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SAN BEDA COLLEGE OF LAW, 2000-2001

MEMORY AID in COMMERCIAL LAWAny form of reproduction of this copy is strictly prohibited!!!

I. NEGOTIABLE INSTRUMENTSLAW (NIL)

NEGOTIABLE INSTRUMENT (NI)- it is a writtencontract for the payment of money which by itsform and on its face is intended as a substitutefor money and passes from hand to hand asmoney, so as to give the holder in due course(HDC) the right to hold the instrument free fromdefenses available to prior parties.

BRIEF HISTORY OF THE LAW:

Act No.2031, the Negotiable InstrumentsLaw, took effect on June 2,1911, and ispatterned after the U.S Uniform NegotiableLaw, which in turn is copied from theEnglish Bill of Exchange Act of 1882.

TWO DISTINCTIVE FEATURES ORCHARACTERISTICS OF NI:

1. NEGOTIABILITY- it is that attribute or property whereby a bill or note or check maypass from hand to hand similar to money, soas to give the holder in due course the rightto hold the instrument and to collect the sumpayable for himself free from defenses.

2. ACCUMULATION OF SECONDARYCONTRACTS- secondary contracts arepicked up and carried along with NegotiableInstruments as they are negotiated from oneperson to another; or in the course of negotiation of negotiable instruments, aseries of juridical ties between the partiesthereto arise either by law or by privity. Theindorsers become secondarily liable to theholder.

DISTINCTIONS:

NEGOTIABLE NON-NEGOTIABLE

1. must contain allrequisites of sec. 1

1. does not containall requisites of sec.1

2. transferable bynegotiation andassignment.

2. transferable byassignment notnegotiation

3. HDC can haverights better thanhis transferor

3. a transfereeacquires nobetter rightsthan histransferor

4. prior partieswarrant payment(secondarilyliability).

4. prior parties donot warrantpayment butmerely thelegality of histitle

CLASSES OF NI:

1. PROMISSORY NOTE (PN)-unconditional promise in writing by oneperson to another signed by the maker engaging to pay on demand or at a fixedor determinable future time, a sumcertain in money to order or to bearer.(Sec. 184, NIL)

2. BILL OF EXCHANGE (BE)-an unconditional order in writingaddressed by one person to another,signed by the person giving it, requiringthe person to whom it is addressed topay on demand or at a fixed or determinable future time a sum certainin money to order or to bearer (Sec.126, NIL) ; and

3. CHECK- a bill of exchange drawn on abank payable on demand (Sec. 185,NIL) .

DISTINCTIONS:NegotiableInstruments

NegotiableDocuments of

Title1. The subject ismoney

1. The subject isgoods

2. Is itself theproperty with value

2. The document isa mere evidence of title the things of value being thegoods mentioned inthe documents

3. Has all therequisites of Sec 1of NIL

3. Does not havethese requisites

4. A holder of NImay run after thesecondary partiesfor payment if dishonored by theparty primarilyliable

4. Intermediateparties are notsecondarily liable if the document isdishonored

5. A holder, if HDC,may acquire rights

over the instrumentbetter than hispredecessor

5. A holder cannever acquire rights

to the documentbetter than hispredecessors

Page 1Commercial Law Memory Aid Committee : NICEFORO AVILA JR. (Chairperson ), MA. HAZEL M. GUBATON (EDP) ,Ma. Leonora R. Tabladillo, Ma. Cecilia Taliman, Kristine Gayapa, Jaymie Parafina, Joanne Tatel, DariusManlangit, Maricel Eschavez, Marisol Caneja, Shey Alvarez, Malou Ababa, Joeffrey Ravago, Abet Rebosa, ZharoneJapson, Jinky Manguntalao, Lenie Basilio, Wilfred Babano, Alvin Carullo, Verny Camacho, Abraham Guiao, Michelle

Antonio, Jil, Reina, Macky Macaldo

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DISTINCTIONS:PROMISSORY

NOTEBILL OF

EXCHANGE1. unconditional

promise1. unconditional

order 2. involves 2

parties2. involves 3 parties

3. maker primarilyliable

3. drawer is onlysecondarily liable

4. only onepresentment: for payment

4. twopresentments: for acceptance andfor payment

DISTINCTIONS:BILL OF

EXCHANGECHECK

1. Not necessarilydrawn on a deposit.It is not necessarythat a drawer of aBOE should havefunds in the handsof the drawee.

1. It is necessarythat a check isdrawn on a deposit.Otherwise, therewould be fraud.

2. Death of adrawer of a BOEwith the knowledgeof the bank, does

not revoke theauthor of thebanker to pay.

2. Death of thedrawer of a check,with the knowledgeby the bank,

revokes theauthority of thebanker to pay.

3. May bepresented for payment within areasonable timeafter its lastnegotiationbecause it may befurther negotiated.

3. Must bepresented for payment within areasonable timeafter its issue.

ASSIGNMENT VS. NEGOTIATION

1. Assignment pertains to contracts in general;Negotiation pertains to negotiableinstruments.

2. One who takes an instrument by assignmenttakes the instrument subject to the defensesobtaining among the original parties;whereas a person who takes the instrumentby negotiation, who is a HDC, takes it freefrom personal defenses available among theparties.

OTHER FORMS OF NEGOTIABLEINSTRUMENTS:1. Certificate of deposit issued by banks,

payable to the depositor or his order, or tobearer

2. Trade acceptance3. Bonds, which are in the nature of promissory

notes

4. Drafts, which are bills of exchangedrawn by one bank upon another

LEGAL TENDER that kind of money which the lawcompels a creditor to accept in payment of his debt when tendered by the debtor in theright amount.NOTE: A negotiable instrument althoughintended to be a substitute for money, isgenerally not legal tender. Thus, a creditor isnot bound to accept commercial papers, likea check, in satisfaction of his demand,because a check, even if good whenoffered, does not meet the requirements of alegal tender.

INCIDENTS IN THE LIFE OF A NI:

1. Issue2. Negotiation3. Presentment for acceptance in certain

kinds of BOE4. Acceptance5. Dishonor by non-acceptance6. Presentment for payment7. Dishonor by non-payment8. Notice of Dishonor 9. Protest in some cases10. Discharge REQUISITES OF NEGOTIABILITY(SEC. 1):

1. Must be in writing and signed by themaker or drawer;2. Must contain an unconditional promise

or order to pay a sum certain in money;3. Must be payable on demand, or at a

fixed or determinable future time;4. Must be payable to order or to bearer;5. When the instrument is addressed to a

drawee, he must be named or otherwiseindicated therein with reasonablecertainty.

UNCONDITIONAL PROMISE OR ORDER-where the promise or order is made todepend on a contingent event, it isconditional, and the instrument involved isnon-negotiable. The happening of the eventdoes not cure the defect.

The unconditional nature of the promise or order is not affected by:a) An indication of a particular fund out of

which reimbursement is to be made, or a particular account to be debited withthe amount; or

b) A statement of the transaction whichgives rise to the instrument (Sec. 3, NIL)

But an order or promise to pay out of aparticular fund is NOT unconditional.



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DISTINCTIONS:Fund for

ReimbursementParticular Fund for

Payment1. Drawee pays

the payee fromhis own funds;afterwards, thedrawee payshimself from theparticular fundindicated.

1. There is only oneact- the draweepays directly fromthe particular fundindicated.Payment issubject to thecondition that thefund is sufficient.

2. Particular fundindicated is NOTthe direct sourceof payment butonly the sourceof reimburse-ment.

2. Particular fundindicated is thedirect source of payment.

3. Indication in theinstrument doesnot affect theunconditionalnature of thepromise or order.

3. Indication in theinstrument makesthe promise or order conditional.

CERTAINTY OF SUM (Sec. 2, NIL)

The instrument is still negotiable and it ispayable--a) With interest; or b) By stated installments; or c) By stated installments with an acceleration

clause; ACCELERATION CLAUSE- renders wholedebt due and demandable upon failure of obligor to comply with certain conditions.

d) With exchange; or e) With cost of collection or attorneys fees.

