Commercial Law Memory Aid

M E M O R Y A I DM E M O R Y A I D

CBO OVER-ALL CHAIRPERSON: Evangeline CoASSISTANT CHAIRPERSON: Rose Lyn Rabanera

ACADEMICS COMMITTEE - HEADS:Reigel Prado, Omar Gabrieles

SECRETARIAT – HEAD: Romino ArzadonFINANCE COMMITTEE – HEAD: Kyan Sioco

LOGISTICS COMMITTEE - HEAD: Janis Ruckenbrod

COMMERCIAL LAW COMMITTEE

HEAD: Darlene Fae Arizobal

NEGOTIABLE INSTRUMENTS LAW: Kathlyn Giaewa LeuterioMEMBER: Marian Allam

INSURANCE: Marty CachaperoMEMBER: Anthony Cruz

TRANSPORTATION LAW: Dianne Elizabeth Feeney

CORPORATION LAW: Darlene Fae Arizobal

BANKING AND INTELLECTUAL PROPERTY LAWS: Charina SabanganMEMBERS: Aristotle Almario, Rowena Gonzales

SPECIAL LAWS: Marissa Corazon Nefalar

SUBJECT ADVISER:

Atty. Manuel T. Gatcho

I n s t i t u t e o f L a wC E N T R A L B A R O P E R A T I O N S 2 0 0 6U n i t e d P u r s u i t o f E x c e l l e n c e

CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS - HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod

M E M O R Y A I D I N C O M M E R C I A L L A W

NEGOTIABLE INSTRUMENTS LAW(Act No. 2031, effective June 2, 1911)

NEGOTIABLE INSTRUMENT - a written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties.

Functions of Negotiable Instrument:1. Substitute for money2. Medium of exchange3. Tool used in commercial

transaction.

Requisites: (Sec.1 NIL)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 a fixed or determinable future time;

d. Must be payable to order or bearer;

e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Two Distinctive Features of NI:1. NEGOTIABILITY - it is that attribute

or property whereby a bill or 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.

2. ACCUMULATION OF SECONDARY CONTRACTS - secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of

negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.

Test of Negotiability: presence of requirements in Section 1 of NIL.

Factors that determine Negotiability:1. The whole instrument itself2. Only what appears on the face

of the instrument3. Provisions of the NIL, Sec.1

NEGOTIABLE INSTRUMENTS

NON-NEGOTIABLE

INSTRUMENTS1. Must contain all requisites of sec.1

1. Does not contain all requisites of sec.1

2. Transferable by negotiation and assignment.

2. Transferable by assignment only

3. HDC can have rights better than his transferor

3. A transferee acquires no better right than his transferor

4. Prior parties warrant payment (secondary liability).

5. Governed by NIL

6. Transferee is a holder in due course.

7. Defenses generally not available.

4. Prior parties do not warrant payment but merely the legality of his title.5. NIL only applies by analogy6. Transferee is assignee only.7. All defenses available against last transferee.

Classes of Negotiable Instruments:1. PROMISSORY NOTE (PN) -

unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time,

C O M M E R C I A L L A WADVISER: Atty. Manuel T. Gatcho

COMMERCIAL LAW – HEAD: Darlene Fae ArizobalMEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,

Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan

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a sum certain in money to order or to bearer. (Sec. 184)

2. BILL OF EXCHANGE (BE) -an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126)

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

Kinds: Manager’s / Cashier’s Check –

drawn by a bank on itself and therefore, it is a primary obligation of the bank.- It is accepted in advance by the act of its issuance and is not subject to countermand by the payor after indorsement.- The bank’s manager signs manager’s check while cashier’s check is signed by the bank cashier.

Memorandum Check – it is like an ordinary check except that the word “memorandum,” “mem” or “memo” is written upon the face of the check, signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and non-payment should be given.

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

Traveler’s check – one upon which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second o counter-signature, to be affixed by him in the presence of the

payee before it is paid, otherwise it is incomplete

Crossed check – when 2 parallel lines are drawn across its face or across a corner thereof. If the name of a bank appears between the parallel lines, the check is said to be specially crossed, and payment should be made only if presented by the named bank. If no name appears between the parallel lines, the check is said to be generally crossed, and payment should be made only upon presentment by some bank.

Effects of crossing a check:a. That the check may not be

encashed but only be deposited in the bank;

b. That the check may be negotiated only once to one who has an account with a bank; and

c. That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose.

Stale check – one which has not been presented for payment within a reasonable time after its issue

NEGOTIABLE INSTRUMENT

NEGOTIABLE DOCUMENT

OF TITLE1. The subject is

Money1. The subject is

goods 2. Is itself the

property with value

2. The document is a mere evidence of title – the things of value being the goods mentioned in the document




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3. Has all the requisites of Sec 1 of NIL

3. Does not have these requisites

4. A holder of NI may run after the secondary parties for payment if dishonored by the party primarily liable

4. Intermediate parties are not secondarily liable if the document is dishonored

5. A holder, if HDC, may acquire rights over the instrument better than his predecessors

5. A holder can never acquire rights to the document better than his predecessors

PROMISSORYNOTE

BILL OF EXCHANGE

1.Unconditional promise

1.Unconditional order

2. Involves 2 parties

2.Involves 3 parties

3. Maker is primarily liable

3.Drawer is only secondarily liable

4.Only one presentment: for payment

4.Two presentments: for acceptance and for payment

Instances when BILL may be treated as a NOTE:1. Drawer and drawee are the same person.2. Drawee is a fictitious person.3. Drawee has no capacity to contract.4. When instrument is so ambiguous, the

holder may treat it either as a BILL or a NOTE.

BILLOF EXCHANGE

CHECK

1.Not necessarily drawn on a deposit. The drawee need not be a bank.

1.It is necessary that a check is drawn on a bank deposit. The drawee is always a bank.

2.Death of a drawer of a BOE, with

2.Death of the drawer of a check, with the

the knowledge of the bank, does not revoke the authority of the drawee to pay.

knowledge of the bank, revokes the authority of the banker to pay.

3. May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated.

3. Must be presented for payment within a reasonable time after its issue.

4.May be payable on demand or at a fixed or determinable future time

4. Always payable on demand

OTHER FORMS OF NEGOTIABLE INSTRUMENTS1. Certificate of deposit issued by banks,

payable to the depositor or his order, or to bearer

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

promissory notes4. Drafts, which are bills of exchange

drawn by one bank upon another All of these must comply with Sec. 1,

NILNote: Letters of credit are not negotiable.

LEGAL TENDER That kind of money that the law

compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount.

Note: A negotiable instrument although intended to be a substitute for money, is generally not a legal tender.

(See notes under New Central Bank Act)

INCIDENTS IN “LIFE” OF NEGOTIABLE INSTRUMENT1. Issue2. Delivery3. Negotiation




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4. Presentment for acceptance, in certain kinds of bills of exchange

5. Acceptance6. Dishonor by non-acceptance7. Presentment for payment8. Dishonor by non-payment9. Notice of dishonor10.Discharge

I. ISSUE

A. CONCEPTSIssue - the first delivery of the instrument, complete in form, to a person who takes it as a holder (sec. 191)

Delivery - transfer of possession, actual or constructive, from one person to another (sec.191)

Holder – refers to the: a. The payee or indorsee of a bill or

note who is in possession of it, or b. The bearer thereof (sec.191)

Bearer - the person in possession of a bill or note which is payable to bearer (sec. 191)

Person - includes a body of persons, whether incorporated or not (sec. 191)

B. FORM AND INTERPRETATION

Requisites of negotiable instrumentsa. It 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 a fixed or determinable future time;

d. Must be payable to order or to bearer; and

e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. (sec. 1)

1. Must be in writing, signed by the maker or drawer;- Otherwise it cannot be a substitute for money.

2. Must contain an unconditional promise or order to pay a sum certain in money;

Certainty of sum payable.The sum payable is a sum certain although it is to be paid:

a. With interest; orb. By stated installments; orc. By stated installments, with a

provision that, upon default in payment of any installment or of interest, the whole shall become due; or

d. With exchange, whether at a fixed rate or at the current rate; or

e. With costs of collection or an attorney's fee, in case payment shall not be made at maturity. (sec. 2)

Acceleration clause - renders whole debt due and demandable upon failure of obligor to comply with certain conditions.

When promise is unconditionalAn unqualified order or promise to pay is unconditional though coupled with:

a. An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or

b. A statement of the transaction which gives rise to the instrument.

An order or promise to pay out of a particular fund is not unconditional. (sec. 3)

FUND FOR REIMBURSEMEN

T

PARTICULAR FUND

FOR PAYMENT

1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated.

1. There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to




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the condition that the fund is sufficient.

2. Particular fund indicated is NOT the direct source of payment but only the source of reimbursement.

2. Particular fund indicated is the direct source of payment.

3. Indication in the instrument does not affect the unconditional nature of the promise or order.

3. Indication in the instrument makes the promise or order conditional.

3. Payable on demand or at a fixed determinable future time;

Certainty of time of paymentAn instrument is payable at a determinable future time which is expressed to be payable:

a. At a fixed period after date or sight; or

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 is certain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (sec. 4)

A promise to pay “when able,” “as soon as I can”, etc., without specification of an absolute date is not negotiable. However, there is a difference of opinion as to whether it is a conditional promise or an absolute promise to pay at un unreasonable time:

a. Under the first view, negotiability is destroyed both

by the condition and by want of a fixed time for payment;

b. Under the second view, by the general principle that a promise to pay within a reasonable time is not so certain as to render an instrument negotiable.

Aftersight Draft - payable only after the expiration of the stipulated period from acceptance (legal sight).

When payable on demand: a. When it is so expressed to be

payable on demand, or at sight, or on presentation; or

b. In which no time for payment is expressed.

Note: Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (sec. 7)4. Payable to order or to bearer

When payable to orderThe instrument is drawn payable:

a. To the order of a specified person or

b. To him or his order.

The payee must be named or otherwise indicated therein with reasonable certainty. (Sec. 8)

It may be drawn payable to the order of: a. A payee who is not maker, drawer,

or drawee; orb. The drawer or maker; or c. The drawee; or d. Two or more payees jointly; or e. One or some of several payees; or f. The holder of an office for the time

being. When payable to bearer.

a. When it is expressed to be so payable; or

b. When it is payable to a person named therein or bearer; or

c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or




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d. When the name of the payee does not purport to be the name of any person; or

e. When the only or last indorsement is an indorsement in blank. (Sec. 9)

Additional provisions not affecting negotiability. GENERAL RULE: the instrument is non-negotiable if it contains a promise or order to do any act in addition to the payment of money.

EXCEPTIONS:

a. authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

b. authorizes a confession of judgment if the instrument be not paid at maturity; or

c. waives the benefit of any law intended for the advantage or protection of the obligor; or

d. gives the holder an election to require something to be done in lieu of payment of money.

Confession of judgment – a written statement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon.

Kinds of confession of judgmenta. cognivit actiomen – literally means

“he has confessed action”. It is a written confession of action by the defendant acknowledging is indebtedness to the plaintiff after the action has been filed. It is given after the action is brought to save expenses.

b. relicta verificationem – literally means “his pleadings being abandoned.” It is confession of judgment by withdrawal of the defense.

Note: However, warrants of attorney to confess judgment, are not authorized nor contemplated by our law. They are void as against public policy because they enlarge the field for fraud, because under these instruments, the promissory

bargains away his right to a day in court. The NIL does not sanction nor validated any provision otherwise illegal.

Omissions; seal; particular money.The validity and negotiable character of an instrument are not affected by the fact that:

a. it is not dated; or b. does not specify the value given, or

that any value had been given therefore; or

c. does not specify the place where it is drawn or the place where it is payable; or

d. bears a seal; or e. designates a particular kind of

current money in which payment is to be made. (sec. 6)

if it is not dated, the instrument will be considered to be dated as of the time it was issued (sec. 17[c])

consideration for the instrument is presumed (art. 154 NCC & sec. 25 NIL)

sec. 73 specifies where presentment for payment should be made when the place of payment is not specified

Rules of construction:a. Where the sum payable is

expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;

b. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

d. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;




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e. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

f. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser;

g. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. (sec. 17)

C. CONSIDERATION

Consideration – inducement to a contract

Presumption of consideration. - every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. (sec. 24)

Value - any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. (sec. 25) Holder for value – one who has given a valuable consideration for the instrument issued or negotiated to him.

What constitutes holder for value: where value has at any time been

given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (sec. 26)

where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. (sec. 27)

Effect of want of consideration: a matter of defense as against any person

not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. (sec. 28)

Absence of consideration – total lack of any valid consideration for the contract, only a personal defense.

Failure of consideration – failure or refusal or one party to do, perform or comply with the consideration agreed upon, only a personal defense.

II. NEGOTIATION

TRANSFER AND NEGOTIATION

Types of transfers:

1. Assignment - transfer of title to the instrument, with the assignee generally taking only such title as his assignor has, subject to all defenses available against his assignor;

2. By operation of law – such as by succession, by insolvency

3. Negotiation - transfer of a negotiable instrument from one person to another made in such a manner as to constitute the transferee the holder thereof (sec. 30)

NEGOTIATION ASSIGNMENT1. Refers only to

negotiable instruments;

2. The transferee is a holder;

3. A holder in due course is subject only to real defenses;

4. A holder in due course may acquire a better right than that of a prior party

5. A general indorser warrants the solvency of prior

1. Refers generally to an ordinary contract;

2. The transferee is an assignee;

3. An assignee is subject to both real and personal defenses;

4. Generally, an assignee merely steps into the shoes of the assignor;

5. An assignor does not warrant the




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parties;

6. An indorser is not liable unless there be presentment and notice of dishonor;

7. Negotiation is governed y the NIL.

solvency of prior parties unless expressly stipulated or the insolvency is known to him;

6. An assignor is liable even without notice of dishonor;

7. Governed by Arts. 1624 to 1635 (on assignment of credits) of the Civil Code.

Methods of negotiation

Instruments payable to order

Indoresment and delivery

Instruments payable to bearer

Delivery

Indorsement - legal transaction effected by the writing of one's own name at the:

a. back of the instrument orb. upon a paper (allonge) attached

thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (sec. 31)

General Rule: indorsement must be of the entire instrument.Exception: where instrument has been paid in part, it may be indorsed as to the residue. (sec. 32)

Kinds of indorsement:a. Special - specifies the person to

whom or to whose order, the instrument is to be payable (sec. 34)

b. Blank - specifies no indorsee:

Instrument is payable to bearer and may be negotiated by delivery (sec. 34)

May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (sec. 35)

c. Restrictive - when the indorsement either:

i. Prohibits further negotiation of the instrument; or

ii. Constitutes the indorsee the agent of the indorser; or

iii. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive.(sec. 36)

A restrictive indorsement confers upon the indorsee the right:

a. To receive payment of the instrument;

b. To bring any action thereon that the indorser could bring;

c. To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. (sec. 37)

Such indorsement destroys the negotiability of the instrument and bars further negotiation to a holder in due course.

d. Qualified - constitutes the indorser a mere assignor of the title to the instrument. (sec. 38) made by adding to the

indorser's signature words like "sans recourse,” “without




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recourse", "indorser not holder", "at the indorser's own risk", etc.

The purpose of this kind of indorsement is to transfer title without guaranteeing payment by the primary party.

It does not mean, however, that the qualified indorser incurs no liability at all. The effect is merely to limit his liability. He is secondarily liable for breach of is warranties as an indorser under Sec. 65. Thus, he is liable if the instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT due to:

a. forgery;b. lack of good title to the

instrument indorsed;c. lack of capacity to

contract on the part of prior parties; or

d. the fact that the instrument was valueless or not valid at the time of the indorsement which fact was known to him.

e. Conditional - right of the indorsee is made to depend on the happening of a contingent event Party required to pay may

disregard the conditions. (sec. 39)

This kind of indorsement has no effect on the further negotiation of the instrument. The party required to pay, if he chooses, may make payment, disregarding the condition without incurring any liability because he is expressly authorized to do so under Sec. 39. But the person who received payment will hold the proceeds subject to the right of the conditional indorser.

f. Absolute - one by which indorser binds himself to pay:

i. upon no other condition than failure of prior parties to do so; and

ii. upon due notice to him of such failure.

g. Joint - indorsement of instrument payable to 2 or more persons (sec. 41); all must indorse in order for the transaction to operate as a negotiation. Exceptions to the rule requiring

joint indorsement:a. Where the payees or

indorsees are partners; and

b. Where the payee or indorsee indorsing has authority to indorse for the others.

h. Successive (Secs. 50, 68)

i. Irregular - a person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery (sec. 64)

j. Facultative

Rules on Indorsements:

Effect of transfer without indorsement:

a. transfer vests in the transferee such title as the transferor had therein (assignment), and

b. the right to have the indorsement of the transferor

For the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made (sec. 49)

Applicable only to order instruments

Indorsement of a bearer instrument: where an instrument, payable to bearer, is indorsed




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specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. (sec. 40)

The rule only applies to originally bearer instruments. If it is originally a BEARER instrument, it will always be a BEARER instrument.

As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specifically, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed.

Striking out indorsements: the holder may at any time strike out any indorsement, which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him, are thereby relieved from liability on the instrument. (sec. 48)

If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such instrument. None of the indorsement would be necessary to it’s title since mere delivery would have been sufficient to transfer title from one holder to another.

Where the instrument is payable to order on its face, the situation is different. First, the indorsement of a special indorsee is necessary for the further negotiation of the instrument. Second, the last indorsement controls the method of further negotiation.

When prior party (reacquirer) may negotiate: where an instrument is negotiated back to a prior party, such

party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. (sec. 50)

In the following cases, a prior party cannot further negotiate the instrument:

1. Where it is payable to the order of a third person, and has been paid by the drawer;

2. Where it was made or accepted for accommodation and has been paid by the party accommodated;

3. In other cases, where the instrument is discharged when acquired by a prior party.

HOLDERS:Classes of holders:1. simple holder (sec. 51)2. holder for value (sec. 26)3. holder in due course (sec.52, 57)

Holder in Due Course holder who has taken the instrument

under the following conditions:

a. That it is complete and regular upon its face;

b. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact;

c. That he took it in good faith and for value;

d. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (Sec. 52)

When title defective - The title of a person who negotiates an instrument is defective when he obtained the instrument or any signature thereto, by:

a. fraud, b. duress, or force and fear, c. other unlawful means, d. illegal consideration,




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e. negotiation in breach of faith, f. circumstances amounting to fraud.

(sec. 55)

What constitutes notice of defect. - The person to whom it is negotiated must have:

a. actual knowledge of the infirmity or defect, or

b. knowledge of such facts that his action in taking the instrument amounted to bad faith. (sec. 56)

Notice before full amount is paid - where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid, he will be deemed a holder in due course only to the extent of the amount paid by him (sec. 54)

When person not deemed a holder in due course - where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course (sec. 53)

Reasonable time, what constitutes. - regard is to be had to the

a. nature of the instrument, b. the usage of trade or

business with respect to such instruments, and the

c. facts of the particular case. (sec. 193)

Effect: in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable (sec. 58)

General Rule: every holder is deemed prima facie to be a holder in due course

Exception: when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course (shifting of burden of proof).

Limitation: the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. (sec. 59)

Rights of a holder in due course:

a. he may sue on the instrument in his own name;

b. he may receive payment and if payment is in due course, the instrument is discharged (sec. 51)

c. holds the instrument free from any defect of title of prior parties,

d. holds the instrument free from defenses available to prior parties among themselves, and

e. may enforce payment of the instrument for the full amount thereof against all parties liable thereon (sec. 57)

Payment in due course is payment made:at or after the maturity of the

instrumentto the holder thereofin good faith and without notice

that his title is defective.

Shelter Rule:a. derives his title through a holder

in due course, and b. who is not himself a party to any

fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter (sec. 58)

RIGHTS OF HOLDER NOT IN DUE COURSE:

1. He may sue on the instrument in his own name;

2. He may receive payment and if the payment is in due course, the instrument is discharged;

3. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable; and

4. He has all the rights of the holder in due course from whom he derived his title in




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respect of all parties prior to such holder, provided he is not himself a party to any fraud or illegality affecting the instrument.

LIABILITY OF PARTIES

Persons primarily liable on instrument: the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable(sec.192)

Classification of parties according to liability

Persons liable:In a Promissory Note

1. Maker2. Indorser3. Persons

negotiating by delivery

In a Bill of Exchange:

1. Drawer2. Acceptor3. Indorsers4. Persons

negotiating by delivery

1. PARTIES PRIMARILY LIABLEa. MAKER (sec. 60)

engages to pay according to the tenor of the instrument; and

admits the existence of the payee and his then capacity to indorse at the time of the making of the note.

A person placing his name on the face of a note is prima facie a maker and liable as such; and he is presumed to have acted with care and to have signed the instrument with full knowledge of its contents.

b. ACCEPTOR OR DRAWEE (sec. 62) engages to pay according to the

tenor of his acceptance; admits:

1. the existence of the drawer,

2. the genuineness of his signature and

3. his capacity and authority to draw the instrument; and

4. the existence of the payee and his then capacity to indorse.

Note: the drawee is not liable until he accepts the instrument

Where a check is certified by a bank, it is equivalent to an acceptance. (Sec. 187) Since certification is equivalent to acceptance, a bank which has certified a check whether at the request of the holder or of a drawer, has the same liabilities and makes the same warranties as an acceptor. It cannot, after certification, question the genuineness of the drawer’s signature. If it discovers that such signature is forged subsequent to certification but prior to payment, it cannot refuse to pay on the check. If its discovery comes after it has paid the check, it cannot recover back what it paid on the ground of mistaken payment unless the holder is guilty of fraud or negligence.

If a drawee-bank accepts or pays a check despite a stop payment order from the drawer, through oversight or otherwise, it cannot refuse to pay the holder or recover what has been paid; neither may it debit the drawer’s account unless the acceptance nor payment was made prior to the receipt of the order.

2. PARTIES SECONDARILY LIABLEa. DRAWER (sec. 61)

admits the existence of the payee and his capacity to indorse;

engages that the instrument will be accepted or paid by the party primarily liable; and




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engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.

b. GENERAL INDORSER (sec. 66) warrants ---

1. genuineness of the instrument;

2. his good title to it;3. capacity to contract of

prior parties; and4. instrument is valid and

subsisting.

engages that the instrument will be accepted or paid by the party primarily liable; and

engages that if the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid.

c. IRREGULAR INDORSER – a person, not otherwise a party to an instrument, places his signature thereon in blank before delivery. (sec. 64)Rules: If instrument payable to the

order of a 3rd person, he is liable to the payee and subsequent parties.

If instrument payable to order of maker or drawer, he is liable to all parties subsequent to the maker or drawer.

If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee.

PRIMARY PARTY

SECONDARY PARTY

1. Unconditionally Bound;2.Absolutely required to pay upon the maturity of the instrument.

1. Conditionallybound;2. Undertakes to pay only after certain conditions have been fulfilled: a. due presentment for

payment or acceptance to primary party; b. dishonor by such party; and

c. the taking of proceedings required by law after dishonor.

INDORSER DRAWER1. A party to either a note or a bill;2. Does not make any admission regarding the existence of the payee and his capacity to indorse; and3. Has warranties.

1. A party only to a bill;2. The drawer makes such admission;3. Makes no warranties, but he engages to pay after certain conditions are complied with.

GENERAL INDORSER

IRREGULAR INDORSER

1. Makes either a blank or special indorsement;2. Indorses the instrument after its delivery to the payee; and3. Liable only to parties subsequent to him

1. Always makes a blank indorsement;2. Indorses before its delivery;3. Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only to all parties subsequent to the payee.

3. PARTIES WITH LIMITED LIABILITY (sec. 65; Metropol Financing v. Sambok, 120 SCRA 864)

a. QUALIFIED INDORSER - warrants that: instrument is genuine and in all

respects what it purports to be; he has good title to it;




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all prior parties had capacity to contract;

he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

b. PERSONS NEGOTIATING BY DELIVERY warranties same as those of

qualified indorsers; and

warranties extend to immediate transferee only.

Liability Warranty1. To pay a sum certain.2. Requires

Notice of Dishonor.

3. Action can be brought only on maturity of instrument.

1. No obligation to pay.2. Notice of Dishonor is not a requirement.3. Action may be brought anytime.

Negotiating by Mere delivery or by Qualified Indorsement

General Indorser

1. No secondary liability;

1. With secondary liability;

2. Warrants that he has no knowledge of any fact, which would impair the validity of the instrument or render it valueless.

2. Warrants that the instrument is, at the time of his indorsement, valid and subsisting.

4. OTHER PARTIES:

General Rule:One whose signature does not appear on the instrument shall not be liable thereon (sec. 18)

Exceptions: 1. The principal who signs through an

agent is liable;2. The forger is liable;

3. One who indorses in a separate instrument (allonge) is liable;

4. One who signs his assumed or trade name is liable; and

5. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee.

Requisites for an Agent to escape liability: (sec. 20)

1. must be duly authorized;2. add words to his signature

indicating that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity; and

3. disclose his principal.

A signature by “procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. (sec. 21)

Indorsement or assignment of the NI by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. (sec. 22)

Accomodation Party - one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person

Liability: such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party (sec. 29)

Effects: 1. accommodation party is

generally regarded as a surety for the party accommodated;

2. When accommodation party makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement.




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Rights of accommodation parties as against each other: the other may demand contribution from his co-accommodation party without first directing his action against the principal debtor provided:

1. he made the payment by virtue of judicial demand; or

2. the principal debtor is insolvent.

Note: A corporation cannot act as an accommodation party. The issuance or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. (Crisologo v. CA, 117 SCRA 594).

Order of liability of indorsers:1. among themselves – indorsers are

liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise (sec. 68)

2. to the holder – indorsers are liable in any order

DEFENSESKinds:1. REAL/ABSOLUTE DEFENSES - those

that attach to the instrument itself and are available against all holders, whether in due course or not. Examples:1. Alteration;2. Non-delivery of incomplete

instrument;3. Duress amounting to forgery;4. Fraud in factum or fraud in esse

contractus;5. Minority;6. Marriage in the case of a wife;7. 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 its charter or statute from issuing any commercial 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 made illegal by statute; and

12.Forgery.

2. PERSONAL/EQUITABLE DEFENSES – those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. Examples:1. Absence or failure of

consideration, partial or total;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 it is payable at a fixed period after sight and the acceptance is undated;

4. Filling up of blank contrary to authority given 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 issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued;

14.Want of authority of agent where he has

15.apparent authority;16.Insanity where there is no notice of

insanity on the part of the one contracting with the insane person; and




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17.Illegality of contract where the form or consideration is illegal.

FRAUD IN FACTUM

FRAUD IN INDUCEMENT

1. It exists in those cases in which a person, without negligence, has signed an instrument which was in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of its, as where a not was signed by one under the belief that he was signing as a witness to a deed.

1. It is that which related to the quality, quantity, value or character of the consideration of the instrument. In this case, the signer is led by deception to execute what he knows is a negotiable instrument. It implies that the signer knew what he was signing but that he was induced by fraud to sign.

2. This kind of fraud is a real defense because there is no contract. It implies that the person did not know what he was signing. But where the signer by the exercise of reasonable diligence could have discovered the nature of the instrument, the fraud cannot be considered a real defense, as where a person, who can read, signed a note but failed to read it.

2. Such type of fraud is only a personal defense because it does not prevent a contract.

Effects of Defenses:1. Complete and undelivered

instrument (sec. 16) as between immediate parties and

as regards a remote party other

than a holder in due course, the delivery must be authorized in order to be effectual

where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed

where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved

2. Incomplete but delivered instrument (sec. 14) where the instrument is wanting in

any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein

it must be filled up strictly in accordance with the authority given and within a reasonable time

if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

3. Incomplete and undelivered instrument (sec. 15) it will not, if completed and

negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

Subsequent indorsers are liable however

4. Forgery (sec.2)




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

intent to defraud; or

2. alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.

Effect: signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party thereto, can be acquired through or under such signature

Exception: unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

Persons precluded from setting up defense of forgery:

1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors.

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

RULES IN CASES OF FORGED SIGNATURE: Where the drawer’s signature is

forged and the drawee pays it without having detected the forgery, he cannot charge the amount thereof to the drawer’s account. MOREOVER: The drawee who has paid a forged bill. whether previously accepted or not, is prevented from recovering from the recipient the amount he paid because he is bound to know the drawer’s signature. EXCEPT, if the person to whom it was paid was guilty of fraud, negligence, or who has not given value therefore.

RECOURSE: Recover from the forger.

Where the payee’s indorsement is forged and the drawee bank pays it, he cannot charge the account of the drawer BUT he can recover from the one to whom he paid since he makes no warranty as to genuineness of any indorsement.

BUT IF BEARER instrument, the drawee may debit the drawer’s account since the indorsement may be disregarded.

HOWEVER: if the DRAWEE’S negligence is the proximate cause of the payment under a forged instrument, the drawee is liable to the collecting bank.

BUT: Where both the drawee and the collecting banks are guilty of negligence, the degree of negligence of each shall be weighed in considering the amount of loss which each should bear.

Where a check has several indorsements on it and one of the indorser’s signatures is forged, it was held that it is only the negotiation based on the forged or unauthorized signature, which is inoperative. Thus, where the drawee bank paid it to the encasher, the drawee bank can recover since the indorser [Sec. 65-66] is supposed to warrant to the drawee that the signature of the payee and previous indorsers are genuine. One who purchases a check is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment, he impliedly assets that he has performed his duty.

Prior parties are not liable to forgery of signature.




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NOTE: CUT-OFF RULE – only if forged signature is necessary to vest title to subsequent parties will prior parties be excused from liability.

5. Alteration (sec. 124) Effect: the instrument is avoided

Exceptions: 1. against a party who has himself

made, authorized, or assented to the alteration

2. subsequent indorsers3. holder in due course not a party

to the alteration - he may enforce payment according to its original tenor

Changes constituting material alteration:

a. date;b. sum payable, either for

principal or interest;c. time or place of payment;d. number or relations of the

parties;e. medium or currency in

which payment is to be made;

f. that which adds a place of payment where no place of payment is specified; and

g. any other change or addition which alters the effect of the instrument in any respect. (sec. 125)

Spoliation – alteration made by a stranger.

The general rule denies the drawee bank’s right to charge against the drawer’s account the amount of an altered check. However, the latter’s negligence, before or after the alteration, may estop him from setting such alteration as against an innocent drawee bank who has paid the check.

In cases of altered checks and checks with forged indorsements, the drawee bank must notify and return them to

the collecting bank before 4:00 p.m. of the next day of clearing, but the drawee bank may still return them even after such time provided he does so within 24 hours from its discovery of the alteration or forged instruments so that recovery of the amount may be had. BUT, in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same.

NOTE: Alteration is only a partial real defense because a holder in due course can still enforce it according to its original tenor.

III. PRESENTMENT FOR ACCEPTANCE

Presentment for acceptance – the production or exhibition of a bill of exchange to the drawee for his acceptance or payment

General Rule: presentment for acceptance is not necessary to render any party to the bill liable.Exception: presentment for acceptance must be made:

a. Where the bill is payable after sight, or where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

b. Where the bill expressly stipulates that it shall be presented for acceptance; or

c. Where the bill is drawn payable elsewhere, then at the residence or place of business of the drawee. (sec. 143)

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. (sec. 144)




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How made: 1. made by or on behalf of the holder2. at a reasonable hour3. on a business day4. before the bill is overdue and

within reasonable time5. to the drawee or some person

authorized to accept or refuse acceptance on his behalf

Days presentment may be made. If date of presentment is:

a. Sunday or a holiday – must be made on the next succeeding business day

b. Saturday – before 12:00 noon on Saturday provided that it is not a holiday (sec. 146)

When delay for presentment excused:a. bill is drawn payable elsewhere

than at the place of business or the residence of the drawee

b. holder has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due

Effect: does not discharge the drawers and indorsers (sec. 147)

Where presentment is excused: a. Where the drawee is dead, or has

absconded, or is a fictitious person or a person not having capacity to contract by bill.

b. Where presentment can not be made after the exercise of reasonable diligence

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

Note: bill may be treated as dishonored by non-acceptance (sec. 148)

Duty of holder where bill not accepted. - where a bill is duly presented for acceptance and is not accepted within the prescribed time (24

hours – sec. 136), the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers (sec. 150) IV. ACCEPTANCE

Acceptance: the signification by the drawee of his

assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him.

How made :1) must be in writing2) signed by the drawee 3) must not express that the drawee

will perform his promise by any other means than the payment of money. (sec. 132)

the holder of the bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored. (sec. 133)

where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value (sec. 134)

Period for drawee to accept - allowed 24 hours after presentment in which to decide whether or not he will accept the bill; if acceptance is given, it dates as of the day of presentation (sec. 136)

Constructive acceptance: where a drawee refuses within 24 hours after delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same (sec. 137)

Note: same effect if the drawee destroys the instrument

Kinds:1. General - assents without qualification

to the order of the drawer.




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2. Qualified - which in express terms varies the effect of the bill as drawn.a. Conditional - makes payment by

the acceptor dependent on the fulfillment of a condition therein stated.

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

i. Local - an acceptance to pay only at a particular place.

ii. Qualified as to timeiii. The acceptance of some one

or more of the drawees but not of all. (sec. 141)

3. Constructive (sec. 137)

Rights of parties as to qualified acceptance. Holder: he 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.

Drawer or indorser: when he receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto (implied assent).

Effect of taking a qualified acceptance: the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. (sec.142)

Other rules of acceptance: a bill may be accepted before it has

been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment

when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill

accepted as of the date of the first presentment. (sec. 138)

an unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.(sec. 135)

where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. (sec. 187)Effect: the drawer and all indorsers are discharged from liability thereon (sec. 188)

Acceptance for Honor - an undertaking by a stranger to a bill after protest for the benefit of any party liable thereon or for the honor of the person for whose account the bill is drawn which acceptance inures also to the benefit of all parties subsequent to the person for whose honor it is accepted, and conditioned to pay the bill when it becomes due if the original drawee does not pay it. (Secs. 161-170)

Requisites: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 the instrument;

3. bill must not be overdue;4. acceptance for honor must be

with the consent of the holder of the instrument.

Formalities: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.




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V. DISHONOR BY NON-ACCEPTANCE

When instrument is dishonored by non-acceptance:

a. When it is duly presented for acceptance and such an acceptance is refused or can not be obtained; or

b. When presentment for acceptance is excused and the bill is not accepted (sec. 149)

where a bill is duly presented for acceptance and is not accepted within the prescribed time (24 hours – sec. 136), the person presenting it must treat the bill as dishonored by non-acceptance (sec. 150)

subsection (a) refers to secs. 132, 133 and 142

subsection (b) refers to sec. 148

Rights of holder where bill not accepted. - when a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary (sec. 151)

VI. PRESENTMENT FOR PAYMENT

Presentment for payment – the presentation of an instrument to the person primarily liable for the purpose of demanding and receiving payment.

General Rules: presentment for payment to

charge persons primarily liable is not necessary

presentment for payment to charge persons secondarily liable is necessary

Exceptions: a. drawer - where he has no right to

expect or require that the drawee or acceptor will pay the instrument (sec. 79)

b. indorser - where the instrument was made or accepted for his accommodation and he has no reason to expect that the

instrument will be paid if presented (sec. 80)

c. when dispensed:i. where, after the exercise of

reasonable diligence, presentment as required cannot be made;

ii. where the drawee is a fictitious person;

iii. by waiver of presentment, express or implied. (sec. 82)

d. when the instrument has been dishonored by non-acceptance (sec. 151)

Sufficiency of presentment.It must be:

1. 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 found at the place where the presentment is made. (sec. 72)

How made:1. personal demand for payment at the

proper place; and

2. readiness to exhibit the instrument if required, and to receive payment and to surrender the instrument if the debtor is willing to pay.

Purpose of exhibition:To enable the debtor to:

1. determine the genuineness of the instrument and the right of the holder to receive payment; and

2. to enable him to reclaim possession upon payment.

When exhibition excused:1. when debtor does not demand to

see the instrument but refuses payment on some other grounds, and

2. when the instrument is lost or destroyed.




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When made: where the instrument is payable at a

fixed or determinable future time, presentment must be made on the day it falls due

where it is payable on demand:a. promissory note: presentment

must be made within a reasonable time after its issue

b. bill of exchange: presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof (sec.71)

a check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay (Sec. 186)

Time of maturity: every negotiable instrument is

payable at the time fixed therein without grace

when the day of maturity falls upon a Sunday or a holiday, the instruments are to be presented for payment on the next succeeding business day

when the day of maturity falls upon a Saturday:

Instrument is payable at a fixed or determinable future time (time instrument) - presented for payment is on the next succeeding business day

instruments is payable on demand - at the option of the holder, be presented for payment:

a. before 12:00 noon on Saturday when that entire day is not a holiday or

b. the next succeeding business day (sec. 85)

How computed:

excluding the day from which the time is to begin to run, and by including the date of payment

applies to instruments which are payable at a fixed period after date, after sight, or after that happening of a specified event (sec. 86)

Where made (proper place):a. Where a place of payment is

specified in the instrument and it is there presented;

b. Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented;

c. Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment;

d. In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. (sec. 73)

When delay in presentment excused – delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. (sec. 81)

VII. WHEN INSTRUMENT CONSIDERED TO BE DISHONORED:

1. If it is not accepted when presented for acceptance; or

2. If it is not paid when presented for payment at maturity; or

3. If presentment is excused or waived and the instrument is past due and unpaid.

VIII. DISHONOR BY NON-PAYMENT

When instrument dishonored by non-payment:




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a. it is duly presented for payment and payment is refused or cannot be obtained; or

b. presentment is excused and the instrument is overdue and unpaid. (sec. 83.)

Effect of dishonor: an immediate right of recourse to all parties secondarily liable thereon accrues to the holder (sec. 84)

IX. NOTICE OF DISHONOR AND PROTEST

A. Notice of Dishonor

Notice of Dishonor - notice given by the holder or his agent to a party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill, or by non-payment by the acceptor of a bill or by non-payment by a maker of a note. (Sec. 89)

If such notice is given by a notary public, it is called PROTEST.

Effect of failure to give notice: parties secondarily liable are discharged

Requisites:1. Given by holder or his agent, or by

any party who may be compelled by the holder to pay (sec. 90);

2. Given to secondary party or his agent (sec. 97);

3. Given within the periods provided by law (sec. 102); and

4. Given at the proper place (Secs. 103 and 104)

When notice of dishonor dispensed with:1. when party to be notified knows

about the dishonor, actually or constructively (Secs. 114-117);

2. if waived (sec. 109); and3. when after due diligence, it cannot

be given (sec. 112).

