due.
-The highest bidder is the person offering to pay the
full amount of the balance on the subscription and
other amount that are due or the smallest number of
shares or fraction of a share.
What are the effects of stock Delinquency
a) Deprives the SH the right
a. To be voted
b. To be entitled to vote
c. To representation
b) Delinquent SH shall not be entitled to any of
the rights of a SH but he shall still be entitled
to receive dividends
c) Delinquent stocks shall be subject to
delinquency sale.
Note: if the delinquent Sh is a directors , he shall
continue to be a director but he cannot run for re-
election.
BOOKS
Who is authorized to make entries in the stock and
transfer book?
The corp. secretary. Entries made by the Chairman or
President are INVALID
What is the probative value of the stock and transfer
book?
-is the best evidence of the transaction that must be
entered or stated therein.
Right of Stockholders to Inspect Books
a. It must be exercised at reasonable hours
b. Has not improperly used any information he
secured through any previous examination
c. Demand is made in good faith or for legitimate
purpose
-mandamus is proper remedy if the SH is being
improperly deprived of his right to inspect
MERGER VS CONSOLIDATION
Merger
-is one where a corporation absorbs the other and
remains in existence while the others are dissolved.
Consolidation
-is one where a new corporation is created and
consolidating corporations are extinguished.
Merger or consolidation does not become effective by
a mere agreement of the constituent corp. The
approval of SEC is required.
EFFECTS OF MERGER AND CONSOLIDATION
a) The constituent corp. shall become a single
corp.
b) The separate existence of the constituent
shall cease except that of surviving corp.
c) The surviving or consolidated corp shall
possess all the rights, privileges, immunity
and powers and shall be subject to all duties
and liabilities of a corp.
d) The surviving or the consolidated corp. shall
possess all rights, privileges and the
properties shall be deemed transferred to the
surviving or conso. Corp.
e) All liabilities of the constituent shall pertain to
the surviving or the consolidated corp.
-The corp. code does not mandate the absorption of
the employees of the non surviving corp. The
absorption of the employees may be provided for in
the Merger Plan.
-in the absence of stipulation, the surviving corp may
not be judicially compelled to absorb the employees of
the non surviving corporation
-SC Held: for purpose of applying the Union Shop
Clause
-the absorbed employees of the non surviving corp.
are considered new employees of the surviving
corporation . hence, the Union Shop Agreement
applies to the absorbed employees.
PLAN OF MERGER
a. The BOD of each corp. shall draw up a plan of
merger or consolidation.
b. Should be approved by majority vote of each
BOD and 2/3 OCS
c. Any amendment must be approved by
majority vote
d. Articles of Merger Or Articles of Consolidation
shall be executed by each of the constituent
corp.
e. Four copies shall be submitted to the SEC for
approval.
NON USE OF CORPORATE CHARTER
Effects of Non Use of Corporate Charter and
Continuous Inoperation of Corp.
a) When the organization does not fully organize
and commence the transaction of its business
within 2 years from the date of its
incorporation, its corporate powers cease and
the corporation shall be deemed dissolved.
56/53
Com. Law Review Sundiang (Chammy Diamond Notes)
b) When the corporation has commenced the
transaction of its business but subsequently
becomes continuously inoperative for a period
of at least 5 years, the certificate of
registration may be suspended or revoked.
Suspension and cancellation Is not automatic.
Exception: Inoperation is beyond the control
of the corporation.
DISSOLUTION
Dissolution of a Corporation
-extinguishment of the franchise of a corporation and
the termination of its corporate existence.
Modes of Dissolution
a) Voluntary Dissolution
b) Involuntary Dissolution
c) Shortening of Term
d) Expiration of Term
Voluntary Dissolution where no creditors are affected:
Voluntary Dissolution where creditors are affected
Dissolution by shortening corporate term
-this is done by amending the AOI. The amended
Articles shall be filed with SEC and the corp. is
deemed dissolved upon approval of the amended
Articles or upon expiration of the new term.