PAYABLE IN MONEY

if some other act is required other thanpayment of money, the instrument is notnegotiable (Sec. 5, NIL).

Exception: Gives option to creditor/holder tochoose another in lieu of money.

PAYABLE ON DEMAND (Sec. 7, NIL)

an instrument is payable on demand:a) where expressed to be payable on demand,

at sight or on presentation;

b) where no period of payment is stated;c) where issued, accepted, or indorsed after

maturity (only as between immediateparties).

DETERMINABLE FUTURE TIME(Sec. 4, NIL)

An instrument is payable at a

determinable future time when payable:a) At a fixed period after date or sight;b) On or before a fixed or determinable

future time specified therein; or c) On or at a fixed period after the

occurrence of a specified event, which iscertain to happen, though the time of happening be uncertain.

PAYABLE TO ORDER (Sec. 8, NIL)

The instrument is payable to order where it is drawn payable to the order of a

specified person or to him or to his order.PAYABLE TO BEARER (Sec. 9, NIL)

The instrument is payable to bearer:a) When it is expressed to be so payable;

or b) When it is payable to a person named

therein or to bearer; or c) When it is payable to the order of a

fictitious or non-existing person, andsuch fact was known to the personmaking it so payable; or

d) When the name of the payee does notpurport to be the name of any person; or e) When the only or last indorsement is an

indorsement in blank.

NOTE: An instrument originally payable tobearer can be negotiated by mere deliveryeven if it is indorsed specifically. If it isoriginally a BEARER instrument, it willalways be a BEARER instrument.

As opposed to an original order instrumentbecoming payable to bearer, if the same isindorsed specifically, it can NO LONGER benegotiated further by mere delivery, it has tobe indorsed.

REAL DEFENSE - those that attach to theinstrument and are available against allholders, whether in due course or not. PERSONAL DEFENSE - or equitabledefenses are available only against theholder not in due course who stands inprivity with the party who is entitled to set itup or those who are not or do not have therights of a holder in due course.

EXAMPLES OF PERSONALDEFENSES:1. Absence or failure of consideration,

partial or total.



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2. Want of delivery of complete instrument.3. Insertion of wrong date in an instrument,

where it is payable at a fixed period after date and it is issued undated or where itis payable at a fixed period after sightand the acceptance is undated.

4. Filling up of blank contrary to authoritygiven or not within reasonable time,where the instrument is delivered.

5. Fraud in inducement.6. Acquisition of instrument by force,

duress, or fear.7. Acquisition of the instrument by unlawful

means.8. Acquisition of the instrument for an illegal

consideration.9. Negotiation in breach of faith.10. Negotiation under circumstances that

amount to fraud.11. Mistake.12. Intoxication according to better authority.13. Ultra vires acts of corporations where the

corporation has the power to issuenegotiable paper but the issuance wasnot authorized for the particular purposefor which it was issued.

14. Want of authority of agent where he hasapparent authority.

15. Insanity where there is no notice of insanity on the part of the one contractingwith the insane person.

16. Illegality of contract where form or consideration is illegal.

EXAMPLES OF REAL DEFENSES :1. Alteration2. Want of delivery of incomplete instrument.3. Duress amounting to forgery.4. Fraud in factum or fraud in esse contractus.5. Minority6. Marriage in the case of a wife7. Insanity where the insane person has a

guardian appointed by the court.8. Ultra vires acts of a corporation, where the

corporation is absolutely prohibited by itscharter or statute from issuing anycommercial paper under any circumstances.

9. Want of authority of agent.10. Execution of instrument between public

enemies.11. Illegality of contract where it is the contract

or instrument itself which is expressly madeillegal by statute.

12. Forgery.

EFFECTS OF DEFENSES

A. EFFECTS OF INCOMPLETE BUTDELIVERED NI (SEC. 14, NIL):

1. Holder has prima facie authority to fill up theinstrument.

2. Completion within reasonable time andaccording to authority; and

3. HDC can enforce such despitedeficiency.

MAKER DRAWER ACCEPTOR

1. engagesthat he willpay itaccordingto is tenor;

1. engagesthat on duepresentment,theinstrumentwill beaccepted, or paid, or bothaccording toits tenor;

1.engagesthat he willpayaccording tothe tenor of his accept-ance;

2.admits

theexistence of the payee;

2.admits the

existence of the payee;

2. admits the

existence of the drawer,the genuine-ness of hissignature,and hiscapacity &authority todraw theinstrument;

3. admitspayeescapacity to

indorse

3. admitspayeescapacity to

indorse

3. admits theexistence of the payee

and hiscapacity toindorse.

B. EFFECTS OF INCOMPLETE ANDUNDELIVERED NI (SEC. 15, NIL):

if completed and delivered withoutauthority, not a valid contract against aperson who has signed before delivery of the contract even in the hands of HDC butsubsequent indorsers are liable.

C. EFFECTS OF COMPLETE BUTUNDELIVERED NI (SEC. 16, NIL):

1. Between immediate parties and remoteparties not a HDC, must be anauthorized delivery.

2. As to HDC, all prior deliveries areconclusively presumed valid; and

3. If instrument is not in the hands of drawer/maker, valid and intentionaldelivery is presumed.



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COMPARISON OF SECTIONS 14, 15 AND 16Section 14 Section 15 Section 16

COMPLETENESSa. wanting in any material particular

b. blank paper with signatureincomplete complete

DELIVERY delivered undelivered Undelivered

Note: Delivery may be made for a conditional or for a special purpose only and not for the purposeof transferring the property in the instrument

AUTHORITY OFPERSON INPOSSESSION

a. prima facie authority to complete it by filling upthe blanks therein

b. signature operates as a prima facie authority tofill up it up as such for any amount

No authority to complete and / or neg otiateinstrument

May negotiate if delivered to him by or under theauthority of the party making, indorsing, drawing or accepting , as the case may be.

WHENENFORCEABLE

If filled up strictly in accordance with authority givenand within a reasonable time

Not enforceable When delivery is made by or under authorit y of the party making, indorsing, drawing or accepti ng , asthe case may be.

KIND OF DEFENSE Personal Real Personal

RIGHTS OF HOLDER If holder in due course, he can enforce the instrumentas completed against parties prior or subsequent to thecompletion

If not a holder in due course, he can enforce the

instrument as completed only against partiessubsequent to the completion but not against those prior thereto.

None in the hands of the holder. However, th einvalidity of the above instrument is only withreference to parties whose signatures appear onthe instrument prior to delivery because as to

parties whose signatures appear on the i nstrument

after delivery, the instrument is valid.

Can enforce the instrument. Note: Where the instrument is in the hands of aholder in due course , a valid delivery thereof by all

parties prior to him so as to make them liable tohim is conclusively presumed. Where the

instrument is no longer in the possession of a partywhose signature appears thereon, a valid andintentional delivery to him is presumed until thecontrary is proved.

Page 5Commercial Law Memory Aid Committee : NICEFORO AVILA JR. (Chairperson ), MA. HAZEL M. GUBATON (EDP) ,Ma. Leonora R. Tabladillo, Ma. Cecilia Taliman, Kristine Gayapa, JaymieParafina, Joanne Tatel, Darius Manlangit, Maricel Eschavez, Marisol Caneja, Shey Alvarez, Malou Ababa, Joeffrey Ravago, Abet Rebosa, Zharone Japson, Jinky Manguntalao, Lenie Basilio, Wilfred Babano, Alvin Carullo, Verny Camacho, Abraham Guiao, Michelle Antonio, Jil, Reina, Macky Macaldo

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D. EFFECT OF ABSENCE OR FAILUREOF CONSIDERATION (SEC. 28, NIL):

Personal defense to the prejudiced partyand available against any person not HDC.