How given: 1. by bringing verbally or 2. by writing to the knowledge of the

person liable the fact that a specified instrument, upon proper

proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

To whom given: 1. Non-acceptance (bill) – to persons

secondarily liable, namely, the drawer and indorsers as the case may be.

2. Non-payment (both bill and note) – indorsers.

Note: Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent.

By whom given:1. the holder2. another on behalf of the holder3. any party to the instrument who

may be compelled to pay it to the holder, and who would have a right of reimbursement from the party to whom notice is given. (sec. 90)

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

a. all parties prior to the holder, who have a right of recourse against the party to whom the notice is given; and

b. all holders subsequent to the holder giving notice. (sec. 92)

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

a. the holder; andb. all parties subsequent to the

party to whom notice is given. (sec. 93)

Where an instrument is dishonored in the hands of an agent, he can do either of the ff.:

a. directly give notice to persons secondarily liable thereon; or

b. give notice to his principal. In such case, he must give notice within the time allowed by law as if he were a holder. (sec. 94)




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A party giving notice is deemed to have given due notice where:

a. the notice of dishonor is duly addressed, and

b. deposited in the post-office, even when there is miscarriage of mail. (sec. 105)

Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. (sec. 107)

Notice may be waived either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied. (sec. 109)

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

a. if it appears in the body or on the face of the instrument, it binds all parties; but

b. if it is written above the signature of an indorser, it binds him only. (sec. 110)

Notice of dishonor is not required to be given 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 will honor the instrument;

5. where the drawer has countermanded payment. (sec. 114)

Notice of dishonor is not required to be given to an indorser in the ff. cases:

1. drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument;

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

3. instrument was made or accepted for his accommodation. (sec. 115)

If an instrument is not accepted by the drawee, there is no sense presenting it again for payment, and notice of dishonor must at once be given. If there was acceptance, presentment for payment is still required and if payment is refused, there is a need for notice of dishonor. (sec. 116)

An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. (sec. 117)

B. Protest

Protest - the formal instrument executed usually by a notary public certifying that the legal steps necessary to fix the liability of the drawee and the indorsers have been taken.

Effect of waiver: where protest is waived, presentment and notice of dishonor are also deemed waived. But where the notice of dishonor is waived, presentment is not waived.

Applicability: protest is necessary only in case of foreign bills of exchange which have been dishonored by non-acceptance or non-payment, as the case may be. If it is not so protested, the drawer and indorsers are discharged. (Sec. 118)

FOREIGN BILL OF EXCHANGE:1. Drawn in the Philippines but payable

outside the Philippines.2. Payable in the Philippines but drawn

outside the Philippines.

PROTEST MAY BE MADE BY:




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1. a notary public; or2. any respectable resident of the place

where the bill is dishonored, in the presence of 2 or more credible witnesses. (Sec. 154)

Protest for better security is one made by the holder of a bill after it has been accepted but before it matures, against the drawer and indorsers, where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of the creditors. (Sec. 158)

X. DISCHARGE

Discharge of instrument - a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated.

How discharged: 1. By payment in 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 the holder of the instrument at or after maturity in his own right (sec. 119)

By any act which would discharge a simple contract:

1. Payment or performance;2. Loss of the thing due;3. Condonation or remission;4. Confusion or Merger;5. Compensation;6. Novation;7. Annulment or Rescission;8. Fulfillment of a resolutory

condition;9. Prescription.

When persons secondarily liable on the instrument are discharged:

1. By any act which discharges the instrument;

2. By the intentional cancellation of his signature by the holder;

3. By the discharge of a prior party;4. By a valid tender of payment made

by a prior party;5. By the release of the principal

debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved;

6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument. (Sec. 120)

In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable:

a. where the extension of time is consented to by such party;

b. where the holder expressly reserves his right of recourse against such party.

Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him. (Sec. 121)

Effects of Renunciation: 1. A renunciation in favor of a

secondary party may be made by the holder before, at or after maturity of the instrument. Effect: only such secondary party is discharged and all parties subsequent to him but the instrument itself remains in force.

2. A renunciation in favor of the principal debtor may be effected at or after maturity. Effect: the instrument is discharged and all parties thereto provided the renunciation is made unconditionally and absolutely. (sec. 122)

Note: In either case, renunciation does not affect the rights of a holder in due course without notice.




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Cancellation of an instrument includes tearing, erasure, obliteration, or burning. It is not limited to writing of the word ‘cancelled”, or “paid”, or drawing of criss-cross lines across the instrument. (Sec. 123)

Payment for Honor - payment made by a person, whether a party to the bill or not, after it has been protested for non-payment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn. (Secs. 171-177)

Requisites: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 the protest or form an extension of it;

5. the notarial act must be based on the declaration made by the payor 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 not complied with, payment will operate as a mere voluntary payment and the payor will acquire no right to full reimbursement against the party for whose honor he pays.

In payment for honor, the payee cannot refuse payment. If he refuses, he cannot recover from the parties who would have been discharged had he accepted the same. In acceptance for honor, the holder’s consent is necessary.

The payor for honor is given the right to receive both the bill and the protest obviously to enable him to enforce his

rights against the parties who are liable to him.

INSURANCE CODE(P.D. No. 1460, effective June 11,

1978)

I. INTRODUCTION

A. Laws governing Insurance:a. Insurance Code of 1978;b. Civil Code, Art. 2011 and other

articles;c. Family Code (E.O 209);d. Other Special laws.

B. General concept of insuranceInsurance - an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Sec. 2, par. 2, ICP)

TYPES OF INSURANCE CONTRACTS:1. LIFE INSURANCE

a. individual life (Secs. 179–183, 227)

b. group life (Secs. 50, last par., 228)

c. industrial life (Secs. 229–231)

2. NON-LIFE INSURANCEa. Marine (Secs. 99–166)b. Fire (Secs. 167–173)c. Casualty (Sec. 174)

3. CONTRACTS OF SURETYSHIP OR BONDING (Secs. 175–178)

C. Nature and Characteristics

1. Risk distributing device - By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group.

2. Contract of adhesion or Fine Print Rule - most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by




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the insurer in printed form to which the insured adhere if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the insured.( Rizal Surety and Insurance Co. v. C.A.,336 SCRA 12 [2000].

3. Aleatory - there is an obligation on the part of the insurer to pay the proceeds of the insurance upon the happening of the event which is uncertain, or which is to occur at an indeterminate time.

4. Contract of Indemnity - there is an exchange of value for value (quid pro qou), applies only to property insurance except the creditor insuring the life of his debtor.

5. Uberrimae fides contract / principle of utmost good faith - It requires the parties to the contract of insurance to disclose conditions affecting the risk of which he is aware, or material fact, which the applicant knows, and those which he ought to know.

6. Personal Contract - insurer considers the personal qualifications of the insured in approving the contract.

7. Consensual – it is perfected by the meeting of the minds of the parties.

8. Bilateral - both parties are bound to do something.

9. Onerous - there is a valuable consideration called the premium.

10.Conditional - subject to conditions such as the happening of the event insured against, payment of premium, etc.

11. Property in legal contemplation

CONSTRUCTION OF INSURANCE CONTRACTS:

As a general rule, it is to be construed liberally in favor of the insured and strictly against the insurer. Such rule applies only in cases of doubt and not when the intention of the policy is clear

or the language is sufficiently clear to convey the meaning of the parties.

PRINCIPLE OF SUBROGATION A process of legal substitution where

the insurer steps into the shoes of the insured and he avails of the latter’s rights against the wrongdoer at the time of loss.

Applicable only to property insurance. The insurer can only recover from the

third person what the insured could have recovered.

There can be no subrogation in cases:1. Where the insured by his own act

releases the wrongdoer or third party liable for the loss or damage;

2. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s claim for loss;

3. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company v. CA, 184 SCRA 54)

PRINCIPLE OF INDEMNITY Except life and accident insurance, a

contract of insurance is a contract of indemnity whereby the insurer promises to make good only the loss of the insured.

Requisites for recovery:1. The insured must have

insurable interest in the subject matter;

2. That interest is covered by the policy;

3. There must be a loss; and4. The loss must be proximately

caused by the peril insured against.

D. Elements of Insurance1. Existence of an insurable interest

(Secs. 12-14,ICP);2. Risk of loss (Sec. 51, par. 9, ICP);3. Assumption of Risk (Sec. 2, ICP);4. Scheme to distribute losses; and5. Payment of premiums (Sec.77,

ICP). (Philamcare Health Systems, Inc. v. CA, No. 125678, March 18,2002).




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A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements, it is a risk-distributing device.

II. CONTRACT OF INSURANCE

A. Requisites of a contract of insurance:a. A subject matter in which the

insured has an insurable interest;b. Event or peril insured against

which may be any contingent or unknown event, past or future, and a duration for the risk thereof;

c. A promise to pay or indemnify in a fixed or ascertainable amount;

d. A consideration for the promise, known as the premium

e. A meeting of minds of the parties upon all the foregoing essentials

f. The parties must be competent to enter into the contract

g. The contract must be for a purpose not contrary to law or public policy.

B. Perfection consensual contract and therefore

perfected the moment there is meeting of the minds with respect to the object and the cause or consideration. (Cognition Theory)

Mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance (Great Pacific Life Assurance Corp. v. CA, 89 SCRA 543)

C. Parties to a contract of insurancea. Insurer – the person who

undertakes to indemnify anotherb. Insured – the person with capacity

to contract and having an insurable interest in the life or property of the insured

c. Beneficiary – person designated to receive the proceeds of the policy when the risk attaches

Every person, partnership, association, or corporation duly authorized to transact insurance business as elsewhere provided in this code, may be an insurer. (Sec. 6)

Anyone except a public enemy may be insured. (Sec. 7)

Public enemy means a nation with whom the Philippines is at war and it includes every citizen or subject of such nation.

Rules on minors For life, health or accident insurance

– A minor may enter into a valid contract of insurance provided:

a. He is 18 years of age or over;b. the insurance is taken on his

own life, and c. the beneficiary appointed is the

minor's estate or the minor's father, mother, husband, wife, child, brother or sister. (Sec. 3)

Other insurance – taken by the minor is voidable

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy. (Sec. 3)

Note: the law has lowered the age of majority to 18 years hence a minor is no longer qualified to take insurance by himself.

Rules on married women The consent of the husband is not

necessary for the validity of an insurance policy taken out by a married woman on her life or that of her children. (Sec. 3)

The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges of an owner under a policy. (Sec. 3)

Foreign Insurance Corporations




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May be authorized by the Commission to engage in insurance business in the country.

Requirements:a. appointment of a resident as a

general agentb. paid-up unimpaired assets or

capital and reserves not less than that required of domestic corporation.

c. Deposit for the benefit and security of policyholders, securities satisfactory to the Commission

d. Investments should not exceed 20% of the net worth of the foreign corporation or 20% of the capital of the registered enterprise.

D. Subject matter of insurance Any contingent or unknown event,

whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter. (Sec. 3)

An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize is not authorized. (Sec. 4)

E. Insurance not a wagering contract An insurance for or against the

drawing of any lottery, or for or against any chance or ticket in

a lottery drawing a prize is not authorized. (Sec. 4)

GAMBLING CONTRACT

INSURANCE CONTRACT

1. The parties contemplate gain through mere chance.

1. The parties seek to distribute possible loss by reason of mischance.

2. The gambler courts fortune.

2. The insured seeks to avoid misfortune.

3. Tends to 3. Tends to

increase the inequality of fortune

equalize fortune.

4. Essence: whatever one person wins from a wager is lost by the other party.

4. What the insured gains is not at the expense of another insured.

III. INSURABLE INTEREST

A. Concept of insurable interest in general A person has an insurable interest

in the subject matter if he is so connected, so situated, so circumstanced, so related, that by the preservation of the property he shall derive pecuniary benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice.

B. Insurable interest in life insurance Every person has an insurable

interest in the life and health: a. Of himself, of his spouse and of

his children; b. Of any person on whom he

depends wholly or in part for education or support, or in whom he has a pecuniary interest;

c. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and

d. Of any person upon whose life any estate or interest vested in him depends. (Sec. 10)

General Rule: No limit in the amount the insured can insure his life.Exception: In a creditor-debtor relationship

where the creditor insures the life of his debtor,

the limit of insurable interest is equal to the amount of the debt.




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Note: Insurable interest in the life of another need exist only at the time of perfection of the contract and need not exist thereafter. (Sec. 19)

C. Insurable interest in property insurance Every interest in property whether

real or personal, or any relation thereto, or liability in respect thereof, of such nature that the contemplated peril might directly damnify the insured (Sec. 13), which may consist in:

1. an existing interest;2. any inchoate interest

founded on an existing interest; or

3. an expectancy coupled with an existing interest in that out of which the expectancy arises. (Sec. 14)

The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. (Sec. 17)

INSURABLE INTEREST IN LIFE

INSURABLE INTEREST IN PROPERTY

1. Must exist only at the time the policy takes effect and need not exist at the time of loss

1. Must exist at time the policy takes effect and when the loss occurs

2. Insurable interest unlimited except in life insurance effected by creditor on life of debtor

2. Insurable interest limited to actual value of interest in property insured

3. The expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient without more.

3. An expectation of a benefit to be derived from the continued existence of the property insured must have a legal basis.

a. Insurable interest in case of mortgaged property Both the mortgagor and the

mortgagee have insurable interest in the property which is separate and distinct from each other.

Mortgagor’s insurable interest - to the extent of its value, even though the mortgage debt equals such value.

Mortgagee's interest - up to the extent of the debt only.

STANDARD OR UNION MORTGAGE CLAUSE

OPEN OR LOSS PAYABLE MORTGAGE CLAUSE

the subsequent acts of the mortgagor cannot affect the rights of the assignee

the mortgagor does not cease to be a party to the contract. Thus, the acts of the mortgagor affect the mortgagee (Secs. 8 and 9)

b. Effect of change in interest in the thing insured

General Rule: suspends the insurance until the interests in the thing and the interest in the insurance are vested in the same person. (Sec. 20)Exceptions:1. In life, health and accident

insurance (Sec. 20);2. Change in interest in the thing

insured after occurrence of an injury which results in a loss (Sec. 21);

3. Change in interest in one or more of several distinct things separately insured by one policy (Sec. 22);

4. Change of interest, by will or succession, on the death of the insured (Sec. 23);

5. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to others (Sec. 24);




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6. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57);

7. 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 (Art. 1306, NCC).

IV. DEVICES FOR ASCERTAINING AND CONTROLLING RISK AND LOSS

1. CONCEALMENT - neglect to communicate that which a party knows and ought to communicate

2. REPRESENTATION - factual statements made by the insured at the time of, or prior to, the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract.

3. WARRANTIES - statements or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or non-fulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment. The same may be expressed, implied, affirmative or promissory.

4. CONDITIONS - the insurer may also protect himself against fraudulent claims of loss and this he attempts to do by inserting in the policy various conditions, which take the form of conditions precedent. For instance, there are conditions requiring immediate notice of loss or injury and detailed proofs of loss within a limited period.

5. EXCEPTIONS - provisions that may specify excepted perils. It makes more definite the coverage indicated by the general description of the risk by excluding certain specified risk that otherwise would be included under the general language describing the risks assumed

A. Concealment

a. Concept A neglect to communicate that

which a party knows and ought to communicate, is called a concealment. (Sec. 26)

b. Duty to communicate Each party to a contract of

insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining. (Sec. 28)

c. Test of Materiality Materiality is to be 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. (Sec. 31)

d. Requisites: a. The matters concealed must be

material;b. There must be an obligation for

the insured to reveal the same;c. The matters concealed are those to

which he makes no warranty;d. And the insurer has no means of

ascertaining those matters.

e. Effects of concealment

General Rule: Rescission of the contract by the insurer, whether the concealment is intentional or unintentional. Good faith therefore is not a defense. (Sec. 27)

Exceptions:a. Incontestability clause

In life insurance, after the policy has been in force for at least 2 years, the insurer cannot rescind the policy due to fraudulent concealment or




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misrepresentation by the insured.

b. Certain Concealments in Marine Insurance

The following matters, though concealed will not vitiate the contract except when they caused 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

documents;e. Use of false or simulated

papers.

The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered (Sunlife v. Sps. Bacani, 246 SCRA 268).

f. Matters which need not be communicated Neither party to a contract of

insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other:

a. Those which the other knows;

b. Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant;

c. Those of which the other waives communication;

d. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and

e. Those which relate to a risk excepted from the policy

and which are not otherwise material. (Sec. 30)

Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade. (Sec. 32)

Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by section 51. (Sec. 34)

Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. (Sec. 35)

g. Waiver of information By:

the terms of the insurance or

by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated. (Sec. 33)

B. Representation

1. Concept oral or written statement of a fact

or condition affecting the risk, made by insured to insurer, tending to induce insurer to assume risk. (Sec. 36)

2. Kinds of representation a. AFFIRMATIVE – affirmation

of a fact when the contract begins; and (Sec. 37)

b. PROMISSORY – promise to be performed after policy was issued. (Sec. 39)




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A representation may be made at the time of, or before, issuance of the policy. (Sec. 37)

A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation. (Sec. 39)

3. Test of materiality The materiality of a representation

is determined by the same rules as the materiality of concealment. (Sec. 46)

4. Effect of alteration or withdrawal A representation may be

altered or withdrawn before the insurance is effected, but not afterwards. (Sec. 41)

5. Time to which representation refers A representation must be

presumed to refer to the date on which the contract goes into effect. (Sec. 42)

6. Effect when representation is obtained from third persons When a person insured has no

personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information. (Sec. 43)

7. When presumed false, effect of falsity A representation is to be deemed

false when the facts fail to correspond with its assertions or stipulations. (Sec. 44)

If a representation is false in a material point, whether affirmative or promissory,

the injured party is entitled to rescind the contract from the time when the representation becomes false.

exception: The acceptance of premium payments despite knowledge of the ground for rescission. (Sec. 45).

C. Remedies available in case of concealment or false representation

GROUNDS FOR RESCISSION OF INSURANCE CONTRACT:

a. Concealment; b. Misrepresentation; c. Breach of warranty

WAIVER OF RIGHT TO RESCIND: The right to rescind is waived by the acceptance of premium payments despite the knowledge of the ground for rescission. (Sec. 45)

LIMITATIONS ON THE RIGHT OF THE INSURER TO RESCIND: In non-life policy – such right must be

exercised prior to the commencement of an action on the contract;

In life insurance – such right must be availed of during the first 2 years from the date of issue of policy or its last reinstatement. (Sec. 48)

1. When recission by the insurer may be exercised Whenever a right to rescind a

contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. (Sec. 48)

2. When life insurance policy becomes incontestable After (1) a policy of life insurance

(2) made payable on the death of the insured (3) shall have been in force during the lifetime of the insured for a period of 2 years from the date of its issue or of its last reinstatement the insurer cannot prove that the policy is void




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ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. (Sec. 48)

a. Requisites for incontestabilityi. The insurance is a life

insurance policy payable on the death of the insured.

ii. It has been enforced during the lifetime of the insured for at least two years from its date of issue or of its last reinstatement.

b. Theory and object of incontestability

As to the insurer – the theory is that an insurer should have a reasonable opportunity to investigate the statements which the applicant makes in procuring his policy and that after a definite period, the insurer should not be permitted to question the validity of the policy, either by affirmative action or by defense to a suit bought on the life policy by the beneficiary (Powell vs Mut. Life Ins. Co., 144 N.E. 825)

As to the insured – the clause has as its object to give the greatest possible assurance to a policyholder that his beneficiaries would receive payment without question as to the validity of the policy (Newton vs New York Life Ins. , 35 F. 2d 498) or the existence of the coverage once the period of contestability passes.

c. Defenses not barred by incontestabilityi. That the person taking

the insurance lacked

insurable interest as required by law;

ii. That the cause of the death of the insured is an excepted risk;

iii. That the premiums have not been paid (Secs. 77, 227[b], 228[b], 230[b]);

iv. That the conditions of the policy relating to military or naval service have been violated (Secs. 227[b], 228[b]);

v. That the fraud is of a particularly vicious type;

vi. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or

vii.That the action was not brought within the time specified.

D. Warranties

1. Concept Statement or promise by the

insured set forth in the policy or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer.

PURPOSE: In order to eliminate potentially increasing hazards which may either be due to the acts of the insured or to the change to the condition of the property.

WARRANTY REPRESENTATION1. part of

the contract

1. mere collateral inducement

2. written on the policy, actually or by reference

2. may be written in the policy or may be oral.




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3. conclusively presumed material.

3. must be proved to be material.

4. must be strictly complied with.

4. requires only substantial truth and compliance.

2. Kinds of warranties a. EXPRESS b. IMPLIED - it is deemed included in

the contract although not expressly mentioned. Example: In marine insurance, seaworthiness of the vessel.

c. AFFIRMATIVE- asserts the existence of the fact or condition at the time it is made.

d. PROMISSORY- the insured stipulates that certain facts or conditions shall exist or thing shall be done or omitted. (Sec. 67)

3. Time to which warranty refers A warranty may relate to the past,

the present, the future, or to any or all of these. (Sec. 68)

4. Effects of breach Violation of material warranty

Rule: Violation of material warranty or of a material provision of a policy will entitle the other party to rescind the contract. (Sec. 74)

Violation of immaterial provision General Rule: it will not avoid the policy.Exception: when the policy expressly provides or declares that a violation thereof will avoid it. (Sec. 75)

A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk. (Sec. 76)

“OTHER INSURANCE” CLAUSE A condition in the policy requiring the

insured to inform the insurer of any

other insurance coverage of the property insured is lawful and specifically allowed under Sec. 75 of the ICP

To constitute a violation, the other insurance must be upon the same subject matter, the same interest therein and the same risk.

V. POLICY OF INSURANCE

A. Definition and formPolicy of insurance - the written instrument in which a contract of insurance is set forth. (Sec. 49)

shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein.

Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.

Group insurance and group annuity policies, however, may be typewritten and need not be in printed form. (Sec. 50)

B. Contents of the policya. Partiesb. Amount of insurance, except in

open or running policies;c. Rate of premium;d. Property or life insured;e. Interest of the insured in the

property if he is not the absolute owner;

f. Risk insured against; andg. Duration of the insurance.

C. Papers attached to the policy and their binding effect




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RIDER – printed stipulation usually attached to the policy because they constitute additional stipulations between the parties.

General Rule: not binding Exception: Valid when: the descriptive title or name of the

rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy. (Sec. 50)

D. Kinds of policya. Open - one in which the value

of the thing insured is not agreed upon, but is left to be ascertained in case of loss. (Sec. 60)

b. Valued - one which expresses on its face an agreement that the thing insured shall be valued at a specific sum. (Sec. 61)

c. Running - one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements. (Sec. 62)

E. Cover notes a concise and temporary written

contract issued to the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance.

It is intended to give temporary insurance protection coverage to the applicant pending the acceptance or rejection of his application for a period of not exceeding 60 days unless a longer period is approved by Insurance Commissioner (Sec. 52).

BINDING RECEIPT - merely an acknowledgment on behalf of the company that their branch office had received from the applicant

the insurance premium and had accepted the application subject to processing by the head office.

F. Cancellation of policy

GROUNDS (EXCEPT LIFE INSURANCE):

a. Non-payment of premium;b. Conviction of a crime out of

acts increasing the hazard insured against;

c. Discovery of fraud or material misrepresentation;

d. Discovery of willful or reckless acts of omissions increasing the hazard insured against;

e. Physical changes in property making the property uninsurable; and

f. Determination by the Insurance Commissioner that the continuation of the policy would violate the Insurance Code. (Sec. 64)

REQUIREMENTS FOR CANCELLATION OF POLICY:

a. prior notice of cancellation to the insured;

b. notice must be based on the occurrence after the effectivity date of the policy;

c. notice must be in writing, mailed or delivered to the named insured at the address shown in the policy;

d. notice must state which of the grounds set forth in Sec. 64 is relied upon and that upon written request of the insured, the insurer will furnish the facts on which the cancellation is based. (Sec. 65)

Rule on renewal of policy:General Rule: entitled to renewalExceptions:

a. life insurance; orb. the insurer does not intend to

renew, provided: the insurer at least 45 days in

advance of the end of the policy period




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mails or delivers to the named insured at the address shown in the policy

notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverage

G. Time to commence action on the policy; effect of stipulation

A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than 1 year from the time when the cause of action accrues, is void. (Sec. 63)

VI. PREMIUM

A. Concept A consideration paid to an insurer

for undertaking to indemnify the insured against a specified peril.

The basis of the right of the insurer to collect premiums is the assumption of risk.

B. Effect of non-payment of premium; exceptions

General Rule: No policy issued by an insurance company is valid and binding until actual payment of premium. Any agreement to the contrary is void. (Sec. 77)

Exceptions to the requirement for pre-payment of premiums:

1. in case of life or industrial life insurance, when the grace periods applies; (Sec. 77)

2. when the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)

3. when there is a stipulation which provides for the payment of the premium on installment, the same not being contrary to law, morals, good custom, public order or public policy

4. In suretyship, where the obligee has accepted the bond (Sec. 177)

5. cover note

Effect of non-payment: notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. (Sec. 77)

Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. (Makati Tuscanny Condominium Corp. v. CA, 215 SCRA 462)

The contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. If the stipulation is contrary to law, morals or public policy, the contract is void and inexistent from the beginning. (Art. 1306 NCC)

C. When insured entitled to the return of premiums

1. If thing insured was never exposed to the risks insured against (Sec. 79);

2. Contract is voidable due to the fraud or misrepresentation of insurer or his agents; (Sec. 81)

3. Contract is voidable because of the existence of facts of which the insured was ignorant without his fault; (Sec. 81)

4. When by any default of the insured other than actual fraud, the insurer never incurred liability (Sec. 81);

In 1-4 above, the whole premium is returned.




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5. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof;

Only pro rata return of the unexpired time. Exceptions:a. policy not made for a

definite period of timeb. short period rate is

agreed upon c. life insurance policy

6. When there is over-insurance (Sec. 82);

Only pro rata return to the amount by which the aggregate sum insured exceeds the insurable value of the thing at risk. (Sec. 82)

7. When rescission is granted due to the insurer’s breach of contract. (Sec. 82)

Only pro rata return of the unexpired time.

If a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not entitled to return of premiums, so far as that particular risk is concerned. (Sec. 80)

VII. PERSONS ENTITLED TO RECOVER ON THE POLICY AND CONDITIONS FOR RECOVERY

A. BeneficiaryGeneral Rule: Designation is revocable.Exception: Express provision in the policy that it is irrevocable

The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. (Sec. 12)

The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy. (Sec. 53)

When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy. (Sec. 56)

A policy may be so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured. (Sec. 57)

B. Rule where insurance is made by an agent or trustee When an insurance contract is

executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as agent or trustee, or by other general words in the policy. (Sec. 54)

C. Rule where insurance if made by the partner or part owner To render an insurance effected by

one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. (Sec. 55)

D. Notice and proof of loss When a preliminary proof of loss is

required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time. (Sec. 89)




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All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived. (Sec. 90)

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground. (Sec. 91)

If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified. (Sec. 92)

LOSS - injury or damage sustained by insured from perils insured against.

PROXIMATE CAUSE - an event which sets all other events in motion without any intervening or independent case, without which the injury or loss would not have occurred.

LOSS FOR WHICH INSURER IS LIABLE:

1. loss the proximate cause of which is the peril insured against (Sec. 84);

2. loss the immediate cause of which is the peril insured against except where proximate cause is an excepted peril;

3. loss through negligence of insured except where there was gross negligence amounting to willful acts; and

4. loss caused by efforts to rescue the thing from peril insured against;

5. if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part (Sec. 85).

LOSS FOR WHICH INSURER IS NOT LIABLE:

1. loss by insured’s willful act;2. loss due to connivance of the

insured (Sec. 87); and3. loss where the excepted peril is

the proximate cause.

EFFECT OF FAILURE TO GIVE NOTICE OF LOSS:

1. In fire insurance - it will defeat the right of the insured to recover;

2. In other types of insurance – it will not exonerate the insurer unless there is a stipulation in the policy to that effect.

VIII. DOUBLE INSURANCE

A. Definition exists where the same person is

insured by several insurers separately in respect to the same subject and interest. (Sec. 93)

REQUISITES:1. The person insured is the

same;2. Two or more insurers

insuring separately;3. The subject matter is the

same;4. The interest insured is also

the same;5. The risk or peril insured

against is likewise the same.

OVER-INSURANCE

DOUBLE INSURANCE

1. One insurer is sufficient

1. Two or more insurers

2. Insurance taken must be more than the amount of insurable interest

2. Total amount of policies taken need not exceed the amount of the insurable interest




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B. Stipulation against double insurance The purpose of the prohibition

against double insurance is to prevent over-insurance and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a loss would be profitable to the insured. (Pioneer insurance & Surety Corp. vs Yap)

C. Rules for payment where there is over-insurance by double insurancea. The insured, unless the policy

otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts;

b. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured;

c. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy;

d. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves;

e. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (sec. 94)

IX. REINSURANCE

A. Definition one by which an insurer procures a

third person to insure him against loss or liability by reason of such original insurance. (Sec. 95)

In every reinsurance, the original contract of insurance and the contract of reinsurance are covered by separate policies.

B. Nature A reinsurance is presumed to be a

contract of indemnity against liability, and not merely against damage. (Sec. 97)

The original insured has no interest in a contract of reinsurance. (Sec. 98)

DOUBLE INSURANCE

REINSURANCE

1. involves the same interest

1. involves different interest

2. insurer remains in such capacity

2. insurer becomes the insured in relation to reinsurer

3. insured is the party in interest in the 2 contracts

3. original insured has no interest in the reinsurance contract.

4. subject of insurance is property

4. subject of insurance is the original insurer’s risk

5. insured has to give his consent

5. insured’s consent not necessary

C. Duty of reinsured to disclose facts Where an insurer obtains

reinsurance, except under automatic reinsurance treaties, he must communicate all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or




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subsequently acquired, which are material to the risk. (Sec. 96)

X. MARINE INSURANCE

A. Definition insurance against risks connected

with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. (Sec. 99)

B. Scope of marine insurance1. vessels, goods, freight, cargo,

merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation;

2. persons or property in connection with marine insurance;

3. precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and

4. bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99)

Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 139 SCRA 596)

C. Risk or losses covered in marine insurance

a. perils of the sea vs. perils of the ship

PERILS OF THE SEA includes only those

casualties due to the unusual violence or extraordinary action of wind and wave or to other extraordinary causes connected with navigation.

PERILS OF THE SHIP a loss which in the ordinary course

of events, results from the: 1. natural and inevitable action

of the sea2. ordinary wear and tear of

the ship or3. negligent failure of the

ship’s owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions.

BARRATRY any willful misconduct on the part

of the master or crew in pursuance of some unlawful or fraudulent purpose without consent of owners, and to the prejudice of the owner’s interest.

b. “all risks” marine insurance policy insurance against all causes of

conceivable loss or damage, except: (1) as otherwise excluded in the policy or (2) due to fraud or intentional misconduct on the part of the insured.

INCHAMAREE CLAUSE – covers loss or damage to the hull or machinery through:

1. negligence of the captain, engineers, etc.

2. explosions, breakage of shafts; and

3. latent defect of machinery or hull.

D. Insurable interest in marine insurance1. ship owner’s insurable interest

a. rule where vessel is chartered The owner of a ship has

in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss except that in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer. (Sec. 100)




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b. rule where vessel is hypothecated by bottomry difference between the

value of vessel and the amount of loan. (Sec. 101)Creditor’s insurable interest: amount of the loan.

c. insurable interest in freightage

Freightage - in the sense of a policy of marine insurance signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others. (Sec. 102)

The owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. (Sec. 103)

2. charterer’s insurable interest to the extent that he is liable to

be damnified by its loss. (Sec. 106)

3. cargo owner’s insurable interest over the cargo and the

expected profits (Sec. 105)

E. Concealment1. Meaning of concealment in marine

insurance failure to disclose any material

fact or circumstance which in fact or law is within, or which ought to be within the knowledge of one party and of which the other has no actual or presumptive knowledge.

2. Duty to communicate each party is bound to

communicate, in addition to what is required by section 28, all the information which he

possesses, material to the risk, except such as is mentioned in section 30, and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose. (Sec. 107)

3. Opinions or expectations of third persons information of the belief or

expectation of a third person, in reference to a material fact, is material. (Sec. 108)

4. when concealment does not vitiate the entire contract A concealment in a marine

insurance, in respect to any of the following matters, does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: a. The national character of

the insured; b. The liability of the thing

insured to capture and detention;

c. The liability to seizure from breach of foreign laws of trade;

d. The want of necessary documents;

e. The use of false and simulated papers. (Sec. 110)

F. Representations1. Effect of false representation by

the insured If a representation is

intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract. (Sec. 111)

2. Effect of false representation as to expectation The eventual falsity of a

representation as to expectation does not, in the




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absence of fraud, avoid a contract of marine insurance. (Sec. 112)

G. Implied Warranties in Marine Insurancea. that the ship is seaworthy at the

inception of the insurance (Sec. 113);

b. that the ship will not deviate from agreed voyage unless deviation is proper (Sec. 123, 124, 125);

c. that the ship will not engage in an illegal venture;

d. warranty of neutrality: that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted; (Sec. 120)

e. presence of insurable interest.

Seaworthiness In every marine insurance

upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy. (Sec. 113)

what constitutes seaworthiness A ship is seaworthy when it is

reasonably fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy. (Sec. 114)

A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be:

a. properly laden, and b. provided with a competent

master, c. sufficient number of competent

officers and seamen, and the d. requisite appurtenances and

equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and

e. other necessary or proper stores and implements for the voyage. (Sec. 116)

A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo. (Sec. 119)

It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods (Roque v. IAC, 139 SCRA 596).

when complied with; exceptions An implied warranty of

seaworthiness is complied with if the ship be seaworthy at the time of the of commencement of the risk.

Exceptions: a. When the insurance is made for

a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time;

b. When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage. (Sec. 115)

Rule where ship becomes unseaworthy in the course of the voyage When the ship becomes

unseaworthy during the voyage to which an insurance relates, an




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unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner's interest from liability from any loss arising therefrom. (Sec. 118)

Warranty that necessary documents are carried Where the nationality or neutrality of

a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon. (Sec. 120)

Warranty against improper deviation Deviation is a departure from the

course of the voyage insured or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage. (Sec. 123)

Proper voyage: (in order) i. that stated in the insurance

contractii. that fixed by mercantile usageiii. that which is most natural,

direct and advantageous

when deviation proper: i. When caused by circumstances

over which neither the master nor the owner of the ship has any control;

ii. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against;

iii. When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or

iv. When made in good faith, for the purpose of saving human life or relieving another vessel in distress. (Sec. 124)

Note: Every deviation not specified above is improper. (Sec. 125)

effect of improper deviation An insurer is not liable for any

loss happening to the thing insured subsequent to an improper deviation. (Sec. 126)

H. Loss1. Kinds of losses

a. TOTAL LOSS:i. actual loss - cause by:

a. A total destruction of the thing insured;

b. The irretrievable loss of the thing by sinking, or by being broken up;

c. Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or

d. Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. (Sec. 130)

ii. constructive total loss - one which gives to a person insured a right to abandon (sec. 131 & sec. 139)

b. PARTIAL LOSS – that which is not total (Sec. 128) An actual loss may be

presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case. (Sec. 132)

CO-INSURANCE - A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. (Sec. 157)

When the property is insured for less than its value, the insured is considered a co-insurer of the difference between the amount of insurance and the value of the property.

Requisites:1. The loss is partial;2. The amount of insurance is less than the value of the property insured (Sec 157).




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Note: In fire insurance, in addition to the above 2 requisites, there has to be an express stipulation to that effect.

2. Right to payment upon an actual total loss Upon an actual total loss, a person

insured is entitled to payment without notice of abandonment. (Sec. 135)

3. Scope of insurance against actual total loss An insurance confined in terms to

an actual loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured. (Sec. 137)

4. When constructive total loss exists A person insured by a contract of

marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: a. If more than 3/4 thereof in

value is actually lost, or would have to be expended to recover it from the peril;

b. If it is injured to such an extent as to reduce its value more than 3/4;

c. If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than 3/4 the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or

d. If the thing insured, being cargo or freightage, and the voyage cannot be performed,

nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned unless the ship is also abandoned. (Sec. 139)

Note: In case of constructive total loss, insured may

1. abandon goods or vessel to the insurer and claim for whole insured value (Sec. 139), or

2. he may, without abandoning vessel, claim for partial actual loss. (Sec. 155)

5. Concept of abandonment and its requisites 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. (Sec. 138)

Effects: equivalent to a transfer by the

insured of his interest to the insurer, with all the chances of recovery and indemnity. (Sec. 146)

acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer and for his benefit. (Sec. 148)

acceptance of an abandonment, whether express or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment. (Sec. 151)

once made and accepted is irrevocable, unless the ground upon which it was made proves to be unfounded. (Sec. 152)

Requisites:1. There must be an actual

relinquishment by the person




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insured of his interest in the thing insured (Sec. 138);

2. There must be a constructive total loss (Sec. 139);

3. The abandonment be neither partial nor conditional (Sec. 140);

4. It must be made within a reasonable time after receipt of reliable information of the loss (Sec. 141);

5. It must be factual (Sec. 142);6. It must be made by giving notice

thereof to the insurer which may be

done orally or in writing (Sec. 143); and7. The notice of abandonment must

be explicit and must specify the particular cause of the abandonment (Sec. 144).

where the information regarding the loss is of a doubtful character, the insured is entitled to a reasonable time to make inquiry. (Sec. 141)

where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was then in fact no total loss, the abandonment becomes ineffectual (Sec. 142)

if the notice be done orally, a written notice of such abandonment shall be submitted within seven days from such oral notice.(Sec. 143)

an abandonment can be sustained only upon the cause specified in the notice thereof (sec. 145)

where notice of abandonment is properly given, the rights of the insured are not prejudiced by the fact that the insurer refuses to accept the abandonment. (Sec. 149)

Other Rules: If a marine insurer pays for a loss

as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there

had been a formal abandonment. (Sec. 147)

The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as an acceptance. (Sec. 150)

On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insured of said freightage; but freightage subsequently earned belongs to the insurer of the ship. (Sec. 153)

If an insurer refuses to accept a valid abandonment, he is liable as upon actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured. (Sec. 154)

6. Average 1. Kinds of average (particular and

general)

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 real or known risk. It must be borne equally by all of the interests concerned in the venture.

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 persons interested in the vessel and her cargo. It is borne alone by the owner of the cargo or the vessel, as the case may be.