Involuntary Dissolution:
-filing a verified complaint with SEC based on grounds
provided by law or rules including
a) Failure to organize and commence business in
2 years
b)Continuously inoperative for 5 years
c) Failure to file by laws within 30 days from issue
of Certificate of incorporation
d_Fraud in procuring Certificate of Registration
f. Serious Misrepresentation
g. Failure to file required reports.
EFFECTS OF DISSOLUTION:
a) Results in the transfer of legal title to
properties in the SH who become co owners
thereof
b) The corporation ceases as a body corporate
to continue business
c) The SH are not prevented from conveying
their respective shareholdings toward the
creation of a new corp. to continue the
business of the old
d) Reincorporation of Dissolved Corp.
e) The corporation continues as a body
corporate for 3 years for purposes of winding
up or liquidation ;
f) Upon the expiration of 3 year winding up
period, the corporation ceases to exist for all
purposes.
LIQUIDATION AFTER THREE 3 YEARS
-if full liquidation can only be effected after the 3 years
period and there is no trustee, the directors may be
permitted to complete the liquidation by continuing as
trustees by legal implication
LIQUIDATION
-process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate
the payment of obligation to creditors , and the
remaining balance if any is to be distributed to the
stockholders.
MODES OF LIQUIDATION
a) By the BOD
b) Through a Trustee
c) By management committee or rehabilitation
receiver
FOREIGN CORPORATION
-corporation formed, organized or existing under any
other than those of the Philippines and whose allow
Filipino citizens and corporations to do business in its
own country or state.
Foreign Corporation –power to sue and be sued.
a) Suit by a Foreign Corporation – the F.C
transacting business in the PHils. WITHOUT
LICENSE to do business shall not be
permitted to maintain or intervene in any
action , suit or proceeding in any court or
administrative agency.
b) Suit Against a Foreign Corporation – Any FC
transacting business in the Phils. Whether or
not with a license may be used against before
Phil courts or administrative tribunals on any
valid cause of action recognized under Phils
laws
What constitutes DOING BUSINESS in the PHils.
Continuity test – doing business implies continuity of
commercial dealings and arrangements, and
performance of acts the purpose and object.
Substance Test – if it continuing the body or
substance of the enterprise of business for which it
was created
Note: the two test are characterized as the “Twin
Characterization Test”
Isolated Transaction?
If single or isolated transaction is incidental and casual
transaction, it cannot qualify as “doing business” since
it lacks the element of continuity
However, where a single or isolated transaction is not
merely incidental or casual but indicates the FC
intention to do other business in the PHils. Said single
act constitutes “doing business” in the PHils.
CONTRACT TEST of doing Business in the PHils.
57/53
Com. Law Review Sundiang (Chammy Diamond Notes)
a) Is the actual performance of specific
commercial acts within the territory of the
Phils. For the plain reason that the Phils. Has
no jurisdiction over commercial acts
performed in foreign territories.
b) Activities within the Phil jurisdiction that do not
create earning or profits to the FC do not
constitute business in the PHils.
c) A FC that merely imports of goods from a Phil
exporter without opening an office or
appointing an agent in the Phil is not doing
business in the Phil.
d) A FC that exports products to the Phils.
Without doing any specific commercial act,
without doing any specific commercial act is
not doing business in this country.
DOING BUSINESS under the FOREIGN
INVESTMENT ACT
a) Soliciting orders , service contracts opening
offices
b) Appointing representatives
c) Participating in the mngt , supervision and
control of any domestic business
d) Any act or act that imply a continuity of
commercial dealings
Not Doing Business
a) Mere investment as shareholder
b) Having a nominee director or officer to
represent its interest in the corporation
c) Appointing a representative or distributor
which transact business in its own manner
Requisites for obtaining license to do business.
a. The FC should file a verified application
containing and together with the ff:
b. Designated Resident Agent
c. An agreement that if it cease to transact
business or if there is no more resident
agent, summons shall then be served through
SEC
d. Oath of Reciprocity
e. Within 60 days from issuance of license, the
corp. should deposit at least 100k for the
benefit of creditors subject to further deposit
every 6 months.