E. FORGERY

counterfeit making or fraudulent alteration of any writing, which may consist of:1. signing of another name with intent to

defraud; or 2. alteration of an instrument in the name,

amount, name of payee, etc. with intent todefraud.

EFFECTS OF FORGERY (SEC. 23, NIL) :

signature (not instrument itself andsubsequent indorsers) is wholly inoperative, andno right to retain the instrument, or to give adischarge therefor, or to enforce paymentthereof against any party to it, is acquiredthrough or under such signature UNLESS theparty against whom it is sought to enforce suchright is precluded from setting up the forgery or want of authority.

Persons precluded from setting up forgery:1. those who warrant or admit the genuineness

of the signature in question. This includesindorsers, persons negotiating by deliveryand acceptors.

2. Those who by their acts, silence, or negligence, are estopped from setting up thedefense of forgery.

VALUABLE CONSIDERATION

In general, it is said to consist either insome right, interest, profit or benefit, accruing tothe party who makes the contract, or someforebearance, detriment, loss, responsibility,act , labor, or service on the other side.

ACCOMMODATION - legal arrangementunder which a person called the accommodationparty, lends his name and credit to another called the accommodated party without anyconsideration. REQUISITES OF ACCOMMODATION (SEC. 29, NIL):

1. accommodation party must signs as maker,drawer, acceptor, or indorser;

2. no value is received by the accommodationparty from the accommodated party; and3. purpose is to lend the name.

EFFECTS OF ACCOMMODATION (SEC.29, NIL):

person to whom instrument thus executed issubsequently negotiated has a right of recourse

against the accommodation party inspite of theformers knowledge that no considerationpassed between the accommodation andaccommodated parties.

NOTE: A corporation cannot act as anaccommodation party. The issue or indorsementof negotiable instrument by a corporation withoutconsideration and for the accommodation of another is ultra vires. (Crisologo vs. CA, 117SCRA 594).

RIGHTS AND LEGAL POSITION OFACCOMODATION PARTY

1. AP is generally regarded as SURETY for theparty accomodated

2. When AP make payment to holder of thenote, they have the right to sue theaccomodated party for reimbursement

LIABILITY OF ACCOMODATION PARTY

liable on the instrument to a holder for valuenotwithstanding such holder at the time of thetaking of the instrument knew him to be only anaccomodation party

RIGHTS OF ACCOMODATION PARTYAGAINST EACH OTHER

demand from principal debtor reimbursement of the amount which he had paidon the promissory note demand contribution from his co-accomodation maker without first directing hisaction against the principal debtor provided:

1. he made the payment by virtue of judicial demand

2. the principal debtor is insolvent

F. MATERIAL ALTERATION

any alteration which changes the date, sumpayable, time or place of payment, number or relation of parties, or medium or currency of payment, or adds a place of payment wherenone is specified or which alters the effect of theinstrument in any respect . (PNB vs. CA)

EFFECTS OF MATERIAL ALTERATION(SECS. 124 & 125, NIL):

avoids the instrument except as against theparty who made, authorized, or assented to thealteration and subsequent indorsers. HDC canenforce it accordingly to its original tenor.



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LIABILITIES OF PARTIES

1. PARTIES PRIMARILY LIABLE

a. MAKER (Sec. 60, NIL)(i) engages to pay according to the

tenor of the instrument; and(ii) admits the existence of the

payee and his capacity to indorse.b. ACCEPTOR OR DRAWEE (Sec. 62,

NIL)(i) engages to pay according to the

tenor of his acceptance;(ii) admits the existence of the

drawer, the genuineness of his

signature and his capacity andauthority to draw the instrument;and

(iii) admits the existence of thepayee and his capacity to indorse.

2. PARTIES SECONDARILY LIABLE

a. DRAWER (Sec. 61, NIL)(i) Admits the existence of the

payee and his capacity to indorse.(ii) Engages that the instrument will

be accepted or paid by the party

primarily liable; and(iii) Engages that if the instrument isdishonored and proper proceedings are brought, he willpay to the party entitled to be paid.

b. GENERAL INDORSER (Sec. 66, NIL)(i) warrants ---

(1) genuineness of theinstrument;

(2) his good title to it;(3) capacity to contract of prior

parties; and(4) instrument is valid and

subsisting.(ii) engages that the instrument will be

accepted or paid by the partyprimarily liable; and

(iii) engages that if the instrument isdishonored and proper proceedings are taken he will payto the party entitled to be paid.

c. IRREGULAR INDORSER one whoaffixes his signature in blank on aninstrument before delivery (Sec. 64,NIL).(i) instrument payable to the order

of a 3 rd person-liable to payee and subsequent parties(ii) instrument payable to maker or

drawer

-liable to all parties subsequent to themaker or drawer.(iii) irregular indorser signs for

accommodation of payee.

-liable to all parties subsequent to payee.

3. PARTIES WITH LIMITED LIABILITY (Sec.65, NIL; METROPOL FINANCING VS.SAMBOK, 120 SCRA 864).

a. QUALIFIED INDORSER- warrants that(i) instrument is genuine and in all

respects what it purports to be;(ii) he has good title to it;(iii) all prior parties had capacity to

contract;(iv) he has no knowledge of any fact

which would impair the validity of the instrument or render itvalueless.

b. PERSONS NEGOTIATING BYDELIVERY

(i) warranties same as those of qualified indorsers; and

(ii) warranties extend to immediatetransferee only.

INDORSEMENT - legal transaction effected bythe writing of one's own name at the:

a. back of the instrumentb. upon a paper (allonge) attached

thereto with or without additionalwords specifying the person towhom or to whose order theinstrument is to be payable wherebyone not only transfers one legal titleto paper transferred but likewiseenters into an implied guaranty thatthe instrument will be duly paid(Section 31, NIL)

GENERAL RULE: Indorsement must be of theentire instrument

EXCEPTION: Where instrument hasbeen paid in part, it may be indorsed as to theresidue (Section 32, NIL).

KINDS OF INDORSEMENT

A. SPECIAL - specifies the person to whom or to whose order the instrument is to bepayable (Section 34)

B. BLANK - specifies no indorsee;1. may be negotiated by delivery2. may be converted to special

indorsement by writing over thesignature of indorser in blank anycontract consistent with character of indorsement (Sections 34 and 35)



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C. ABSOLUTE - one by which indorser bindshimself to pay:1. upon no other condition than failure of

prior parties to do so2. upon due notice to him of such failure

D. CONDITIONAL - indorsement subject to thehappening of a contingent event (Section39)

E. RESTRICTIVE1. when it PROHIBITS further negotiation

of the instrument;2. when it CONSTITUTES the indorsee the

agent of the indorser 3. when it VESTS the title in the indorsee

in trust for or to the use of other persons(Section 36)

F. QUALIFIED - made by adding to theindoser's signature words like "sansrecourse", "without recourse", "indorser notholden", "at the indorser's own risk", etc.

G. JOINT - indorsement payable to 2 or morepersons (Section 38)

H. SUCCESSIVEI. IRREGULARJ. FACULTATIVE

REQUISITES BEFORE SECONDARYLIABILITY ATTACHES:

1. presentment for payment in notes andpresentment for acceptance and/or paymentin bills of exchange.

2. Dishonor by non-payment in notes anddishonor by non-acceptance and/or non-payment in bills of exchange; and

3. Notice of dishonor to secondary parties.

RECOURSE- resort to a person secondarilyliable after default of person primarily liable.