2. Requisites of general average1. There must be a common

danger to the vessel or cargo;2. Part of the vessel or cargo was

sacrificed deliberately;




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3. The sacrifice must be for the common safety or for the benefit of all;

4. It must be made by the master or upon his authority;

5. It must be not be caused by any fault of the party asking the contribution;

6. It must be successful, i.e. resulted in the saving of the vessel or cargo; and

7. It must be necessary.

3. Insurer’s liability for general average the liability of the insurer shall

be limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. (Sec. 164)

when a person insured by a contract of marine insurance has a demand against others for contribution, he may claim the whole loss from the insurer, subrogating him to his own right to contribution. (Sec. 165)

No liability: a. after the separation of the

interests liable to the contribution

b. when the insured, having the right and opportunity to enforce the contribution from others, has neglected or waived the exercise of that right. (Sec. 165)

XI. FIRE INSURANCE

A. Definition and scope of fire insurance 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, when such risks are covered by extension to fire insurance policies or under separate policies. (Sec. 167)

B. Risks or losses covered1. direct losses2. indirect or consequential losses

a. physical damageb. loss of earningsc. extra expense

C. Effect of alteration in the thing insured entitles an insurer to rescind a

contract of fire insurance; (Sec. 168) provided:

1. The use or condition of the thing is specifically limited or stipulated in the policy;

2. Such use or condition as limited by the policy is altered;

3. The alteration is made without the consent of the insurer;

4. The alteration is made by means within the control of the insured;

5. The alteration increases the risk; (Sec. 168) and

6. There must be a violation of a policy provision. (Sec. 170)

D. Measure of indemnity

Open policy: the measure of indemnity in an

insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition in which at the time of the injury (Sec. 171)

Valued Policy: the effect shall be the same as in a

policy of marine insurance (Sec. 171)Note: Insured is not a co-insurer in the absence of stipulation

FALL-OF-BUILDING CLAUSE – provides that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.




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OPTION TO REBUILD CLAUSE – option of insurer to reinstate or replace the property damaged or destroyed or any part thereof, instead of paying the amount of the loss or the damage. The insurer, after electing to rebuild, cannot be compelled to perform this undertaking by specific performance because this is an obligation to do, not to give. Remedy: ‘the same be executed at his cost’. (Art. 1167 Civil Code)

XII. CASUALTY INSURANCE

A. Concept insurance covering loss or liability

arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine.

includes, but is not limited to: employer's liability

insurance, motor vehicle liability

insurance, plate glass insurance, burglary and theft

insurance, personal accident and health

insurance as written by non-life insurance companies, and

other substantially similar kinds of insurance.

B. Liability insurablea. liability for quasi-delict or non-

fulfillment of contractb. liability for criminal negligence

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 liability consequences of deliberate criminal acts are not insurable.

C. Meaning of “accident” and “accidental” in casualty insurance

ACCIDENTAL - The terms “accident” and “accidental” have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen.

INTENTIONAL - as used in an accident policy excepting intentional injuries inflicted by the insured or any other person, implies the exercise of the reasoning faculties, 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 the third person, the insurer is relieve from liability as stipulated (Biagtan v. the Insular Life Assurance Co. Ltd., 44 SCRA 58, 1972)

D. Basis and extent of insurer’s liability Casualty insurance may provide

for 3rd party liability (in the nature of stipulation pour autrui for personal injury and even damage to property), in which case, the third party may directly sue the insurer upon the occurrence of the loss. (First Integrated Bonding and Ins. Co., Inc. vs Hernando, 199 SCRA 769)

If the policy provides for “reimbursement after actual payment by the insured,” or for the indemnity against loss, a third person has no cause of action against the insurer. (Bonifacio Brothers vs Mora 20 SCRA 261)

The direct liability of the insurer under indemnity contract against 3rd party does not mean that the insurer can be held solidarily liable with the insured and / or the other parties found at fault. The liability of the insurer to the 3rd party is based on contract; that of the insured is based on tort. (Malayan




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Insurance Co. Inc. vs CA 165 SCRA 136)

While in a solidary obligation the creditor may enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes to indemnify the insured against loss, damage or liability arising from unknown or contingent event. To make the insurer solidarily liable with the latter’s entire obligation beyond the sum limited in the insurance contract would result in “evident breach of the concept of solidary obligations.” (Vda. De Maglana vs Consolacion, 212 SCRA 268)

XIII. SURETYSHIP

A. Definition An agreement whereby a surety

guarantees the performance by the principal or obligor of an obligation or undertaking in favor of an obligee. (Sec. 175) It is essentially a credit accommodation.

Kinds:a. Fidelity Bond – contract of

insurance against loss from misconduct

b. Fidelity Guaranty Insurance – a contract whereby one, for a consideration, agrees to indemnify the assured against loss arising from want of integrity, fidelity or honesty of employees or other persons holding positions of trust

B. Nature of liability of surety1. Solidary; 2. Limited to the amount of the

bond;3. It is determined strictly by the

terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Sec. 176)

SURETYSHIP PROPERTY INSURANCE

1.accessory contract

1. principal contract

2. parties: surety, obligor and obligee

2. parties: insurer and insured

3. credit accommodation

3. contract of indemnity

4. surety can recover from principal

4. no such right; only right of subrogation

5. bond can be cancelled only with consent of obligee, Commissioner or court

5. may be cancelled unilaterally either by insured or insurer on grounds provided by law

6. requires acceptance of obligee to be valid

6. no need of acceptance by any third party

7. risk-shifting device, premium paid being in the nature of a service fee

7. risk-distributing device, premium paid as a ratable contribution to a common fund

XIV. LIFE INSURANCE

A. Definition insurance on human lives and

insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities. (Sec. 179)

B. Kinds of life insurance1. ORDINARY LIFE, GENERAL LIFE

OR OLD LINE POLICY - insured pays a fixed premium every year until he dies. Surrender value after 3 years.

2. LIMITED PAYMENT POLICY – insured pays premium for a limited period. If he dies within the




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period, his beneficiary is paid; if he outlives the period, he does not get anything.

3. ENDOWMENT POLICY – pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit.

4. TERM INSURANCE – insurer pays once only, and he is insured for a specified period. If he dies within the period, his beneficiaries benefits. If he outlives the period, no person benefits from the insurance.

5. INDUSTRIAL LIFE - life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener; and

6. VARIABLE CONTRACT – any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment.

C. Liability of insurer in case of suicide

1. If committed after 2 years from the date of the policy’s issue or its last reinstatement;

2. If committed after a shorter period provided in the policy; and

3. If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril. (Sec. 180-A)

Note: Any stipulation extending the 2-year period is null and void.

Premiums paid out of conjugal funds, the proceeds are considered conjugal. If the beneficiary is other than the insured’s estate, the

source of premiums would not be relevant (Del Val v. Del Val, 29 Phil 534).

If the insured or beneficiary is a minor, and the amount involved does not exceed P20,000, the father, in the absence of a judicial guardian, or in his absence or incapacity, the mother may exercise the minor’s rights under the policy, without the need of a court authority or a board. (Sec. 180)

D. Right to assign life insurance policy A policy of insurance upon life or

health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. (Sec. 181)

Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required. (Sec. 182)

E. Measure of indemnity Unless the interest of a person

insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. (Sec. 183)

XV. CLAIMS SETTLEMENT

a. Life insurance The proceeds of the policy shall be

paid immediately upon maturity of the policy, unless such proceeds are made payable in installments or as an annuity, in which case the installments, or annuities shall be paid as they become due.

That in the case of a policy maturing by the death of the insured, the proceeds thereof shall be paid within 60 days after presentation of the claim and filing




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of the proof of the death of the insured. (Sec. 242)

b. Property Insurance Proceeds under the policy shall be

paid within 30 days after proof loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration. (Sec. 243)

Effect of delay: the beneficiary is entitled to payment of:

a. interest for the duration of the delay at the rate of twice the legal interest (24% interest)

b. attorney’s fees and other litigation expenses

c. appropriate damages under the Civil Code like moral and exemplary damages. (Sec. 244; Zenith Insurance Corp. vs. CA, 185 SCRA 389)

Note: Sections 243 and 244 of the Insurance Code apply only when the court finds an unreasonable delay or refusal in the payment of the claims. The applicable law is Article 2209 of the Civil Code which provides that if the obligation consists in the payment of a sum of money and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is 6% per annum.". (Tio Kho Chio vs CA, 202 SCRA 119).

Prescriptive period: 10 yearsException: the parties may validly agree on a shorter period provided it is 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.

Prescriptive period commences from the initial denial of the claim, not from the resolution of the motion for reconsideration filed by

the insured. (Sun Insurance Office Ltd. vs. CA, 195 SCRA 193)

Note:Under Sec. 384 of the insurance Code, notice of claim setting for the nature, extent and duration of the injuries sustained must be filed otherwise the claim is waived. This is different from the prescription period of 1 year from the denial of the claim within which to file an action against the insurer. (Vda. De Gabriel vs. CA, 264 SCRA 17)

XVI. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI)

a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner.

A. Reason for the requirement primarily intended to provide

compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of a negligent operation and use of motor vehicles. The victims and / or their dependents are assured of immediate financial assistance, regardless of the financial capacity of motor vehicle owners. (Shafer vs Judge, RTC 167 SCRA 386)

B. Scope of coverage requireda. Private motorists – comprehensive

against 3rd party liability for death or bodily injuries

b. Operators of land transportation – comprehensive against both passenger and 3rd party liabilities for death or bodily injuries

C. Persons subject to the requirement1. motor vehicle owner (MVO) – one

who is the actual legal owner of a motor vehicle in whose name such




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vehicle is registered with the Land Transportation Office

2. land transportation operator (LTO) – one who is the owner of a motor vehicle or vehicles being used for conveying passengers for compensation including school buses

D. No-fault indemnity claim

“NO-FAULT” CLAUSE – any claim for death or injury shall be paid up to P5,000.00 without necessity of proving fault or negligence, provided the following proofs of loss under oath are submitted:

1. police report of accident;2. death certificate and

evidence sufficient to establish proper payee;

3. medical report and evidence of medical or hospital disbursement. (Sec. 378)

E. Rules of recovery1. 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

2. if not an occupant, case or claim shall lie against the insurer of the directly offending vehicle

3. 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.

The claimant is not free to choose from which insurer he will claim the “no fault indemnity.” As the law, makes it mandatory that the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. The said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying may recover against the owner of the vehicle responsible for the accident. (Perla

Compania de Seguros, Inc. v. Ancheta, 169 SCRA 144).

See also Casualty Insurance, basis and extent of insurer’s liability

Period to file notice: written notice of claim must be presented within 6 months from the date of the accident otherwise the claim is deemed waived. (Sec. 384)

Prescriptive period: within 1 year from denial of the claim (Sec. 384)

It shall commence from the denial of the claim, not from the resolution of the motion for reconsideration, otherwise it can be used by the insured as a scheme or device to waste time until the evidence which may be used against him is destroyed (Sun Insurance Office, Ltd. v. CA, 195 SCRA).

Jurisdiction: where the amount involved does not exceed P100,000.00, the Office of the Insurance Commission and the RTC have concurrent jurisdiction. Where the amount exceeds P100,000.00, RTC has jurisdiction

FUNCTIONS OF THE COMMISSIONER:1. Adjudicatory functions - except

when amount involved in maritime insurance is within the exclusive jurisdiction of the RTC

2. Administrative functions – includes suspension or revocation of license, power to examine books and records, etc.

Note: The Insurance Commissioner has no jurisdiction to decide the legality of a contract of agency entered into between an insurance company and its agent. The same is not covered by the term “doing or transacting insurance business” under Sec 2, ICP, neither is it covered by Sec. 416 of the same Code which grants the Commissioner adjudicatory powers (Philippine American Life




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Insurance Co. v. Ansaldo, 234 SCRA 509).

AUTHORIZED DRIVER CLAUSE – The clause means that it 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 (Villacorta v. Insurance Commissioner) The requirement that the person

driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle. It is applicable only if the person driving is other than the insured.

Where the car is unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and thus, it is the “theft clause” and not the “authorized driver clause” that should apply (Palermo v. Pyramids Ins., 161 SCRA 677).

COOPERATION CLAUSE – clause in an automobile insurance policy which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings.

TRANSPORTATION LAWS

I. PRELIMINARY CONSIDERATIONS

Governing Laws:

1. Land TransportationA. Overland Transportation

a. Common carriersi. Civil Code - primary lawii. Code of Commerce -

suppletory lawb. Private carriers

B. Object merchandisea. Code of Commerce - primary

law

b. Civil Code - suppletory law

2. Transportation by SeaA. Coastwise

a. Civil Code - primary lawb. Code of Commerce -

suppletory law COGSA - inapplicable even if

the parties expressly provide for it.

B. Foreign Ports to Philippine Portsa. New Civil Code - primary

lawb. Code of Commerce c. Carriage of Goods by Sea

Act the law of the Philippines

still applies even if the collision actually takes place in foreign waters.

C. Philippine Ports to Foreign Ports laws of the country to which

the goods are to be transported. (Eastern Shipping v. IAC, 150 SCRA 463)

3. Air transportationA. Domestic - Civil CodeB. International - Warsaw

Convention applies to all international

transportation of person, baggage or goods performed by aircraft for hire.

When not applicable: (WCN)1. If there is willful misconduct on

the part of the carrier’s employees. The Convention does not regulate,

much less exempt, carrier from liability for damages for violating the rights of its passengers under the contract of carriage (PAL v. CA, 257 SCRA 33).

2. when it contradicts public policy;

3. if the requirements under the Convention are not complied with.

International transportation means any transportation in which the place of




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departure and the place of destination are situated either

1. within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or transshipment, or

2. within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though that power is not a party to the Convention.

Whether the transportation is "international" is determined by the contract of the parties, which in the case of passengers is the ticket. When the contract of carriage provides for the transportation of the passenger between certain designated terminals "within the territories of two High Contracting Parties," the provisions of the Convention automatically apply and exclusively govern the rights and liabilities of the airline and its passenger. (Santos III vs. Northwest Orient Airlines 210 SCRA 256)

Transportation to be performed by several successive air carriers shall be deemed to be one undivided transportation if it has been regarded by the parties as a single operation, whether it has been agreed upon under the form of a single contract or of a series of contracts, and it shall not lose its international character merely because one contract or a series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party. (Art. 1 WC)

Warsaw Convention prevails over the Civil Code, Rules of Court and all laws in the Philippines since an

international law prevails over general law.

Concept of Public Utility & Public Service (Sec. 13, Public Service Act)

Public Service includes every person that operates,

manages or controls in the Philippines for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier or public utility, ice plants, power and water supplies communication and similar public services. (Sec. 13b, CA 146)

Public Utility refers to a business or service

engaged in supplying the public with some commodity or service of public consequence.

Constitutional limitations on operation of public utilities (Art. XII, 1987 Constitution)

No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to:

1. Citizens of the Philippines2. Corporations or associations

organized under the laws of the Philippines at least sixty (60%) per centum of whose capital is owned by such citizens (Art. XII Sec. 11 1987 Constitution)

The State may, in the interest of national welfare or defense, establish and operate vital industries and upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the government. (Art. XII, Sec. 18).

The State shall regulate or prohibit

monopolies when the public interest so requires; no combination in restraint of trade or unfair




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competition shall be allowed. (Art. XII, Sec. 19).

The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof. (Tatad vs. Garcia G.R. No. 114222)

Regulatory Agencies

Government agencies that replaced the Public Service Commission:

1. Land Transportation Franchising Regulatory Board (LTFRB) – land transportation (The Land Transportation Office registers motor vehicles)

2. Maritime Industry Authority (MARINA) – water transportation

3. National Telecommunications Commission – communication utilities and services, radio communications systems, wire or wireless telephone and telegraph systems,, radio and television broadcasting systems and other similar public utilities

4. Energy Regulatory Board – electric or power companies

5. National Water Resources Council – water resources

6. Civil Aeronautics Board 0 air transportation (The Air Transportation Office undertakes the maintenance and operation of airports and other similar facilities. The ATO also registers aircrafts.)

Concept of franchise and certificate of public convenience

Certificate of Public Convenience

Certificate of Public Convenience and Necessity

1. any authorization to operate a public service issued by the appropriate government agency

1. issued by the appropriate government agency to a public service to which any political subdivision has granted a franchise

2. an authorization for the operation of public services for which no franchise, either municipal or legislative is required by law

2. an authorization for the operation of public services for which a franchise is required by law

3. it is a “property” and have a considerable value and can be the subject of sale by the holder (Cogeo-Cubao Operators and Drivers Assn. v. CA, 207 SCRA 343)

3. neither a franchise nor a contract, confers no property right, and is a license or a privilege. Revocation of this certificate deprives him of no vested right. New and additional burdens, alteration of the certificate, or even revocation or annulment thereof are reserved to the State. (Luque v. Villegas, 30 SCRA 408)

Requirements for granting Certificate of Public Convenience : (CPPS)

1. The applicant must be a citizen of the Philippines or a corporation or entity 60% of the capital of which is owned by such citizens;

2. The applicant must prove public necessity.

3. The applicant must prove that the operation of the public service




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proposed and the authorization to do business will promote the public interest on a proper and suitable manner;

4. The applicant must have sufficient financial capability to undertake the proposed services and meeting the responsibilities incident to its operation;

Grounds for the Revocation of the Certificate: (VDCA)when the holder:

1. Violates or contumaciously refuses to comply with any order, rule or regulation of the commission

2. Is a mere dummy3. Ceases operations by placing his

buses in storage4. Abandons the service

Grounds for Suspension : when the operator willfully or contumaciously refuses to comply with any order, rule or regulation. General Rule: Prior notice and

hearing. Exception: When it is necessary to

avoid serious and irreparable damage or inconvenience to the public or private interest, in which case, a suspension not more than 30 days may be ordered, prior to the hearing. (Soriano v. Medina, 164 SCRA 36)

II. GENERAL CONCEPTS

Contract of Transportation - a contract whereby a person, natural or juridical, obligates to transport persons, goods or both, from one place to another by land, air or water for a price or compensation.

Kinds of Contracts of Transportation:1. Carriage of passengers or Carriage

of goods2. Common carrier or Private carrier

Parties to the Contract of Transportation:A. Carriage of Passengers

1. Common carrier - persons, corporations, firms or associations engaged in the contract of transportation as defined above and offering their

services to the public. (Art. 1732, NCC)

2. Passenger - one who travels in a public conveyance by virtue of contract, express or implied, with the carrier as to the payment of fare or that which is accepted as an equivalent thereof.

Note: someone is still considered as passenger even if he is being carried gratuitously or under a reduced fare. However, a stipulation limiting the common carrier’s liability for negligence is valid.

B. Carriage of Goods1. Shipper - one who delivers the

goods to the carrier for transportation and who pays the consideration or on whose behalf payment is made

2. Common carrier3. Consignee - to whom the goods

are to be delivered which could be:

the shipper himself or may be a 3rd person who is

not actually a party to the contract

Note: there are instances when the third-party consignee is bound by the agreement between the shipper and the carrier, when it was established that he accepted the same and is trying to enforce the agreement. (Everett Steamship Corp. v. CA, 297 SCRA 496)

Perfection of the Contract of Transportation:

1. Carriage of Passengers a. contract to carry - an

agreement to carry the passenger at some future date which is consensual in aircrafts, contract to

carry is perfected even if no tickets have been issued so long as there was already meeting of minds with respect to the subject




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matter and the consideration

b. contract of carriage - which is a real contract for not until the carrier is actually used can the carrier be said to have already assumed the obligation of the carrier aircrafts:

Perfected contract - if it was established: that the passenger

had checked in at the departure counter,

passed through customs and immigration,

boarded the shuttle buses and

proceeded to the ramp of the aircraft, and

his baggage had already been loaded in the aircraft to be flown with him to his destination.

in buses, jeepneys and street cars: Once a public utility bus

or jeepney stops, it is in effect making a continuous offer to bus riders.

A passenger is deemed to be accepting the offer if he is already attempting to board the conveyances and the contract of carriage is perfected from that point.

trains: Perfected when:

the passenger purchases a ticket and

presents himself at the proper place and in the proper manner to be transported and

must also have the bona fide intention to

use the facilities of the carrier.

2. Carriage of Goods a. contract to carry - whereby the

carrier agrees to accept and transport goods at some future date

b. contract of carriage - when the goods are unconditionally placed in the possession and control of the carrier, and upon their receipt by the carrier for transportation

Tests for determining whether the carrier is a common carrier of goods: (EUMH)1. he must be engaged in the business of

carrying goods for others as public employment, and must hold himself out as ready to

engage in the transportation of goods generally as a business and not as a casual occupation

2. he must undertake to carry goods of the kind to which his business is confined

3. he must undertake to carry by the method by which his business is conducted and over his established roads and

4. the transportation must be for hire (First Phil. International Corporation v. CA, 300 SCRA 66)

Characteristics of common carrier under Art. 1732 and under the Public Service Act:a. Art. 1732 makes no distinction

between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as a sideline) (De Guzman v. CA, 168 SCRA 612)

b. Art. 1732 also carefully avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis




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c. Art. 1732 does not distinguish between a carrier offering its services to the general public and one who offers services or solicits business only from a narrow segment of the general population

d. A person or entity is a common carrier and has the obligations of the common carrier under the Civil Code even if he did not secure a Certificate of Public Convenience

e. The Civil Code makes no distinction as to the means of transporting, as long as it is by land, water or air (First Philippine Industrial Corp. v. CA, 300 SCRA 661)

f. The Civil Code does not provide that the transportation should be by motor vehicle (Asia Lighterage and Shipping Inc. v. CA, GR No. 147246, August 19, 2003)

g. A person or entity need not be engaged in the business of public transportation for the provisions of the Civil Code on common carriers to apply to them (Fabre Jr. v. CA, 259 SCRA 426)

Private Carrier - not engaged in business of carrying as a public employment, undertakes to deliver goods or passengers for compensation (requires only ordinary diligence). (Home Insurance Co. vs. American Steamship Agency, 23 SCRA 24)

Distinctions between a common carrier and a private carrier:

Common Carrier

Private Carrier

1. holds himself out for all people indiscriminately

1. contracts with particular individuals or groups only

2. extraordinary diligence is required

2. ordinary diligence is required

3. subject to 3. not subject to

State regulation State regulation

4. parties may not agree on limiting the carrier’s liability except when provided by law

4. parties may limit the carrier’s liability provided it is not contrary to law, morals or good customs

5. exempting circumstance; prove extraordinary diligence and Art. 1733, NCC

5. general exempting circumstance; caso fortuito, Art. 1174 NCC

6. there is presumption of fault or negligence

6. no presumption of fault or negligence

Functions of Arrastre Operator:1. to receive, handle, care for, and

deliver all merchandise imported and exported, upon or passing over government-owned wharves and piers in the port

2. to record or check all merchandise which may be delivered to said port at shipside

3. to furnish light, and water services and other incidental services in order to undertake its arrastre service

Note: The arrastre operator’s services are clearly not maritime. They are in fact no different from those of a depositary or warehouseman.

Nature of Business common carriers are impressed with

public interest and concern hence, common carriers are subject to regulation by the State.

Common Carrier




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Towage A vessel is hired to bring another vessel to another place. It refers to a service rendered to a vessel by towing for the mere purpose of expediting her voyage without reference to any circumstances of danger

Persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.

Arrastre A contract for the unloading of goods from a vessel

Stevedoring

Involves the loading and unloading of coastwise vessels calling at the port

Registered Owner Rule the person who is the registered

owner of a vehicle is liable for any damage 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.

Kabit System A system whereby a person who has

been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings.

It is void and inexistent

Effects of the System:1. The transfer, sale, lease or

assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons. (Gelisan v. Alday, 152 SCRA 388)

2. The registered owner is generally liable for all the consequences flowing from the operations of the carrier. The public has the right to

assume that the registered owner is the actual or lawful owner thereof.

It would be very difficult and often impossible, as a practical matter, for the public to enforce their rights of action that they may have for injuries inflicted by the vehicle if they should be required to prove who the actual owner is (Benedicto v. IAC, 187 SCRA 547).

The thrust of the law in enjoining the kabit system is not so much as to penalize the parties but to identify the person upon whom responsibility may be fixed in case of an accident with the end view of protecting the riding public. The policy therefore loses its force if the public at large is not deceived, much less involved. (Lim vs. CA G.R. No. 125817)

3. The registered owner cannot recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself, both being in pari delicto (Teja Marketing v. IAC)

4. For the better protection of the public, both the registered owner and the actual owner are jointly and severally liable with the driver (Zamboanga Transportation Co. v. CA).

III. OBLIGATIONS OF THE COMMON CARRIER IN A CONTRACT OF CARRIAGE OF GOODS




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A. Vigilance over the Goods:

Duty to exercise extraordinary diligence From the nature of their business

and for reasons of public policy, they are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. (Art. 1733) a common carrier is required to

faithfully comply with his obligation to deliver the goods to the point of destination

Presumption of negligence In case of loss, destruction and

deterioration of the goods, common carriers are presumed to be at fault or have acted negligently, unless they prove that they exercise extraordinary diligence.

Proof required: mere proof of delivery of goods

in good order to a carrier and the subsequent arrival of the same goods at the place of destination in bad order makes for a prima facie case against the carrier. (Coastwise Lighterage Corp. v. CA, 245 SCRA 796)

the court need not make an express finding of fault or negligence of common carriers, the law imposes liability upon common carriers, as long as it is shown that:

1. there exist a contract between the shipper and the common carrier2. that the loss or deterioration took place during the existence of the contract

Duration of liability: Commencement: when the goods are

unconditionally placed in the possession of, and received by

the carrier for transportation

Termination: when the same are delivered, actually or constructively, by the carrier to the consignee or to the person who has the right to receive them. (Art. 1736)

It remains in full force and effect even when they are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu (Art. 1737).

It continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination until the consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them (Art. 1738).

Defenses of common carriers 1. Flood, storm, earthquake,

lighting, or other natural disaster or calamity.

2. Act of the public enemy in war, whether international or civil

3. Act or omission of the shipper or the owner of goods

4. The character of the goods or defects in the packing or in the containers.

5. Order or act of competent authority (Art. 1734)

1. Natural DisasterRequisites: (PDN)a. must be the proximate and only

cause of the loss b. carrier must exercise due

diligence to prevent or minimize the loss before, during or after the occurrence of the disaster (Art. 1739)

c. carrier had not negligently incurred in delay in




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transporting the goods (Art. 1740)

2. Acts of the Public EnemyRequisites:a. the act must be the proximate

and only cause of the lossb. carrier must exercise due

diligence to prevent or minimize the loss before, during or after the act causing the loss, deterioration or destruction of the goods (Art. 1739)

3. Contributory Negligence of the Shipper If the shipper or owner

merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the carrier, the carrier shall still be liable for damages, but such shall be equitably reduced. (Art. 1741)

4. Character of the Goods or Defects in the Packing or in the Container Even if the damage should

be caused by the inherent defect/character of the goods, the common carrier must exercise due diligence to forestall or lessen the loss. (Art. 1742)

The carrier who knowing the fact of improper packing of the goods upon ordinary observation, still accepts the goods notwithstanding such condition is not relieved of liability or loss or injury resulting there from. (Southern Lines, Inc. v. CA, 4 SCRA 258)

5. Order or Act of Public Authority Said public authority must

have the power to issue the order (Art. 1743). Consequently, where the officer acts without legal process, the common carrier will be held liable.

Stipulation limiting liability of carrier Requisites: (WVR) 1. The common carrier and the

shipper may agree on the carriers observance of diligence to a degree less than extraordinary, provided it be:

a. in writing, signed by the shipper or owner;

b. supported by a valuable consideration other than the service rendered by the carriers; and

c. reasonable, just and not contrary to public policy. (Art. 1744)

2. The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy (Art. 1751)

Valid stipulations: A stipulation that the common

carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. (Art. 1749)

A contract fixing the sum to be recovered by the owner or shipper for the loss, destruction or deterioration of the goods, if it is reasonable and just under the circumstances and has been fairly and freely agreed upon. (Art. 1750)

An agreement limiting the common carrier’s liability for delay on account of strikes or riots (Art. 1748)

Invalid stipulations: (RNNLNTD) a. the goods are transported at the

risk of the owner or shipper;b. the carrier will not be liable for

any loss, destruction or deterioration of the goods;




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c. the carrier need not observe any diligence in the custody of the goods;

d. the carrier shall exercise a degree of diligence less than that of a good father of a family over the movable transported;

e. the carrier shall not be responsible for the acts or omissions of his or its employees;

f. the carrier’s liability for acts committed by thieves or robbers who do not act with grave or irresistible threat, violence or force is dispensed with or diminished;

g. the carrier is not responsible for the loss, destruction or deterioration of the goods on account of the defective condition of the car, vehicle, ship or other equipment used in the contract of carriage. (Art. 1745)

Effect of delay: If the common carrier, without just

cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of the goods. (Art. 1747)

Rule on presumption despite stipulation: Even when there is an agreement

limiting the liability of the common carrier in the vigilance over the goods, the common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration.( Art. 1752)

B. Other Obligations:

Duty to accept goods - without any discrimination

Grounds for valid refusal to accept goods: (DUO-CIELSF)

1. when the goods sought to be transported are dangerous objects

or substances including dynamites and other explosives

2. goods are unfit for transportation3. acceptance would result in

overloading4. the goods are considered

contrabands or illegal goods5. goods are injurious to health6. goods will be exposed to untoward

danger like flood, capture by enemies and the like

7. goods like livestock will be exposed to diseases

8. strike9. failure to tender goods in time

Duty to deliver goods

Time of delivery OFT-REPEATED RULE: In the

absence of a special contract, a carrier is NOT an insurer against delay in transportation of goods

when a common carrier undertakes to convey goods, the law implies a contract that they shall be delivered at destination within a reasonable time.

in determining if the delivery is made within a reasonable time:

i. the expected date of arrival reflected in the bill of lading may be considered

ii. depend upon the nature of goods

Consequences of delay: A natural disaster shall not free

such carrier from responsibility. (Art. 1740)

The contract limiting the common carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of the goods. (Art. 1747)

Excusable delays in carriage suspend, but do not generally terminate, the contract of carriage, and when the cause is removed, the master must proceed with the voyage and make delivery.

During detention or delay the vessel continues to be liable as a common carrier, not as a warehouseman, and remains duty




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bound to exercise extraordinary diligence

payment of the indemnity: stipulated in the bill of lading,

or If no indemnity is stipulated,

then the carrier shall be liable for the damages incurred due to the delay.

the consignee may:1. leave the goods transported in

the hands of the former (abandonment) advising him thereof in writing before their arrival at the point of destination. Effect: The carrier shall pay the full value of the goods as if they had been lost or mislaid.

2. If no abandonment was made indemnification shall not

exceed the current price of the goods at the time it should have been delivered.

Where and to whom delivered:a. To the consignee in the place

agreed upon by the parties. b. To the consignee or any other

person to whom the bill of lading was validly transferred or negotiated.

(See: Liability of Air Carriers regarding liabilities in the transport of goods by air)

IV. OBLIGATIONS OF THE COMMON CARRIER IN A CONTRACT OF CARRIAGE OF PASSENGERS

A. Safety of Passengers

Duty to observe utmost diligence A common carrier is bound to

carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. (Art. 1755)

Duration of liability Commencement: from the moment the

person who purchases the

ticket from the carrier presents himself at the proper place and in a proper manner to be transported with a bona fide intent to ride the coach

Termination: until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises

Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises, including the time upon which the passenger looks for his baggage and claim them.

All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and includes a reasonable time to see after his baggage and prepare for his departure (La Mallorca v. CA, July 27 1966; Abiotiz Shipping Corporation v. CA, November 6, 1989).

Presumption of negligence - the same presumption as in the carriage of goods applies.

The courts need not make an express finding of fault or negligence of common carriers, the law imposes upon common carriers strict liability, as long as it is shown that there exists a relationship between the passenger and the common carrier and that injury or death took place during the existence of the contract.

The doctrine of res ipsa loquitur applies.

Liability for acts of employees




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Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former’s employees, although such employees may have acted beyond the scope of This responsibility cannot be

eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise. (Art. 1760)

The liability of the carrier for the personal violence of its employees or agents upon its passengers extends only to those acts that the carrier could foresee or avoid through the exercise of the degree of diligence required.

Note: Diligence in the selection and supervision of employees under Articles 2180 NCC, cannot be interposed by the common carrier to prevent damages because the liability of the carriers arises from the breach of the contract of carriage. The defense under said articles is applicable to negligence in quasi-delicts (Del Prado v. Manila Electric Co., 52 Phil 900).

Liability for acts of strangers or other passengers A common carrier is responsible

for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier’s employees, through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. (Art. 1763)

The carrier is liable when its personnel allowed a passenger to drive the vehicle causing it to collide with another vehicle resulting to the injuries suffered by the other passengers. (MRR v. Ballesteros, 16 SCRA 641)

Effect of stipulation on liability General Rule: liability cannot be

dispensed with or lessened by stipulation, by posting of notices, by statements on tickets or otherwise. (Art. 1757) Exception: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid, Exception to the exception: Not for willful acts on gross negligence. (Art. 1758)

Notes: The diligence required in the

carriage of the goods may be reduced by only one degree, from extraordinary to ordinary diligence or diligence of a good father of a family. (Art. 1744, Art. 1745, no. 4)

In the transport of passengers, the diligence required may be reduced by two degrees from extraordinary to ordinary diligence or even to simple negligence but not to gross negligence. (Art. 1758)

B. Passenger’s Baggages1. in the custody of the passengers or

their employees a. The common carrier shall be

responsible for the baggage as depositaries, provided that: notice was given to them or its

employees and the passenger took the

necessary precautions which the carrier has advised them relative to the care and vigilance of their baggage.

b. In case of loss due to the fault of the passenger, the carrier will not be liable. The act of thief will not

be force majeure unless the same is committed by armed men and through irresistible force (Arts. 1998, 2000-2003).

2. not in such custody, but in that of the carrier The carrier is required to observe

extraordinary diligence. In case of loss or damage the carrier is presumed negligent. (Arts. 1733-




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1753)

C. Liability of Air Carriers – Warsaw Convention

Liability for damages:1. Death or injury of a passenger if

the accident causing it took place on board the aircraft or in the course of its operations; (Art. 17)

2. Destruction, loss or damage to any luggage or goods, if it took place during the carriage; (Art. 18) and

3. Delay in the transportation of passengers, luggage or goods. (Art. 19)

Note: The Hague Protocol amended the Warsaw Convention by removing the provision that if the airline took all necessary steps to avoid the damage, it could exculpate itself completely (Art. 20(1)). (Alitalia v. IAC, 192 SCRA 9)

Special Rules on Liabilities of Airline Carriers:1. In case of flight diversion due to bad

weather or other circumstances beyond the pilot’s control, the relation between the carrier and the passenger continues until the latter has been landed at the port of destination and has left the carrier’s premises. The carrier should necessarily exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination (Philippine Airlines v. CA, 226 SCRA 423).

2. Even where overbooking of passengers is allowed as a commercial practice, the airline company would still be guilty of bad faith and still be liable for damages if it did not properly inform passenger that it could breach the contract of carriage even if they were confirmed passengers. (Zalamea v. CA, 228 SCRA 23)

3. An open-dated ticket constitutes a complete contract between the carrier and passenger. Hence, the airline company is liable if it refused to

confirm a passenger’s flight reservation (Singson v. CA, 282 SCRA 149).

4. An airline company which issued a confirmed ticket to a passenger covering successive trips on different airlines can be held liable for damages occasioned by “bumping off” by one of the successive airlines (Lufthansa German Airlines v. CA, 238 SCRA 290).

5. An airline ticket providing that carriage by successive air carriers is to be regarded as a “single operation” is to make the issuing carrier liable for the tortuous conduct of the other carrier. A printed provision in the ticket limiting liability only to its own conduct is not enough to rebut that liability (KLM Royal Dutch Airlines v. CA, 65 SCRA 237)

V. OBLIGATIONS OF THE SHIPPER, CONSIGNEE AND PASSENGER

A. Effects of negligence of shipper or passenger If the shipper or owner merely

contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced (Art. 1741)

The passenger must observe the diligence of a good father of a family to avoid injury to himself (Art. 1761)

The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced. (Art. 1762.)

If the negligence of the shipper or the passenger may be the proximate and only cause of the loss, the carrier should not be held liable.

However, even if the carrier is responsible for the loss or injury, the passenger is also required to




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lessen the damage or injury under what is known as the Doctrine of Avoidable Consequences.

B. Payment of freightWho will pay: Shipper

before or at the time he delivers the goods to the carrier for shipment.

Consignee if agreed upon by the parties at

the point of destination is bound by such stipulation the moment he accepts the goods.

Passengers they are contractually bound to

pay the fare within such time as prescribed by regulations or by the carrier.

Time to pay: Tickets are purchased in advance

from ticket outlets. Consignees to whom the shipment

was made may not defer the payment of the expenses and transportation charges of the goods they receive after the lapse of 24 hours following their delivery.

In case of delay in payment, the carrier may demand the judicial sale of the goods transported in an amount necessary to cover the cost of transportation and the expenses incurred.

C. Liability for demurrage

Demurrage - the compensation provided for in the contract of affreightment for the detention of the vessel beyond the time agreed on for loading and unloading. It is a claim for damages for failure to accept delivery. Liability for demurrage exists only

when expressly stipulated in the contract.

VI. EXTRAORDINARY DILIGENCE

Common carriers, from the nature of their business and for reasons of public policy, are bound to observe

extraordinary diligence in the vigilance over goods and for the safety of the passengers transported by them according to all the circumstances of each case (Art. 1733, in relation to Art. 1755)

(See notes on stipulations on liability)

Extraordinary Diligence in Carriage by Sea

1. Seaworthiness (Implied warranty) extends not only to the

condition of the structure of the ship itself, but requires that it be: (PCSAO)

a. properly laden, and b. provided with a

competent master, c. sufficient number of

competent officers and seamen, and the

d. requisite appurtenances and equipment and

e. other necessary or proper stores and implements for the voyage (sec. 116, Insurance Code).

ship itself must not only be seaworthy to undertake the voyage but it must also be cargo worthy (sec. 119, ICP).

carrier is bound before and at the beginning of the voyage to exercise due diligence to:

a. make the ship seaworthy,b. property man, equip and

supply the ship (sec. 3, COGSA).

shippers are not required to inquire into the seaworthiness, genuineness of licensees and compliance with all maritime laws.

vessel must be adequately equipped and manned.

Qualifications of captains, masters or patrons of vessels:

a. Filipinob. Have legal capacity to contractc. With qualifications necessary to

command and direct the vessel as established by marine or




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navigation laws, ordinances or regulations

d. Must not be disqualified under the same laws

e. If ship owner desires to be captain without having the necessary qualifications, shall limit him to the financial administration of the vessel, and shall in trust the navigation to a person possessing the qualifications required (Art. 609, Code of Commerce).