CLOSE CORPORATIONS
Requirements;
a. The AOI must state that the number of SH
must not exceed 20
b. AOI must contain a restriction on the transfer
of issued stocks
c. The stock cannot be listed in the stock
exchange nor be publicly offered.
The ff: cannot be a close corporation:
a. Mining companies
b. Oil companies
c. Stock exchanges
d. Banks
Pre-emptive Right in Close Corporation
-shall extend to all stocks to be issued including re-
issuance of treasury shares , whether for money or
property or personal services, or in payment of
corporate debts unless the articles of incorporation
provide otherwise.
-includes:
a) issued in compliance of the Corporation Code:
offering or minimum stock ownership
b) in exchange of property needed for corporate
purpose upon 2/3 vote of OC.
Deadlock
-in case of irreconcilable dispute among the directors
or shareholders, the SEC may be asked to intervene
and the SEC may perform such actions that may be
necessary under the circumstance including the
appointment of provisional director who will be
impartial.
CHACTERISCTICS
a) The SH themselves can directly managed the
corporation and perform functions of directors
b) Sh are liable as directors
c) No need to call a meeting to elect directors
d) Sh are liable for tort.
c) Despite the presence of the requisites, the
corporation shall not be deemed a close
corporation if at least 2/3 of the voting stocks
or voting rights belong to a corporation which
is not a close corporation.
NON STOCK CORPORATION
Purpose:
a. Charitable, religious, educational, cultural etc.
Rights of Members
a) Right to Vote – a member is entitled to one
vote, such right may be broadened or limited
or denied by the AOI. The By laws of the Non
stock corporation may provide for the desired
voting rights of members.
b) Right to transfer Membership- As a gen. rule,
a member cannot transfer his membership in
a non stock corporation. By way of exception,
the AOI or By laws may provide for their
transferability.
TERMINATION OF MEMBERSHIP
-the power to admit members pertains to the Board in
the absence of any contrary provisions in the AOI . it
is also the BOT who has the power to terminate
membership
58/53
Com. Law Review Sundiang (Chammy Diamond Notes)
Standards: - A non stock corp. is authorized to
terminate membership in accordance with the AOI.
When Property Rights are Involved – Member ship
may involve property rights. Deprivation of such
property right should also be in accordance with the
provision of CC.
Lien – Non payment of dues may be a ground for
termination or suspension of membership. The
Articles or By laws may provide that unpaid dues shall
constitute lien on the members share.
Notice – the termination of membership to be valid ,
should be reasonable notice to the member
concerned and must be given opportunity to be
heard..
Effect of Death of Member – Membership are personal
and non transferable unless the AOI or by laws
provide otherwise. Deceased member are not to be
counted in determining he requisite vote in corporate
matters or the requisite quorum.
CONVERSION
A non stock corporation cannot be converted into a
stock corporation through a mere amendment of its
AOI . This would violate Sec 87 which prohibits
distribution of income as dividends to members.
A non stock corporation can be converted into stock
corporation only if the members dissolve it first and
then organize a stock corporation
A stock corporation may be converted into a non stock
corporation by mere amendment provided all the
requirements are complied with .
ORDER OF DISTRIBUTION OF ASSETS (on
dissolution of non stock corp)
a) All its creditors shall be paid
b) Assets held subject to return on dissolution,
shall be delivered back to their givers
c) Assets held for charitable, religious purposes
shall be conveyed to one or more organization
engaged in similar activities
d) All other assets shall be distributed to
members
RELIGIOUS CORPORATION
Corporation Sole – special form of corporation usually
associated with the clergy and consist of one person
and his succesors who are incorporated by law to give
some legal capacities and advantages.