NEGOTIATION- transfer of instrument fromone person to another to constitute the

transferee as holder thereof (Sec. 30, NIL).CONDITIONAL INDORSEMENT - right of theindorsee is made to depend on the happening of a contingent event. Party required to pay maydisregard the conditions (Sec. 39, NIL).

SPECIAL INDORSEMENT - name of indorseespecifed ( Sec. 34, NIL ).

RESTRICTIVE INDORSEMENT - limits theright of indorsee by restricting further negotiation; giving the indorsee lesser right than

those under a general indorsement when aninstrument negotiable by delivery is indorsed toholder --- becomes liable as indorsee (Sec. 36-37, NIL ).

An indorsement is restrictive, which either:

a) prohibits further negotiation of theinstrument; or

b) constitutes the indorsee the agent of theindorser; or

c) vests the title in the indorsee in trust for or tothe use of some other person. But mere

absence of words implying power tonegotiate does not make an indorsementrestrictive.

HOLDER IN DUE COURSE (SEC. 52, NIL):

1. Instrument is complete and regular upon itsface;

2. Became a holder before it was overdue andhad no notice that it has been previouslydishonored;

3. For value and in good faith; and

4. At the time he took it, he had no notice of any infirmity in the instrument nor defect inthe title of the person negotiating it.

DISTINCTIONS:Negotiating by

Mere delivery or by QualifiedIndorsement

GeneralIndorser

1. he has goodtitle to it;

1. he hasgood title toit;

2. all prior partieshad capacity tocontract;

2. all prior parties hadcapacity tocontract;

3. he has noknow- ledge of any fact whichwould impair the validity of the instrumentor render itvalueless.

4. theinstrumentis, at thetime of hisindorsement valid andsubsisting.

PRESENTMENT the production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or theproduction of a p.n. to the party liable for thepayment of the same. (Section 70, NIL)

Presentment for payment consists of:1. personal demand for payment at the proper

place;2. readiness to exhibit the instrument if

required, and to receive payment and tosurrender the instrument if the debtor is

willing to pay.

WHEN PRESENTMENT SHOULD BEMADE (Section 71, NIL)



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1. Demand instrument within reasonable timeafter its issue

2. Bill of exchange payable on demand: withinreasonable time after its last negotiation

3. Instrument payable on a specified date: onthe date it falls due.

WHAT CONSTITUTES A SUFFICIENTPRESENTMENT1. made by the holder or any person

authorized to receive payment on his behalf;

2. at a reasonable hour on a business day;3. at a proper place;4. to the person primarily liable or if he is

absent or inaccessible, to any person foundat the place where the presentment is made.

PRESENTMENT FOR PAYMENT IS MADE

AT A PROPER PLACE WHERE:

1. it is presented at the place specified;2. no place is specified, and the address of the

person to make payment is given, and it isthere presented;

3. no place specified, no address is given,presentment may be made at the usualplace of business or residence of theperson to make payment;

4. in any other case, if presented to the personto make payment wherever he can be found,or if presented at his last known place of

business or residence. (Section 73, NIL)

THE PURPOSE OF EXHIBITION IS TOENABLE THE DEBTOR TO :

1. determine the genuiness of the instrumentand the right of the holder to receivepayment; and

2. to enable him to reclaim possession uponpayment. (Section 74, NIL)

WHEN EXHIBITION EXCUSED1. when debtor does not demand to see the

instrument but refuses payment on someother grounds, and

2. when the instrument is lost or destroyed.

Instrument payable at a bank must be madeduring banking hours unless there are no fundsto meet it at any time during the day,presentment at any hour before the bank isclosed on that day is sufficient. If the person liable is dead, presentmentmay be made to his personal representative.

PRESENTMENT FOR PAYMENT IS NOTREQUIRED:

1. in order to charge the drawer where he hasno right to expect or require that the draweeor acceptor will pay the instrument;

2. in order to charge an indorser when theinstrument was made or accepted for hisaccommodation and he has no reason toexpect that the instrument will be paid if presented.

WHEN DELAY IN MAKINGPRESENTMENT OR OF GIVING NOTICEIS EXCUSED:

1. when caused by circumstances beyond thecontrol of the holder; and

2. not imputable to his default, misconduct, or negligence.

WHEN PRESENTMENT FOR PAYMENTIS EXCUSED:

1. after exercise of reasonable diligence, itcannot be made;

2. drawee is a fictitious person;3. express or implied waiver

THE INSTRUMENT IS DISHONORED BYNON-PAYMENT WHEN:

1. It is duly presented for payment andpayment is refused or cannot be obtained;

2. Presentment is excused and the instrument

is overdue and unpaid. When instrument is dishonored by non-payment, there is an immediate right of recourseby the holder against persons secondarily liable.However, notice of dishonor is generallyrequired.

Every negotiable instrument is payable atthe time fixed therein without grace.

REQUISITES OF PAYMENT IN DUECOURSE:

1. Payment must be made at or after maturity.2. Payment must be made to the holder.3. Payment must be made in good faith and

without notice that the holders title isdefective.

Good faith refers to the maker or acceptor and not to the holder.

NOTICE OF DISHONOR- notice given by holder or his agent to party or parties secondarily liablethat instrument was dishonored by non-acceptance by drawee of a bill, or by non-payment by acceptor of a bill or by non-paymentby maker of a note. (Sec. 89, NIL).



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REQUISITES OF NOTICE OF DISHONOR:

1. given by holder or his agent, or by an partywho may be compelled by the holder to pay(Sec. 90, NIL) .

2. Given to secondary party or his agent (Sec.97, NIL) .

3. Given within the periods provided by law(Sec. 102, NIL) ; and

4. Given at the proper place (Sec. 103, 104,NIL) .

WHEN NOTICE OF DISHONOR ISDISPENSED WITH:

1. when party to be notified knows about thedishonor, actually or constructively (Secs.114-117, NIL) ;

2. if waived (Sec. 109, NIL) ; and3. when after due diligence, it cannot be given

(Sec. 112, NIL) .

How given:

1. by bringing verbally or 2. by writing to the knowledge of theperson liable the fact that a specifiedinstrument, upon proper proceedings taken,

has not been accepted or has not been paid,and that the party notified is expected to payit.

To whom given:

1. Non-acceptance (bill) to personssecondarily liable, namely, the drawer andindorsers as the case may be.2. Non-payment (both bill and note) indorsers.

NOTE: Notice must be given to persons

secondarily liable. Otherwise, such partiesare discharged. Notice may be given to theparty himself or to his agent.

WHERE INSTRUMENTS PAYABLE ININSTALLMENTS:

1. No acceleration clause failure to givenotice of dishonor on a previous installmentdoes not discharge drawers and indorsersas to succeeding installments.

2. With acceleration clause failure to givenotice as to previous installment will

discharge the persons secondarily liable asto the succeeding installments.

By whom given:

1. the holder

2. another on behalf of the holder 3. any party to the instrument who may be

compelled to pay it to the holder, and whowould have a right to reimbursement fromthe party to whom the notice is given.

Notice of dishonor given by or on behalf of a holder inures to the benefit of:

1. all parties prior to the holder, who havea right of recourse against the party towhom the notice is given; and

2. all holders subsequent to the holder giving notice.

Notice of dishonor given by or on behalf of a party entitled to give notice inures to thebenefit of:

1. the holder; and2. all parties subsequent to the party to

whom notice is given.

Where an instrument is dishonored in thehands of an agent, he can do either of thefollowing:

1. directly give notice to personssecondarily liable thereon; or

2. give notice to his principal. In suchcase, he must give notice within the timeallowed by law as if he were a holder.

A party giving notice is deemed to havegiven due notice where:

1.the notice of dishonor is duly addressed,and

2.deposited in the post-office, even whenthere is miscarriage of mail.