The payment made by the insurer for the insured value of the lost cargo operates as waiver of its (insurer) right to enforce the term of the implied warranty against the insured under the marine insurance policy. However, the same cannot be validly interpreted as an automatic admission of the vessel’s seaworthiness by the insurer as to foreclose recourse against the carrier for any liability under its contractual obligation as a common carrier. The fact of payment grants the insurer subrogatory right which enables it to exercise legal remedies that would otherwise be available to the insured as owner of the lost cargo against the petitioner common carrier. (Delsan Transport Lines vs. CA GR No. 128797)

It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods (Roque v. IAC, 139 SCRA 596)

2. Overloading duty to exercise due diligence

likewise includes the duty to take passengers or cargoes that are within the carrying capacity

of the vessel (Negros Navigation v. CA).

3. Negligence of Captain and Crew if captain and crew were

negligent, limited liability rule may apply. If the captain and crew’s negligence is due to their inherent incompetence, ship-owner is deemed incompetent; limited liability rule does not apply.

4. Deviation and Transshipmenta. Deviation

if route is stipulated upon by the shipper and carrier, carrier can’t change unless due to force majeure.

Carrier shall be liable for all losses suffered from any other cause, beside the sum stipulated for such case.

If due to said force majeure he took another route and incurred expenses by reason thereof, he shall be reimbursed for such increase upon formal proof thereof (Art. 359, Code of Commerce).

b. Transshipment the act of taking cargo out

of one ship and loading it in another.

When done without legal excuse, however competent and safe the vessel into which the transfer is made, is a violation of the contract and an infringement of the right of the shipper and subjects the carrier to liability if the freight is lost even by a cause otherwise excepted (Magellan Manufacturing Corp. v. CA).

Extraordinary Diligence in Carriage by Land

1. Condition of vehicle - duty to exercise extraordinary diligence requires the carriers to purchase and use vehicle parts that aren’t defective.




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2. Traffic rules - unless there is a proof to the contrary, it is presumed that a person driving a motor vehicle has been negligent if at the time of the mishap, he was violating traffic rules (Art. 2185, New Civil Code). In case of breach of contract of carriage, proof of violation of traffic rules confirms that the carrier failed to exercise extraordinary diligence.

3. Duty to inspect - in overland transportation, common carrier is not bound nor empowered to make an examination of the contents of packages or bags particularly those hand carried. Airline companies are e\required to inspect each and every cargo brought into the aircraft (RA 6235).

Extraordinary Diligence in Carriage by Air

1. Airworthiness - an aircraft, its engines, propellers and other components and accessories are of proper design and construction, and are safe for air navigation purposes, such design and construction being consistent with accepted engineering practice and in accordance with aerodynamic laws and aircraft science (RA 779).

2. Competent and well trained crew 3. To take the required and

prescribed route4. Adverse weather conditions or

extreme climatic changes are some of the perils involved in air travel consequence of which the passenger must assume or expect.

5. RA 6235 (An Act Prohibiting Certain Acts Inimical to Civil Aviation and for Other Purposes) - acts punishable:

a. to compel a change in the course or destination of an aircraft of Philippine registry; or

b. to seize or usurp control of the aircraft while in flight.

VII. BILL OF LADING AND OTHER FORMALITIES

Bill of Lading - written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or to his order. It is not indispensable for the creation

of a contract of carriage (Compania Maritima v. Insurance Company of North America, 12 SCRA 213)

ambiguity is construed against the carrier, the contract being one of adhesion.

becomes effective upon its delivery to and acceptance by the shipper.

4 copies, all signed by the captain and the shipper. Shipper shall keep one and shall send one to the consignee; captain shall take 2, 1 for himself and the other for the ship agent.

legitimate holder of a bill who fails to present the captain of the vessel before the unloading obliging the latter thereby to unload it and place it in deposit, shall be responsible for the expenses of warehousing and other expenses arising therefrom (Art. 711, Code of Commerce).

Limitations as to Carriers’ Liability:1. No liability - the carrier will not be

liable at all for the negligent acts of its crew and employees. This is null and void for being contrary to public policy;

2. Limited liability - regardless of the value of the cargo, the maximum liability of the carrier will be, for example, P500. This is void for being contrary to public policy;

3. Qualified liability - A stipulation in the bill of lading limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight is valid (Org. v. CA and PAL, 91 SCRA 223).

Note: However, the carrier cannot limit its liability for injury to, or loss of, goods shipped where such injury or loss was caused by its own negligence (Shewaram




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v. PAL, 17 SCRA 606).

Kinds:1. Negotiable2. Non-Negotiable3. Clean Bill of Lading - does not contain

any notation indicating any defect in the goods

4. Foul Bill of Lading - one that contains a notation indicating defect in the goods

5. On Board Bill of Lading - issued when the goods have been actually placed aboard the ship with very reasonable expectation that the shipment is as good as on its way

6. Received bill of lading - one in which it is stated that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped.

7. Spent Bill of Lading - goods were already delivered but the bill of lading was not returned

8. Through Bill of Lading - issued by the carrier who is obliged to use the facilities of other carriers as well as his own facilities for the purpose of transporting the goods from the city of the buyer, which bill of lading is honored by the 2nd and other interested carriers who do not issued their own lading (Agbayani, Comments and Jurisprudence on the Commercial Laws of the Philippines).

9. Custody Bill of lading - goods are already received by the carrier but the vessel indicated therein has not yet arrived in the port (Agbayani).

10.Port Bill of Lading - vessel indicated in the bill of lading that will transport the goods is already at the port.

Nature of Bill of Lading (the 3-Fold nature of a bill of lading applies only to carriage of goods):1. a receipt;2. a contract - contains the following:

a. name, surname and residence of shipper;

b. name, surname and residence of carrier;

c. name, surname and residence of person to whom or to whose order the goods are to be sent

or whether they are to be delivered to the bearer of the said bill;

d. description of the goods;e. cost of transportation;f. date on which shipment is

made;g. place of delivery of the carrier;h. place and time at which

delivery to the consignee shall be made;

i. indemnity to be paid by the carrier in case of delay, if there should be any agreement on this matter

3. a document of title

Functions:1. best evidence of the existence of the

contract of carriage of cargo;2. commercial document whereby, if

negotiable, ownership may be transferred by negotiation; and

3. receipt of cargo (Magellan Manufacturing v. CA, 201 SCRA 2021).

(See: notes on Air Carriers below for the limits of liability of air carriers with respect to transport of goods)

VIII. ACTIONS IN CASE OF BREACH OF CONTRACT OF CARRIAGE

A. Causes of Action:1. Culpa Contractual Passengers and shippers who suffered

damages because of the breach of the contractual obligation of the carrier may sue the latter for damages.

Here, the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering into the contractual relation.

2. Culpa Aquiliana The damage was caused by reason of

negligence or fault whereby the parties have no pre-existing contractual relation between them.

it is the wrongful or negligent act or omission itself, which creates the vinculum juris.

3. Culpa Delictual




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Note: The same act that breaches the contract may also be tort. A negligent act that breaches the contract may give rise to a liability based on contract and quasi-delict.

Liability:1. Negligence of driver alone: The driver may be held liable for

culpa delictual or culpa aquiliana. He is not liable based on contract because there is no privity of contract between him and the passenger or shipper.

2. Negligence of 3rd persons concurs with the breach:

The 3rd person and/or his employer may be held liable for quasi delict. The driver alone may be held criminally or civilly liable based on delict. The employer is subsidiarily liable.

3. In case of injury to a passenger due to negligence of driver of both colliding vehicles:

The drivers and owners of the two vehicles are jointly and severally liable for damages. If the owner and driver of the other vehicle are not impleaded, the carrier may implead them by filing a 3rd party complaint.

B. Prescriptive Period and Conditions Precedent:

1. Inter-island - if goods arrived in damaged condition (Art. 366):

a. If damage is apparent, the shipper must file a claim immediately (it may be oral or written);

b. If damage is not apparent, he should file a claim within 24 hours from delivery.

The filing of claim under either (1) or (2) is a condition precedent for recovery.

If the claim is filed, but the carrier refuses to pay: enforce carrier’s liability in court by filing a case:

i. within 6 year, if no bill of lading has been issued; or

ii. within 10 years, if a bill of lading has been issued.

2. Overseas –where goods arrived in a damaged condition from a foreign port to a Philippine port of entry: (COGSA applied)a. upon discharge of goods, if the

damage is apparent, claim should be filled immediately;

b. if damage is not apparent, claim should be filled within 3 days from delivery.

Filing of claim is not a condition precedent, but an action must be filed against the carrier within a period of 1 year from discharge.

The prescriptive period of 1 year starts after the delivery of the goods or the date the goods should have been delivered (sec. 3 COGSA) It starts from the delivery to the arrastre operator, not the consignee

A stipulation reducing the 1 year period is null and void, but a written agreement to suspend it is valid

In cases of collision the period starts from the date the goods should have been delivered, had the cargoes been saved (Maritime Company of the Philippines vs. CA, 164 SCRA 593)

An extra-judicial demand does not suspend the period

An insurer who is exercising its right of subrogation is also bound by the 1 year period (Fil. Merchants vs. Alejandro 145 SCRA 42). It does not apply to a claim against the insurer for the insurance proceeds. The claim against the insurer is based on contract that expires in 10 years (Mayer Steel Pipe Corp. vs. CA 274 SCRA 432)

Damages arising from delay or late delivery are not the damage or loss contemplated under the COGSA. The goods are not actually lost or damaged. The applicable period is 10 years. (Mitsui vs. CA 287 SCRA 366)




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If there is no delivery in case of undelivered or lost cargo the one-year period starts to run from the day the vessel left port

Where there was delivery to the wrong person, the prescriptive period is 10 years because there is a violation of contract, and the carriage of goods by sea act does not apply to misdelivery. (Ang v. American SS Agencies (19 SCRA 631)

3. Air Carriers - Warsaw Convention

Action for Damages:1. Condition precedent

A written complaint must me made within:- 3 days from receipt of baggage- 7 days from receipt of goods- in case of delay, 14 days from receipt of baggage / goods

otherwise the action is barred except in case of fraud on the part of the carrier. (Art. 26)

2. Jurisdiction - governed by domestic law

3. Venue – at the option of the plaintiff:a. court of domicile of the carrier;b. court of its principal place of

business;c. court where it has a place of

business through which the contract has been made;

d. court of the place of destination. (Art. 28)

The places enumerated by Article 28 of the Warsaw Convention where an action for damages may be bought are not matters of venue which can be waived, but are jurisdictional in nature. (Santos III vs. Northwest Orient Airlines 210 SCRA 256)

4. Prescriptive period – 2 years from: a. date of arrival at the

destinationb. date of expected arrivalc. date on which the

transportation stopped. (Art. 29)

5. Rule in case of various successive carriers, a. In case of transportation of

passengers – the action is filed only against the carrier in which the accident or delay occurred unless there is an agreement whereby the first carrier assumed liability for the whole journey.

b. In case of transportation of baggage or goods i. the consignor can file an

action against the first carrier and the carrier in which the damage occurred

ii. the consignee can file an action against the last carrier and the carrier in which the damage occurred. These carriers are jointly and severally liable. (Art. 30)

Limit of Liability: (Art. 22 as amended by Guatemala Protocol, 1971; Alitalia v. IAC)

1. passengers - $10,000 to $100,000except: agreement to a higher

limit2. checked-in baggage - $20 / kg

except: consigner declared its value and paid a supplementary sum, carrier liable to not more than the declared sum unless it proves the sum is greater than its actual value.

3. hand-carry baggage - $400 to $1000 / passenger

an agreement relieving the carrier from liability or fixing a lower limit is null and void. (Art. 23)

Carrier not entitled to the foregoing limit if the damage is caused by willful misconduct or default on its part. (Art. 25)

C. RECOVERABLE DAMAGES




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Extent of Liability:

Carrier in good faith

Carrier in bad faith

liable only to pay for the damages that are the natural

and probable consequences of the breach of the obligation,

and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.

liable for all damages whether the same can be foreseen or not.

Kinds of Damages:1. Actual

(damnum emergente) or compensatory (lucro cessante)a. In case of Goods:

Plaintiff is entitled to their value at the time of destruction.

b. In case of Passengers: Personal Injury:

The claimant is entitled to all medical expenses and other reasonable expenses the he incurred to treat the injuries. It may include plastic surgery.

Also entitled to the amount of loss of earning capacity from the time of the accident up to the time he has fully recovered.

Death: The claimant is entitled to

all medical expenses and other reasonable expenses the he incurred to treat the injuries.

Also entitled to the amount spent during the wake and funeral of the deceased, but

expenses incurred after the burial is not compensable.

The relatives of the deceased are entitled to the amount of loss of earning capacity as determined according to Art. 2206 of the NCC.

2. Moral Generally, no moral damages may

be awarded where the breach of contract is malicious. However if contractual negligence is considered gross negligence, moral damages may be awarded.

Conditions in order that moral damages may be awarded: (ICPC)a. there must be an injury,

whether physical, mental or psychological, clearly sustained by the claimant,

b. there must be a culpable act or omission factually established,

c. the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant, and

d. the award of damages is predicated on any of the cases stated in Art. 2219 of the NCC in relation to Art. 2220.

3. Nominal The assessment of nominal

damages is left to the discretion of the court according to the circumstances of the case. The award of such damages is justified in the absence of proof of the specific amounts of actual damages suffered.

4. Temperate or moderate Temperate or moderate damages

are awarded when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty.

5. Liquidated Liquidated damages are those

agreed upon by the parties to a




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contract, to be paid in case of breach thereof. Generally the court cannot change the amount agreed upon except when the indemnity or penalty is iniquitous or unconscionable.

6. Exemplary or corrective Requisites in order that exemplary

damages may be awarded: (ECB)a. they may be imposed by way of

example in addition to compensatory damages, and only after the claimant’s right to them has been established,

b. they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant,

c. the act must be accompanied by bad faith or done in wanton, fraudulent, oppressive or malevolent manner.

Note: The rule on the award of interest on damages is that, when an obligation, not constituting a loan or forebearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.

IX. MARITIME LAW

A. Concept of Maritime Law

Maritime Law - system of laws which particularly relates to the affairs and business of the sea, to ships, their crews and navigation and to marine conveyance of persons and property

Merchant vessel vessel engaged in maritime

commerce, whether foreign or otherwise.

constitutes property which may be acquired and transferred by any of the means recognized by law. They shall continue to be considered as personal property. (Arts. 573, 585)

Characteristics of Maritime Law:1. Real

similar to transactions over real property with respect to effectively against third persons which is done through registration. The evidence of real nature is shown by (1) the limitation of the liability of the agents to the actual value of the vessel and the freight money and (2) the right to retain the cargo and embargo and detention of the vessel (Luzon Stevedoring Corp v. CA, 156 SCRA 169);

2. Hypothecary the liability of the owner of the

value of the vessel is limited to the vessel itself (Doctrine of Limited Liability).

3. Preference of Credits Mortgage of a vessel properly

registered becomes of preferred mortgage lien which shall have priority over all claims against the vessel in an extrajudicial foreclosure for:a. credit in favor of the public

treasury;b. judicial costs of the

proceedings;c. pilotage and tonnage charges

and other sea and port charges;d. salaries of depositaries and

keepers of the vessele. captain and crew’s wages;f. general average;g. salvage, including contract

salvage;h. maritime liens arising prior in

time to the recording of the preferred mortgage;

i. damages arising out of tort; andj. preferred mortgage registered

prior in time.

B. Limited liability rule (Art. 587, 590, 643, 837, CC)

Doctrine of Limited Liability – “No vessel, no liability”General Rule: The liability of ship owners is limited to the amount of interest in said vessel such that where vessel is entirely lost, the obligation is extinguished. (Luzon Stevedoring v.




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Escano, 156 SCRA 169)

The interest extends to: a. the vessel itself, b. equipments, c. freightage and d. insurance proceeds. (Chua v.

IAC, 166 SCRA 183)

Exceptions: (WINES)1. claims under Workmen’s

Compensation;2. injury or damage due to ship owner’s

fault;3. the vessel is insured.4. expenses for repair on vessel before

loss;5. the vessel is not abandoned;

Note: Abandonment of the vessel, its appurtenances and the freightage is an indispensable requirement before the shipowner or ship agent can enjoy the benefits of the limited liability principle. The only instance where such abandonment is dispensed with is when the vessel was entirely lost.Admiralty Jurisdiction - in all actions in admiralty and maritime jurisdiction where the demand or claim exceeds P300, 000.00 or in Metro Manila, where such demand or claim exceeds P400, 000.00 the RTC has jurisdiction. If the amount of the demand or claim

is less than the jurisdictional amount of the RTC, the jurisdiction over the admiralty and maritime cases are with the Metropolitan Trial Court, Municipal Trial Court or Municipal Circuit Trial Court as the case may be. (Section 19(3) BP 129)

C. Vessels

Ownership of Vessels:1. Acquisition

a. Prescription - acquisition of the vessel must appear in a written instrument, which shall not produce any effect with respect to third persons if not inscribed in the registry of the vessels and shall be acquired by possession in good faith, continued for 3 years, with a just title duly recorded. In the absence of

any of these, continuous possession for 10 years shall be necessary in order to acquire ownership.

b. Sale - includes the rigging, masts, stores and engine of a streamer appurtenant thereto, which at the time belongs to the vendor if sale is made while it is on

voyage, the freightage which it earns from the time it receives its last cargo shall pertain entirely to the purchaser, and the payment of the crew and other persons who make up its complement shall be for his account

if the sale is made after the vessel has arrived at the port of its destination, the freightage shall pertain to the vendor, and the payment of the crew and other individuals who make up its complement shall be fore his account, unless the contrary is stipulated in either case.

2. Registration - must be made through the Maritime Industry Authority (MARINA)

Ship’s Manifest -is a declaration of the entire cargo. The object of a manifest is to furnish customs officers with a list to check against, to inform the revenue officers what goods are being brought into a port of the country on a vessel. Hence, the requirement that a vessel must carry a manifest is not complied with even if a bill of lading can be presented. A bill of lading is just a declaration of

a specific cargo rather than the entire cargo. It is issued as a matter of convenience by virtue of a contract.

D. Persons who take part in Maritime Commerce

Participants in Maritime Commerce:a. ship-owners and ship agentsb. captains and masters of the vesselc. officers and crew of the vesseld. supercargoes

Complement of the vessel




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all persons on board, from the captain to the cabin boy, necessary for the management, maneuvers, and service, thus, include the crew, the sailing mates, engineers, stokers and other employees on board not having specific designations.

does not include the passengers or the persons whom the vessel is transporting.

1. Shipowners and ship agents (Art. 586-588, CC)

Ship-owner - person who has possession, control in management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues.

Ship agent - person entrusted with provisioning and representing the vessel in the port in which it may be found; also includes the ship-owner.

Civil Liabilities of the Shipowner and the Ship Agents: 1. All contracts of the captain,

whether authorized or not, to repair, equip and provision the vessel; (Art. 586)

2. Loss and damage to the goods loaded on the vessel without prejudice to their right to free themselves from liability by abandoning the vessel to the creditors. (Art. 587)

Both are liable jointly and severally in case of breach of contract and extra-contractual obligation such as tort.

Neither of them will be liable for an obligation contracted by the captain in excess of the latter’s powers and privileges pertaining to him.

Powers, Functions and Liabilities of the Ship Agents:1. Capacity to trade;2. Discharge duties of the captain, in

case of the latter’s absence;3. Contract in the name of the

owners with respect to repairs,

details of equipment, armament, and all that relate to the requirements of navigation;

4. Order a new voyage, make a new charter or insure the vessel after obtaining authorization from the ship-owners.

Duty of Ship Agent to Discharge the Captain and the Members of the Crew: If the seamen contract is not for a

definite period or voyage, he may discharge them at his discretion (Art. 603).

If for a definite period, he may not discharge them until after the fulfillment of their contracts, except on the following grounds:a. insubordination in serious

matters;b. robbery;c. theft;d. habitual drunkenness;e. damage caused to the vessel or

to its cargo through malice or manifest or proven negligence (Art. 605).

2. Captains and masters of vessels

Nature of Position:1. general agent of the ship-owner;2. technical director of the vessel;3. representative of the government

of the country under whose flag he navigates.

Qualifications:1. Filipino citizen;2. legal capacity to contract;3. must have passed the required

physical and mental examinations required for licensing him as such (Art. 609).

Inherent Powers of the Captain: (ACICSR)1. appoint crew in the absence of

ship agent;2. command and direct crew;3. impose correctional punishment on

those who, while on board vessel, fail to comply with his orders or are wanting in discipline;




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4. make contracts for the charter of vessel in the absence of ship agent.

5. supply, equip, and provision the vessel; and

6. order repair of vessel to enable it to continue its voyage (Art. 610).

Sources of Funds to Comply with the Inherent Powers of the Captain: (in successive order)1. from the consignee of the vessel;2. from the consignee of the cargo;3. by drawing on the ship agent;4. by a loan on bottomry;5. by sale of part of the cargo. (Art.

611)

Duties of the Captain:1. bring on board the proper

certificate and documents and a copy of the Code of Commerce;

2. keep a Log Book, Accounting Book and Freight Book;

3. examine the ship before the voyage;

4. say on board during the loading and unloading of the cargo;

5. be on deck while leaving or entering the port;

6. protest arrivals under stress and in case of shipwreck;

7. follow instructions of and render an accounting to the ship agent;

8. eave the vessel last in case of wreck;

9. hold in custody properties left by deceased passengers and crew members;

10.comply with the requirements of customs, health, etc. at the port of arrival. (Art. 612)

Liabilities of the Ship Agent / Ship Owner for Acts Done By the Captain towards Passengers and Cargoes:1. damages to vessel and to cargo

due to lack of skill and negligence;2. thefts and robberies of the crew;3. losses and fines for violation of

laws;4. damages due to mutinies;5. damages due to misuse of power;6. for deviations;7. for arrivals under stress;

8. damages due to non-observance of marine regulations. (Art. 618)

Effect: ship agent or ship owner solidarily liable to the passengers and owners of the cargoNo Liability for the Following:1. damages caused to the vessel or to

the cargo by force majeure;2. obligations contracted for the

repair, equipment, and provisioning of the vessel unless he has expressly bound himself personally or has signed a bill of exchange or promissory note in his name. (Art. 620)

3. Pilot

Pilot a person duly qualified and licensed to

conduct a vessel into or out of ports, or in certain waters. In a broad sense, the term includes:1. those whose duty it is to guide

vessels into or out of ports, or in particular waters, and

2. those entrusted with the navigation of vessels on the high seas.

however, the term ‘pilot’ is more generally understood as a person taken on board at a particular place for the purpose of conducting a ship through a river, road or channel, or from a port.

Compulsory Pilotage states possessing harbors have

enacted laws or promulgated rules requiring vessels approaching their ports to take on board pilots licensed under the local law.

pilot supersedes the master for the time being in the navigation of the ship, considered as a master pro hac vice but a master is still in command of the vessel that did not deal with navigation

Duties and Liabilities:1. Responsible for the direction of a

vessel from the time he assumes control thereof until he leaves it anchored or berthed safely.

2. Shall properly and safely secure or




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anchor vessels under their control when requested to do so by the master of such vessels.

3. Personally liable for damages caused by his own negligence or default to the owners of the vessel and to third parties for damages sustained in a collision.

Cases where the master is allowed to displace a compulsory pilot:1. obvious incompetence2. intoxicated pilot3. in all cases of great necessity4. in cases of danger where the pilot

does not foresee4. Officers and crew of the vessel

Officers and crew of the vessel:1. Sailing Mate / First Mate2. Second Mate3. Engineers4. Members of the Crew

1. Sailing Mate / First Mate second chief of the vessel who

takes the place of the captain in case of absence, sickness, or death and shall assume all of his duties, powers and responsibilities. (Art. 627)

2. Second Mate takes command of the vessel in

case of the inability or disqualification of the captain and the sailing mate, assuming in such case their powers and responsibilities.

3. Engineers officers of the vessel but have

no authority except in matters referring to the motor apparatus. When two or more are hired, one of them shall be the chief engineer.

4. Members of the Crew hired by the ship agent, where

he is present and in his absence, the captain hires them, preferring Filipinos, and in their absence, he may take in foreigners, but not exceeding 1/5 of the crew. (Art. 634)

Classes of Seaman’s Contracts:1. by the voyage;2. by the month; and3. by share of profits or

freightage.

Just Causes for Discharge:1. perpetration of a crime;2. repeated insubordination, want

of discipline;3. repeated incapacity and

negligence;4. habitual drunkenness;5. physical incapacity;6. desertion. (Art. 637)

Causes of Revocation of Voyage:1. war;2. blockade;3. prohibition to receive cargo at

destination;4. embargo;5. inability of the vessel to

navigate. (Art. 640)

No Liability under the following circumstances:

1. if, before beginning voyage, captain attempts to change it, or a naval war with the power to which the vessel was destined occurs;

2. if a disease breaks out and be officially declared an epidemic in the port of destination;

3. if the vessel should change owner or captain. (Art. 647)

Supercargoes persons who discharge administrative

duties assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain. (Art. 649)

E. Charter Parties

Charter Party Contract by which an entire ship, or

some principal part thereof is let by the owner to another person for a specified time or use for the conveyance of goods, in consideration of the payment of freight. (Caltex Phil., Inc. vs. Sulpicio Lines, Inc., etc.,




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315 SCRA 709)

LEASE CHARTER PARTY

1. If for a definite period, lessee cannot give up lease by paying a portion of the amount agreed upon

1. Charterer may rescind charter party by paying half of the freightage agreed upon

2. If the leased property is sold to one who knows of the existence of the lease, the new owner must respect the lease

2. The new owner is not compelled to respect the charter party so long as he can load the vessel with his own cargo

Classes of Charter Party:1. Bareboat or Demise

charterer provides crew, food and fuel. The charterer is liable as if he were the owner, except when such arises from the unworthiness of the vessel.

Owner pro hac vice - means that a charterer, in spite of the fact that somebody else is the owner of the vessel, is treated as the owner of the chartered vessel, just for that one particular purpose only. This situation exists in “demise”

or “bareboat” charter, wherein the ship-owner turns over possession of the vessel to the charterer who then undertakes to provide a crew and victuals and supplies and fuel for the vessel for the duration of the charter.

Because the charterer is treated as owner pro hac vice, the charterer assumes the customary rights and liabilities of the ship-owner to third persons and is held liable for the expense of the voyage and the wages of the seamen.

2. Contract of Affreightment owner leases the boat or part of

it for the carriage of goods. (Planters Products Inc. v. CA, 226 SCRA 476) It may either be time charter or voyage charter.

a. Time charter vessel is chartered for a

period of time or duration of voyage; owner retains possession and control of the vessel; charterer acquires the right to use the carrying capacity, facilities of the vessel and could designate destinations.

b. Voyage or trip charter contract for hire of vessel

for one or series of voyages usually for purposes of transporting goods for charterer.

BAREBOAT OR DEMISE CHARTER

CONTRACT OF AFFREIGHTMENT (TIME OR VOYAGE CHARTER)

1. Charterer becomes liable to others caused by its negligence

1. Owner remains liable as carrier and must answer for any breach of duty

2. Charterer regarded as owner pro hac vice for the voyage

2. Charterer is not regarded as owner.

3. Owner of vessel relinquishes possession, command and navigation to charterer

3. The vessel owner retains possession, command and navigation of the ship

Who may contract:1. Bottomry - by the ship owner or

ship agent. Outside of the




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residence of the owners, the captain.

2. Respondentia - only the owner of the cargo.

Requisites of a valid charter: (CEC)1. consent of the contracting parties2. an existing vessel which should be

placed at the disposition of the shipper

3. the freight4. compliance with the requirements

of Art. 652 of the Code of Commerce:

A charter party must be drawn in duplicate and signed by the contracting parties and when either does not know how or is not able too do so, by two witnesses at his request.

The charter party shall contain, besides the conditions freely stipulated, the following circumstances:

a. the kind, name, tonnage of the vessel

b. her flag and port of registryc. the name, surname and

domicile of the captaind. the name, surname and

domicile of the ship agent, if the latter should make the charter party

e. the name, surname, and domicile of the charterer and if he states that he is acting by commission, that of the person for whose account he makes the contract

f. the port of loading and unloading

g. the capacity, number of tons or weight, or measurement which they respectively bind themselves to load and transport or whether the charter party is total

h. the freight to be paid, stating whether it is to be a fixed amount for the voyage or so much per month, or for the space to be occupied, or for the weight or measurement of the goods making up the cargo, or in any other manner

whatsoever agreed uponi. the amount of primage to be

paid the captainj. the days agreed upon for

loading and unloadingk. the lay days and extra lay days

to be allowed and the demurrage for each of them to be paid.

Freight The parties may fix the manner or

form in which the charter price or money shall be satisfied. It shall accrue to the conditions stipulated in the contract. In the absence of stipulations, the rules are as follows:

a. the freight shall begin to run from the day of loading on the vessel

b. in charters with a fixed period, the freight shall begin upon that very day, and

c. if the freight is charged according to weight, the payment thereof shall be made according to the gross weight, including the weight of the containers.

Lay days - period when vessel will be delayed in the port for loading and unloading.

Primage - bonus to be paid to the captain after the successful voyage.

Deadfreight - where the charterer failed to occupy the leased portion of the vessel, he may thereby be made liable by the ship-owner

Demurrage - sum due, by express contract, for the detention of the vessel, in loading and unloading, beyond the time allowed in the contract of affreightment, and to any other improper detention or delay beyond the time set for loading.

Rights and Obligations of a Charter Party:

Of the ship owner or ship agent:




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1. Bound to observe the capacity of the vessel

2. Any loss incurred by a shipper whose cargo is refused on account of the receipt by the shipowner of a greater amount of cargo belonging to other persons shall be for the account of the shipowner in the form of indemnity.

3. May effect a substitution in respect of the vessel, which had been initially chartered with that of another.

4. After 3/5 of the vessel is loaded, the vessel cannot be substituted with another, unless he procures the consent of the shipper or charterer.

5. May be held generally liable for damages incurred by the charterer due to voluntary delay.

6. May unload cargo clandestinely placed on board, or transport them

7. To leave the port if the charterer does not bring the cargo within the lay days and extra lay days allowed;

8. To place in a vessel in a condition to navigate;

9. To bring cargo to nearest neutral port in case of war or blockade.(Arts. 669-678)

Of the charterer: 1. May subcharter the vessel to a 3rd

person only if he is authorized by the shipowner

2. To load goods that were contracted upon, otherwise he will be held liable to indemnify the parties injured thereby.

3. If illicit cargo is loaded with the knowledge of the shipowner or captain, charterer is jointly liable for damages.

4. To pay the agreed charter price;5. To pay freightage on unboarded

cargo;6. To pay for the full freightage, the

expenses of the arrival made at his request and the losses and damages caused to the other shippers if any of the shipper unloads his goods before arriving

at the port, unless in cases of force majeure.

7. To wait if the vessel needs repair;8. To pay expenses for deviation.

(Arts. 679-687)

Rescission of a Charter Party:A. At charterer’s request: (Art 688)

1. by abandoning the charter and paying half of the freightage;

2. error in tonnage or flag;3. failure to place the vessel at the

charterer’s disposal;4. return of the vessel due to

pirates, enemies or bad weather;

5. arrival at a port for repairs.

B. At ship owner’s request: (Art. 689)

1. if the extra lay days terminate without the cargo being placed alongside the vessel;

2. sale by the owner of the vessel before loading by the charterer;

C. Fortuitous causes: (Art. 690)1. war;2. blockade;3. prohibition to receive cargo;4. embargo; and5. inability of the vessel to

navigate.

Usual forms of Consummating Contracts:1. C.I.F - cost, insurance and freight;2. F.O.B. - free on board;3. F.A.S. - free alongside ship; and4. C. and F. - cost and freight.

Transshipment of Goods the act of taking cargo from one ship

and loading it in another, if done without legal excuse, however

competent and safe the vessel into which the transfer is made is a violation of contract and infringement of right of shipper and subjects carrier to liability if freight s lost event by cause otherwise excepted (Magellan Manufacturing vs. CA, 201 SCRA 102).

F. Loans on Bottomry and Respondentia




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Loan on Bottomry - loan made by ship-owner or ship agent guaranteed by vessel itself and repayable upon arrival of vessel at destination. (Art. 719)

Loan on Respondentia - loan, taken on security of the cargo laden on a vessel, and repayable upon safe arrival of cargo at destination. (Art. 719)

Common Elements:1. Exposure of security to marine

peril;2. Obligation of the debtor

conditioned only upon safe arrival of the security at the point of destination.

Exceptions to the Hypothecary Nature of Bottomry and Respondentia:

1. loss due to inherent defect;2. loss due to the barratry on the part

of the captain;3. loss due to the fault of malice of

the borrower;4. that the vessel was engaged in

contraband; and5. that the cargo loaded on the

vessel be different in form that agreed upon..

BOTTOMRY/ RESPONDENTIA

ORDINARY LOAN

1. Liability of the borrower is contingent on the safe arrival of the vessel or cargo at destination

1. Not subject to any contingency

2. The last lender is a preferred creditor

2. The first lender is a preferred creditor

Note: Under existing laws, the parties to a loan, whether ordinary or maritime, may agree on any rate of interest. (CB Circular 905).

Who may contract:1. Bottomry - by the ship owner or

ship agent. Outside of the

residence of the owners, the captain.

2. Respondentia - only the owner of the cargo.

Formalities: May be executed by means of:1. public instrument2. policy signed by the contracting

parties and the broker taking part therein

3. private instrument (Art. 720)

Contents:1. kind, name and registry of the

vessel;2. name, surname and domicile of the

captain;3. names, surnames and domiciles of

the borrower and the lender;4. amount of the loan and the

premium stipulated;5. time for repayment;6. goods pledged to secure

repayment;7. voyage during which the risk is run

(Art.721)

G. Accidents in Maritime Commerce

Accidents in Maritime Commerce: 1. Averages 2. Collision 3. Arrival Under Stress 4. Shipwreck

Protest - the written statement by the master of a vessel or any authorized officer, attested by proper officer or a notary, to the effect that damages has been suffered by the ship. Protest is required in the following instances:

1. when the vessel makes an arrival under stress

2. where the vessel is shipwrecked3. where the vessel has gone through

the hurricane or the captain has suffered damages or averages

4. maritime collisions

1. Averages an extra-ordinary or accidental

expense incurred during the voyage in order to preserve the cargo, vessel or both; and all damages or deterioration




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suffered by the vessel from departure to the port of destination, and to the cargo from the port of loading to the port consignment. (Art. 806)

Classes of Averages:A. Particular or Simple Average

Damage or expenses caused to the vessel or cargo that did not inure to common benefit, and borne by respective owners. (Art. 809)

The owner of the goods which gave rise to the expense or suffered the damage shall bear this average. (Art. 810)

B. Gross or General Average Damage or expenses deliberately

caused in order to save the vessel, its cargo or both from real and known risk. (Art. 811)

All the persons having an interest in the vessel and the cargo therein at the time of the occurrence of the average shall contribute to satisfy this average. (Art. 812)

Requisites: (CDSA)1. There must be a common danger; 2. That for the common safety, part

of the vessel or of the cargo or both is deliberately sacrificed;

3. That from the expenses or damage caused follows the successful saving of the vessel and the cargo, and;

4. That the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority

Who is entitled to indemnity: The owner of the goods, which were

sacrificed, is entitled to receive general average contribution.

However, the following goods are not covered:

1. Goods carried on deck unless the rule, special law or customs of the place allow the same,

2. Goods that are not recorded in the books or records of the vessel, and

3. Fuel for the vessel if there is more than sufficient fuel for the

voyage.

Procedure for recovery: (Art. 813-814)1. There must be a resolution of the

captain, adopted after a deliberation with the other officers of the vessel and after hearing all persons interested in the cargoes. If the latter disagree, the decision of the captain should prevail but they shall register their objections.

2. The resolution must be entered in the logbook, stating the reasons and motives for the dissent, and the irresistible and urgent causes if he acted in his own accord. It must be signed, in the first case, by all persons present in the hearing. In the second case, by the captain and all the officers of the vessel.

3. The minutes must also contain a detail of all the goods jettisoned and those injuries caused to those on board.

4. The captain shall deliver it to the maritime judicial authority of the first port he may make, within 24 hours after his arrival, and to ratify it immediately under oath.

Order of goods to be cast overboard in case of jettison:

1. those which are on the deck, preferring the heaviest one with the least utility and value;

2. those which are below the upper deck, beginning with the one with greatest weight and smallest value. (Art. 815)

York-Antwerp Rules on determining liability for contribution on averages: Under the rule, deck cargo is

permitted in coastwise shipping but prohibited in overseas shipping.1. If deck cargo is located with the

consent of the shipper on overseas trade, it must always contribute to general average, but should the same be jettisoned, it would not be entitled to reimbursement because there is violation of the Y-A Rules.

2. If deck cargo is loaded with the consent of the shipper on coastwise shipping, it must always




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contribute to general average and if jettisoned would be entitled to reimbursement.

2. Collision impact of 2 vessels both of which are

moving.

Allision impact between a moving vessel and a

stationary one.

Zones of Time in the Collision of vessels:1. First zone - all time up to the

moment when risk of collision begins;

2. Second zone - time between moment when risk of collision begins and moment it becomes a practical certainty;

3. Third zone - time when collision is certain and time of impact.

Error in Extremis - sudden movement made by a faultless vessel during the 3rd zone of collision with another vessel which is at fault during the 2nd zone. Even if such sudden movement is wrong, no responsibility will fall on said faultless vessel. (Urrutia and Co. v. Baco River Plantation Co., 26 PHIL 632).

Rules on Collision of Vessels under Code of Commerce:

1. The collision may be due to the fault, negligence or lack of skill of the captain, sailing mate, or any other member of the complement of the vessel. The owner of the vessel at fault is liable for losses or damage. (Art. 826)

2. The collision may be due to the fault of both vessels. Each vessel shall suffer its own losses, but as regards the owner of cargoes both vessels shall be jointly and severally liable. (Art. 827)

3. If it cannot be determined which vessel is at fault. Each vessel shall also suffer its own losses and both shall be solidarily liable for losses o damages on the cargoes. (Art. 828)

4. The vessels may collide with each other through fortuitous event or

force majeure. In this case each shall bear its own damage. (Art. 830)

5. Two vessels may collide with each other without their fault by reason of a third vessel. The third vessel will be liable for losses and damages. (Art. 831)

6. A vessel which is properly anchored and moored may collide with those nearby, reasons of storm or other cause of force majeure. The vessel run into shall suffer its own damage and expense. (Art. 832)

Cases covered by collision and allision:1. One vessel at fault - such vessel is

liable for damage caused to innocent vessel as well as damages suffered by the owners of cargo of both vessels.