Religious Societies – non stock corporation formed by
a religious society , group , diocese, or religious
denomination
The By laws of religious corporation may provide that
the member may be expelled or removed without prior
notice.
CORPORATION SOLE
-Nationality – A corporation sole does not have any
nationality , the nationality is determined not by the
nationality of its head, but by the nationality of its
head, but by the nationality of its members constituting
the sect in the Phils.
Conversion to Corporation Aggregate – a corporation
sole may be converted to a corporation aggregate
through amendment of its AOI. Concurrence of 2/3 of
the members of the corporation sole.
Dissolution – by filing a verified declaration of
dissolution stating
a. Name of the corporation
b. Reason for dissolution
c. Authorization for the dissolution by the
particular religious denomination
d. Names and addresses of the person who will
supervise the dissolution
SECURITIES REGULATION CODE
Jurisdiction of SEC
1. Supervision over all corp, partnership and
associations
2. Formulate policies and recommendation on
issues concerning securities market
3. Approve , suspend reject “ registration
statements”
4. Suspend revoke franchise and certificate of
registration of corp, partnership an assco.
5. Supervise activities and exchanges of clearing
agencies
Jurisdiction of the RTC
1. Fraudulent deices and schemes
2. Intra-corporate dispute
3. Controversies in election, appointment of
directors and trustees
What are SECURITIES
-securities are shares , participation or intereset in a
corporation or in a commercial enterprise or profit
making venture evidenced by certificate , contract,
instrument whether written or electronic includes:
a. Shares of stock, bonds
b. investment contract
c. fractional undivided interest
d. derivatives like option and warrant
registration statement – is the application for the
registration of securities required to be filed with the
Commission
Investment Contract
-means of contract transaction or scheme whereby a
person invest his money in a common enterprise and
59/53
Com. Law Review Sundiang (Chammy Diamond Notes)
is led to expect profit primarily from the efforts of
others.
Requisites:
a. An investment of money
b. Common enterprise
c. With expectation of profits
d. Primarily on the efforts of others
Derivatives
-financial instrument including option and warrants
whose value depend on the interest in or performance
of an underlying security but which does not require
any investment of principal in the underlying security.
Options – contracts that gives the buyer the right but
not the obligation to buy or sell an underlying security
at a predetermined price.
Call Option – right to buy
Put Option – right to sell
Warrant – right to subscribe or purchase new shares
or existing shares in a company on or before a
predetermined date.
How does the SRC protects the public in investing
securities?
a. The law requires full disclosure of information
to the public regarding the securities that are
being offered and the issuers including the
filing of registration statements and the
approval of prospectus.
b. –continuity duty of submit material information
to SEC
c. Close monitoring of the securities
d. Prohibiting and penalizing different fraudulent
acts
BASIC RULES REGARDING REGISTRATION OF
SECURITIES
a)provides that securities shall not be sold or offered
for sale or distribution within the Phil, without a
registration statement duly filed with and approved by
the Commission.
b)full disclosure of information is given to the public .
EXEMPT SECURITIES
a) Any securities issued or guaranteed by the
Government of the Philippines.
b) Any security issued or guaranteed by the
government of any country with which the
Phil. Maintains diplomatic relations
c) Certificate issued by a receiver or by a trustee
in bankruptcy
d) Any security or its derivatives the sale or
transfer of which by law , supervision and
regulation of the office.
e) Any security issued by a bank except its own
shares of stock
EXEMPT TRANSACTIONS
a. At a judicial sale or sale by executor
b. An isolated transaction
c. Sale of capital stock of a corporation to its
own stockholders
d. Brokers transaction
e. The sale of securities by an issuer to fewer
than 20 person in the Phils. During any 12
month period.
What are the ground for revocation and or rejection of
the registration of securities?
a) The issuer:
-judicially declared insolvent
-has violated any of the provision of this code
-engaged in fraudulent transaction
-has made any false or misleading
representation of material facts
-has failed to comply with any requirement
that the Commission may impose
b) The registration statement is on its face
incomplete or inaccurate
c) The issuer , any officer , director or controlling
person of the issuer has been convicted of
moral turpitude.