Notice is deemed to have been deposited inthe post office when deposited in any branchpost-office or in any letter box under the controlof the post office department. Where a party receives notice of dishonor,he has, after the receipt of such notice, thesame time for giving notice to antecedent partiesthat the holder has after the dishonor.

Notice may be waived either before the timeof giving notice, or after the omission to give duenotice. Waiver may be expressed or implied.

As to who are affected by an express waiver depends on where the waiver is written.

1. if it appears in the body or on the faceof the instrument, it binds all parties; but

2. if it is written above the signature of anindorser, it binds him only.

PROTEST - is the formal instrument executedusually by a notary public certifying that the legal



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steps necessary to fix the liability of the draweeand the indorsers have been taken. Where protest is waived, presentment andnotice of dishonor are also deemed waived. Butwhere the notice of dishonor is waived,presentment is not waived.

Notice is dispensed with when, after theexercise of reasonable diligence, it cannot begiven or does not reach the parties sought to becharged. Notice of dishonor is not required to begiven to the drawer in any of the ff. cases:

1. drawer and drawee are the same;2. drawee is a fictitious person or not

having the capacity to contract;3. drawer is the person to whom the

instrument is presented for payment;4. the drawer has no right to expect or

require that the drawee or acceptor willhonor the instrument;

5. where the drawer has countermandedpayment.

Notice of dishonor is not required to begiven to an indorser in either of the ff. cases:

1. drawee is a fictitious person or does nothave the capacity to contract, andindorser was aware of that fact at thetime he indorsed the instrument;

2. indorser is the person to whom theinstrument is presented for payment;

3. instrument was made or accepted for hisaccommodation.

If an instrument is not accepted by thedrawee, there is no sense presenting it again for payment, and notice of dishonor must at oncebe given. If there was acceptance, presentmentfor payment is still required and if payment isrefused, there is a need for notice of dishonor.

An omission to give notice of dishonor bynon-acceptance does not prejudice the rights of a holder in due course subsequent to theomission.

Protest is necessary only in case of foreignbills of exchange which have been dishonoredby non-acceptance or non-payment, as the casemay be. If it is not so protested, the drawer andindorsers are discharged

FOREIGN BILL OF EXCHANGE:

1. Drawn in the Philippines but payable outsidethe Philippines.2. Payable in the Philippines but drawn outside

the Phillipines.

DISCHARGE OF NEGOTIABLEINSTRUMENT (Section 119, NIL):

Discharge of an instrument- means arelease of all parties, whether primary or secondary, from the obligations arisingthereunder. It renders the instrument withoutforce and effect and, consequently, it can nolonger be negotiated.

WHEN A NEGOTIABLE INSTRUMENT ISDISCHARGED:

1. By payment I due course by or on behalf of the principal debtor;

2. Payment by accommodated party;3. Intentional cancellation by the holder;4. By any act which will discharge a simple

contract for the payment of money;5. When the principal debtor becomes theholder of the instrument at or after maturityin his own right.

WHEN A PERSON SECONDARILYLIABLE IS DISCHARGED (Section 120,NIL):

1. By any act which discharges the instrument;2. By the intentional cancellation of his

signature by the holder;3. By the discharge of a prior party;

4. By a valid tender of payment made by aprior party;5. By the release of the principal debtor, unless

the holders right of recourse against theparty secondarily liable is expresslyreserved;

6. By any agreement binding upon the holder to extend the time of payment or topostpone the holders right to enforce theinstrument.

In the following cases, the agreement toextend the time of payment does not discharge

a party secondarily liable:a) where the extension of time isconsented to by such party;

b) where the holder expressly reserves hisright of recourse against such party.

Payment at or after maturity by a partysecondarily liable does not discharge theinstrument. It only cancels his own liability andthat of the parties subsequent to him. (Section121, NIL).

EFFECT OF RENUNCIATION (Section

122, NIL): 1. A renunciation in favor of a secondary party

may be made by the holder before, at or after maturity of the instrument. The effectis to discharge only such secondary party



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and all parties subsequent to him but theinstrument itself remains in force.

2. A renunciation in favor of the principaldebtor may be effected at or after maturity.The effect is to discharge the instrument andall parties thereto provided the renunciation

is made unconditionally and absolutely.

NOTE: In either case, renunciation doesnot affect the rights of a holder in due coursewithout notice.

Cancellation of an instrument includestearing, erasure, obliteration, or burning. It is notlimited to writing of the word cancelled, or paid, or drawing of criss-cross lines across theinstrument (Section 123, NIL).

MATERIAL ALTERATION - any change inthe instrument which affects or changes theliability of the parties in any way.

EFFECT OF ALTERATION:

1. Alteration by a party material alteration by the holder is todischarge the instrument and all prior partiesthereto who did not give their consent tosuch alteration.NOTE : Since no distinction is made, it doesnot matter whether it is favorable or unfavorable to the party making thealteration. The intent of the law is topreserve the integrity of the negotiableinstruments.

2. Alteration by a stranger it is called spoliation.

3. The right of holder in due course A material alteration avoids theinstrument in the hands of one who is not aholder in due course as against any prior party who has not assented to the alteration. If an altered instrument is negotiated to

a HIDC, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent.

CHANGES IN THE FOLLOWINGCONSTITUTES MATERIALALTERATIONS:

1. date2. sum payable, either for principal or interest3. time or place of payment4. number or relations of the parties5. medium or currency in which payment is to

be made6. that which adds a place of payment where

no place of payment is specified7. any other change or addition which alters

the effect of the instrument in any respect.

ACCEPTANCE AND PRESENTMENT FOR

ACCEPTANCE (Secs. 132-151, NIL) Acceptance of a bill is the signification bythe drawee of his assent to the order of thedrawer. It is the act by which the draweemanifests his consent to comply with the requestcontained in the bill of exchange directed to himand it contemplated an engagement or promiseto pay.

WHEN PRESENTMENT FORACCEPTANCE IS REQUIRED:

1. where the bill is payable after sight, or whenit is necessary in order to fix the maturity of the instrument;

2. where the bill expressly stipulates that it

shall be presented for acceptance;

3. where the bill is drawn payable elsewherethan at the residence or place of business of the drawee.

NOTE: In all the above cases, the holder must

either present the bill for acceptance or negotiate it within a reasonable time; otherwise,the drawer and all indorsers are discharged.

FORM OF PRESENTMENT FORACCEPTANCE:

1. must be made by or no behalf of the holder;2. at a reasonable hour or a business day;3. before the bill is overdue; and4. to the drawee or some person authorized to

accept or refuse to accept on his behalf.

WHEN PRESENTMENT EXCUSED:

1. where the drawee is dead, or hasabsconded, or is a fictitious person nothaving capacity to contract by bill.

2. after exercise of reasonable diligence,presentment cannot be made;

3. although presentment has been irregular,acceptance has been refused on some other ground.

WHERE BILL DISHONORED BY NON-ACCEPTANCE:

1. when it is duly presented for acceptance andsuch an acceptance is refused or cannot beobtained; or



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2. when presentment for acceptance isexcused, and the bill is not accepted.

If bill is duly presented for acceptance and itis not accepted within the prescribed time, theperson presenting it must treat the bill asdishonored by non-acceptance or he loses theright of recourse against the drawer andindorsers.

When a bill is dishonored by non-acceptance, an immediate right of recourseagainst the drawers and indorsers accrues tothe holder and no presentment for payment isnecessary.

There is implied acceptance if after 24hours, the drawee fails to return the instrument.He is also deemed to have accepted theinstrument when he destroys the same.