2. Both vessels at fault - each vessel must bear its own loss, but the shippers of both vessels may go against the ship owners who will be solidarily liable.

3. Vessel at fault not known - same as rule as (2).

4. Third vessel at fault - same rule as (1).

5. Fortuitous event - no liability. Each bears its own loss.

Prerequisite to recovery: Protest should be made within 24

hours before the competent authority at the point of collision or at the first port of arrival, if in the Philippines and to the Philippine consul, if the collision took place abroad. (Art. 835)

Injuries to persons and damage to cargo of owners not on board on collision time need not be protested. (Art. 836)

Doctrine of “Inscrutable Fault” In case of collision where it cannot be

determined which between the two vessels was at fault, both vessels bear their respective damage, but both should be solidarily liable for damage to the cargo of both vessels.

Note: The Doctrine of Limited Liability




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applies in case of collisions, but it shall be limited only to the value of the vessel with all its appurtenances and freightage earned during the voyage. When the latter is not sufficient to cover all the liabilities, the indemnity due by reason of the death or injury of persons shall have preference. (Arts. 837 and 838)

3. Arrival Under Stress arrival of a vessel at a port of

destination on account of lack of provision, well founded fear of seizure, pirates, or accidents of sea disabling navigation. (Art. 819)

When not lawful:1. lack of provisions due to

negligence to carry according to usage and customs;

2. risk of enemy not well known or manifest

3. defect of vessel due to improper repair; and

4. malice, negligence, lack of foresight or skill of captain. (Art. 820)

Who bears expenses: The ship-owner or ship agent shall be

liable but they shall not be liable for the damages caused by the shippers by reason of a lawful arrival. (Art. 821)

The captain shall be liable for damages caused by his delay, if after the cause of the arrival under stress has ceased, he continues the voyage. (Art. 825)

Steps to be Taken in the Determination of the Propriety of Arrival Under Stress:

1. the captain should be determine during the voyage if there is well founded fear of seizure, privateers and other valid grounds

2. the captain shall then assemble the officers

3. the captain shall summon the persons interested in the cargo who may be present and who may attempt but without right to vote

4. the offices shall determine and agree if there is well founded reason after examining the

circumstances. The captain shall have the deciding vote

5. the agreement shall be drafted and the proper minutes shall be signed and entered in the log book

6. objections and protests shall likewise entered in the minutes

4. Shipwreck loss of the vessel at sea as a

consequence of its grounding, or running against an object in sea or on the coast.

Rules pertaining to Shipwrecks:1. Losses and deteriorations suffered

by a vessel and her cargo shall be individually for the account of the owners. (Art. 840)

2. If the wreck was due to malice, negligence or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain.(Art. 841)

3. Goods saved shall be specially bound for the payment of the expenses of the respective salvage and must be paid before they are delivered, with preference over any other obligation if the merchandise should be sold. (Art. 842)

4. If several vessels sail under convoy, and any of them should be wrecked, the cargo saved shall be distributed among the rest in proportion to the amount with each one is able to take. (Art. 843)

5. Any goods taken on board saved from the wreck shall continue his course and upon arrival shall deposit the same. (Art. 844)

6. If there is no person interested in the cargo who can pay the expenses and freightage corresponding to the salvage, it may be sold to cover the same. (Art. 845)

H. Salvage services one person render to the

owner of a ship or goods, by his own labor, preserving the goods or the ship which the owner or those entrusted with the care of them have




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either abandoned in distress at sea, or are unable to protect or secure.

Kinds of Salvage Services:1. voluntary - wherein the compensation

is dependent upon success2. rendered under a contract for a per

diem or per horam voyage, payable at all events

3. under a contract for a compensation payable only in case of success

Contract of Towage - contract whereby one vessel, usually motorized, pulls another, whether loaded or not with merchandise, from one place to another, for compensation. It is a contract for services rather than a contract of carriage.

SALVAGE TOWAGE1. governed by

special law (Act No. 2616)

1. governed by Civil Code on contract of lease

2. requires success, otherwise no payment

2. success not required

3. must be done with the consent of the captain/crewmen

3. only the consent of the tugboat owner is needed

4. vessel must be involved in an accident

4. vessel need not be involved in an accident

5. fees distributed among crewmen

5. fees belong to the tugboat owner

Requisites for Salvage Award: 1. Valid object of salvage2. Object must have been exposed to

marine peril3. Salvage services rendered

voluntarily4. Salvage services are successful

Derelict – a ship or her cargo, which is abandoned and deserted at sea by those who were in charge of it, without any

hope of recovering it, or without any intention of returning to it.

Rules on Salvage Award:1. The reward is fixed by the RTC judge

in the absence of agreement or where the latter is excessive (Sec. 9).

2. If sold (no claim being made within 3 months from publication), the proceeds, after deducting expenses and the salvage claim, shall go to the owner; if the latter does not claim it within 3 years, 50% of the said proceeds shall go to the salvors, who shall divide it equitably, and the other half to the government (Secs. 11-12).

3. If a vessel is the salvor, the reward shall be distributed as follows:

a. 50% to the ship-owner;b. 25% to the captain; andc. 25% to the officers and crew in

proportion to their salaries (Sec. 13)

Rights Obligations of Salvors and OwnersSalvors:

1. Entitled to compensation for services rendered.

2. Acquires a lien upon the property salvaged until he is compensated.

3. To all intents and purposes, he is a joint owner and if the property is lost he must bear his share.

4. Acquires the right of possession of derelict for purposes of a salvage claim.

5. Entitled to half of the deposit of the derelict sold, if after the lapse of 3 years no claim was made.

Owners:1. He does not renounce his right to

the derelict.2. Has a right to the delivery of the

vessel or things saved after the salvage is accomplished, provided he pays or gives a bond.

3. Should make a claim within 3 months after the publication of a salvage report, otherwise the thing saved shall be sold.

4. Entitled to the salvage reward for the use of his vessel in rendering salvage services.




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THE CORPORATION CODE OF THE PHILIPPINES

Batas Pambansa Bilang 68 (May 1, 1980)

TITLE IGENERAL PROVISIONS

Definitions and Classifications

Sec. 2. Corporation defined. A corporation is an artificial being

created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Attributes of a Corporation: (CARP)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 its existence.

THEORIES on the Formation of a Corporation:1. Concession Theory – a corporation

is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC.

2. Theory of corporate enterprise or economic unit – the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit.

3. Genossenschall Theory – treats the corporation as the reality of the group as a social and legal entity independent of state recognition and “concession”

Doctrine of Separate Personality A corporation has a juridical

personality separate and distinct from that of its stockholders or members.

Consequences:

1. Liability for acts or contracts - obligations incurred by a corporation, acting through its authorized agents are sole its sole liabilities (Creese vs CA, 93 SCRA 483)

2. Right to bring actions – may bring civil and criminal actions in is own name in the same manner as natural persons (Art 46, NCC)

3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members (Art 44(3), NCC)

4. Acquisition of court of jurisdiction – service of summons may be mad on the president, general manager, corporate secretary, treasure or in-house counsel (Sec 11, Rule 14, Rules of Court)

5. Changes in individual membership - Remains unchanged and unaffected in its identity by changes in its individual membership

6. Entitlement to constitutional guarantees:

Due Process Equal protection of the

law Protection against

unreasonable searches and seizures

NOTE: A corporation is not entitled to invoke the right against self-incrimination (Bataan Shipyard vs PCGG)7. Liability for torts – a

corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body or generally, from the directors as the governing body (PNB vs CA)

8. A corporation is not entitled to moral damages because it has




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no feelings, no emotions, no senses (ABS-CBN vs CA)

9. Liability for crimes – since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable (People vs Tan Boon Kong, 54 Phil 607)

Doctrine of Piercing the Veil of Corporate Entity Requires the court to see through the

protective shroud which exempts its stockholders from liabilities that they ordinarily would be subject to, or distinguishes a corporation from a seemingly separate one, were it not for the existing corporate fiction (Lim vs CA, 323 SCRA 102)

Extent: The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied (Koppel v. Yatco 77 Phil. 496)Rules:

1. has only a res judicata effect2. to prevent wrong or fraud and

not available for other purposes3. judicial prerogative only4. must be with necessary and

factual basis3 Classes of Piercing:1. Fraud Cases – when a corporation is

used as a cloak to cover fraud, or to do wrong.

2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation

3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity.

Instrumentality / Alter Ego Rule where one corporation is so organized

and controlled and its affairs are conducted so that it is, in fact, a mere

instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded.

Requisites:1. There must be control, not mere

majority or complete stock control, but complete domination, not only of finances, but of policy, and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had, at that time, no separate mind, will or existence of its own (control);

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff’s legal rights (breach of duty); and

3. Such control and breach of duty must proximately cause the injury to the plaintiff. (proximate cause)

CORPORATION PARTNERSHIP1. Creation

Created by operation of law;

Created by agreement of the parties;

2. Numbers of incorporators2. Requires at least 5 incorporators;

2. Requires at least 2 partners;

3. Commencement of juridical personality

Acquires juridical personality from the date of issuance of the certificate of incorporation by the Securities and Exchange Commission

Acquires juridical personality form the moment of execution of the contract of partnership

4. PowersCorporation can exercise only the powers expressly granted by law or

Partnership may exercise any power authorized by the partners




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implied from those granted or incident to its existence

(provided it is not contrary to law, morals, good customs, public order, public policy)

5. Management The power to do the business and manage its affairs is vested in the board of directors and trustees

When management is not agreed upon, every partner is an agent of the partnership

6. Effect of mismanagementThe suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation

A partner as such can sue a co-partner who mismanages

7. Right of successionHas right of succession

Has nor right of succession

8. Extent of liability to third persons

Stockholders are liable only to the extent of the shares subscribed by them

Partners are liable personally and subsidiarily (sometimes solidarily) for partnership debts to third persons

9. Transferability of interestsStockholder has generally the right to transfer his shares without prior consent of the other stockholders because a corporation is not based on this principle

Partner cannot transfer his interest in the partnership so as to make the transferee a partner without the unanimous consent of all existing partners because the partnership is based on the principle of delectus personarum

10. Term of existence

May not be formed for a term in excess of 50 years extendible to no more than 50 years in any one instance

May be established for any period of time stipulated by the partners

11. Firm nameMay adopt any name provided it is not the same as or similar to any registered firm name

Limited partnership is required by law to add the word “Ltd” to its name

12. DissolutionCan only be dissolved with the consent of the State

May be dissolved at any time by or all of the partners

13. Governing LawGoverned by the Corporation Code

Governed by the Civil Code

Franchises of Corporations:1. Primary or corporate franchise

The right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation.

2. Secondary or special franchise The special right or privilege

conferred upon an existing corporation to the business for which it was created. Example, use of the streets of a municipality to lay pipes or tracks, or operation of a messenger and express delivery service.

PRIMARY SECONDARY1. Refers to the

franchise of being or existing as a corporation

1. Refers to the exercise of rights. Example: right of eminent domain

2. Vested in the individuals who compose the corporation

2. Vested in the corporation after its incorporation and not upon the individuals who compose it

3. It cannot be sold or

3. It may be sold or transferred;




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transferred because it is inseparable from the corporation itself.

subject to sale on execution, subject to levy

Basic Advantages of Corporate Organizations:

1. Separate juridical personality2. Limited liability of investors3. Free transferability of units of

ownership4. Centralized management

Circumstance rendering the Subsidiary in a Parent-Subsidiary Relationship an instrumentality: a. The parent corporation owns all or

most of the capital stock of the subsidiary.

b. The parent and subsidiary corporations have common directors or officers.

c. The parent corporation finances the subsidiary.

d. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

e. The subsidiary has grossly inadequate capital.

f. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

g. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own.

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 their orders from the parent corporation.

j. The formal legal requirements of the subsidiary are not observed.

The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. (PNB vs Ritratto Group Inc. GR No. 142616)

SEC. 3. CLASSES OF CORPORATIONS.1. AS TO ORGANIZERS:

a. Public – by State only; andb. Private – by private persons alone

or with the State.2. AS TO FUNCTIONS:

a. Public – government of a portion of the territory; and

b. Private – usually for profit-making c. Quasi-public – those private corps. which have accepted from the state the grant of a franchise or contact involving the performance of public duties.

3. AS TO GOVERNING LAW:a. Public – Special Laws; andb. Private – Law on Private Corporations

4. AS TO LEGAL STATUS:a. De jure corporation – organized in

accordance with the requirements of law.

b. De facto corporation – organized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20)

Requisites:1. The existence of a valid

law under which it may be incorporated;

2. A bona fide attempt in good faith to incorporate under such law;




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3. Actual use or exercise in good faith of corporate powers; and

4. Issuance of certificate of incorporation by the SEC as a minimum requirement of continued good faith

NOTE: The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist

c. Corporation by estoppel – group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. (Sec. 21) It is neither de jure nor de facto.

d. Corporation by prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic Church.

5. AS TO EXISTENCE OF SHARES OF STOCK:a. Stock corporation – a corporation:

1. whose capital stock is divided into shares and

2. which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3)

b. Non-stock Corporation – does not issue stocks nor distribute dividends to their members.

6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL:a. Holding corporation - it is one

which controls another as a

subsidiary by the power to elect management.

b. Subsidiary corporation1. Majority-owned subsidiary –

where one corporation owns 51% to 94% of the capital stock of another corporation.

2. Wholly-owned subsidiary – where one corporation holds 95% to 100% of the capital stock of another corporation.

c. Affiliates - company that is subject to common control of a mother holding company and operated as part of the system.

d. Parent and Subsidiary Corporation - separate entities with power to contract with each other. The board of directors of the

parent company determines its representatives to attend and vote in the stockholder’s meeting of its subsidiary.

The stockholders of the parent company demand representation in the board meetings of its subsidiary.

7. AS TO PLACE OF INCORPORATION:a. Domestic corporation - a

corporation formed, organized, or existing under Philippine laws.

b. Foreign corporation – a corporation formed, organized, or existing under any laws other than those of the Philippines.(see sec. 123)

Government-owned or controlled corporations (GOCC): They are not immune from suits; Employees of GOCCs are governed by

Civil Service if created by special law and by Labor Code if created under corporation law;

While public services operated by government entities and GOCCs, are again placed under the jurisdiction of the Public Service Commission, they are not required to secure certificates of public convenience before commencing operations;

Quasi-Corporations: Public bodies which are not

corporations in the full sense but only




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resemble them in that they have some of the attributes of corporation, and

which are created or authorized by the legislature as public agencies to aid the State in, or take charge of, some public or state work other than community government, for the general welfare.

They are created for narrow or limited purpose;

They do not have the power and liabilities of self-governing corporations.

Example: MMDA, LLDA

QUASI-CORPORATION

PUBLIC CORPORATION

1. Possesses only some corporate powers, therefore, not a full corp.

2. Organized to aid the state in some public or state work other than the government of a portion thereof.

1. A full corporation;

2. Organized for the government of a portion of the state.

QUASI-CORPORATION

QUASI-PUBLIC CORPORATION

1. Not a full corp.;

2. An instrumentality of the state.

1. A full corp.;

2. An instrumentality of private individuals.

SEC. 4. CORPORATIONS CREATED BY SPECIAL LAWS OR CHARTERS. Governed primarily by the provisions

of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code insofar as they are applicable.

Charter – refers to the law under which it is created which may be either the general law (i.e. B.P. Blg. 68.) or a special law. It includes the articles of

incorporation and by-laws of the

corporation and all laws including the Constitution applicable thereto.

SEC. 5. CORPORATORS AND INCORPORATORS, STOCKHOLDERS AND MEMBERS.

Components of a Corporation:1. Promoter;2. Incorporators;3. Corporators

a. stockholdersb. members;

4. Governing body (absolute control and direction)a. board of directors (stock); orb. board of trustees (non-stock).

5. Managing and administrative body (limited to the general corporate business)a. executive committee; and b. contracted managers.

6. Corporate officers

Promoter - a person who brings about the incorporation and organization of a corporation. He brings together the persons who

become interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself.

Corporators – those who compose a corporation, whether as stockholders or as members. Corporators in a stock corporation are

called stockholders or shareholders. Corporators in a non-stock

corporation are called members.

Incorporators - those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

INCORPORATORS

CORPORATORS

1. Signatory to the Articles of Incorporation

1. Stockholder (stock corporation) or member (non-stock




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corporation)2. Fait accompli;

accomplished fact (the Articles of Incorporation cannot be amended to replace them)

2. They may cease to be such if they subsequently lose their qualifications

4. Number is limited to 5-15

3. No restriction as to number

4. Must have contractual capacity

4. May be such through a guardian

SEC. 6. CLASSIFICATION OF SHARES. Limitations:

No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares.

There shall always be a class or series of shares that have complete voting rights.

Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation, except that banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

1. COMMON SHARES The basic class of stock

ordinarily and usually issued without extraordinary rights and privileges, and

The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever

2. PREFERRED SHARES Those issued with par value, and

preferences either with respect to:a. Assets after dissolution,b. Distribution of dividends, or

both, andc. Other preferences.

Limitations:a. If deprived of voting rights, it

shall still be entitled to vote on matters enumerated in Sec 6, paragraph 6

b. Preference must not be violative of the Code

c. May be issued only with a stated par value

d. The board of directors may fix the terms and conditions only when so authorized by the articles of incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC

Kinds:a. Cumulative preferred shareb. Non-cumulative preferred sharec. Participating preferred shared. Non-participating preferred

sharee. Cumulative-participating

preferred share3. REDEEMABLE SHARES

Those which permit the issuing corporation to redeem or purchase its own shares

Limitations: a. Issued only when expressly

provided for in the articles of incorporation;

b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares;

c. May be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code

May be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock

4. TREASURY SHARES Shares that have been earlier

issued as fully paid, and have thereafter been acquired by the




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corporation by purchase, donation, and redemption or through some lawful means. (Sec. 9)

If purchased from stockholders: It is in effect a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have

surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital.

If acquired by donation from the stockholders: Amounts to a surrender of their stock without getting back their investments that are instead, voluntarily given to the corporation.

Need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable.

When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares.

Not entitled to dividends and may not be voted

5. FOUNDERS' SHARE Shares issued to organizers and

promoters of a corporation in consideration of some supposed right or property.

May be given special preference in voting rights and dividend payments.

But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval.

6. VOTING SHARES Shares with a right to vote.

7. NON-VOTING SHARES Shares without right to vote. The law only authorizes the denial

of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or

series of shares which have complete voting rights.

When such voting rights are denied, it shall nevertheless be entitled to vote on the following fundamental matters: (AASIIMID)a. Amendment of Articles of

Incorporation;b. Adoption and amendment of by-

laws;c. Sale or disposition of all or

substantially all of corporate property;

d. Incurring, creating or increasing bonded indebtedness;

e. Increase or decrease of capital stock;

f. Merger or consolidation of corporation;

g. Investments of corporate funds in another corporation or another business purpose; and

h. Corporate dissolution. (Sec. 6)8. ESCROW STOCK

Deposited with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of full subscription price.

9. OVER-ISSUED STOCK Stock issued in excess of the

authorized capital stock. It is also known as spurious stock. Its issuance is considered null and

void. 10.WATERED STOCK

A stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services.

“Water” in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock

It includes stocks:a. Issued without considerationb. Issues as fully paid when in the

corporation has received a lesser sum of money than its par value

c. Issued for a consideration other than actual cash, the fair




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valuation of which is less than its par or issued value

d. Issues s stock dividend when there are no sufficient retained earnings to justify it

11.PAR VALUE SHARES Shares with a value fixed in the

certificates of stock and the articles of incorporation.

12.NO PAR VALUE SHARES Shares having no par value but

have issued value stated in the certificate or articles of incorporation.

Limitations:a. No par value shares cannot

have an issued price of less than P5.00;

b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends;

c. They cannot be issued as preferred stocks;

d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association;

e. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares;

f. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

Advantages of no-par shares:1. Does not pretend to place a

definite money value on the share, and therefore, is less likely to mislead naïve investors who may take e par value printed on the certificate as a representation of the present actual value of the share.

2. Allow flexibility of price.3. On the part of the shareholder,

the disappearance of personal liability for unpaid stock subscription as they are deemed fully paid and non-assessable.

4. Afford a possible remedy for, or at least a means of relief from,

the evil of over-capitalization and stock watering.

Disadvantages:1. They legalize instead of restrict

large issues of stock property;2. They conceal what money or

property a share represents;3. They permit the issuance of a

maximum of watered stock at a minimum risk.

The issued price of no-par value shares may be fixed:

In the articles of incorporation By the board of directors pursuant

to authority conferred upon it by the articles of incorporation or the by-laws

In the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (Sec. 62)

13.STREET CERTIFICATE A stock certificate endorsed by the

registered holder in blank and transferee can command its transfer to his name from the issuing corporation.

14.CONVERTIBLE SHARE A share a share that is changeable

by the stockholder from one class to another at a certain price and within a certain period.

15.FRACTIONAL SHARE A share with a value of less than

one full share.

DOCTRINE OF EQUALITY OF SHARES Where the articles of incorporation do

not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. (Sec. 6)

CORPORATE INDEBTEDNESS AND BONDS:

I. Promissory Note – complete in itself and which is ordinarily used for short-term loans;




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II. Bond – for long-term obligations and which is usually issued as a series under a single instrument known as trust indenture. The bonds are the instruments

representing the contract of the corporation to pay the holder or owner a definite sum of money at a definite time, together with periodic payments of interest.

a. Mortgage Bond – secured by a mortgage constituted on corporate physical property. The property is conveyed

to a trustee for the benefit of the bondholder in case the interest or principal is defaulted;

b. Equipment Bond – secured by a mortgage or pledge of corporate movable equipments.

c. Collateral Trust Bond – not secure by a lien on physical property of the corporation but by a lien on securities deposited with a trustee as collateral. Such securities may

consist of shares or bonds issued by the subsidiaries of the corporation and it may also consist of bonds of a small operating company which the corporation controls;

d. Guaranteed Bond – secured by a guaranty of a corporation other then the one issuing it;

e. Debentures – not secured by any specific mortgage, lien or pledge on specific corporate property but by the general credit of the corporation and restrictive agreements;

f. Income Bond – one the principal of which may or may not be secured by a

mortgage, but the interest is payable only out of net profits;

g. Coupon Bond – those to which are attached a sheet of dated, numbered and similarly printed coupons which the bondholders may cut off when due or thereafter. Such coupons may be

served and deposited in a bank, negotiated before the maturity of the interest they represent, and transferred just like any commercial paper.

TITLE IIINCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

STEPS IN THE CREATION OF CORPORATIONS:1. Promotion –the act of getting it upon

organizing it, and procuring of subscriptions to its capital stock. It includes:

a. The taking of preliminary options and the making of promotion and financing arrangement by the organizers or promoters with the aid of competent legal advisers;

b. The solicitation of pre-incorporation subscriptions, subject to the requirement of the Securities Act, such as the registration and/or licensing of securities.

2. Incorporation – the act or process of forming or creating a corporation.

It refers to the performance of conditions, act, deeds and writings by the incorporator and the official acts and certification of record, which give the corporations its existence.

3. Organization and commencement of business operations.




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SEC. 10. NUMBER AND QUALIFICATIONS OF INCORPORATORS.

Incorporators They are those mentioned in the

Articles of Incorporation as originally forming and composing the corporation, having signed the Articles and acknowledged the same before a notary public.

Qualifications:1. Natural person;2. Not less than 5 but not more than

15;3. Of legal age;4. Majority must be residents of the

Philippines; and5. Each must own or subscribe to at

least one share. Effect of lack of qualifications: Failure

to comply with them substantially will prevent the formation of a de jure corp. But the lack of requisite qualifications cannot be collaterally raised, and the corporation has a de facto existence.

General Rule: Only natural persons can be incorporators.Exception: When otherwise allowed by law, e.g., Rural Banks Act of 1992, where incorporated cooperatives are allowed to be incorporators of rural banks. Note: However, it is undeniable that corporations can be Corporators.

SEC. 11. CORPORATE TERM. Limitations:

a. The term shall not exceed 50 years in any one instance

b. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons as determined by the SEC

c. The amendment shall be effected before the expiration of the corporate term, for after dissolution by expiration of the corporate term there is no more corporate life to extendEXCEPTION: Doctrine of Relation - extension was not achieved due to insurmountable

intervening event, which the corporation cannot avoid even with the exercise of prudence.

SEC. 12. MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS.

DEFINITION OF TERMS:1. CAPITAL STOCK OR LEGAL STOCK

OR STATED CAPITAL Amount fixed in the corporate

charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation.

2. CAPITAL The value of the actual property or

estate of the corporation whether in money or property. Its net worth (or stockholder’s equity) is its assets less liabilities.

3. AUTHORIZED CAPITAL STOCK The capital stock divided into

shares with par values. Par value stocks are required in

the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter, which may be raised by the corporation for its operations.

4. SUBSCRIBED CAPITAL STOCK The total amount of the capital

stock subscribed whether fully paid or not.

5. OUTSTANDING CAPITAL STOCK The portion of the capital stock

issued to subscribers except treasury stocks.

6. STATED CAPITAL The capital stock divided into no

par value shares. 7. PAID-UP CAPITAL

The amount paid by the stockholders on subscriptions from unissued shares of the corporation.

Minimum Capital Stock (MCS):




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GENERAL RULE : No minimum required for capital stock under the Corporation Code (Sec. 12). However, the MCS, in effect, is P5,000 because the minimum paid-up capital required under the Code is P5,000 (Sec. 13).EXCEPTIONS:A. As provided by special law:

1. Domestic Insurance Corporations - P500T capital stock; 50% subscribed and the balance payable in 12 months.

2. Private Development Banks- P4M for class A- P2M for class B- P1M for class C

3. Investment Companies – paid up at least P500T

4. Savings and Loan Corporation – to be fixed by the Monetary Board, but not less than P100T

5. Financing Companies 1Paid up: - P2M for Metro Manila

- P1M for Cities- P500T for others

B. Provided that at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription must be paid up

Sec. 13. AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR THE PURPOSES OF INCORPORATION.

MINIMUM SUBSCRIBED CAPITAL STOCK 25% of authorized capital stock

MINIMUM PAID-UP CAPITAL 25% of total subscription must be paid

upon subscription but must not be less than P5,000.

NOTE: Non-resident aliens should pay their subscriptions in full unless a resident assumes the balance. The subscription payments of the non-resident aliens shall not be included in the computation of the 25% minimum paid-up capital requirement.

Ways of increasing the capital stock:1. By increasing the number of

shares and retaining the par value;

2. By increasing the par value of existing shares without increasing the number of shares;

3. By increasing the number of shares and increasing the par value.

4. By reinvesting retained earnings to the capital and issuing stock dividends

Tools available to a stockholder to replenish capital:

1. Additional subscription to shares of stock of the corporation by stockholders or by investors;

2. Advances by the stockholders to the corporation;

3. Payment of unpaid subscription by the stockholders.

Trust Fund Doctrine (TFD) The subscribed capital stock of the

corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate.

The creditors may sue the stockholders directly for the latter’s unpaid subscription.

Application of the TFD:1. Where the corporation has distributed

its capital among the stockholders without providing for the payment of creditors;

2. Where it had released the subscribers to the capital stock from their subscriptions;

3. Where it has transferred the corporate property in fraud of its creditors; and

4. Where the corporation is insolvent.

Coverage of the TFD:1. If the corporation is solvent , the TFD

extends to the capital stock represented by the corporation’s legal capital.

2. If the corporation is insolvent , the TFD extends to the capital stock of the corporation as well as all of its property and assets.




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Exceptions to the TFD:1. Redemption of redeemable shares

(Sec. 8)2. In close corporation, when there

should be a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share. (Sec. 104)

SEC. 14. CONTENTS OF THE ARTICLES OF INCORPORATION.

ARTICLES OF INCORPORATION The document prepared by the

persons establishing a corporation and filed with the SEC containing the matters required by the Code.

Significance: 1. Its issuance signals the birth of the

corporation’s juridical personality;2. It is an essential requirement for

the existence of a de facto corporation.

Contents: 1. Name of corporation;2. Purpose/s, indicating the primary

and secondary purposes;3. Place of principal office;4. Term of existence;5. Names, citizenship and residences

of incorporators;6. Number, names, citizenship and

residences of directors or trustees;7. Names, nationalities, and

residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified;

8. If a stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share;

9. Names, residences, number of shares, and the amounts subscribed and paid by each of the original subscribers which shall not be less than 25% of authorized capital stock;

10.If non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which

shall not be less than 25% of total subscription;

11.Name of treasurer elected by subscribers; and

12.If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum.

The articles of incorporation of any stock corporation must be accompanied by a Treasurer’s Affidavit showing that:

At least 25% percent of the authorized capital stock of the corporation has been subscribed, and

At least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least 25% percent of the said subscription, such paid-up capital being not less than P5,000.00.

SEC. 16. AMENDMENT OF ARTICLES OF INCORPORATION

L imitations: 1. The amendment of any provision

or matters stated in the articles pf incorporation is not allowed when it will be contrary to the provisions or requirement prescribed by the Code or by special law or changes any provision in the articles of incorporation stating an accomplished fact

2. It must be legitimate purposes3. It must be approved by the

required vote of the board of directors or trustees and the stockholders or members

4. The original articles and amended articles must contain all provisions required by law to be set out in the articles on incorporation

5. Such articles, as amended, must be indicated by underscoring the changes made, and a copy thereof




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duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the amendments have been duly approved by the required vote of the stockholders or members must be submitted to the SEC

6. If the corporation is governed by special law, the amendments must be accompanied by a favorable recommendation of the appropriate government agency

Vote requirement: majority vote of the board of directors

or trustees and the vote or written assent of the

stockholders representing at least 2/3 of the outstanding capital stock or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.

Note: appraisal right of dissenting

stockholders is available meeting of stockholders is not

necessary

Effectivity of amendment: upon their approval by the SEC; or from the date of filing with the said

Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved.

1. the articles or its amendment is not substantially in accordance with the form prescribed

2. The purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations

3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false

4. The required percentage of ownership of the capital stock to be owned by Filipino citizens ahs not been complied with

Note: The SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment.

Grounds for suspension or revocation of Certificate of Incorporation (Pres. Decree No. 902-A)

1. Fraud in procuring its certificate of incorporation

2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or damage to, the general public

3. Refusal to comply with or defiance of a lawful order of the SEC restraining the commission of acts which would amount to a grave violation of its franchise

4. Continuous inoperation for a period of at least 5 years

5. Failure to file the by-laws within the required period

6. Failure to file required reports

Non-amendable facts in the articles on 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 subscribed and paid up capital;

3. Treasurer elected by the original subscribers;

4. Members who contributed to the initial capital of non-stock corporation;

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

6. Witnesses to the signing and acknowledgment of the article

A certificate of authority is required for the following:

1. banks, building and loan associations, finance companies – Monetary Board




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2. insurance companies – Insurance Commission

3. educational institutions – Secretary of Education

4. Public utilities – Land Transportation Commission, Civil Aeronautics Board, National Telecommunications Commission, etc.

Sec. 18. Corporate name.

Prohibitions : 1. Proposed name is identical or

deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or

2. Patently deceptive, confusing or contrary to existing laws.

Note: When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Doctrine of Secondary Meaning a word or phrase originally incapable

of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product.

Note: The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or trade name. (Lyceum of the Phil vs. CA, G.R. No. 101897)

Sec. 19. Commencement of corporate existence. From the date the SEC issues a

certificate of incorporation under its official seal

Sec. 20. De facto corporations. A corporation has a de facto existence

where there is a bona fide attempt to incorporate, colorable compliance with the statute and user of corporate powers

Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding

The only entity that can attack the de facto existence of a corporation is the State and only by a direct proceeding called quo warranto specifically sought for the purpose of ousting the corporators from their right to exist as a corporation.

Requisites of De Facto Corporation:1. The existence of a valid law under

which it may be incorporated;2. A bona fide attempt in good faith

to incorporate under such law;3. Actual use or exercise in good faith

of corporate powers; and 4. Issuance of a certificate of

incorporation by the SEC as a minimum requirement of continued good faith.

Difference between a de facto corporation and a de jure corporation

A de jure corporation can successfully resist a suit by a state brought to challenge its existence; while a de facto corporation cannot sustain its right to exist.

Sec. 21. Corporation by estoppelDefinition group of persons that assumes to act

as a corporation knowing it to be without authority to do so, and

enters into a transaction with a third person on the strength of such appearance.

It cannot be permitted to deny its existence in an action under said transaction. It is neither de jure nor de facto.

Estoppel to deny corporate existence against




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a. persons who assume to act as a corporation knowing it to be without authority to do soEffect: liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof

b. persons who assume an obligation to an ostensible corporation as such

Note: A third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited 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. (Lim Tong Lim vs. CA, 317 SCRA 728)

DE FACTO CORPORATION

CORPORATION BY ESTOPPEL

1. Has a real existence in law;

2. May exist even if there are no dealings between the parties on a corporate basis.

1. No real existence in law but it is a mere fiction existing only for a particular case;

2. Cannot exist unless there are dealings between the parties on a corporate basis.

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation.

Non-User for 2 Years When a corporation does not

formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved (automatic).

Non-User for 5 Years When a corporation has

commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation (not automatic).

Note: This principle does not apply if the causes are beyond the control of the corporation as may be determined by the SEC.

“Formal Organization” and “Commencement of the Transaction of Business” Conditions subsequent, which may be

satisfied by substantial compliance in order that a corporation may legally continue as such.

Formal Organization: 1. Adoption of By-Laws and filing of

the same with the SEC;2. Election of board of

directors/trustees, and officers;3. Establishment of principal office;4. Providing for subscription and

payment of capital stock.

TITLE IIIBOARD OF DIRECTORS/TRUSTEES/OFFICERS

Sec. 23. The board of directors or trustees.

A. Qualifications1. For a stock corporation, ownership of

at least (1) share of capital stock of the corporation in his own name and IF he ceases to own at least one share in his own name, he automatically ceases to be a director.

For Non-stock Corporation, only members of the corporation can be elected to seat in the Board of Trustees.

Exception: Trustee in a voting trust may be elected director/trustee




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Note: In order to be eligible as a director, what is material is legal title thereto (stocks), not beneficial ownership of the stocks appearing in the books of the corporation

2. A majority of the directors/trustees must be residents of the Philippines.

3. 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 Corporation Code, committed within 5 years from the date of his election. (Sec. 27)

4. Only natural persons can be elected directors/trustees.

5. Other qualifications as may be prescribed in the by-laws of the corporation.

B. Additional qualifications for directors of particular corporations

a. For banks and banking institutions and financing corporations, at least 2/3 of the members of the BODs shall be citizens of the Philippines;

b. For rural banks and registered investment companies, every member of the BODs shall be citizen of the Philippines;

c. For domestic air carriers, the directing head and 2/3 or more of the BODs and other managing officers shall be Filipino citizens.;

d. The management of mass media shall be limited to Filipino citizens or to corporations and/or associations wholly owned and managed by Filipino citizens;

e. The governing body of every entity engaged in commercial telecommunications shall be in all cases be controlled by Filipino citizens;

f. The control and administration of education institutions shall be vested to Filipino citizens.

C. Corporate Officers1. President – must be a director;2. treasurer – may or may not be a

director; as a matter of sound corporate practice, must be a resident

3. Secretary – need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines, and

4. Such other officers as may be provided in the by-laws

CORPORATE OFFICER

CORPORATE EMPLOYEE

Position is provided for in the by-laws or under the Corporation Code

Employed by the action of the managing officer of the corporation

RTC has jurisdiction in case of labor dispute

NLRC has jurisdiction in case of labor disputes

D. Board of Directors/Trustees as Repository of Corporate PowersGeneral Rule: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees.

Exceptions:1. In case of an Executive Committee

duly authorized in the by-laws;2. In case of a contracted manager

which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies.

3. In case of close corporations, the stockholders may manage the business of the corporation instead by the board of directors, if the articles of incorporation so provide.

Note: The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be




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with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its officers and agents when authorized by a board resolution or by its by-laws (Spouses Constantine Firme vs. Bukal Enterprises and Development Corporation, G.R. No. 146608, Oct 23, 2003)

E. Limitation on powers of board of Directors/Trustees1. Limitations imposed by the Constitution, statues, articles of incorporation or by-laws2. Cannot perform constituent or those involving fundamental changes in the corporation requiring the approval of the stockholders or members3. Cannot exercise powers not possessed by the corporation.

F. Nature of Powers of Board of Directors / Trustees Under the Theory of Original Power,

the powers of the board of directors or trustees are ORIGINAL and UNDELEGATED. The stockholders or members do

not confer, nor can they revoke, those powers.

They are DERIVATIVE only in the sense of being received from the State in the act of incorporation.

G. Business Judgment RuleDefinition A resolution or transaction pursued

within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to the corporation or decrease the profits of a department

Consequences Resolutions and transactions entered

into by the board within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders

Directors and duly authorized officers acting within such business judgment cannot be held personally liable for acts or contracts Exceptions:

a. when the Code expressly provides otherwise

b. when the directors or officers acted with fraud, gross negligence or in bad faith

c. when the director or officers act against the corporation in conflict-of-interest situation

Remedies in case of Mismanagement1. receivership;2. injunction, if the act has not yet been

done;3. dissolution if the abuse amounts to a

ground for quo warranto but the Solicitor General refuses to act; and

4. derivative suit or complaint filed with SEC

Requisite for filing a DERIVATIVE SUIT General Rule: The Board must act as a body to bind the corporationExceptions:

1. When the directors are themselves the only shareholders;

2. Ratification by vote or acquiescence, upon full disclosure of the circumstances, is generally held effective to validate irregular or voidable acts of the directors;

3. A transaction carried out in the name of the corporation and with the approval of all of its shareholders.

H. RIGHTS OF STOCKHOLDERS:1. Managerial Rights

a. Voting rights; andb. Right to remove directors

2. Proprietary Rights a. Right to dividends;b. Right to issuance of stock

certificate for fully paid shares;c. Proportionate participation in the

distribution of assets in liquidation;




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d. Right to transfer of stocks in corporate books;

e. Preemptive right;f. Right to inspect books and

records;g. Right to be furnished of the most

recent financial statement/financial report;

h. Right to recover stocks unlawfully sold for delinquent payment of subscription.

3. Remedial Rightsa. Individual suit – a suit instituted by

a shareholder for his own behalf against the corporation;

b. Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation; and

c. Derivative suit – a suit filed in behalf of the corporation by its shareholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation.