DEVICES AND PRACTICES ON MANIPULATION
1) To create a false or misleading appearance of
active trading.
a) Wash sale – by effecting any transaction in
such security which involves no change in
beneficial ownership
b) Match orders – 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.
2)To effect a series of transactions in securities
3)Create active trading to induce such a purchase or
sale through manipulative devices .
4)To circulate information that price of securities will
likely rise or fall
WHO IS AN INSIDER?
-Insider means
-the issuer
-a director or officer or a person controlling the issuer
-a person whose relationship or former relationship to
the issuer gives him access to material information
-a government employer who has access to material
information about an issuer
-a person learns such information by communication
from any of the foregoing insiders
DUTIES OF AN INSIDER when he is TRADING?
60/53
Com. Law Review Sundiang (Chammy Diamond Notes)
-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 interest.
-The insider proves that the information was not
gained from such relationship;
-if the other party selling to or buying from the insider
is identified
-that he disclosed the information to the other party
-that he ad reason to believe that the other party
otherwise is also in possession of the information
PRESUMPTION
-a purchase of sale of a security of the issuer made by
an insider , shall be presumed to have been effected
while in possession of material non public information
if transacted after such information came into
existence but prior to dissemination of such
information to the public.
-That this presumption shall be rebutted upon a
showing by the purchaser that the was not aware of
the material public information at the time of the
purchase or sale.
MATERIAL NON PUBLIC INFORMATION
-if 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
reasonable time for the market to absorb the
information;
b)would be considered by a reasonable person
important under the circumstance in determining his
course of action whether to buy or sell or hold a
security.
TENDER OFFER
-means publicly announced intention by a person
acting alone or in concert with other person to acquire
equity securities of a public company.
-it is an offer by the acquiring person to Sh of public
company for them to tender their share. It is used to
protect minority shareholder against any scheme that
dilutes the share value of their investment. Giving
them opportunity to sell their shares at the same price
as those of the majority shareholders.
PUBLIC COMPANY
-any corporation with a class of equity securities listed
on an Exchange with assets in excess of P50M and
having 200k or more holders, at least 200 of which are
holding at least 100k share of a class of its equity
securities.
When is Tender Offer Mandatory?
a) when any person who intends to acquire 35%
or more of equity shares in a public company.
b) Any person who intends to acquire 35% or
more of equity shares in a public company
within a 12 month , period.
c) If any acquisition of even less than 35% but
would result in ownership of over 50% of the
total outstanding equity securities of a public
company.
Exempt from Mandatory Tender Offer
1) Purchase in connection with privatization
2) Purchase in connection with corporate
rehabilitation
3) Merger or consolidation
MARGIN TRADING
-the customer purchases stock by advising only a
portion of the purchase price with the broker or
extending credit or making loan for balance due.
-the main purpose is to give the government an
effective method of reducing the aggregate amount of
the nations credit resources
PROHIBITIONS
A) A broker shall not extend credit to a customer
in an amount that exceeds 50% of the current
market value of the security at the time of the
transaction.
B) The margin maintained in a margin account of
a customer shall not be less than 25% of the
current market value of all securities
MANDATORY CLOSE OUT RULE
-when there is an insufficient margin, a call for
additional margin shall be issued promptly by the
Broker to the customer. A call shall be satisfied within
5 business days, a call for maintenance margin shall
be satisfied within 24 hours.
Violation of SRC
-filed with SEC
-if criminal in nature, the Sec shall indorse complaint
to DOJ for preliminary investigation and prosecution.
SEC power is not only purely administrative. It may
exercise other power as may be provided by law as
well as those which may be implied form necessary or
incidental powers.
SEC can issue Cease and Decease order without
prior hearing. It if will cause irreparable injury.
*** End of Corpo Code ***
Good luck Atty. (“,)
61/53