KINDS OF ACCEPTANCE:

1. GENERAL- assents without qualification tothe order of the drawer.

2. QUALIFIED- which in express terms variesthe effect of the bills as drawn.

a) Conditional- makes payment by theacceptor dependent on the fulfillment of a condition therein stated.

b) Partial- an acceptance to pay part onlyof the amount for which the bill is drawn.

c) Local- an acceptance to pay only at aparticular place.

d) Qualified as to timee) The acceptance of some one or more of

the drawees but not of all.

PROTEST (Secs. 152-160)

PROTEST IS REQUIRED FOR 2 GOOD

REASONS:

1. for uniformity in international transactionsbec. most countries require it; and

2. it furnishes authentic and satisfactoryevidence of the dishonor to the drawer, whofrom his residence abroad, wouldexperience difficulty in verifying the matter and thus be compelled to rely on therepresentation of the holder.

PROTEST MAY BE MADE BY:

1. a notary public; or 2. any respectable resident of the place where

the bill is dishonored, in the presence of 2 or more credible witnesses.

Protest for better security- is one made bythe holder of a bill after it has been accepted butbefore it matures, against the drawer andindorsers, where the acceptor has beenadjudged a bankrupt or an insolvent, or hasmade an assignment for the benefit of thecreditors.

ACCEPTANCE FOR HONOR(Secs. 161-170)

Acceptance for honor- is an undertaking bya stranger to a bill after protest for the benefit of any party liable thereon or for the honor of theperson for whose account the bill is drawn whichacceptance inures also to the benefit of allparties subsequent to the persons for whosehonor it is accepted, and conditioned to pay thebill when it becomes due if the original draweedoes not pay it.

REQUISITES OF ACCEPTANCE FORHONOR:

1. the bill must have been protested for dishonor by non-acceptance or for better security;

2. the acceptor for honor must be a stranger and not a party already liable on theinstrument;

3. bill must not be overdue;

4. acceptance for honor must be with theconsent of the holder of the instrument.

FORMAL REQUISITES:

1. must be in writing;2. must indicate that it is an acceptance for

honor;3. signed by the acceptor for honor;4. must contain an express or implied promise

to pay money;5. the accepted bill for honor must be delivered

to the holder.

PAYMENT FOR HONOR (Secs.171-177)

Payment for honor- is payment made by aperson, whether a party to the bill or not, after ithas been protested for non-payment, for thebenefit of any party liable thereon or for thebenefit of the person for whose account it was

drawn.

REQUISITES OF PAYMENT FOR HONOR:



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1. the bill has been dishonored by non-payment;

2. it has been protested for non-payment;3. payment supra protest (another term for

payment for honor because prior protest for non-payment is required) is made by any

person, even by a party thereto;4. the payment is attested by a notarial act of honor which must be appended to theprotest or form an extension of it;

5. the notarial act must be based on thedeclaration made by the payee for honor or his agent of his intention to pay the bill for honor and for whose honor he pays.

NOTE: If the above formalities are no compliedwith, payment will operate as a mere voluntary

payment and the payer will acquire no right tofull reimbursement against the party for whosehonor he pays.

In payment for honor, the payee cannotrefuse payment. If he refuses, he cannotrecover from the parties who would have beendischarged had he accepted the same. Inacceptance for honor, the holders consent isnecessary.

The payer for honor is given the right toreceive both the bill and the protest obviously to

enable him to enforce his rights against theparties who are liable to him.

BILLS IN SET (Secs. 178-183)

BILL IN SET is one composed of several parts,each part being numbered and containing a

reference to the other parts, the whole of theparts constituting but one bill.

Purpose: Are usually availed of in caseswhere a bill had to be sent to a distant placethrough some conveyance. If each part is sentby different means of conveyances, the chancethat at least one part of the set would reach itsdestination would be greater.

Rights of holders where parts arenegotiated separately:

1. if both are HIDC, the holder whosetitle first accrues is considered the trueowner of the bill.

2. But the person who accepts or pays indue course shall not be prejudiced.

Obligations of holder who indorses 2 or more parts of the bill in set:

1. the person shall be liable on everysuch part;

2. every indorser subsequent to him isliable on the part he has himself indorsed, as if such parts wereseparate bills.

LEGAL TENDER (R.A. 7653, NEWCENTRAL BANK ACT)

Section 52. Legal Tender. All notes and coinsissued by the Bangko Sentral shall be fullyguaranteed by the Government of the Republicof the Philippines and shall be legal tender in the

Philippines for all debts, both public and private.PROVIDED, however, That, unless otherwisefixed by the Monetary Board, coins shall be legaltender in amounts not exceeding Fifty pesos(P50.00) for denominations of Twenty-fivecentavos and above, and in amounts notexceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.

R.A. 8183 (Repealed R.A. 529, the UniformCurrency Act- Foreign currency as mode of payment)

SECTION 1. All monetary obligations shall besettled in the Philippine currency which is legaltender in the Philippines. However, the partiesmay agree that the obligation or transaction shallbe settled in any other currency at the time of payment.



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II. CORPORATION CODE

CORPORATION- artificial being created byoperation of law having the right of succession,and the powers, attributes and propertiesexpressly authorized by law and incident to itsexistence (Sec. 2).

THEORIES ON THE FORMATION OFA CORPORATION:

1. CONCESSION THEORY juristic principlein the creation of corporation, under which acorporation is an artificial creature withoutany existence until it has received theimprimatur of the state acting according tolaw, through the SEC.

2. THEORY OF CORPORATE ENTERPRISEOR ECONOMIC UNIT corporation notmerely an artificial being, but more as anaggrupation of persons doing business, or an underlying business unit.

3. ETHNOLOGICAL THEORY Corporateidea is the product of no one people, and noone country but on the contrary, developed

more or less independently, in varying formsamong the several ethnological units.

4. IMITATIVE THEORY OF JURALDEVELOPMENT the formation of privatecorporation for certain purposes is permittedon the condition that they did not operate inviolation of laws of the state.

FRANCHISES OF CORPORATION

1. PRIMARY FRANCHISE the franchise toexist as a corporation.

2. SECONDARY FRANCHISE right or

privilege conferred upon existingcorporation, such as to use the streets of amunicipality to lay pipes or tracks, or operatea messenger and express delivery service.

DISTINCTIONS :

PRIMARY SECONDARY1. refers to the

franchise of being or existing as acorporation, i.e., possessinga unity andcontinuity of existence

1. refers to theexercise of rightsas for example, the rightof eminentdomain or thepartialappropriation of public property

2. vested in theindividuals whocompose thecorporation andis essential to acorporation de

jure.

2. It is deemed tovest in thecorporation

3. it cannot be soldor transferredbecause it isinseparable fromthe corporationitself.

3. It may be sold or transferred; sueor be sued;subject to sale onexecution, subjectto levy providedsuch sale isdecreed or ordered in

judgment and iseffective onlywhen sale isconfirmed bycourt often duenotice.

ATTRIBUTES OF A CORPORATION:

1. It is an artificial being.2. It is created by operation of law.3. It enjoys the right of succession.4. It has the powers, attribute and properties

expressly authorized by law or incident to itsexistence.

CLASSES OF CORPORATION:

1. AS TO ORGANIZERSa. public by State only; andb. private by private persons alone or with the State.

2. AS TO FUNCTIONSa. public governmental and other

functions; andb. private usually for profit-making

functions3 . AS TO GOVERNING LAW

a. public Special Laws; andb. private Law on Private Corporations

4. AS TO LEGAL STATUSa. de jure corporation corporation

organized in accordance withrequirements of law

b. de facto corporation a corporation

where there exists a flaw in itsincorporation (Sec. 20). Its existencecannot be inquired collaterally. Suchinquiry may be made by the Solicitor General in a quo warranto proceeding(Sec. 20).