Requisites:a. the party bringing suit should

be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material;

b. he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c. the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

4. Appraisal Rights (see sec. 81)

5. Inspection Rights (see sec. 74)

Sec. 24. Election of directors or trustees. Limitations / conditions

1. At any meeting of stockholder or members called for the election of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or

2. If there be no capital stock, a majority of the members entitled to vote.

3. The election must be by ballot if requested by any voting stockholder or member.

4. No delinquent stock shall be voted.5. Candidates receiving the highest

number of votes shall be declared elected provided there is quorum.

6. In case of failure to hold an election for any reason, the meeting may be adjourned from day to day or from time to time but not sine die or indefinitely.

Methods of voting1. Straight Voting – every stockholder

may vote such number of shares for as many persons as there are directors to be elected

2. Cumulative Voting for one candidate – a stockholder is allowed to concentrate his votes and give one candidate, as many votes as the number of directors to be elected multiplied by the number of his shares shall equal

3. Cumulative Voting by Distribution – a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit his shares




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Time to determine voting right:a. shares standing in one’s name at

the time fixed in the by-lawsb. where by-laws silent, at the time of

election

Sec. 25. Corporate officers, quorum.1. president - must be a director2. treasurer - may or may not be a

director3. secretary - must be a resident and

citizen of the Philippines 4. other officers as may be provided

for in the by-laws

Notes: Any 2 or more positions may be held

concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

Corporate officers are subject to the business judgment discretion of the board to terminate

Quorum – such number of the membership of a collective body as is competent to transact its business or do any other corporate act.

General Rule: a majority of the number of directors or trustees as fixed in the articles of incorporation Exceptions:

unless the articles of incorporation or the by-laws provide for a greater majority

election of officers which shall require the vote of a majority of all the members of the board.

Note: Every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act. Directors or trustees cannot attend or vote by proxy at board meetings.

Sec. 26. Report of election of directors, trustees and officers. Report of election of directors,

trustees and officers shall be made to the SEC within 30 days after the

election, their names, nationalities and residences

IF any one dies, resigns or in any manner ceases to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the SEC

Sec. 27. Disqualification of directors, trustees or officers. 1. Convicted by final judgment of an

offense punishable by imprisonment of 6 years; or

2. Violation of the Corporation Code committed within 5 years prior to the date of his election or appointment

Note: If the disqualification is based on a violation of the Code, the duration of the imprisonment is immaterial. (see sec. 23)

Sec. 28. Removal of directors or trustees. Requisites:1. Vote of at least 2/3 of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members entitled to vote2. at a regular or special meeting after proper notice is given3. Removal may be with or without cause4. A minority director elected through cumulative voting cannot be removed without just case

Extent: Removal may be with or without cause.Limitation: Removal without cause may not be used to deprive minority stockholders or members of the right of representation.

Sec. 29. Vacancies in the office of director or trustee. The following vacancies shall be filled by stockholders / members in a regular or special meeting:

1. removal by the stockholders or members or by expiration of term

2. other than by removal by the stockholders or members or by expiration of term, if the remaining




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directors or trustees do not constitute a quorum

3. by reason of an increase in the number of directors or trustees

The following vacancies shall be filled by the members of the board:

1. if still constituting a quorum, any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term

Note: A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

Sec. 30. Compensation of directors.

General Rule: They shall be entitled to reasonable per diems onlyExceptions:1. When their compensation is fixed by the by-laws2. When granted by the vote of stockholders representing at least a majority of the outstanding capital stock at a regular or special meeting3. When they are also officers of the corporation

Where the compensation of a director is for services rendered other than as such, and the board fixes the compensation, all the conditions required under Sec. 32 must be present.

Sec. 31. Liability of directors, trustees or officers. Three-Fold Duties of Directors:1. Duty of Obedience

to direct the affairs of the corporation in accordance with the purposes for which it was organized

Legal Basis: The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws

2. Duty of Diligence Legal Basis: Directors or trustees

who willfully and knowingly vote for or assent to patently unlawful acts of the corporation who are

guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons (Sec. 31)

3. Duty of Loyalty Legal Basis: Directors or trustees

who acquire any pecuniary or personal interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom (Sec 31)

Note:When a director or trustee attempts to acquire or acquires in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence as to which equity imposes upon him to deal in his own behalf

He shall be liable as trustee and must account for all the profits which otherwise would have accrued to the corporation (Sec 31, par 2)

Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits which belong to the corporation

He must account to the latter for all such profits by refunding the same (Sec 34)

PERSONAL liability of Directors1. Willfully and knowingly voting for and

assenting to patently unlawful acts of the corporation;




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2. Gross negligence or bad faith in directing the affairs of the corporation; jointly and severally liable for all

damages suffered by the corporation, its stockholders or members and other persons; (sec. 31)

3. Acquiring any personal or pecuniary interest in conflict of duty; liable as a trustee for the

corporation and must account for the profits which otherwise would have accrued to the corporation (sec. 31)

4. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with the secretary; solidarily, liable with the

stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same; (sec. 65)

5. Agreeing or stipulating in a contract to hold himself liable with the corporation; or

6. By virtue of a specific provision of lawSpecial Fact Doctrine

Director takes advantage of information by virtue of his office to the disadvantage of the corporation.

DOCTRINE OF LIMITED

LIABILITY

DOCTRINE OF IMMUNITY

Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation

Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions

Sec. 32. Dealings of directors, trustees or officers with the corporation. Special rules on contracts entered into by directors/trustees or officers:

1. Doctrine of Corporate Opportunity Unless his act is ratified, a director

shall refund to the corporation all the profits he realizes on a business opportunity which:

1. The corporation is financially able to undertake;

2. From its nature, is in line with corporation business and is of practical advantage to it; and

3. The corporation has an interest or a reasonable expectancy

The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture

2. Contracts of self-dealing directors Contracts which are entered into

by the corporation with one or more of its own directors/trustees, or officers

They are voidable unless:1. The presence of such

director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting;

2. The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract;

3. The contract is fair and reasonable under the circumstances;

4. In the case of an officer, there was previous authorization by the board of directors

Although not all said conditions are present, the corporation may elect not to attack or question the validity of the contract, without prejudice, however, to the liability of the director/trustee for damages under Sec. 31

Where any of the two conditions is absent, said contract must be ratified by the vote of the stockholders representing at least




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2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/trustee involved is made at such meeting

Sec. 33. Contracts between corporations with interlocking directors. Contracts entered into between

corporations with interlocking directors (interest of said directors is “substantial”, i.e. exceeding 20% of the outstanding capital stock)

They are valid, provided that:1. The contract is not fraudulent;

and2. The contract is fair and

reasonable under the circumstances

IF the interlocking director’s interest in one corporation or corporations is “nominal” (not exceeding 20% of the outstanding capital stock)

All the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal interest

Sec. 34. Disloyalty of a director. Doctrine of Corporate Opportunity Unless his act is ratified, a director

shall refund to the corporation all the profits he realizes on a business opportunity which:

1. the corporation is financially able to undertake;

2. from its nature, is in line with corporations business and is of practical advantage to it; and

3. The corporation has an interest or a reasonable expectancy

The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture.

Sec. 35. Executive committeeDefinition

A body created by the by-laws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws

Must be provided for in the by-laws and composed of not less than 3 members of the board appointed by the board

May act by a majority vote of all of its members

Limitations on the powers of the Executive Committee: It cannot act on the following:

1. Matters needing stockholder approval;

2. Filling up board vacancies;3. Amendment, repeal, adoption of

by-laws;4. Amendment or repeal of any

resolution of the Board which by its express terms is not amendable or repealable; and

5. Cash dividend declaration

TITLE IVPOWERS OF CORPORATIONS

Sec. 36. Corporate powers and capacity. 1. Express Powers - granted by law,

Corporation Code, and its Articles of Incorporation or Charter

2. Inherent / Incidental Powers – not expressly stated but are deemed to be within the capacity of corporate entities

3. Implied / Necessary Powers – exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the CharterClassification:

a. Acts in the usual course of business

b. Acts to protect debts owing to the corporation

c. Acts which involve embarking in a different business usually to collect debts out of profits

d. Acts to protect or aid employees




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e. Acts to increase businessNote: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees.

A. Theory of General Capacity A corporation is said to hold such

powers as are not prohibited or withheld from it by general law (everything is allowed except when prohibited).

General Powers and Capacity: 1. To sue and be sued;2. Of succession;3. To adopt and use a corporate seal;4. To amend its Articles of

Incorporation;5. To adopt its by-laws;6. For stock corporations: issue and sell

stocks to subscribers and treasury stocks; for non-stock corporations: admit members;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds

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

public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan political activity.

10.To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees.

11.To exercise other powers essential or necessary to carry out its purposes.

B. Theory of Special Capacity A corporation cannot exercise powers

except those expressly or impliedly given (everything is prohibited except when allowed).

Special Powers: (Secs. 37-44)1. Power to extend or shorten corporate

term; 2. Increase or decrease corporate stock;

3. Incur, create, or increase bonded indebtedness;

4. Sell, dispose, lease, encumber all or substantially all of corporate assets;

5. Purchase or acquire own shares provided:

i. there is an unrestricted retained earnings, and

ii. it is for a legitimate purpose. 6. 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 with another corporation (not with an individual or a partnership-within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term.

Sec. 37. Power to extend or shorten corporate termVote requirement

1. majority vote of the board and2. ratified at a meeting by the

stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-stock corporations.

Notice requirement Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

Note: in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtednessWays of increasing/decreasing the capital stock1. By increasing/decreasing the number of shares and retaining the par value;




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2. By increasing/decreasing the par value of existing shares without increasing/decreasing the number of shares;3. By increasing/decreasing the number of shares and increasing/decreasing the par value

Requirements:1. prior approval of the SEC is

required2. compliance with Sec. 12 and 13 is

required3. no decrease of the capital stock

shall be approved by the SEC if its effect shall prejudice the rights of corporate creditor

4. majority vote of the board of directors and

5. ratified at a stockholder’s meeting duly called for the purpose, 2/3 of the outstanding capital stock

Note: non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least 2/3 of the members in a meeting duly called for the purpose.

Notice requirement: Written notice of the proposed action and of the time and place of the stockholder’s meeting must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

Tools available to the stockholders to replenish capital1. Additional subscription to shares of stock of the corporation by stockholders or investors;2. Advances by the stockholders ot the corporation;3. Payment of unpaid subscription by the stockholders; and4. Loans from third persons

Sec. 39. Power to deny pre-emptive right

Pre-emptive Right – right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings the purpose being to enable the

shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.

General Rule: Applies to all issues or disposition of shares of any class Exceptions:

a. shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public

b. shares issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for: i. property needed for corporate

purposes, or ii. in payment of a previously

contracted debtc. the right is denied by the articles

of incorporation d. shares that are being reoffered by

the corporation after they were initially offered together with all the shares (Benito vs SEC 123 SCRA 722)

Note: In close corporations, the pre-emptive right is subject to no exceptions unless denied in the articles.

Sec. 40. Sale or other disposition of assets Sale or disposition of all or

substantially all of corporate property and assets – if the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Vote requirement Stockholders representing at least 2/3 of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to 2/3 of the members, in a stockholder’s or member’s meeting duly called for the purpose




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However, no ratificatory vote is needed in the following instances:a. If it is necessary in the usual

and regular course of businessb. If the proceeds of such property

and assets be appropriated for the conduct of the remaining shares

Notice requirementWritten notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

Note: dissenting stockholder may exercise his appraisal right

Sec. 41. Power to acquire own shares

General Rule: A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purposeLimitation: existence of unrestricted retained earnings in its books

Instances:1. To eliminate fractional shares

arising out of stock dividends;2. To collect or compromise an

indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code

4. To acquire treasury shares5. Redeemable shares regardless of

existence of retained earnings6. To effect a decrease of capital

stock7. in close corporations, when there

is a deadlock in the management of the business

Notes:

i. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock

ii. In numbers 1-3, there must be unrestricted retained earnings

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purposeVote requirements:

1. majority of the board of directors or trustees and

2. ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/3 of the members in the case of non-stock corporations, at a stockholder’s or member’s meeting duly called for the purpose

Notice requirement Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

Notes:i. any dissenting stockholder can

exercise his appraisal rightii. where the investment by the

corporation is reasonably necessary to accomplish its primary purpose, the approval of the stockholders or members shall not be necessary

iii. the other purposes for which the funds may be invested must be among those enumerated as secondary purposes and must further comply with the requirements of Sec 42

Sec. 43. Power to declare dividendsDefinitions




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1. RETAINED EARNINGS = ASSETS, LIABILITIES AND LEGAL CAPITAL

2. UNRESTRICTED – if the retained earnings have not been reserved or set aside by the board of directors for some corporate purpose

3. DIVIDENDS - corporate profits set aside, declared, and ordered to be paid by the directors for distribution among shareholders at a fixed time.

Kinds of dividends1. Cash

cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses

2. Property3. Stock

stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid

no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for the purpose

cannot be issued to non-stockholders (Nielson vs Lepanto Consolidated Mines 26 SCRA 540)

Cash Dividend Stock DividendInvolves a disbursement of the SH of accumulated earnings

Does not involve any disbursement

Cash dividend declared and paid becomes the absolute property of the SH and cannot be reached by the creditors of the corporation in the absence of fraud

May be reached by corporate creditors being still part o corporate property

Declared only by the board of directors at its

Declared by the board with the concurrence of the

discretion SH representing at least 2/3 of the outstanding capital

Does not increase the corporate capital

Increases corporate capital

Declaration creates a debt from the corporation in favor of its SH

No debt is created

Taxable as income to the SH

Not subject to income tax

Cash dividends due on delinquent shares can be applied to the payment of the unpaid balance

Stock dividends cannot be applied as payment dividends for unpaid subscription

Note: The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto anyone else

Other kinds of dividends:1. Optional dividend – gives an option to

receive cash or stock dividend2. Composite dividend – dividend partly

in cash partly in stocks3. Scrip dividend – issued to a

stockholder entitling him to the payment of money or the like at some future time, similar to a promissory note

4. Bond dividend – dividends distributed in bonds of the corporation to the stockholders

5. Liquidating dividends – distributions of the assets of the corporation upon dissolution or winding up o the same

General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-up stock capitalExcept:

1. When justified by definite corporate expansion projects approved by the board of directors

2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without




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its/his consent, and such consent has not yet been secured; or

3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies

Sources of dividends : General Rule: Dividends can only be declared and paid out of actual and bona fide unrestricted retained earnings.

Special Rules:1. Where a corporation sold its real

property, which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution.

2. Increase in the value of a fixed asset as a result of its revaluation is not retained earning. However, increase in the value of fixed assets as a result of revaluation (“Revaluation surplus”) may be declared as cash or stock dividends provided that the company:

a. has sufficient income from operations from which the depreciation on the appraisal increase was charged

b. has no deficit at the time the depreciation on the appraisal increase was charged to operations; and

c. such depreciation on appraisal increase previously charged to operations has not been impaired by losses.

3. Dividends can be declared out of the amount received in excess of the par value of shares (“paid-in surplus”) when:

a. That they be declared only as stock dividends and not cash;

b. No creditors are prejudiced; and

c. There is no impairment of capital.

Note: unlike par value shares, when no par value shares are sold at a premium, the entire consideration paid is considered capital, hence the same cannot be declared as dividends.

4. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable.

5. No dividends can be declared out of capital except only in two instances: 1) liquidating dividends; and 2) dividends from investments in wasting asset corporation. It permits corporations solely or

principally engaged in the exploitation of “wasting assets” to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion.

Wasting Assets Corporation is one sole purpose of which is to invest its capital in a specific property and afterward to consume that property or extract its value at a profit, such as mining.

6. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital.

7. Money cannot be borrowed for the payment of dividends because an indebtedness is not a retained earning of the corporation.

8. Corporate earnings which have not yet been received even though they consist in money which is due, cannot be included in the profits out of which dividends may be paid.

Sec. 44. Power to enter into management contract

Management contract - any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise

Vote requirement: 1. approved by the board of directors

and 2. by stockholders owning at least

the majority of the outstanding capital stock, or by at least a




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majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose

Exceptions: 1. where stockholders representing the

same interest of both the managing and the managed corporations own or control more than one-third 1/3 of the total outstanding capital stock entitled to vote of the managing corporation (interlocking stockholders); or

2. where 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 directors of the managed corporation (interlocking directors)

Note:the management contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of the members in the case of a non-stock corporation

Term: maximum of 5 years

Sec. 45. Ultra vires acts of corporations.

TYPES OF ULTRA VIRES CASES:1. Acts done beyond the powers of the

corporation as provided in the law or its articles of incorporation;

2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation); and

3. Acts or contracts, which are per se illegal as being contrary to law.

Note: An ultra vires act may be that of:a. The corporation;b. The Board of Directors; andc. The corporate officers.

Ultra Vires Acts and Illegal Acts:

Ultra vires (“beyond powers”) refers only to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or special laws, either prohibited or declared illegal. It is in this context that the Code has used the term.

TEST whether or not a corporation may perform an act:

consider the logical and necessary relation between the act questioned and the corporate purpose expressed by law or in the charter. If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense (Montelibano Doctrine).

An illegal corporate act is an act which is contrary to law, morals, good customs, public order, or public policy (Art. 1306 NCC)

Effects of Ultra Vires Act on:1. executed contract – courts will not set

aside or interfere with such contracts;2. executory contracts – no enforcement

even at the suit of either party (void and unenforceable);

3. part executed and part executory – principle of “no unjust enrichment at expense of another” shall apply; and

4. executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

Requisites for valid ratification of ultra vires act:

a. act or contract must be consummated, not merely executory;

b. the creditors are not prejudiced, or all of them have given their consent

c. the rights of the public or the State are not involved; and

d. all the stockholders must give their consent (Pirovano vs Dela Rama Steamship 96 Phil. 335)




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Doctrine of Ratification When corporate officers exceed their

authority, their actions cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them. Such ratification can come only from the act or omission of the Board of Directors. (San Juan Structural vs CA 296 SCRA 631)

Doctrine of Apparent Authority If a corporation knowingly permits

one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power so to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

TITLE VBY LAWS

Sec. 46. Adoption of by-laws.

By-laws – rules of action adopted by the corporation for its internal regulations and for the government of its officers and of its stockholders or members.

ARTICLES OF INCORPORATION

BY-LAWS

1. It is a condition precedent in the acquisition of corporate existence;

1. It is a condition subsequent; its absence merely furnishes a ground for the revocation of the franchise

2. It is essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State;

2. It is for the internal government of the corporation but has the force of a contract between the corporation and the stockholders/members, and between the stockholders and members;

3. It is executed before incorporation

3. It may be executed after incorporation. Sec. 46 allows the filing of the by-laws simultaneously with the Articles of Incorporation

4. It is amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/3 of the members in case of non-stock corporations

4. It may be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the member in non-stock corporation

5. Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees.

5. Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non-stock corporation.

Time and procedure of adoption: filed after incorporation

1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC

affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary

filed prior to incorporation approved and signed by all the

incorporators and submitted to the SEC, together with the articles of incorporation.

Where kept: principal office of the corporation, subject to the inspection of




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the stockholders or members during office hours

Effectivity: only upon the issuance by the SEC of a certification that the by-laws are not inconsistent with this Code

A certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law is required for the following: bank or any banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed

by special laws

Note: Third persons are not bound by the by-laws of a corporation except when they have knowledge of its provisions either actually or constructively.

Section 46 reveals the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. Therefore, the failure to file the by-laws within that period does not imply “demise” of the corporation, but merely constitute a ground by which the SEC may seek forfeiture of the franchise of the corporation as provided in PD 902-A. (Loyola Grand Villas vs CA, 276 SCRA 681) Sec. 47. Contents of by-laws. A private corporation may provide in its by-laws for:

1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; with respect to stockholders or

members, see Sec. 51 and Sec. 93.

2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein; the by-laws cannot provide that

a lesser number shall constitute a quorum in those cases in which the law requires for the validity of certain corporate acts

4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and employees; cannot dispense with the

minimum legal requirements provided for in Sec. 23

6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officers other than directors or trustees; cannot provide for manner of

election and term of office of directors or trustees which are already regulated by law (Secs. 23 & 24)

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock certificates; and

10.Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)

Limitations: contents are subject to the provisions of the Constitution, the Corporation Code, other special laws

Sec. 48. Amendments to by-laws. Vote requirement: majority of the board of directors or

trustees and the owners of at least a majority of

the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or




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special meeting duly called for the purpose

Delegation to the board: owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation

Limitation: the power to adopt the 1st

original by-laws cannot be delegated to the board; only the power to adopt new by-laws that will supplant the old by-laws

Revocation: stockholders representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations

Effectivity: upon the issuance by the SEC of a certification that the same are not inconsistent with this Code.

TITLE VIMEETINGS

Sec. 49. Kinds of meetings. Meetings of stockholders or members: regular special (sec. 50)

Meetings of directors regular special (secs. 50-53)

Sec. 50. Regular and special meetings of stockholders or members.

Regular meetings of stockholders or members:

annually on a date fixed in the by-laws, or

if not so fixed, on any date in April of every year as determined by the board of directors or trustees

Notice Requirement: written notice shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws.

Special meetings of stockholders and members:

any time deemed necessary or as provided in the by-laws

Notice requirement: at least 1 week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws.

Note: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

Requisites for a valid meeting:1. Held at the proper place2. Held at the stated date at the

appointed time or at a reasonable time thereafter

3. Called by the proper person4. Previous notice5. Quorum

Remedy if there is no person authorized to call a stockholder’s (S/H) meeting: SEC upon petition of a S/H, may order the petitioning S/H to call a meeting by giving the required notice to the other S/H.

Sec. 51. Place and time of meetings of stockholders or members. Place: city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation provided, that Metro Manila shall, for purposes of this section, be considered a city or municipality.

Improperly Held or Called Meetings:General Rule: all proceedings had and any business transacted shall be invalid

Exception: valid if:a. business transacted is within

the powers or authority of the corporation

b. all the stockholders or members of the corporation are present or duly represented at the meeting

Sec. 52. Quorum in meetings. General Rule: consist of the stockholders representing a majority of the




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outstanding capital stock or a majority of the members in the case of non-stock corporations.

Exception: unless otherwise provided for in this Code or in the by-laws

Sec. 53. Regular and special meetings of directors or trustees.

Regular meetings of the board of directors or trustees:

held monthly, unless the by-laws provide otherwise.

held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

notice stating the date, time and place of the meeting must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws.

Special meetings of the board of directors or trustees:

may be held at any time upon the call of the president or as provided in the by-laws.

held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

notice stating the date, time and place of the meeting must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws.

Note: a director or trustee may waive the notice requirement, either expressly or impliedly.

Sec. 54. Who shall preside at meetings. President shall preside at all meetings

unless the by-laws provide otherwise. see Sec. 50, last par.

Sec. 55. Right to vote of pledgors, mortgagors, and administrators.

General Rule: the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholdersException: the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is

recorded on the appropriate corporate books.

Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.

Sec. 56. Voting in case of joint ownership of stock.

General Rule: the consent of all the co-owners shall be necessaryExceptions:

there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote

the shares are owned in an “and/or” capacity by the holders thereof any one of the joint owners can

vote said shares or appoint a proxy

Sec. 57. Voting right for treasury shares. no voting right as long as such shares

remain in the Treasury.

Sec. 58. Proxies.

Proxy - a written instrument, signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former

Period of validity: unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time.

The right to vote by proxy may be exercised in any of the following instances:

1. election of the board of directors or trustees;

2. voting in case of joint ownership of stock;




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3. voting by trustee under voting trust agreement;

4. pledge or mortgage of shares;5. as provided for in its by-laws.

Note: Stockholders or members may attend and vote in their meetings by proxy; directors cannot do so. Directors must always act in person (Sec. 25).

Sec. 59. Voting trusts. An agreement whereby one or more

stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares;

and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement.

Limitations on voting trust agreement:1. No voting trust agreement shall be

entered into:a. for a period not exceeding 5

years at any time except if the voting trust is required as a condition in a loan agreement, it may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan

b. for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud

2. in writing and notarized, and shall specify the terms and conditions thereof

3. A certified copy of such agreement shall be filed with the corporation and with the SEC. Otherwise, it is ineffective and unenforceable

4. shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record

5. Unless expressly renewed, all rights granted in the agreement

shall automatically expire at the end of the agreed period

6. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise

VOTING TRUSTS

PROXY

1. The trustee votes as owner rather than as mere agent

1. The proxy holder votes as agent

2. The trust may vote in person or by proxy unless the agreement provides otherwise

2. The proxy must vote in person

3. Trustee acquires legal title to the shares of the transferring stockholder

3. Proxy has no legal title to the shares of the principal

4. The agreement must be notarized

4. Proxy need not be notarized

5. The agreement is irrevocable

5. Revocable anytime except one with interest

6. Trustee is not limited to act at any particular meeting

6. Proxy can only act at a specified stockholder’s meeting (if not continuing)

7. A trustee can vote and exercise all the rights of the stockholder even when the latter is present

7. A proxy can only vote in the absence of the owners of the stock

8. An agreement must not exceed 5 years at any one time except when the same is made a condition of a loan.

8. A proxy is usually of shorter duration although under Sec. 58 it cannot exceed 5 years at any one time




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9. The voting right is divorced from the ownership of stocks

9. The right to vote is inherent in or inseparable from the right to ownership of stock

TITLE VIISTOCKS AND STOCKHOLDERS

Sec. 60. Subscription contract. any contract for the acquisition of

unissued stock in an existing corporation or in one still to be formed, irrespective of how the parties refer to the agreement

Issue - the initial disposition (for consideration not less than par or stated value) of unissued shares, such as by subscriptions, stock dividends, and sale of, or payment of obligation with, shares from the unsubscribed capital stock.

How person may become shareholder:1. by subscription contract;2. by purchase from the corporation of

treasury shares;3. by the transfer from a shareholder of

outstanding shares, by which transfer he is substituted in the place of the transferor.

The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. (Ong Yong vs Tiu, G.R. No. 144476)

Sec. 61. Pre-incorporation subscription.

PRE-INCORPORATION SUBSCRIPTION AGREEMENTS (PISA) Subscription of shares of stock of a

corporation still to be formed

irrevocable for a period of at least 6 months from date of subscription, unless:

1. all of the other subscribers consent to the revocation;

2. the incorporation of said corporation fails to materialize with said period or within a longer period as may be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC.

Sec. 62. Consideration for stocks. Consideration may be any or a

combination of any two or more of the following:1. Actual cash paid to the

corporation;2. Property, tangible or intangible,

actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital; and

6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Limitations: Stocks shall not be issued for a

consideration less than the par or issued price thereof except treasury shares (sec. 9)

Shares shall not be issued in exchange for promissory notes or future service

Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of




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directors, subject to approval by the SEC

The issued price of no-par value shares may be fixed in the (a) articles of incorporation or by the (b) board of directors pursuant to authority conferred upon it by:

a. the articles of incorporation or b. the by-laws, or c. in the absence thereof, by the

stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

Sec. 63. Certificate of stock and transfer of shares.

Certificate of Stock - the document evidencing the ownership of shares of stocks by a stockholder and the full payment of its issue or subscription price.

It is not essential to the ownership and/or existence of the share of stock.

Where the certificate of stock reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered:

1. To the extent that there is an overissue, the excess issuance (over the authorized capital stock or the stated capital) shall be void as being ultra vires.Remedy of purchaser: to recover damages for misrepresentation.

2. If there is no overissue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute “watered” stocks.

3. If there is no overissue and watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith,

reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party.

Requisites for issuance of certificates of stock:

1. Must be signed by the president or vice-president; countersigned by the secretary or clerk, and sealed with the seal of the corporation;

2. Generally, delivery of a certificate is essential. Except when the shareholder has control over the books of the company.

3. The par value or the full subscription must first be fully paid.

4. In case of transfer of shares, the original certificate must be surrendered to the corporation.

Capital stock Shares of stock- the amount

paid in or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself (monetary value).

- the interest or right which the stockholder has in the management of the corporation, and its surplus profits, and upon a dissolution, in all of its assets remaining after payment of corporate debts.

SHARES OF STOCK

CERTIFICATE OF STOCK

1. Unit of interest in a corporation

1. Evidence of the holder’s ownership of the stock and of his right as a shareholder

2. It is an incorporeal or intangible property

2. It is concrete and tangible




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3. It may be issued by the corporation even if the subscription is not fully paid.

3. It may be issued only if the subscription is fully paid.

4. Situs is the state where the corporation has its domicile

a. For taxation purposes, situs is inconsistent with an express provision of the statute or it is unjust.b. To register the chattel mortgages over the shares of stock, the status is the duty/promise in which the corporation has its principal place of business.c. For purposes of execution, it is the domicile of the corporation.

4. The situs may be the place where it is located or at the domicile of the owner, except when corporation is dominated elsewhere.

TRANSFER OF SHARES A stockholder has an absolute right to

dispose of his shares except if there is a reasonably restriction in the articles of incorporation and in the certificates of stock.

Kinds:a. Absolute transfers/transfer of

ownership No transfer shall be valid,

except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any

unpaid claim shall be transferable in the books of the corporation. any unpaid claims arising

from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction

Modes: By indorsement and delivery

when there is a certificate of stock (presupposes that the subscription is already fully paid); and

By deed of assignment when there is no certificate of stock, but the transfer shall be valid only between the parties and void as to others until its recording in the stock and transfer book.

b. Limited transfers/transfer of juridical possession only, e.g., pledge and mortgage.

PLEDGE OR MORTGAGE OF SHARES: The pledge or mortgage itself

need not be recorded in the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a pledge would require the certificate to be placed in the possession of the creditor/pledgee. The agreement must appear in a public instrument to take effect against third persons.

When mandamus will lie to compel corporation to register transfer:1. That due application therefore has

been made by the registered owner or by one who holds a power of attorney from the registered owner authorizing the transfer in the books of the corporation;

2. That said application has been denied;3. That there are no unpaid claims

against the stock by the corporation;




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4. That an ordinary action against the corporation for damages would be inadequate;

5. That an action in the nature of a suit in equity to secure a decree ordering the transfer would also be inadequate.

Underwriting Agreement- an agreement between a corporation and a third person, termed the “underwriter”, by which the latter agrees, for a certain compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not taken by those to whom they are first offered.

UNDERWRITING AGREEMENT

STOCK SUBSCRIPTION AGREEMENT

1. The signers obligate themselves to take the shares of stock which cannot be sold.

1. The obligation of the signer to the purchasers and to the public is absolute.

2. Underwriters are given commission.

2. There is no commission.

3. The signer can refuse to become a stockholder/ member of the company.

3. He becomes a stockholder of the company and is liable to pay the amount due on the stock.

Sec. 64. Issuance of stock certificates.

1. Majority view : No certificate of stock shall be issued to a subscriber until the full amount of his subscription has been paid.Basis: Doctrine of Individuality of Subscription that espouses that the subscription is one, entire, indivisible, and whole contract which cannot be divided into portions.

2. Justice Vitug’s View : “The doctrine in the Baltazar v. Lingayen Gulf case (14 SCRA 522) is still authoritative, not only because Sec. 64, in essence, is a reiteration of the old law, but more

importantly, the ruling is not really opposed to Sec. 64 which speaks of ‘subscription’ obviously referring to the shares rather than to the instrument of subscription.”

“The Baltazar doctrine itself recognizes that a certificate of stock may not be issued on unpaid subscription even to the extent of the paid-up, but that payments (subsequent to the subscription) may specifically be so applied by the stockholder to certain shares thereof as to make them fully paid for which, and to the extent of full payment, certificates may be issued as long as such application of payment is permitted by a board resolution indiscriminately applicable to all shareholders.”

Issuance of forged certificates: As a rule, a corporation will be held

responsible:a. where the forgery is committed

by an officer having charge of the transfer and stock books and having authority to issue certificates, and

b. the certificate is apparently genuine.

On the other hand, the company is not responsible where a necessary signature is forged by an officer or employee who is not charged with the duty of issuing certificates.

Sec. 65. Liability of directors for watered stocks. solidarily liable with the stockholder

concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same (water)

for consenting to the issuance of the stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary

Watered Stock – stock issued for no value at all or for a value less than its




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equivalent either in cash, property, stock dividends or sevices.

Sec. 66. Interest on unpaid subscriptions. from the date of subscription, if so

required by the by-laws at the rate fixed in the by-laws and if

no rate is fixed, the legal rate (12%)

Sec. 67. Payment of balance of subscription.

Collection of Unpaid Subscription1. Voluntary payment

a. upon the date specified in the subscription contract

b. upon call by the Board of Directors

2. Involuntary paymenta. extrajudicial

i. delinquency saleii. application of dividends

b. judicial action

Call – a declaration officially made by a corporation usually expressed in the form of a resolution of the board of directors requiring the payment of all or a certain prescribed portion of a subscriber’s stock subscription

When Stocks become delinquent:1. If the subscription contract fixes

the date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty (30) days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise.

2. If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days (30) therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to

sale, unless the board declares otherwise.

Sec. 68. Delinquency sale.

Procedure for the Sale of Delinquent Stocks:1. Call by resolution demanding payment

of the balance. However, if the contract of subscription prescribes the date of payment, no call is necessary. In addition, when the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of suits to collect unpaid balance on the subscriptions.

2. Notice of the board resolution given to the stockholders by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required.

3. Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of subscription or in the call, the stocks shall be declared delinquent and shall be subject to sale.

4. Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent.

5. Sale of the delinquent shares at public auction.




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HIGHEST BIDDER The person participating in the

delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares. In other words, the amount of the bid does not vary but only the number of shares to be bought changes and determines the highest bidder.

Notes: The remaining shares, if any, shall be

credited in favor of the delinquent stockholder who shall be entitled to the issuance of a certificate of stock covering such shares.

Should there be no HIGHEST BIDDER the corporation may, subject to the provisions of the Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. The stocks shall then be considered as treasury shares.

Sec. 69. When sale may be questioned.

Grounds for recovery of stock unlawfully sold: irregularity or defect in the notice of

sale irregularity or defect in the sale itself

of the delinquent stock

Conditions: the party seeking to maintain such

action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate

a complaint must be filed within 6 months from the date of sale.

Sec. 70. Court action to recover unpaid subscription. A call may be required before a

corporation can maintain a suit for the enforcement of unpaid subscription (sec. 67)

The judicial remedy is limited to the amount due on any unpaid subscription, with accrued interest, costs and expenses

Sec. 71. Effects of delinquency. 1. Accelerates the entire amount of the

unpaid subscription;2. Subject the shares to interest,

expenses and costs;3. Disenfranchise the shares from any

right that inheres to a shareholder, except the right to dividends (but which shall be applied to any amount due on said shares or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares. (Sec. 43)

Upon the rights of stockholders:1. The delinquent stock is not entitled

to vote or to be represented at any stockholders’ meeting;

2. The holder of delinquent stock is not entitled to any of the rights of a stockholder except the right to receive dividends subject to the rule in Sec. 43:

a. cash dividends shall first be applied to the unpaid balance plus costs and expenses;

b. stock dividends shall be withheld until the unpaid subscription is fully paid.

Upon the director owning delinquent shares:

1. He can continue serving in that capacity unless and until said shares are totally bidded away, he continues to be the owner thereof and in the interim he is not disqualified.

2. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly elected to, the board.

Sec. 72. Rights of unpaid shares. all the rights of a stockholder as long

as the stocks are not delinquent




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Sec. 73. Lost or destroyed certificates.

PROCEDURE FOR ISSUANCE OF NEW CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN OR DESTROYED ONES: 1. Filing with the corporation an

affidavit in triplicate by the registered owner setting forth the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate and the name of the corporation that issued the same.

2. Publication of notice of loss by the corporation in a newspaper of general circulation in the place of the principal office, once a week for 3 consecutive weeks.

3. After the lapse of 1 year from the date of the last publication, if no contest has been presented, the corporation shall cancel in its books the certificate of stock, which has been lost, stolen or destroyed, and issue in lieu thereof a new certificate of stock.

However, if the registered owner files a bond or other securities as may be necessary to the board, the new certificate of stock may be issued even before the expiration of 1 year period. The prescribed procedure does not

apply to a case where the certificates are in the company’s possession when mislaid which thereby obligates the corporation, not the stockholder, to suffer the consequences. (SEC Opinion)

Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R. A. 201a)

TITLE VIIICORPORATE BOOKS AND RECORDS

Sec. 74. Books to be kept; stock transfer agent.

Inspection RightsLimitations:

a. The right must be exercised during reasonable hours on business days;

b. The person demanding the right has not improperly used nay information obtained through any previous examination of the books and records of the corporation; and

c. The demand is made in good faith or for a legitimate purpose.

Remedies:a. Action for mandamusb. Civil (damages) or criminal liability

under par. 3 and sec. 144 – imposed on the guilty officer or agent of the corporation.Extent: if the refusal is made pursuant to a resolution or order of the board, liability shall be imposed upon those who voted for such refusal.

Note: it shall be a defense to any action under this section that the person demanding to examine the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-owned by the corporation.

Books required to be kept:1. Book of Minutes

a. minutes of stockholder or members meetings; andb. minutes of board meetings.

2. Book of all business transactions; 3. Stock and transfer book, in case of

stock corporations. Corporate records required by the

SEC to be kept and/or registered:1. Books of Account;2. List of Stockholders or Members;

and




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3. Financial Records. A stockholder has the power to

inspect the corporate books of a controlled subsidiary of the mother corporation of which he is the stockholder provided. (Gokongwei vs SEC, 89 SCRA 36)

Sec. 75. Right to financial statements. The financial statement shall include:1. a balance sheet as of the end of the

last taxable year2. a profit or loss statement for said

taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.

The board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year at the regular meeting of stockholders or members which shall include financial statements,

Form: duly signed and certified by an independent CPA

Exception: if the paid-up capital of the corporation is less than P50,000.00, it may be certified under oath by the treasurer or any responsible officer of the corporation

TITLE IXMERGER AND CONSOLIDATION

Procedure for effecting a merger or consolidation: ( Secs. 76 to 80.)

1. The BOD or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation.

2. Approval by the stockholders or members of the constituent corporations by a vote of at least 2/3 of the voting power of the corporations.

3. Articles of merger or articles of consolidation shall be executed, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation.

4. Submittal to the SEC and issuance of a certificate of merger or consolidation, at which time the merger or consolidation shall be effective.

Sec. 76. Plan of merger or consolidation.

Modes of corporate combination:1. by the sale of all or part of the

assets of one corporation to another;

2. by the transfer of the assets of one corporation to another by lease;

3. by consolidation or merger;4. by the use of the holding company.

Merger A union whereby one or more existing

corporations are absorbed by another corporation which survives and continues the combined business.

Consolidation The union of two or more existing

corporations to form a new corporation called the consolidated corporation.

SALE OF ASSETS

MERGER/CONSOLIDATION

1. Merger or consolidation is not always involved;

2. Ordinarily, the purchasing corp. does not assume the liabilities of the selling corp;

3. Does not constitute a dissolution or liquidation of the seller.

1. A sale of assets is always involved;

2. Involves an assumption of the debts and liabilities of the absorbed corp.;

3. Involves the dissolution of the absorbed companies.

Contents of Plan of Merger or Consolidation:

1. The names of the corporations proposing to merge or consolidate,




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hereinafter referred to as the constituent corporations;

2. The terms of the merger or consolidation and the mode of carrying the same into effect;

3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and

4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

Vote requirement: approval by majority vote of each of the board of directors or trustees of the constituent corporations (sec. 77)

Sec. 77. Stockholder’s or member’s approval.

Vote requirement: affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock of each corporation in the case of stock corporations or at least 2/3 of the members in the case of non-stock corporations

Notice requirement: given to all stockholders or members of the respective corporations, at least 2 weeks prior to the date of the meeting, either personally or by registered mail.

Contents: purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation.

Amendment to Plan of Merger or Consolidation:Vote requirement: approved by majority vote of the

respective boards of directors or trustees of all the constituent corporations and

ratified by the affirmative vote of stockholders representing at least 2/3

of the outstanding capital stock or of 2/3 of the members of each of the constituent corporations

Note: any dissenting stockholder in stock corporations may exercise his appraisal right except that if the board of directors decides to abandon the plan, the appraisal right shall be extinguished.

Sec. 78. Articles of merger or consolidation. executed by each of the constituent

corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation

Contents:1. The plan of the merger or the plan

of consolidation;2. As to stock corporations, the

number of shares outstanding, or in the case of non-stock corporations, the number of members; and

3. As to each corporation, the number of shares or members voting for and against such plan, respectively.

Sec. 79. Effectivity of merger or consolidation. upon the issuance of a certificate of

merger or of consolidation by the SECConditions precedent:

submission of articles of merger or of consolidation, signed and certified to the SEC

favorable recommendation of the appropriate government agency in case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws

Note: If, upon investigation, the SEC has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a




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hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least 2 weeks before said hearing.

Sec. 80. Effects of merger or consolidation. 1. The constituent corporations shall

become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any

pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.

General Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other.Exceptions to Non-assumption of Liabilities:

1. If there is an express assumption of liabilities;

2. If there is a consolidation or merger;

3. If the purchase was in fraud of creditors; and

4. If the purchaser is merely a continuation of the seller.

TITLE XAPPRAISAL RIGHT

Sec. 81. Instances of appraisal right.

APPRAISAL RIGHTS The right to withdraw from the

corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure, namely: 1. An amendment to the articles that

has the effect of a. changing or restricting the

rights of shareholders or of authorizing preferences over those of outstanding shares, or

b. extending the term of corporate existence;

2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets.

3. Merger or consolidations; and




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4. Investment of corporate funds in another corporation or in a purpose other than the primary purpose; (Sec. 42)

5. A stockholder of a close corporation may, for any reason, compel said corporation to purchase his shares at their fair value (Sec. 105)

It is essential that the dissenting shareholder must have been present, either in person or by proxy, in the stockholders’ meeting and had his dissenting vote recorded.

Sec. 82. How right is exercised. by making a written demand for

payment of the fair value of his shares on the corporation within 30 days after the date on which the vote was taken

failure to make the demand within such period shall be deemed a waiver of the appraisal right

upon surrender of the certificate(s) of stock (which must be within 10 days from the date of demand) representing his shares the corporation shall pay to such stockholder the fair value thereof

upon payment by the corporation of the agreed or awarded price, the stockholder shall transfer his shares to the corporation

Determination of fair value of the shares: the fair value as of the day prior to the

date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.

if within a period of 60 days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by 3 disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the

appraisers shall be final, and their award shall be paid by the corporation within 30 days after such award is made

Limitation: no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment

Sec. 83. Effect of demand and termination of right. Effect of demand of right: all rights accruing to such shares,

including voting and dividend rights, shall be suspended

Period: from the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation

Limitation: if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

Sec. 84. When right to payment ceases. demand for payment is withdrawn

with the consent of the corporation proposed corporate action is

abandoned or rescinded by the corporation

proposed corporate action disapproved by the SEC where such approval is necessary

if the SEC determines that such stockholder is not entitled to the appraisal right

Effect: his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him

Sec. 85. Who bears costs of appraisal. General Rule: the corporationException: the stockholder if the fair value ascertained by the appraisers is approximately the same as the price




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which the corporation may have offered to pay the stockholder

Who bears costs and expenses in an action to recover fair value:General Rule: the corporationException: the stockholder if refusal of the stockholder to receive payment was unjustified

Sec. 86. Notation on certificates; rights of transferee. within 10 days after demanding

payment for his shares, a dissenting stockholder shall submit the certificates of stock for notation that they are dissenting shares

Transfer of dissenting shares: rights of the transferor as a dissenting

stockholder to be paid the fair value of the shares shall cease

the transferee shall have all the rights of a regular stockholder;

all dividend distributions which would have accrued on such shares shall be paid to him

TITLE XINON-STOCK CORPORATIONS

Sec. 87. Definition. Non-stock corporation - one where no part of its income is distributable as dividends to its members, trustees, or officers

Limitation: any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized

Governing Law: governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features.

STOCK NON-STOCK1. Has capital

stock divided into shares and with authority to distribute

1. Does not have shares and may not distribute profits to its

dividends to its stockholders

members

2. Stockholders may transfer their shares

2. Members cannot transfer their membership unless allowed by the articles or by-laws

3. Cumulative voting is available in the election of directors

3. Cumulative voting not available unless otherwise provided in the articles or by-laws

4. Directors cannot exceed 15 in number

4. Trustees may exceed 15 in number

5. The term of a director is 1 year

5. The term of a trustee is 3 years; 1/3 of the Board shall be elected annually

6. Stockholders may vote by proxy

6. Members may be deprived of the right to vote by proxy in the articles or by-laws

7. Officers are elected by the Board of Directors

7. Officers may be directly elected by the members unless otherwise provided in the articles or by-laws

8. Stockholders and directors must act in a meeting, except where a mere written assent is sufficient or a formal meeting unnecessary

8. Members may be allowed by the by-laws to vote by mail or other similar means

Rules on Conversion: (SEC Opinion)1. Stock to non-stock corporation:




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Conversion may be made by mere amendment of the articles of incorporation.

2. Non-stock to stock corporation: The corporation must first be

dissolved; mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to monetary gain.

The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation.

Sec. 88. Purposes. Non-stock corporations may be formed or organized for

a. charitable, b. religious, c. educational, d. professional, e. cultural, f. fraternal, g. literary, h. scientific, i. social, j. civic service, or k. similar purposes, like trade,

industry, agricultural and like chambers, or any combination thereof

Chapter I - MEMBERS

Sec. 89. Right to vote. General Rule: each member, regardless of class, shall be entitled to one voteExtent: it may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws

a member may vote by proxy unless otherwise provided in the articles of incorporation or the by-laws

voting by mail or other similar means may be authorized by the by-laws with the approval of the SEC

Sec. 90. Non-transferability of membership. General Rule: membership and all rights arising from it are personal and non-transferableException: the articles of incorporation or the by-laws otherwise provide

Sec. 91. Termination of membership. in the manner and for the causes

provided in the articles of incorporation or the by-laws

Effect: extinguish all rights in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.Chapter II - TRUSTEES AND OFFICERS

Sec. 92. Election and term of trustees. trustees elected shall have a term of

three 3 yearsException: as soon as organized, the term of office of 1/3 of the number of the board shall expire every year

elections of trustees comprising 1/3 of the board of trustees shall be held annually

Notes: only a member of the corporation

shall be elected as a trustee officers of a non-stock corporation

may be directly elected by the members unless otherwise provided in the articles of incorporation or the by-laws

Sec. 93. Place of meetings. General Rule: city or municipality where the principal office of the corporation is located (sec. 51)Exception: any place within the Philippines (regular or special meetings), which the by-laws may provide

Notice requirement: proper notice is sent to all members indicating the date, time and place of the meeting

Chapter III - DISTRIBUTION OF ASSETS IN




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NON-STOCK CORPORATIONS

Sec. 94. Rules of distribution.

Distribution of Assets of Non-Stock Corporation upon Dissolution:

1. All its creditors shall be paid;2. Assets held subject to return upon

dissolution shall be delivered back to their respective transferors;

3. Assets held for charitable, religious, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as the dissolved corporation;

4. Other assets shall be distributed to members, as provided for in the articles or by-laws; and

5. In any other case, assets may be distributed as specified in a plan of distribution.

Sec. 95. Plan of distribution of assets. Procedure:a. The board of trustees shall, by

majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights.

b. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in the Code for the giving of notice of meetings to members.

c. Such plan of distribution shall be adopted upon approval of at least 2/3 of the members having voting rights present or represented by proxy at such meeting.

TITLE XIICLOSE CORPORATIONS

Sec. 96. Definition and applicability of Title.

Close corporation - a special kind of stock corporation:1. whose articles of incorporation should

provide that: a. the number of stockholders shall

not exceed 20;b. issued stocks are subject to

transfer restrictions, with a right of preemption in favor of the stockholders or the corporation; and

c. the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND

2. whose 2/3 of the voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation.

The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not itself sufficient ground for disregarding the separate corporate personalities. So, too, a narrow distribution of ownership does not, by itself, make a close corporation (San Juan Structural vs CA 296 SCRA 631 1998)

The following cannot be a close corporation:

a. mining companies;b. oil companies;c. stock exchanges;d. banks;e. insurance companies;f. public utilities;g. education institutions;h. other corporations declared to be

vested with public interest.

Governing Law: the provisions of this Title shall primarily govern close corporations provided, that the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

Characteristics of Close Corporations:




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1. Stockholders may act as directors without need of election and therefore are liable as directors;

2. Stockholders who are involved in the management of the corporation are liable in the same manner as directors are.

3. Quorum may be greater than mere majority;

4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid;

5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others;

6. Preemptive right extends to all stock issues;

7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and

8. Stockholder may withdraw and avail of his right of appraisal.

ORDINARY STOCK CORPORATION

CLOSE CORPORATION

1. Its articles of incorporation need only contain the general matters enumerated in Sec. 14 of the Code.

1. Its articles must contain the special matters prescribed by Sec. 97, aside from the general matters in Sec. 14. Failure to do so precludes a de jure close corporation status.

2. Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights.

2. 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation.

3. Its articles cannot classify its directors.

3. Its articles may classify its directors.

4. Business of the 4. Business of the

corporation is managed by the board of directors.

corporation may be managed by the stockholders if the articles so provide, but they are liable as directors.

5. The corporate officers and employees are elected by a majority vote of all the members of the board of directors.

5. Its articles may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders.

6. The pre-emptive right is subject to the exceptions found in Sec. 39.

6. The pre-emptive right is subject to no exceptions unless denied in the articles

7. The appraisal right may be exercised by a stockholder only in the cases provided in Secs. 81 and 42 of the Code.

7. The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason.

8. Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings.

8. In case of an arbitration of an intra-corporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings.

8. Arbitration of intra-corporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting the management of

8. Arbitration of intra-corporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the




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the corporation. management of the corporation.

Sec. 97. Articles of incorporation. it may provide:

1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers;

2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and

3. For a greater quorum or vote requirements in meetings of stockholders or directors than those provided in this Code.

it may provide that the business of the corporation shall be managed by the stockholders provided that:1. No meeting of stockholders need

be called to elect directors;2. The stockholders of the

corporation shall be deemed to be directors for the purpose of applying the provisions of this Code unless the context clearly requires otherwise; and

3. The stockholders of the corporation shall be subject to all liabilities of directors.

it may also provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.

Sec. 98. Validity of restrictions on transfer of shares.

Conditions of restrictions:1. Restrictions on the right to transfer

shares must appear in the: a. articles of incorporation, b. by-laws, and in the c. certificate of stock; otherwise, the

same shall not be binding on any purchaser thereof in good faith.

2. The restrictions shall not be more onerous than granting the existing stockholders or the corporation the

option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein.

Note: If the existing stockholders fails to exercise the option to purchase upon the expiration of said period, the transferring stockholder may sell his shares to any third person.

Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions. Whenever any person to whom stock

of a close corporation has been issued or transferred who is not entitled under any provision of the articles of incorporation to be a holder of record of stock, he is conclusively presumed to have notice either that:

a. he is a person not eligible to be a holder of stock of the corporation

b. transfer of stock to him would cause the stock to be held more than the number of persons permitted by its articles of incorporation to hold stock of the corporation; or

c. with the transfer of stock he corporation’s restrictions on transfer is violated

The corporation may, at its option refuse to register the transfer of the stock in the name of the transferee. But these restrictions may be waived by consent of all the stockholders or by amendment of the articles of incorporation. Sec. 100. Agreements by stockholders.

1. Agreements by and among stockholders executed before the formation of a close corporation, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among them, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation.




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2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.

3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.

4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

Sec. 101. When board meeting is unnecessary or improperly held. Rule: any action by the directors without a meeting shall be deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the directors; or

2. All the stockholders have actual or implied knowledge of the action

and make no prompt objection thereto in writing; or

3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or

4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

Exception: the by-laws provide otherwise

Sec. 102. Pre-emptive right in close corporations.

Extent: all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.

Sec. 103. Amendment of articles of incorporation.

Vote requirement: affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation, at a meeting duly called for the purpose

Sec. 104. Deadlocks. the SEC, upon written petition by any

stockholder, shall have the power to arbitrate the dispute

the Commission shall have authority to make such order as it deems appropriate, including an order:

1. canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder’s agreement;

2. canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers;

3. directing or prohibiting any act of the corporation or its board of directors, stockholders,




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officers, or other persons party to the action;

4. requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders;

5. appointing a provisional director;

6. dissolving the corporation; or7. granting such other relief as

the circumstances may warrant.

Provisional director: an impartial person who is neither a

stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission.

not a receiver of the corporation and does not have the title and powers of a custodian or receiver.

shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders.

Sec. 105. Withdrawal of stockholder or dissolution of corporation.

Right to withdraw: any stockholder may, for any reason,

compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value

Limitation: the corporation has to have sufficient assets in its books to cover its debts and liabilities exclusive of capital stock

Right to have the corporation dissolved: by written petition to the SEC:

1. whenever any of acts of the directors, officers or those in

control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or

2. whenever corporate assets are being misapplied or wasted.

TITLE XIIISPECIAL CORPORATIONS

Chapter I - Educational Corporations

Sec. 106. Incorporation.

Educational Corporation – a stock or non-stock corporation organized to provide facilities for teaching or instruction.

Governing Law: Educational corporations shall be governed by special laws and by the general provisions of this Code.

Sec. 107. Pre-requisites to incorporation. The articles and by-laws must be

accompanied by a favorable recommendation of the Department of Education, Culture and Sports.

Sec. 108. Board of trustees.

For non-stock educational institutions: trustees shall not be less than 5 nor

more than 15 the number of trustees shall be in

multiples of 5 the terms of the office of the trustees

shall be staggered with 1 year interval, unless otherwise provided by the articles or the by-laws

shall hold office for 5 years trustees elected to fill vacancies,

occurring before the expiration of a particular term, shall hold office only for the unexpired period

majority of the trustees shall constitute a quorum for the transaction of business

powers and authority of trustees shall be defined in the by-laws

For stock educational institutions:




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the number and term of directors shall be governed by the provisions on stock corporations.

Chapter II - RELIGIOUS CORPORATIONS

Sec. 109. Classes of religious corporations. a. corporation sole - a special form of

corporation, usually associated with the clergy, consisting of one person only and his successors, who is incorporated by law to give some legal capacities and advantages; and

b. religious societies - a non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc.

Sec. 110. Corporation sole. A corporation sole may be formed by the:

a. chief archbishop, b. bishop, c. priest, d. minister, e. rabbi or f. other presiding elder of such

religious denomination, sect or church

Sec. 111. Articles of incorporation. Filed by the chief archbishop, bishop,

priest, minister, rabbi or presiding elder of any religious denomination, sect or church

Contents:1. That he is the chief archbishop,

bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole;

2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it;

3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with

the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction;

4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and

5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines.

6. Any other provision not contrary to law for the regulation of the affairs of the corporation.

Sec. 112. Submission of the articles of incorporation. must be verified, before filing, by

affidavit or affirmation of the chief archbishop, etc., as the case may be, and

accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public

Effect: such chief archbishop, etc. shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, etc., shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.

Sec. 113. Acquisition and alienation of property.




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Rule: authority from the RTC is required before the corporation sole may mortgage or sell real property

Exception: where the religious denomination, sect or church, religious society or order concerned represented by the corporation sole has rules which regulate the acquisition, mortgage and selling of real estate and personal property

Sec. 114. Filling of vacancies. the successors in office of any chief

archbishop, etc. as the case may be shall become the corporation sole on the filing with the SEC of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public

in case of any vacancy in the office of chief archbishop, etc. as the case may be, the person or persons authorized by the rules of the religious denomination to administer the affairs of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy

Sec. 115. Dissolution. A corporation sole may be dissolved

and its affairs settled voluntarily by submitting to the SEC a verified declaration of dissolution.

The declaration of dissolution shall set forth:1. The name of the corporation;2. The reason for dissolution and

winding up;3. The authorization for the

dissolution of the corporation by the particular religious denomination, sect or church;

4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.

Upon approval of such declaration of dissolution by the SEC, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.

Sec. 116. Religious societies.

Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least 2/3 of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate.

Contents of article of incorporation:1. That the religious society or

religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church;

2. That at least 2/3 of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body;

3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part;

4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate;

5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and

6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period




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as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

TITLE XIVDISSOLUTION

Sec. 117. Methods of dissolution.

MODES OF DISSOLUTION1. Voluntary

a. Application for dissolution with the SECi. Where no creditors are affectedii. Where creditors are affected

b. Shortening of the corporate term by amending the articles of incorporation.

2. Involuntarya. Expiration of the corporate term;b. Failure to organize and commence

business within 2 years from the date of issuance of the certificate of incorporation (Note: However, the SEC has opined that the dissolution in this case is not automatic. The corporation continues to exist as such, notwithstanding its non-operational status until the SEC orders its dissolution after notice and hearing.)

c. Legislative dissolution; d. Quo warranto suit against a de

facto corporation;e. Minority stockholders’ suit for

dissolution on justifiable grounds; or

f. SEC dissolution, upon complaint and after notice and hearing, on the following grounds:

i. The corporation was illegally organized;

ii. Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years;

iii. Serious dissension in the corporation; or

iv. Commission by the corporation of illegal or ultra vires acts or violations of the Code.

STEPS IN DISSOLUTION:1. The termination of the corporate

existence as far as the right to go on doing ordinary business is concerned;

2. winding up of its affairs, payment of its debts and the distribution of its assets among the shareholders.

Sec. 118. Voluntary dissolution where no creditors are affected. Procedure:1. Publication

3 consecutive weeks publication of the notice of time, place and object of the meeting in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least 30 days prior to said meeting

2. Board Resolution majority vote of the board of

directors or trustees3. Stockholders or members approval

affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or of at least 2/3 of the members of a meeting to be held upon call of the directors or trustees

4. Certification a copy of the resolution shall be

certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation

5. Issuance of certificate of Dissolution the SEC shall thereupon issue the

certificate

Sec. 119. Voluntary dissolution where creditors are affected. Petition for dissolution: Formalities:




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signed by a majority of its board of directors or trustees or other officers having the management of its affairs

verified by its president or secretary or one of its directors or trustees

affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members at a meeting of its stockholders or members called for the purpose

Contents: set forth all claims and demands

against it Where filed:

filed with the SEC

Procedure by the SEC:a. by order reciting the purpose of the

petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than 30 days nor more than 60 days after the entry of the order

b. a copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for 3 consecutive weeks in 3 public places in such municipality or city

c. upon 5 day’s notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.

Sec. 120. Dissolution by shortening corporate term. Effected by amending the articles of

incorporation It refers to the dissolution of a

corporation prior to the expiration of its term as fixed in the articles of incorporation.

This may be done by following the formal requirements of Sec. 16 (not mere written assent) and the procedural requirements of Sec. 37 of the Code (stockholders’ approval).

Sec. 121. Involuntary dissolution. upon filing of a verified complaint

before the SEC and after proper notice and hearing on the grounds provided by existing laws, rules and regulations

Effects of dissolution: The corporation ceases as a body

corporate to continue the business for which it was established (sec. 122)

The corporation continues as a body corporate for years for purposes of winding-up or liquidation (sec. 122)

Upon the expiration of the winding-up period of years, the corporation ceases to exist for all purposes

SEC may dissolve a corporation, upon filing of a verified complaint, and after notice and hearing, on the following grounds:

a. fraud or misrepresentation as to the paid-up capital of the corporation (25%-25% requirements);

b. misrepresentation;c. ultra vires – mala pohibita, but too

numerous infractions, which is persistent despite SEC warnings (Republic vs Security Credit & Acceptance Corp., 19 SCRA 58)

d. continuous inactivity of the corporation for at least 5 years;

e. refusal to adopt or approve by-laws. (P.D. 902-A).

Sec. 122. Corporate liquidation.

Corporate Liquidation




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After the dissolution of the corporation, it continues to exist as a body corporate, but only for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

Liquidation The process by which all the assets of

the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members.

Methods:1. By the corporation itself through its

board of directors/trustees (sec. 122, par. 1);

2. By a trustee to whom the corporate assets have been conveyed (sec.122, par. 2); and

3. By a management committee or rehabilitation receiver appointed by the SEC (sec.119, last par.).

NOTE: The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or the receiver is appointed within the said period.

The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike (see Sec. 145). Where, in the case of a corporation, the 3-year extended life has expired without a trustee or receiver having been expressly designated within the said period, those who have been charged to wind up its affairs or, in their absence, the board of directors/trustees should be permitted to continue as “trustees” by legal implication to complete the corporate liquidation.

TITLE XVFOREIGN CORPORATIONS

Sec. 123. Definition and rights of foreign corporations. A corporation formed, organized or

existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state.

The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.

It is not permitted to “transact or do business in the Philippines” until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency.

TESTS TO DETERMINE NATIONALITY OF CORPORATIONS:1. INCORPORATION TEST –

determined by the state of incorporation, regardless of the nationality of the stockholders.

2. DOMICILE TEST – determined by the state where it is domiciled.

3. CONTROL TEST – determined by the nationality of the controlling stockholders or members. This test is applied in times of war. Also known as the WAR-TIME TEST.

“PHILIPPINE NATIONAL” UNDER THE FOREIGN INVESTMENT ACT OF 1991 (R.A. No. 7042):1. A corporation organized under the

laws of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens;

2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; and

However, it provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both




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corporations must be Filipino citizens (double 60% rule).

NOTE: The law applies the control test both with respect to the ownership of shares entitled to vote and the membership in the board of directors.

“GRANDFATHER RULE” The method by which the percentage

of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where there are corporate shareholders.

The present liberal application of the rule embodies the control test: Shares belonging to corporations

or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.

But if the percentage of Filipino ownership in the corporation or partnership is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.

DOMICILE The domicile of a corporation is the

place fixed by the law creating or recognizing it; in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercise its principal functions (Art. 51, NCC).

Sec. 124. Application to existing foreign corporations. A license issued to the corporation

before the effectivity of the Code shall continue to have such authority under the terms and condition of its license, subject to the provisions of this Code and other special laws

Any corporation that is affected by the new requirements of this Code, said corporation shall, unless otherwise

herein provided, be given a period of not more than 2 years from the effectivity of this Code within which to comply with the same (sec. 148)

Sec. 125. Application for a license.

Contents of Application:The application shall be under oath

and, unless already stated in its articles of incorporation, shall specifically set forth the following:

1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;

3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation;

4. The place in the Philippines where the corporation intends to operate;

5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency;

6. The names and addresses of the present directors and officers of the corporation;

7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any;

9. A statement of the amount actually paid in; and




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10.Such additional information as may be necessary or appropriate in order to enable the SEC to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable.

Documents required: copy of its articles of incorporation

and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary

duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing

statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the SEC and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding 1 year immediately prior to the filing of the application.

foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them

in the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the SEC without previous authority from the appropriate government agency, whenever required by law

Sec. 126. Issuance of a license. SEC will issue a license to the foreign

corporation to do business in the Philippines provided the following conditions are met:

a. appointment of a resident agent:

i. either a Filipino or a domestic corporation

ii. power of attorney to SEC to receive process

b. must prove that the foreign corporations country grants reciprocal rights to Filipinos and Philippine corporations

c. establish an office in the Philippines

d. bring in its assetse. in the event o insolvency –

undertaking that Filipino creditors will be preferred

f. notice of six months should desire to terminate

g. franchise and patents must remain in the Philippines, if possible

h. must file a bond of P100,000 which may be in the following form:

i. surety bondii. government securities

iii. securities of political subdivisions

iv. shares of stock of registered enterprises with SEC

v. shares of stock of any corporation being sold at the stock exchange

That within 6 months after each fiscal year, SEC shall require the deposit of additional securities equivalent to 2% of the amount in excess of P5M of the gross income.

Sec. 127. Who may be a resident agent. Either:

a. an individual residing in the Philippines must be of good moral

character and of sound financial standing

b. a domestic corporation

Sec. 128. Resident agent; service of process. Requirement: written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may




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be served in all actions or other legal proceedings against such corporation

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the SEC of the new address

Service of summons: service to resident agent within 10 days thereafter, transmit by

mail a copy of such summons or other legal process to the corporation at its home or principal office all expenses incurred by the

Commission for such service shall be paid in advance by the party at whose instance the service is made

Sec. 129. Law applicable. General Rule: Philippine laws

Exception: Laws of the state of creation on matters relative to:

creation, formation, organization or dissolution of corporations or those which fix the relations,

liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation

Sec. 130. Amendments to articles of incorporation or by-laws of foreign corporations. within 60 days after the amendment

becomes effective, file with the SEC, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended

indicate clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation

the filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines

Sec. 131. Amended license. When required: in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes

How: by submitting an application to the SEC, favorably endorsed by the appropriate government agency in the proper cases

Sec. 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. Requirements:1. With a domestic corporation:

a. it is permitted under Philippine laws and by the law of its incorporation, and

b. the requirements on merger or consolidation as provided in this Code are followed

2. With another foreign corporation:a. permitted by the law of its

incorporationb. within 60 days after such

merger or consolidation becomes effective, file with the SEC, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected

c. if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of it license

Sec. 133. Doing business without a license.

TEST OF “DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES”: The Corporation Code does not define

the phrase “doing or transacting business.”

A. Jurisprudential Tests1. Twin characterization test




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a. Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another (Substance Test); and

b. Whether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization (Continuity Test).

2. Contract Test Whether the contracts entered into by

the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines.

B. Statutory Tests1. Foreign Investment Act of 1991 (R.A.

No. 7042) Acts constituting “doing

business”:a. Soliciting orders, service

contracts, opening offices, whether called “liaison” offices or branches;

b. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more;

c. Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; and

d. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose of the business organization.

2. Implementing Rules of R.A. No. 7042 Acts not constituting “doing

business”:a. Mere investment as a shareholder

in a domestic corporation and/or the exercise of rights as such investor;

b. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;

c. Publication of a general advertisement through any print or broadcast media;

d. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

e. Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export;

f. Collecting information in the Philippines; and

g. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis.

EFFECTS OF LACK OF LICENSEA. On suits1. Foreign corporation doing business in

the Philippines: a. may not sue or intervene in any

action in any court or administrative agency of the Philippines; but

b. may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasi-estoppel by acceptance of benefits).

2. Foreign corporation not doing business in the Philippines:a. Generally, it may not sue and be

sued in any court or administrative agency of the Philippines;

b. However, it may sue and be sued for isolated transactions, as well as for those which are casual or incidental thereto.




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DOCTRINE OF ISOLATED TRANSACTIONS Foreign corporations, even unlicensed

ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. However, it is not the lack of the

prescribed license to do business in the Philippines but the doing of business without license which bars a foreign corporation from access to Philippine courts. An unlicensed foreign corporation is not ipso facto barred from bringing an action. The legal prohibition is confined to cases relating to its business activity in the country.

INSTANCES WHEN A FOREIGN CORPORATION MAY SUE IN THE PHILIPPINES WHETHER OR NOT LICENSED TO DO BUSINESS THEREAT:

1. To seek redress for an isolated business transaction;

2. To protect its corporate reputation, name, and goodwill;

3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the Philippines;

4. When the parties have contractually stipulated that Philippines is the venue of actions; and

5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation.

B. On contracts The contracts contemplated are those

that satisfy the “contract test” or those that make a foreign corporation as one “doing business in the Philippines.”

General Rule: The contracts are unenforceable. They are enforceable only upon securing a license.

Exception: However, the contracts are null and void if they are contrary to law, morals, good customs, public order and public policy.

Sec. 134. Revocation of license. Grounds:

1. Failure to file annual reports required by the Code;

2. Failure to appoint and maintain a resident agent;

3. Failure to inform the SEC of the change of residence of the resident agent;

4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation;

5. A misrepresentation in material matters in reports;

6. Failure to pay taxes, imposts and assessments;

7. Engage in business unauthorized by SEC;

8. Acting as dummy of a foreign corporation; and

9. Not licensed to do business in the Philippines.

Sec. 135. Issuance of certificate of revocation. upon the revocation of any such

license to transact business in the Philippines

Sec. 136. Withdrawal of foreign corporations. by filing a petition for withdrawal of

license

no certificate of withdrawal shall be issued by the SEC unless all the following requirements are met:

1. All claims which have accrued in the Philippines have been paid, compromised or settled;

2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and

3. The petition for withdrawal of license has been published once a week for 3 consecutive weeks




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in a newspaper of general circulation in the Philippines.

TITLE XVIMISCELLANEOUS PROVISIONS

Sec. 137. Outstanding capital stock defined. the total shares of stock issued under

binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares

Sec. 138. Designation of governing boards. non-stock or special corporations

may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees.

Sec. 139. Incorporation and other fees. - The SEC is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission. (n)

Sec. 140. Stock ownership in certain corporations.

NATIONALIZED CORPORATIONS: 1. 100% Filipino Owned

a. Mass Media which includes radio, television and printed media (Sec. 11(1), Art. XVI, 1987 Constitution)

b. Rural Banks - 100% of its capital stock (RA No. 720, as amended)

c. Rice and Corn Industry (RA No. 3018, as amended)

d. Security, watchman, and detective Agency (RA No. 5487)

2. 70% Filipino Owneda. Advertising Industry; (Sec. 11(2),

Art. XVI, 1987 Constitution)b. Banks and other than rural banks

and new banks established by consolidation of branches or agencies of foreign banks in the Philippines; (RA No. 337)

c. Private Development Banks; (RA No. 4093)

d. Savings and Loan Associations (RA No. 3779 and RA No. 4378, as amended)

3. 60% Filipino Owneda. Financing Companies – 60% of the

capital stock. (RA No. 5980)b. Fishing and Business Activity

relating to Fishery Industry – 60% of the capital stock. (PD 43 and PD 704)

c. Exploration, Development, and Utilization of Natural Resources. (Sec. 2 Art. XII, 1987 Constitution)

d. Ownership of Lands (Sec. 2 Art. XII, 1987 Constitution)

e. Operation of Public Utility (Sec. 11 Art. XII, 1987 Constitution)

f. Educational Institutions other than those established by religious groups. (Sec.4[2], Art. XIV, 1987 Constitution)

g. Any business reserved by Congress. (Sec. 10 Art. XII, 1987 Constitution)

4. Majority Owned by Filipinosa. Investment House (PD NO. 129)

Sec. 141. Annual report or corporations. submitted to the SEC together with a

financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases

report shall be submitted within such period as may be prescribed by the SEC

Sec. 142. Confidential nature of examination results. Coverage: all interrogatories propounded by the SEC and the answers thereto, as well as the results of any examinationException: insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be presented as evidence before any court

Visitorial power / right of visitation – power of the State through the proper governmental agency to examine the business affairs, administration and condition of corporations




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Sec. 143. Rule-making power of the SEC. power and authority to implement the

provisions of this Code

promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers

Sec. 144. Violations of the Code. By an individual: fine of not less than P1,000.00 but not

more than P10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in the discretion of the court

By the corporation: after notice and hearing, be dissolved

in appropriate proceedings before the SEC such dissolution shall not preclude

the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation

Sec. 145. Amendment or repeal. No right or remedy in favor of or

against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.

SECURITIES REGULATION CODE (R.A. 8799) – July 19, 2000

The Code is also known as the “Blue Sky Law”, because it was enacted to protect the public from unscrupulous promoters who stake business or venture claims which have really no basis and sell shares or interests therein to investors, who are then left

holding certificates representing nothing more than a square of the blue sky.

The Code is self-executory and failure of SEC to issue rules and regulations shall not in any manner affect its self-executory nature. (Subsec. 72.1)

Powers and Functions of the SEC: (Sec. 5)

1. Shall have jurisdiction and supervision over all corporations, partnerships or associations who are grantees of primary franchises;

2. Formulate policies and recommendations on securities market, advise Congress and other government agencies on all aspects of securities market, and propose legislation and amendments thereto;

3. Approve, reject, suspend, revoke, or require amendments to the registration statements, and registration licensing applications;

4. Regulate, investigate or supervise activities of persons to ensure compliance;

5. Supervise, monitor, suspend or take over activities of exchanges, clearing agencies and other SROs;

6. Impose sanctions for violation of laws and rules, regulations, and orders;

7. Prepare, approve, amend or repeal rules and regulation and orders, and issue opinions and provide guidance on and supervise compliance therewith;

8. Enlist aid and support of and/or deputize any and all enforcement agencies of Government, as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions;

9. Issue cease and desist orders to prevent fraud or injury to investing public;

10.Punish for both direct and indirect contempt;

11.Compel corporate officers to call meetings of stockholders or members thereof under its supervision;




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12.Issue subpoena duces tecum and summon witnesses, and order the examination, search and seizure of all documents, papers, file and records, tax returns, and books of accounts of any entity or person under investigation;

13.Suspend, or revoke, after proper notice and hearing, franchise or certificate of registration of corporations, partnerships or associations; and

14.Exercise such other powers as may be provided by law, implied from, or which are necessary or incidental to the carrying out of express powers.

Securities Shares, participation or interest in

a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. (Sec. 3)

Kinds:a. Debt Instruments: bonds,

debentures, notes, and other evidences of indebtedness, asset-backed securities;

b. Equity Instruments: shares of stock, certificate of deposit for a future subscription, proprietary or nonpropriety membership certificates in corporations;

c. Investment Instruments: investment contracts, fractional undivided interests in oil, gas or other mineral rights;

d. Derivatives: like options and warrants;

e. Trust Instruments: certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar certificates;

f. Catch-All: other instruments as may in the future determined by the Commission. (Subsec. 3.1)

Registration of SecuritiesGeneral Rule: Securities shall NOT be sold or offered for sale or distribution within the Philippines (a) without

registration statement duly filed and approved by SEC; and (b) Prior to such sale, information on the securities in such form and with such substance as SEC may prescribe, shall be made available to each prospective purchaser. (Sec.8)

Exception: The following securities may be sold without need of registration;

A. Exempt Securities (Sec. 9):a. Those issued or guaranteed by

the Government or by any political subdivision, agency, or by any person controlled or supervised by, and acting as an instrumentality of the Government;

b. Those issued or guaranteed by the government of any country with which the Philippines has diplomatic relations, or by any state, province, or political subdivision thereof on the basis of reciprocity, although the SEC may require compliance with the form and content of disclosures;

c. Certificates issued by receiver or by trustee in a bankruptcy duly approved by proper adjudicatory body;

d. Any security or its derivatives the sale or transfer of which, by law, is under supervision and regulation of OIC, HLURB, or BIR;

e. Any security issued by bank, except its own shares.

B. Exempt Transactions (Sec. 10):a. Judicial sale by executor,

administrator, guardian/receiver in insolvency or bankruptcy;

b. Sale of pledged or foreclosed property to liquidate debts;

c. Sale on isolated transaction by owner;

d. Distribution of stock dividends;e. Sale of capital stock exclusively

to stockholders where no commission is paid;

f. The issuance of bonds or notes secured by mortgage upon real




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estate or tangible personal property, where the entire mortgage are sold to a single purchaser at a single sale;

g. Issuance of security in exchange of any security from same issuer pursuant to the right of conversion;

h. Broker’s transactions;i. Pre-incorporation subscription

pursuant to the increase of the authorized capital stock;

j. Exchange of securities by issuer with securities holders exclusively;

k. Sale to less than 20 persons during any 12 month period;

l. Sale of securities to banks, registered investment house, insurance companies, pension fund or retirement plan maintained by the government or other persons authorized by the BSP to engage in trust functions.

Any person applying for an exemption under Sec. 10, shall file with SEC notice identifying the exemption relied upon on such form and at such time as SEC by rule may prescribe and with such notice shall pay to SEC a fee (Subsec. 10.3).

Procedure for Registration of Securities:

1. The Issuer(originator, maker, obligor, or creator of the security) shall file with the SEC a sworn registration statement;

2. The registration statement shall include a prospectus (document made by and on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with SEC);

3. The submission of the following information: the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership;

4. The registration statement shall be signed by Issuer’s executive

officer, principal operation officer, principal officer, comptroller, principal accounting officer, secretary or persons performing similar functions accompanied by a duly verified petition of the Board of Director’s of the Issuer;

5. Filing of the written consent of the expert named;

6. Written certification of the selling shareholders, if the registration statement includes shares to be sold by selling shareholders;

7. Payment of fees to the SEC by the Issuer;

8. Publication in 2 newspapers of general circulation in the Philippines, once a week for 2 consecutive weeks, reciting that a registration statement has been filed;

9. The SEC may compel the production of all the books of such Issuer, and may administer oaths to, and examine the officers of such Issuer or any other person connected therewith as to its business and affairs;

10.Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement.

Grounds for Rejection and Revocation: (Sec. 13.1)

1. The issuer:a. has been judicially declared

insolvent;b. has violated the provisions of

the Code or orders issued by the SEC;

c. has been engaged in fraudulent transactions;

d. has made false or misleading representation in any material facts;

e. has failed to comply with any requirement the SEC may impose as a condition of registration;




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2. The registration statement is on its face inaccurate or incomplete, or includes ant untrue statement or omits to state a material fact required to be stated therein;

3. The issuer, any officer, director or controlling person performing similar functions, has been convicted by a competent judicial or administrative body (it includes a foreign court of competent jurisdiction), of an offense involving moral turpitude and/or fraud or is restrained by the SEC or other bodies for violation of securities, commodities and other related laws;

4. Non-production of all books and papers, administration of oath or examination of its officers as required by the SEC.

Pre-Need Plans Contracts which provide for the

performance of future services or the payment of future monetary consideration at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverages and includes life, pension, interment, and other plans which SEC shall approve. (Subsec. 3.9)

Commodity Future Contract a contract providing for the

making or taking delivery at a prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities futures, commodity options and commodity leverage, or margin contracts.