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REQUISITES OF DE FACTOCORPORATION :

1. The existence of a valid law under which itmay be incorporated;

2. An attempt in good faith to incorporate;3. Use of corporate powers; and4. Issuance of certificate of incorporation by

the SEC as a minimum requirement of continued good faith.

c. corporation by estoppel groups of persons which holds itself out as acorporation and enters into a contract witha 3 rd person on the strength of suchappearance. It cannot be permitted todeny its existence in an action under saidcontract (Sec. 21).

d. corporation by prescription body thatthough not lawfully organized as acorporation, has been duly recognized byimmemorial usage as a corporation, withrights and duties maintainable at law.

5. AS TO EXISTENCE OF SHARES OFSTOCK

a. stock corporation a corporation inwhich capital stock is divided into sharesand is authorized to distribute to holdersthereof of such shares dividends or allotments of the surplus profits on thebasis of the shares held. (Sec. 3).

b. Non-stock corporation not issuestocks and not distribute dividends totheir members, for public good andwelfare.

6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

a. holding corporation - it is one whichcontrols another as a subsidiary by thepower to elect management. It is onewhich holds stocks in other companiesfor purposes of control rather than for mere investment. It has a passiveportfolio merely holding securities for control and management, asdistinguished from an active investmentpolicy which has an active portfoliobuying and selling securities

TWO KINDS OF SUBSIDIARIES

1. MAJORITY OWNED SUBSIDIARY whereone corporation owns 51%-94% of thecapital stock of another corporation.

2. WHOLLY OWNED SUBSIDIARY whereone corporation holds 95% to 100% of thecapital stock of another corporation.

b. Affiliates company which is subject tocommon control of a mother holdingcompany and operated as part of thesystem.

c. parent and subsidiary corporation -separate entities with power to contractwith each other. The board of directorsof the parent company determines itsrepresentatives to attend and vote in thestockholders meeting of its subsidiary.

The stockholders of the parent companydemand representation in the boardmeetings of its subsidiary. The board of

directors of the parent or holding companyhas the prerogative to choose its nomineesin the board of directors or its subsidiary .

7. AS TO PLACE OF INCORPORATION

a. Domestic corporation- corporationformed, organized or existing under laws

b. Foreign Corporation a corporationformed , organized or existing under anylaws other than those of the Philippinesand whose laws allow Filipino citizensand corporation to do business in its owncountry or state (Section 123).

8. OTHER CORPORATIONS

a. Close Corporationb. Special Corporation

1. educational corporation2. religious corporation

a. corporation soleb. religious societies

ACQUIRED ASSET CORPORATION

(a) organized under general corporation lawunder private ownership where at least amajority of the shares of stock of which wereconveyed to a government corporation insatisfaction of a debt incurred with a governmentfinancial institution , whether by foreclosure or otherwise; or (b) a subsidiary corporation of a governmentcorporation organized exclusively to own andmanage, or lease or operate specific physicalassets acquired by a government financialinstitution in satisfaction of debts incurredtherewith (PD 2029, Sec. 3 c).

RULE ON CONVERSION



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1. STOCK CORPORATION TO NON-STOCK An existing stock corporation may beconverted into a non-stock corporation by mereamendments of its articles of incorporation.

2. CONVERSION OF NON-STOCKCORPORATION TO STOCKCORPORATION

Mere amendment of the articles would notsuffice as it would change its very nature fromnon-profit to monetary gain. It is fundamentalthat the non-stock corporation be dissolved first.

A non-stock corporation only holds its funds intrust for carrying out the objectives expressed inits charter. The conversion without dissolving itfirst would be tantamount to distribution of itsassets or income to its members inasmuch asafter its conversion, the asset of the non-stockcorporation would now be treated as payment tothe subscriptions of the members who will nowbecome stockholders of the corporation.Moreover, the scheme might defraud the public

who may have given donations not for thebenefit of the stockholders but for organizationpurposes.

ADVANTAGES OF CORPORATION ASAGAINST UNREGISTEREDASSOCIATION

1. enjoys perpetual succession under corporate name and in an artificial form

2. can take and grant property3. can contract obligations4. can sue and be sued in its corporate name

as a juridical person5. capacity to receive and enjoy common

grants of privileges and immunities6. no personal liability beyond value of their

shares

DOCTRINE OF SEPARATEPERSONALITY

A corporation has a personality separate anddistinct from that of its stockholders or members.

PIERCING DOCTRINE OF THE VEIL OFCORPORATE FICTION

Allows the state to disregard for certain

justifiable reasons the fiction of juridicalpersonality for the corporation, separate anddistinct from the persons composing it.

THREE CLASSES OF PIERCING:

1. Fraud Cases when a corporation is usedas a cloak to cover fraud, or to do wrong

2. Alter Ego Cases when the corporate entityis merely a farce since the corporation is analter ego, business conduit or instrumentalityof a person or another corporation

INSTRUMENTALITY RULE- Where onecorporation is so organized and controlled andits affairs are conducted so that it is in fact, amere instrumentality or adjunct of the other, thefiction of the corporate entity of theinstrumentality may be disregarded. Thecontrol necessary to invoke the rule is not meremajority or even complete stock control but suchdomination of finances, policies, practices thatthe controlled corporation has, so to speak, noseparate mind, will or existence of its own, and

is, but a conduit for its principal.3. Equity cases when piercing the corporatefiction is necessary to achieve justice or equity

COMPONENTS OF A CORPORATION :1. incorporators;2. corporators;3. stockholders and members;4. promoter;5. board of directors;

6. executive committee; and7. officers of the corporation.

INCORPORATORS- They are thosementioned in the articles of incorporation asoriginally forming and composing thecorporation, having signed the articles andacknowledged the same before a notary public.They have no powers beyond those vested inthem by the statute.

Only natural persons can be incorporatorsexcept when otherwise allowed by law as in thecase of incorporated cooperative which areallowed to be incorporators of rural banks.

NUMBER AND QUALIFICATION OFINCORPORATORS: (Sec. 10)

1. natural person;2. not less than 5 but not more than 15;3. of legal age;4. majority must be resident of the Philippines;

and5. each must own or subscribe to at least one

share.

DISTINCTIONS :

INCORPORATORS CORPORATORS

1. signatory to articles 1. stockholder of stock corporation



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or member of non-stockcorporation

2. do not cease to besuch

2. cease to be suchif they are nolonger stockholders

3. number is limitedt0 5-15

3. no restriction asnumber

4. must havecontractual capacity

4. may be suchthrough aguardian

CONTENTS OF ARTICLES OFINCORPORATION (SEC. 14):

1. name of corporation;2. purpose/s, indicating the primary and

secondary purposes;3. place of principal office;4. duration;5. names, citizenship and residences of

incorporators;6. number, names, citizenship and residences

of directors;7. if stock corporation, amount of capital stock,

number of shares and in case of par valuestock corporations, the par value of eachshare;

8. names, residences, number of shares andamounts of subscription of subscriberswhich shall not be less than 25% of ACS;

9. names, residences, and amount paid byeach subscriber on their subscription, whichshall not be less than 25% of totalsubscription;

10. name of treasurer elected by subscribers;and

11. if the corporation engages in a nationalizedindustry, a statement that no transfer of stock will be allowed if it will reduce the

stock ownership of Filipinos to a percentagebelow the required legal minimum.

WHAT CANNOT BE AMENDED IN THEARTICLES OF INCORPORATION

Those matters referring to facts existing as of the date of the incorporation such as:

1. names of incorporators;2. names of original subscribers to the capital

stock of the corporation and their subscribedand paid up capital;

3. treasurer elected by the original subscribers;4. members who contributed to the initialcapital of a non-stock corporation;

5. date and place of execution of the articles of incorporation;

6. witnesses to and acknowledgment of thearticles.

LIMITS ON THE USE OF CORPORATENAME

1. Names which are identical, deceptively or confusingly similar to that of any existingcorporation;

2. a name already protected by law;3. a name which is patently deceptive,

confusing or contrary to existing laws.

DISTINCTIONS :

ARTICLES OFINCORPORATION

BY-LAWS

1. It is essentially acontract between thecorporation and thestockholders/members; betweenthe stockholders/member inter se, andbetween thecorporation and theState; hence must benotarized themselves;

1. It is more of arule for theinternalgovernment of the corporationbut has the forceof a contractbetween thecorporation andthe stockholders/members, andbetween thestockholders andmembers;

2. It is executedbefore incorporation

2. It is usuallyexecuted after the incorporationalthough Sec. 46allowssimultaneousfilling of the two;

3.It is a conditionprecedent in theacquisition of corporateexistence;

3.It is a conditionsubsequent;

4. It is amended by amajority of thedirectors/ trusteesand stockholdersrepresenting 2/3 of the outstandingcapital stock, or 2/3of the members incase of non-stockcorporations

4. It may beamended by amajority vote of the BOD andmajority vote of outstandingcapital stock or amajority of themember in non-stock corporation

5. Power to

amend/repealarticles cannot bedelegated by thestockholders/members to theboard of directors/

5. Power to amend

or repeal by-lawsor adopt new by-laws may bedelegated by the2/3 of theoutstanding



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trustees. capital stock or 2/3 of themembers in thecase of non-stockcorporation.

ELEMENTS OF A VALID BY-LAWS:

1. Must not be contrary to existing law nor inconsistent with the Code, else they haveno binding effect;

2. Must not be contrary to morals and publicpolicy State will interfere if it is so;

3. Must not impair contract obligations Art IIISec 10,1987 Constitution

4. Must be general and uniform they mustaffect all alike, and operate equally as to allpersons or matters standing in equal status

or circumstances and without anyunreasonable discrimination as to anyparticular person or thing of the class;

5. Must be consistent with the charter or articles of incorporation charter is usedhere in its broadest sense without regard towhether the statutory right to be acorporation is obtained by special act or under general statutes;

6. Must be reasonable ,not arbitrary or oppressive . Reasonableness dependsupon:a. Facts and circumstances of the case

b. Nature, Purpose, Object of thecorporation

c. Whether or not it is within thecorporations power of adoption

d. The relation which the person raisingthe question sustains to the corporation,i.e. whether he is a stockholder or member or stranger to the corporation.-Thus a by-law may be reasonable as tothe corporation and as to the thirdpersons contracting subsequently to itsadoption with the corporation, and yetbe invalid as to third persons sustainingat no time of its adoption, contractualrelations with the corporation- If stockholders alone are affected,

only they can attack.

BINDING EFFECTS OF BY-LAWS:

1. AS TO MEMBERS AND CORPORATION- They have the same force and effect as the

provisions of the charter and articles of incorporation. They have the force of contract between the members themselves.

They are binding only upon the corporationadopting them and on its members andthose having direction, management andcontrol of its affairs.

2. AS TO THIRD PERSONS

Strangers are not bound to know the by-laws which are merely provisions for thegovernment of a corporation and notice tothem will not be presumed.

Rationale: by-laws have no extra-corporateforce and are not in the nature of legislativeenactments so far as third persons areconcerned.

POWERS OF A CORPORATION

KINDS:

1. Express Powers granted by law ,Corporation Code and its Articles of Incorporation or Charter

2. Inherent / Incidental Powers notexpressly stated but are deemed to bewithin the capacity of corporate entities

3. Implied / Necessary exists as anecessary consequence of the exerciseof the express powers of the corporationor the pursuit of its purposes asprovided for in the Charter

THEORY OF GENERAL CAPACITY corporation is said to hold such powers as arenot prohibited or withheld from it by general law(everything is allowed except when prohibited).

THEORY OF SPECIAL CAPACITY corporation cannot exercise powers exceptthose expressly or impliedly given (everything isprohibited except when allowed).

A. GENERAL CORPORATE POWERSAND CAPACITY (SEC. 36):

1. To sue and be sued;2. Of succession;3. To adopt and use of corporate seal;4. To amend Articles;5. To adopt by-laws;6. For stock corporations issue and sell

stocks to subscribers and treasury stocks,for non-stock corporations admitmembers;

7. Purchase;Receive } real propertyGrant } personal propertyTake } securities andDeal } bonds

8. to enter into merger or consolidation;9. to make reasonable donations for:

a. public welfare;b. hospital;c. charitable;

d. cultural;e. scientific;f. civic; andg. similar purposes

Prohibitions : no donation to i i.political party;



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ii ii.candidate; andiii.partisan political activity.

10. to establish;a. pensionb. retirement

c. and other plans for the benefit of i. directors;ii. trustees;iii. officers;iv.employees.

11. Other powers essential or necessary to

carry out its purposes

RESTRICTIONS ON THE POWER TO MAKEDONATIONS:

1. The donation must be reasonable, otherwise

it would be tantamount to a conversion of corporate funds;2. That it must not be in aid of any political

party or candidate;3. That it must not be for purposes of partisan

political activity.

B. SPECIAL POWERS

1. Power to extend or shorten corporateterm

2. Increase / Decrease Corporate Stock3. Incur, Create Bonded Indebtedness

4. Sell, Dispose. Lease, Encumber all or substantially all of corporate assets5. Purchase or acquire own shares

provided:

(i) there is an unrestrictedretained earnings

(ii) for legitimate purpose6. Invest corporate funds in another

corporation or business for other purpose other than primary purpose

7. Power to declare dividends out of unrestricted retained earnings

8. Enter into management contract.

MANAGEMENT CONTRACT one enteredinto between two corporations whereby onecorporation undertakes to manage all or substantially all of the business of the other corporation for certain period of time, whether such be a service contract, operating agreementor otherwise.

ULTRA VIRES ACT AND ILLEGAL ACTS

An ultra vires act is not necessary illegalalthough an illegal act is always ultra vires. When the act of a corporation are spoken of

as ultra vires, it is not intended that they areunlawful but merely those which are beyondthe powers conferred upon the corporation

by the act of its creation, and are in violationof the trust reposed in the managing boardby the shareholders that the affairs of thecorporation shall be managed and the fundsapplied solely for carrying out businessobjectives. An illegal act however is one

which is expressly prohibited by the charter or statute or which is immoral or againstpublic policy.

EFFECTS OF ULTRA VIRES ACT ON:

1. executed contract courts will not set asideor interfere with such contracts;

2. executory contracts no enforcement evenat the suit of either party (void andunenforceable);

3. part executed and part executory principleof no unjust enrichment at expense of

another shall apply; and4. executory contracts apparently authorizedbut ultra vires the principle of estoppelshall apply.

WASTING ASSET DOCTRINE - It permitscorporations solely or principally engaged in theexploitation of wasting assets to distribute thenet proceeds derived from exploitation of their holdings such as mines, oil wells, patents andleaseholds, without allowance or deduction for depletion.

The justification of such rule is that as

the business of wasting asset corporation is toexploit and exhaust its assets, no one canexpect that its capital would be kept intact.Hence that dividends cannot be paid out of thecapital but only from the profits must not beapplied as a rule.

NOTE: RELATION TO THE TRUST FUNDDOCTRINE -Under the Doctrine, no dividends can bedeclared out of capital except only in twoinstances: (1) liquidating dividends and (2)dividends from investments in wasting asset

corporation.BOARD OF DIRECTORS REPOSITORYOF CORPORATE POWERS unlessotherwise provided by the Code, the corporatepowers of all corporation shall be exercised, allbusiness conducted and all property of suchcorporations controlled and held by the board of directors or trustees to be elected from amongthe members of the corporation, who shall holdoffice for one year and until their successors areelected and qualified.

Except:1. Executive Committee; or 2. The corporation enters into a management

contract.



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