Tender Offer A publicly announced intention by

a person acting alone or in concert with other persons to acquire

equity securities of a “public company”

It is mandatory to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances:a. The person intends to acquire

15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers;

b. The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; or

c. The person intends to acquire shares that would result in ownership of more than 50% of the equity shares of a public company. (Sec. 19)

Securities deposited may be withdrawn at any time throughout the period that the tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after 60 days from the date of the original tender offer or request or invitation.

Unlawful and Prohibited Acts Relating to Tender Offers: To make an untrue statement of a material fact or omit to state any material fact in order to make the statements made, not misleading, or to engage in any fraudulent, deceptive, or manipulative act or practices.

How Tender Offer is made:1. By filing with the SEC a

declaration to make a tender offer;2. By furnishing the issuer or the

originator of the security a statement containing such information required under Sec. 17 of the SRC:a. Annual Report (includes

balance sheet, profit and loss statement); and




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b. Periodical reports for interim fiscal periods; and

3. By publishing all request or invitations for tender, or materials, making a tender offer or requesting on inviting letters of such a security.

Public Company:1. Any corporation with a class of

equity securities listed on an Exchange; or

2. Any corporation with assets in excess of P50M and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its securities.

Unlawful Acts:1. UNLAWFUL SALE OF

SECURITIES-- For any beneficial owner, director, or officer to sell any security if the seller or his principal does not own or does not deliver it within 20 days from sale. (Sec. 23.3)

2. Manipulation of security prices. (Sec. 24.1)

3. MANIPULATIVE AND DECEPTIVE DEVICES-- Employment of manipulative or deceptive device or contrivance in connection with purchase and sale of authorities. Execution of “short sale”, “stop-loss order” not in accordance with SEC rules. (Sec 24.2)

4. OPTION TRADING-- For any member of Exchange directly or indirectly endorse or guarantee the performance of any “put”, “call”, “straddle”, “option” or “privilege” in relation to any security registered. (Sec. 25)

5. FRAUDULENT TRANSACTION-- Fraudulent transactions in the sale of securities. (Sec. 26)

6. Insider trading (Sec. 27)7. For an insider to communicate

material non-public information about the issuer or security (Sec. 27.3)

8. Unlawful Tender Offer (Sec. 27.4)9. Use of Extensive Credit. (Sec.

48.1)

Definition of terms:1. SHORT SALE— A contract for sale

of shares of stock which the seller does not own, or certificates which are not within his control, so as to be available for delivery at the time when delivery must be made.

2. STOP-LOSS ORDER—The direction by a customer to his broker that if the commodity touches the price named, the broker shall close the trade at the best available price.

3. PUT—An option that, in consideration of a premium paid, give the purchase the right to make the seller take for him a given number of shares of a named stock between a given time at a stipulated price which is usually below the prevailing market price of the stock at the time the “put” is purchased.

4. CALL— An option that, in consideration of a premium paid, entitles the buyer the right to compel the seller to deliver to him a certain number of shares within a given time at a stipulated price which is usually higher than the prevailing market price of the stock at the time the “call” is bought. “Call” is the reverse of “put”.

5. STRADDLE—The double privilege of a “put” and a “call”, and secures to the holder the right to demand of the seller at a certain price within a certain time a certain number of shares of specified stock, or to require him to take, at the price within the same time, the same shares of stock.

6. WASH SALE—the operation of simultaneously buying and selling the same stock. It is any transaction in any security which involves no change in the beneficial ownership thereof. It is the reverse of “matched orders” wherein there is a change in the ownership of the securities.

7. SHORT SWING TRANSACTION—One where a person buys securities and sells the same within a period of six months.




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Unlawful Sale of Securities (Sec. 23.3) It shall be unlawful for any such

beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if person selling security or his principal:

a. does not own the security sold; or

b. if owning the security, does not deliver it against such sale within 20 days thereafter, or does not within 5 days after such sale deposit it in the mails or other usual channels of transportation.

No person shall be deemed to have violated the Code if he proves the exercise of good faith.

Prohibition does NOT apply to a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise than in an Exchange, for such security.

Insider’s Trading (Sec. 27) The selling or buying of a security

by an insider while in possession of material non-public information with respect to the issuer or the security. It is considered unlawful unless:1. The insider proves that the

information was not gained from such relationship; or

2. If the other party selling to or buying form the insider (or his agent) is identified, the insider proves:a. that he disclosed the

information to the other party; or

b. that he had reason to believe that the other party otherwise is also in possession of the information.

Presumption: A purchase or sale made by an insider, his spouse, or relatives, shall be presumed to have

been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to public dissemination of such information. (Sec 27.1)

Insider (Sec. 3.8) A person who, with respect to a

particular security, may be any of the following:a. The issuer;b. The director or officer of, or a

person controlling, controlled by, or under common control with the Issuer;

c. A person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available;

d. A government employee, or director, or officer of an exchange, clearing agency and/ or self- regulatory organization who has access to material information about an Issuer or a security that is not generally available to the public;

e. A person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is an insider.

Material Non-Public Information (Sec. 27.2)

1. Information about the Issuer or the security which has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb information; or

2. Information about the Issuer or the security which would be considered by a reasonable person important under the circumstances in determining his course of action to buy, sell or hold security.

Self- Regulatory Organization (SROs)




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Organizations whose operation are related to or connected with securities market such as but not limited to associations of:a. brokers and dealers;b. transfer agents;c. custodians;d. fiscal and paying agents;e. computer services;f. news disseminating services;g. proxy solicitors;h. statistical agencies;i. securities- rating agencies; andj. securities information

processors.

Margin Sum of money, or its equivalent,

placed in the hands of a stockbroker by principal or persons on whose account the purchase is to be made, as a security to the former against losses to which he may be exposed by a subsequent depression in the market value of the stock.

Purpose: Margin limitations are provided in the Code to prevent excessive use of credit for the purchase or carrying of securities.

Margin Trading A kind of trading that allows a

broker to advance for the customer part of the purchase price of a security and to keep it as a collateral for such advance.

The credit extended must be for an amount not greater than whichever is higher of:1. 65% of current market price of

the security;2. 100% of the lowest market

price of security during the preceding 36 calendar months, but not greater than 75% of the current market price. (Sec. 48)

Margin Call When a broker makes a demand on

the investor to deposit money or securities with the broker when a purchase is made or when the investor’s equity in a margin

account declines below a minimum standard set by the exchange or the broker.

Compliance with SRC Provisions Any condition, stipulation or

provision binding any person to waive compliance with any provision of the SRC or of any rule or regulation thereunder, or of any rule of an Exchange required thereby, as well as the waiver itself, shall be void. (Sec. 71.1)

“Over-the-Counter” Transactions Transactions which are not made

at the stock exchange, but directly between the broker and the customer.

“Over-the-Counter” Market A market created other than a

registered stock exchange for both the purchase and sale of any security.

INTELLECTUAL PROPERTY CODE(R.A. No. 8293, effective 06 June 1997 as amended by R.A. 9150)

INTELLECTUAL PROPERTY - those property rights which result from the physical manifestation of original thought. (Ballantine's Law Dictionary) It is the catchall label for the property that is recognized in works of the mind.

GENERAL OVERVIEW

Purpose:To strengthen the intellectual and industrial property system in the Philippines as mandated by the country’s accession to the Agreement establishing the World Trade Organization.

State policy declaration: The policy of the State is:

a. to recognize that an effective intellectual and industrial property system is vital to the development of domestic and creative activity, facilitates transfer of technology, attracts foreign investments, and




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ensures market access for the country’s products.

b. to protect and secure the exclusive rights of scientists, inventors, artists and other gifted citizens to their intellectual property and creations, particularly when beneficial to the people, for such periods as provided in this Act.

c. to recognize that the use of intellectual property bears a social function. To this end, the State shall promote the diffusion of knowledge and information for the promotion of national development and progress and the common good.

d. to streamline administrative procedures of registering patents, trademarks and copyright, to liberalize the registration on the transfer of technology, and to enhance the enforcement of intellectual property rights in the Philippines.

Rule on international conventions and on principle of reciprocity: Any person who is:

a national or domiciled or has a real and effective industrial

establishment in a country: which is a party to any

convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or

extends reciprocal rights to nationals of the Philippines by law;

shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise entitled by this Act.

Laws repealed:

Republic Act No. 8293 repealed all Acts and parts of Acts inconsistent therewith, more particularly: 1. Republic Act No. 165, as amended [An

Act Creating a Patent Office, Prescribing its Powers and Duties, Regulating the Issuance of Patents, and Appropriating Funds Therefor];

2. Republic Act No. 166, as amended[An Act to Provide for the Registration and Protection of Trademarks, Trade-Names, and Service-Marks, Defining Unfair Competition and False Marking and Providing Remedies Against the Same, and for Other Purposes].

3. Presidential Decree No. 49 [Decree on the Protection of Intellectual Property];

4. Presidential Decree No. 285, as amended [Decree on the Protection of Intellectual Property];

5. Articles 188 and 189 of the Revised Penal Code of the Philippines.

Parts of the law: The Intellectual Property Code of the Philippines is divided into 5 parts, to wit: PART I - The Intellectual Property Office PART II - The Law on Patents PART III - The Law on Trademarks, Service Marks and Trade Names PART IV - The Law on Copyright PART V - Final Provisions

Coverage of Intellectual property rights under the I.P. Code: The intellectual property rights under the Intellectual Property Code are as follows:

1. Copyright and related rights; 2. Trademarks and service marks; 3. Geographic indications;

One which identifies a good as originating in the territory of a TRIPS member, or a region or locality in that territory, where given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin. (Art. 22 TRIPS Agreement)

4. Industrial designs Any composition of lines or colors or any three-dimensional form,




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whether or not associated with lines or colors: Provided, That such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft;

5. Patents;

6. Layout designs [topographies] of integrated circuits; Integrated circuit – a product in

its final form or an intermediate form, in which the elements at least one of which is an active element, and some or all of the interconnections are integrally formed in and/or on a piece of material and which is intended to perform an electric function (Sec. 112.2; Art. 5 TRIPS Agreement)

Layout design / topography – 3 dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a 3 dimensional disposition prepared for an integrated circuit intended for manufacture. (Sec. 112.3; Art. 5 TRIPS Agreement)

7. Protection of undisclosed information. Information which

a. is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

b. has commercial value because it is secret; and

c. has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Government Agencies: The agency of the government in charge of the implementation of the Intellectual Property Code is the Intellectual Property Office which replaced the Bureau of Patents, Trademarks and Technology Transfer. It is divided into six [6] Bureaus, namely:

1. Bureau of Patents; 2. Bureau of Trademarks; 3. Bureau of Legal Affairs; 4. Documentation, Information and

Technology Transfer Bureau; 5. Management Information System

and EDP Bureau; and 6. Administrative, Financial and

Personnel Services Bureau.

Intellectual Property Office:Functions:The Intellectual Property Office is mandated under the law to:

1. Examine applications for the grant of letters patent for inventions and register utility models and industrial designs;

2. Examine applications for the registration of marks, geographic indication and integrated circuits;

3. Register technology transfer arrangements and settle disputes involving technology transfer payments covered by the provisions of Part II, Chapter IX on Voluntary Licensing and develop and implement strategies to promote and facilitate technology transfer;

4. Promote the use of patent information as a tool for technology development;

5. Publish regularly in its own publication the patents, marks, utility models and industrial designs, issued and approved, and the technology transfer arrangements registered;

6. Administratively adjudicate contested proceedings affecting intellectual property rights; and

7. Coordinate with other government agencies and the private sector efforts to formulate and implement plans and policies to strengthen




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the protection of intellectual property rights in the country.

Disqualifications of IPO Officers and EmployeesAll IPO officers and employees are disqualified from:

submitting any application with IPO;

acting as attorney or patent agent of an application with IPO; and

acquiring, except by hereditary succession, any intellectual property, or any right, title or interest therein during their employment and for one (1) year thereafter.

Technology Transfer Arrangements contracts or agreements involving the

transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market

Jurisdiction over disputes under the IPC:A. Original Jurisdiction

1. Director General Has original jurisdiction to

resolve disputes relating to the terms of a license involving the author’s right to public performance or other communication of his work. (Sec. 7.1[c])

2. Bureau of Legal Affairs Has jurisdiction over the

following: a. Opposition to applications

for registration of marks;b. Cancellation of trademarks;c. Cancellation of patents,

utility models, and industrial designs;

d. Petitions for compulsory licensing;

e. Administrative complaints for violation of laws involving intellectual property rights where the total damages claimed are not less than P200,000. The Director of Legal Affairs has the power to punish contempt. (Sec. 10)

3. Documentation, Information and Technology Transfer Bureau Has jurisdiction to settle

disputes involving technology transfer payments. (Sec. 11.8)

B. Appellate Jurisdiction1. Director

General Over all decision rendered by

the (1) Director of Legal Affairs, (2) Director of Patents, (3) Director of Trademarks, and (4) Director of the

Documentation, Information and Technology Transfer. (Sec. 7.1[b])

2. Court of Appeals Over decisions of the Director

General in the exercise of his appellate jurisdiction over the decisions of the

(1) Director of Legal Affairs, (2) Director of Patents, (3) Director of Trademarks.

(Sec. 7.1[b])

3. Secretary of Trade and Industry Over decisions of the Director

General in the exercise of his appellate jurisdiction over the decisions of the Director of the Documentation, Information and Technology Transfer; (Sec. 7.1[b]) and

Over decisions of the Director General in the exercise of his original jurisdiction relating to terms of license involving the author’s right. (Sec. 7.1[c])




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Principle of Reverse Reciprocity (Sec. 231) It is the imposition upon nationals of a

foreign country within the Philippine jurisdiction, any condition, restriction, limitation, diminution, requirement, penalty or any similar burden imposed by the law of such foreign country on a Philippine national seeking intellectual property rights in that country.

National Treatment Principle Upon becoming a member of the

WTO, the Philippines, has adhered to the Trade-Related Aspects of Intellectual Property Rights (TRIPS), that provides that the protection afforded to the member-state (with respect to intellectual property) must be extended to the nationals of the other member-states.

Most-favored Nation Principle Any favor, allowance, consideration,

privilege or immunity a member-state grants the nationals of another country, it immediately and unconditionally accords the nationals of other member-states. (TRIPS)

I. LAW ON PATENTS

Patent The exclusive right acquired over an

invention, to sell, use and make the same whether for commerce or industry.Term: 20 years from the filing date of the application. (sec. 54)

PATENT COPYRIGHT When a person,

by independent research arrives at the same product or that already patented, he is restrained by the arm of the law from exploiting such an invention by reason of the patent granted

It may be vested in a work closely similar or even identical to an earlier, already patented work, provided that the former is truly original, i.e., it owes its existence to its creator.

the earlier discoverer.

Patentability A patentable invention is any

technical solution of a problem in any field of human activity which is: new, involves an inventive step and is industrially applicable.

It may be, or may relate to, a product, or process, or an improvement of any of the foregoing.

Requisites of Patentability:A. Novelty (Sec. 23)

that which does not form part of a prior art Prior art consist of:a. Those already available to the public anywhere in the world before the filing date or the priority date of the application.b. that which forms part of an application whether for patent, utility model or industrial design, effective in the Philippines, provided that:i. the inventors or applicants are

not the sameii. the contents of the application

are published in accordance with the requirements of patent application rules

iii. the filing date of the prior art is earlier

B. Inventiveness (Sec. 26) if, having regard to prior act, it is

not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention

C. Industrial applicability (Sec. 27) An invention that can be produced

and used in any industry

Non-Patentable Inventions (Sec. 22)a. Discoveries, scientific theories and

mathematical method b. Schemes, rules and methods of

performing mental acts, playing games or doing business, and programs for computers




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c. Methods for treatment of the human or animal body

d. Plant varieties or animal breeds of essentially biological process for the production of plants or animals

e. Aesthetic creationsf. Anything which is contrary to public

order or morality

Right to Patent: Belongs to the inventor, his heirs, or

assigns. Joint investors: the right to patent is

owned jointly (Sec. 28) The person who commissions the

work shall own the patent, unless otherwise provided in the contract. (sec. 30.1)

Invention made by an employee in the course of employment: the patent shall belong to:

a. The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer.

b. The employer, if it is the result of the performance of his regular assigned duties, EXCEPTION: if there is an agreement, express or implied, to the contrary. (sec. 30.2)

P atent Application First to File Rule (Sec. 29) If 2 or more persons have made the

invention, the right to the patent belongs to the person who filed an application for such invention or to the applicant who has the earliest filing/priority date.

Non-Prejudicial Disclosure Any disclosure of the invention does not prejudice the application if

the disclosure is made by:1. inventor himself (or by anyone who

has the right to patent (Sec. 23)) if made within 12 months

before the filing date For instance, an inventor gave

a lecture about his product; he has 12 months to file patent for it. If he doesn’t file and the 12

months had passed, the lecture will be part of prior art.

2. patent office through publication by means

of another application filed by the inventor and should not have been disclosed. This is publication by mistake.

Also, if a third party without the knowledge or consent of the inventor filed the application, it will not be prejudicial for the inventor to file the application.

Right of Priority (Sec. 31) An application for patent is entitled to

a right of priority if: it is filed by a person who has

previously applied for the same invention in another country, convention or law which affords a similar privilege to Filipino citizens, and

the following requirements are complied with:a. the local application expressly

claims priority;b. it is filed within 12 months from

the date the earliest foreign application was filed; and

c. a certified copy of the foreign application, together with an English translation thereof, is filed within 6 months from the date of filing in the Philippines.

An application for patent entitled to right of priority shall be considered filed as of the date of filing of the foreign application.

Contents of Application (Sec. 32)The patent application shall be in Filipino or English and shall contain the following:

a. a request for the grant of a patent;b. a description if the invention;c. drawings necessary for the

understanding of the invention;d. one or more claims – a claim is one

which defines the matter for which protection is sought.

e. an abstract a concise summary, preferably

in not more than 150 words, of




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the disclosure of the invention as contained in the description, claims and drawings,

drafted in a way as to allow a clear understanding of the technical problem, the gist of the solution of the problem through the invention, and the principal use or use of the invention.

Procedure for Grant of Patent (Sec. 41, et seq.)a. According a filing date to the

application (Sec. 41);b. Examination of compliance by ay

applicant with the formal requirements specified in Section 32, i.e., contents of application (Sec. 42);

c. Classification of application and search for prior art (Sec. 43);

d. Publication of patent application in the IPO Gazette (Sec. 44);

e. Inspection of the application documents by any interested party and written observations by any third party concerning the patentability of the invention (Secs. 44.2 and 47);

f. Written request by the applicant, within six (6) months form the date of publication pf his patent application, for substantive examination by the IPO of his application (Sec. 48);

g. Grant of the patent (Sec. 50), or refusal of the examiner to grant the patent (Sec. 51); in the latter case, the refusal may be appealed to the Director of the Bureau of Patents;

h. Publication of the grant of the patent in the IPO Gazette. (Sec. 52)

Unity of invention – an application for a patent shall relate to 1 invention only or to a group of inventions forming a single general inventive step. (sec. 38)

Cancellation of PatentsGrounds (Sec. 61) Any interested person may petition to

cancel on any of the following grounds:

a. that the invention is not new or patentable;

b. that the patent does not disclose the invention in a manner

sufficiently clear and complete for it to be carried out by any person skilled in the art; or

c. that the patent is contrary to public order or morality.

Effect of cancellation (Sec. 66) The rights shall be terminated, with notice of cancellation published

in IPO Gazette unless restraint by Director General

the decision or order to cancel by Director of Legal Affairs is immediately executory even pending appeal.

Remedies of Person with patentApplication by Persons Not Having Right to Patent (Sec. 67) If a person referred to in Sec. 29

(Relating to the First to File Rule) other than the applicant

is declared by final court order or decision as having the right to the patent,

such person may, within 3 months after the decision has become final:

a. Prosecute application as his own in place of applicant;

b. File new patent application in respect of the same invention;

c. Request that application in respect of the same invention;

d. Seek cancellation of patent, if already been issued.

Remedies of True and Actual Inventor (Sec. 68) When true and actual inventor is deprived of patent without his

consent or through fraud, and so declared by final court order,

court shall order for his substitution as patentee, or

at the option of true inventor, cancel the patent, and award actual and other damages in his favor as warranted.

Time to file: the actions indicated in Secs. 67 and 68 shall be filed within 1 year from date of publication.

RIGHTS OF PATENTEES AND INFRINGEMENT




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Rights Conferred by Patent (Sec. 71)a. where patent covers product

to restrain, prohibit and prevent any authorized person or entity from: making, using, offering for sale, selling or importing that product

b. where patent is process to restrain, prevent or prohibit any

authorized person or entity from: using process, and manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained

directly or indirectly form such process;

c. to assign, or transfer by succession the patent, and to conclude licensing contracts for the same.

Note: Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. ( Sec. 103.1)

Assignment: may be of entire patent and invention

covered thereby, or of an undivided share of entire patent

and invention, in which event parties become joint-owners.

may be limited to specified territory. (Sec. 104)

Form: in writing and notarized. (Sec. 105)

GEN. RULE: shall be void as against any subsequent purchaser or mortgagee without notice, EXCEPTION: unless recorded in IPO within three (3) months from date of said instrument, or prior to subsequent purchase or mortgage. (Sec. 106.2)

Rights of Joint Owners Each of them shall be entitled to

personally make, use, sell, or import for his own profit.

GEN. RULE neither of joint owners shall be entitled to grant licenses or to assign his right, title or interest or part thereof EXCEPTIONS: If made with the consent of other

owner or owners The proceeds are divided

proportionally between them (Sec. 107)

Limitations of Patents Rights (Sec. 72) Patent owner has no right to prevent

3rd parties from performing, in the following circumstances:a. using patent product which has

been put on Philippine market by owner of product, or with his express consent, insofar as such use is performed after that product has been so put on the said market;

b. where act is done privately and on a non-commercial scale for a non-commercial purpose provided that it does not significantly prejudice owner’s economic interests;

c. where act consists of making or using exclusively for purpose of experiments that relate to subject matter of patent invention;

d. where act consists of preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning medicine so prepared;

e. where invention is used in any ship, vessel, aircraft or land vehicle of any other country entering Philippine territory temporarily or accidentally.

Prior Use ( Sec. 72) Any prior user who, in good faith was:

using the invention or has undertaken serious

preparations to use the invention in his enterprise or businesses,




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before the filing date or priority date of the application on which a patent is granted,

shall have the right to continue use thereof as envisaged.

Note: the right of prior user may only be transferred or assigned together with enterprise or business, or with the part of his enterprise or business which use or preparations for use have been made.

Use of Invention by Government (Sec. 74) A government agency or third person

authorized by the Government may exploit the invention even without the agreement of the patent owner:

a. the public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the Government, so requires; or

b. a judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive.

Patent Infringement the making, using, offering for sale,

selling, or importing: apatented product or a product obtained directly or

indirectly from a patented process, OR

the use of a patented process without the authorization of the patentee.

Note: the IPC makes the contributory infringer jointly and severally liable with the infringer. A contributory infringer is one who induces the infringement of a patent or provides the infringer with a component of a patented product produced because of a patented invention and not suitable for substantial non-infringing use.

Doctrine of Patent Exhaustion the patentee, having in the act of sale

received all the royalty or consideration which he claims for the

use of his invention in that particular machine or instrument, it is open to the use of the purchaser without further restriction on account of the monopoly of the patentee.

Tests of Patent Infringementa. Literal infringement test - resort

must be had, in the first instance, to the ”words “ of the claim. If the accused matter clearly falls within the claim, infringement is made out.

b. Doctrine of equivalents test – a device appropriates a prior invention by incorporating its innovative concept and, although with some modification, performs substantially the same function in substantially the same way to achieve substantially the same result. - it requires the satisfaction of

the function-means-and-result test.

(Smith Kline Beckman Corp. v CA 409 SCRA 33)

c. Economic interest test– when the process-discoverer’s economic interests are compromised, i.e., when others can import the products that result from the process, an act is said to be prohibited.

Doctrine of File Wrapper Estoppel The patentee is precluded from

claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations.

it balances the doctrine of equivalents.

Remedies in case of Infringement 1. Action for damages (Sec. 79)

Prescription: must be filed within 4 years from the knowledge of the act of infringement

Requirement of notice:Damages cannot be recovered for acts of infringement committed before the infringer had known; or had




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reasonable grounds to know of the patent. It is presumed that the infringer had known of the patent if on the patented product, or on the container or package in which the article is supplied to the public, or on the advertising material relating to the patented product or process, are placed the words "Philippine Patent" with the number of the patent. (sec. 80)

2. Injunction (Sec. 76)3. Disposal or destruction by court’s

order of infringing goods, materials and implements without compensation. (Sec. 76)

4. Criminal action for repetition of infringement (Sec. 84)

If the subject matter of a patent is a process for obtaining a product, the burden of proof is on the defendant or alleged infringer. Any identical product shall be presumed to have been obtained though the use of the patented process if the product is new or there is substantial likelihood that the identical product was made by the process and the owner of the patent has been unable despite reasonable efforts to determine the process actually used. (sec. 78)

Defenses in Action for Infringement (Sec. 81)

The defendant may validly show:a. invalidity of the patent or any claim

thereof;b. on any grounds on which a petition

for cancellation can be brought.

LICENSING1. Compulsory licensing (Secs. 93-102)

The grant by the Director of Legal Affairs of a license to exploit a patented invention even without the agreement of the patent owner in favor of any person who has shown his capability to exploit the invention under certain circumstances.

2. Voluntary Licensing (Secs. 85-92) the grant by the patent owner to a

third person of the right to exploit a patented invention

UTILITY MODEL - An invention qualifies for registration as a utility model if it is new and industrially applicable.

-the provisions governing patents shall apply, mutatis mutandis, to the registration of utility models.( Sec 108)

Term - seven years after the date of the filing of the application, without any possibility of renewal

Patent Utility Model (sec. 108)

Industrial Design (sec. 112)

Refer to either the grant of rights, or the instrument (sometimes called letters of patent) containing the grant, giving an inventor monopoly on the inventor’s invention for a limited period.

Models of implement or tools of any industrial product even if not possessed of the quality of invention but which is of “practical utility.”

Any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft.

New Indust

rially applicable

Involv

New Indust

rially applicable

Does

New Not

industrially applicable




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es an inventive step

not involve an inventive step

Does not involve any inventive step

20 years from filing date of application; without renewal

7 years from filing date of application; without renewal

5 years from filing date of application; renewable twice (sec. 118)

Conversion of Patent Applications or Applications for Utility Model Registration

At any time before the grant or refusal of a patent, an applicant for a patent may convert his application into an application for registration of a utility model, which shall be accorded the filing date of the initial application. An application may be converted only once. (Sec 110)

Likewise, an applicant for a utility model registration may convert his application into a patent application

Prohibition against Filing of Parallel Applications.

- An applicant may not file two applications for the same subject, one for utility model registration and the other for the grant of a patent whether simultaneously or consecutively. (Sec 111)

Cancellation Grounds : 1. That the claimed invention does not qualify for registration as a utility model and does not meet the requirements of registrability

2. That the description and the claims do not comply with the prescribed requirements;

3. That any drawing which is necessary for the understanding of the invention has not been furnished;

4. That the owner of the utility model registration is not the inventor or his successor in title.

II. LAW ON TRADEMARKS

Mark (Sec. 121.1) Any visible sign capable of

distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container.

Collective Mark (Sec. 121.2) Any visible sign designated as such in

the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark.

Trade name (Sec. 121.3) The name or designation identifying

or distinguishing an enterprise.

Service Mark Any visible sign which distinguishes

the services of an enterprise from the service of other enterprises.

Trademark Anything which is adopted and used

to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor.

It includes individual names and surnames, firm names, devices or words used by manufacturers, industrials, merchants, agriculturists, and others to identify their business, vocations, or occupations; the names or titles lawfully adopted and used by natural or juridical persons, unions,




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and any manufacturing, industrial, commercial, agricultural or other organizations engaged in trade or commerce. (Canon Kabushiki Kaisha v. CA)

Term: The certificate of registration of a trademark shall be 10 years from the filing date of the application provided the registrant shall file a declaration of actual use within a year from the 5th

anniversary of registration date (Sec. 145). Renewable for another 10 years (Sec. 146).

TRADEMARKS TRADE NAMEThe goods or services offered by a proprietor or an enterprise are designated by trademarks or service marks.

The person (whether natural or juridical) who does the business and produces the goods or services is designated by a trade name.

Has an existence separate from the proprietor or the juridical person doing business and producing the goods or distinct from the existence of the services offered by such person or enterprise.

Attached to the natural or juridical person who does business and produces the goods or services.

There is a need to be registered to secure protection for them.

There is no need to register in order to secure protection for them.

Purpose of Trademarka. to indicate origin or ownership of

articles to which they are attached;b. to guarantee that those articles come

up to certain standard of quality; andc. to advertise articles they symbolize.

Acquisition of Ownership of Mark (Sec. 122) and Trade name (Sec. 165)

a. the ownership of a mark is acquired solely through registration.

b. the ownership of trade name is acquired through adoption and use. Registration is not required.

Element of Prior Use no longer enumeratedThe Code no longer provides for the doctrine of prior use as the basis for priority right or registration right of a trademark or service mark. It is the registration of the mark that seems to be the operative act.

Registrability (Sec. 123) The mark must not be one of those

that are considered as non-registrable such as the following:a. immoral, deceptive or scandalous

marks;b. flags, coat of arms of other insignia

of the Philippines or any foreign country;

c. name, portrait or signature of any living individual without his consent or, in the case of that of a deceased Philippine President, without the consent of the widow during her life;

d. identical with the registered mark of another or a mark with an earlier filing or priority date in respect of:

i. the same goods or services, or

ii. closely related goods or services, or

iii. if it nearly resembles such a mark, it is likely to deceive or cause confusion.

e. identical with, or confusingly similar to , or constituting a translation of a well-known mark, whether or not registered in the Philippines, and used for identical or similar goods or services;

f. identical with, or confusingly similar to, or constituting a translation of a well-known mark which is registered in the Philippines, and used for goods or services which are not similar;

g. likely to mislead the public, particularly as to the nature,




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quality, characteristics or geographical origin of the goods or services;

h. consists exclusively of signs that are generic for the goods or services that they seek to identify.

i. consists exclusively of signs or of indications that have customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice;

j. consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, other characteristics of the goods or services;

k. consists of shapes that may be necessitated by the technical factors or by the nature of the goods themselves or factors that affect their intrinsic value;

l. consists of colors alone, unless defined by a given form;

m. contrary to public order or morality

Generic term – constitutes the common descriptive name of an article or substance- refers to the basic nature of the wares or services provided

Descriptive term – conveys the characteristics, functions, qualities or ingredients of a product to one who has never seen it and does not know what it is(Societe Des Produits Nestle, S.A. v. CA, 256 SCRA 207)

Doctrine of Secondary Use The registration of a common name or

geographical location may be permitted under the doctrine of “secondary meaning’ which is applied where it is proven that:

a. this common term has been in use for many years; and

b. the public has associated the products of applicant with this common term.

Suggestive terms - those which require imagination, thought and perception to reach a conclusion as to the nature of the goods; - they involve an element of incongruity, figurativeness or imaginative effort on the part of the observer- such terms which subtly connote something about the product are eligible for protection in the absence of secondary meaning (Societe Des Produits Nestle, S.A. v. CA, 256 SCRA 207)

Filing Date ( Sec. 127) the date on which IPO received the

following indications and elements: a. an express or implicit indication

that the registration of a mark is sought;

b. identity of the applicant;c. indications sufficient to contract

the applicant or his representative, if any;

d. reproduction of the mark whose registration is sought; and

e. list of the goods or services for which the registration is sought.

Priority Right of Foreign Applicant (Sec. 131) An application for registration of mark

filed by a foreign person, and who previously duly filed an

application for registration of the same mark in one of those countries,

shall be considered as filed as of the day the application was first filed in the foreign country.

No registration of mark in the Philippines by a person described in this section shall be granted until such mark has been registered in the country of origin of the applicant.

Certificates of Registration (Sec. 138) prima facie evidence of:

the validity of the registration,




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the registrant’s ownership of the mark, and

of the registrant’s exclusive right to use the same in connection with the goods or services and those that are related thereto specified in the certificate.

Duration: shall remain in force for ten (10)

years. PROVIDED that the registrant

SHALL, WITHIN ONE (1) year from the 5th anniversary of date of registration of the mark,

file a declaration of actual use and evidence to that effect, or

shall show valid reasons based on the existence of obstacles to such use.

Otherwise, the mark shall be removed from the register by IPO. (Sec. 145)

Rights Conferred: 1. Exclusive right to prevent all third

parties not having the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in likelihood of confusion shall be presumed.

2. Exclusive right of owner of a well-known mark which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of which the mark is registered. (Sec. 147)

Registration of a MarkA. Formal requirements (Sec. 124)

a. the application must be in Filipino or English;

b. the appointment of the agent or the representative of the applicant if it is not domiciled in the Philippines;

c. the additional requirements to be satisfied if the applicant claims the priority of an earlier application;

d. the classification of the goods or services;

e. the signature of the applicant ( which is not required to be under oath).

B. Procedure for Registration a. Examination to determine

whether the application satisfies the requirements for the grant of a filing date under Section 127;

b. Examination to determine whether the application meets the requirements of Section 124 and the mark is registrable under Sec. 123;

c. Denial of the application or amendment thereof or publication of the application;

d. Opposition to the application; notice; hearing; decision by examiner; appeal to the Director of the Bureau of Trademarks; appeal to the IPO Director General; appeal to the Court of Appeals;

e. Issuance of certificate of registration

f. Publication in the IPO Gazette of the fact of registration.

Use of Indications by Third Parties for Purposes other than those for which Mark Used (Sec. 148) Registration of the mark shall not

confer on the registered owner the right to preclude 3rd parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the

kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services,

provided: that such use is confined to the

purposes of mere identification or information and

cannot mislead the public as to the source of the goods or services.




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Assignment and Transfer of Application and Registration (Sec. 149) An application for registration of a

mark, or its registration, may be assigned or transferred with or without the transfer or the business using the mark.

HOWEVER, such assignment or transfer shall be null and void if it is liable to mislead the public, particularly as regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or services to which the mark is applied.

Form: in writing and requires the signatures of the

contracting parties. Transfers by mergers or other

forms of successions may be made by any document supporting such transfer. (Sec. 149.3)

License Contracts (Sec. 150)Any license contract concerning the registration of a mark, or an application therefore, shall provide for effective control by the licensor of the quality of the goods or services of the licensee in connection with which the mark is used. OTHERWISE the license contract shall not be valid.

Well-known Mark (Sec. 123.1 [e] and [f]) One which a competent authority of

the Philippines has designated to be well-known internationally and in the Philippines.

In determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark.

Cancellation (Sec. 151) A petition to cancel a registration of a

mark may be filed with the Bureau of Legal Affairs

by any person who believed that he is or will be damaged by the registration of a mark as follows:a. within 5 years from the date of the

registration of the mark;b. at any time, if the registered mark;

i. becomes generic name for the goods or services, or a portion thereof, fro which it is registered;

ii. has been abandoned;iii. its registration was obtained

fraudulently or contrary to the provisions of the Code;

iv. if the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the goods or service on or in connection with which the mark is used.

c. at any time if the registered owner of the

mark without legitimate reason fails

to use the mark within the Philippines,

or to cause it to be used in the Philippines by virtue of a license during an uninterrupted period of 3 years or longer.

Non-Use of Mark When Excused (Sec. 152) if caused by circumstances arising

independently of the will of the trademark owner.

Lack of funds shall not excuse non-use of a mark.

Goodwill through Use When a person has identified in the

mind of the public the goods he manufactures or deals in his business or services from those of others, such a person has a property right in the goodwill of the said goods or services which will be protected in the same manner as other property rights.

Infringement (Sec. 155) if a registered mark is used in

commerce by a person




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without the consent of the registered owner thereof. Such infringement may involve:

a. use in commerce of any reproduction, counterfeit, copy or colorable imitation of the mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution or advertising of any goods or services, including other preparatory steps necessary to carry out the sale of the said goods or services.

b. the reproduction, counterfeit, copying or colorable imitation of the mark or a dominant feature thereof and the application of such reproduction, etc., to labels, signs, prints packages, wrappers, receptacles or advertisements intended to be used in commerce in connection with the sale, etc. of goods, in connection with which such use is likely to cause confusion, mistake or deception.

There is infringement of trademark when the use of the mark involved would be likely to cause confusion or mistake in the mind of the public or to deceive purchasers as to the origin or source of commodity. (Philippine Nut Industry, Inc. v. Standard Brands, Inc. 65 SCRA 575)

Colorable imitation – denotes such a close or ingenious imitation as to be calculated to deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, as to cause him to purchase the one supposing it to be the other.

In determining if colorable imitation exists, the dominancy test or the holistic test may be used. (Societe Des Produits Nestle, S.A. v. CA, 256 SCRA 207)

Tests of Trademark InfringementDominancy Test

Holistic Test

focuses not simply on

considers the mark as a whole

similarities in size, form or color BUT on the main or essential features of each mark taken together.

and not as dissected; focuses on the mark as a totality not usually to any part of it.

The test of dominancy requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result infringement takes place. (Asia Brewery, Inc. v. CA, 224 SCRA 437)

Principle of Related Goods or Services- There is infringement when there is use of similar marks on goods that are so related that the public may be, or is actually deceived, and misled that they come from the same maker or manufacturer. (Esso Standard Eastern, Inc. v CA 116 SCRA 336)

Goods are related when they belong to the same class or have the same descriptive properties, when they possess the same physical attributes or essential characteristics with reference to their form, composition, texture or quality- they may also be related because they serve the same purpose or are sold in grocery store or they flow through the same channels of trade. (Esso Standard Eastern, Inc. v CA 116 SCRA 336)

Exception - well- known mark- a junior user of a well-known markis precluded from using the same on goods or services entirely unrelated to those specified in the certificate of registration of the well-known mark ( 246 Corp. v. Daway 416 SCRA 315)

Idem Sonans Test (similarity of sounds or pronunciations) alone cannot be applied (Amigo Mfg. vs. Cluett Peabody)




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Remedies (Secs 156, 157 & 170)a. Sue for damages;b. Have the infringement goods

impounded;c. ask for double damages;d. ask for injunction;e. Have the infringing goods disposed

of outside the channels of commerce;

f. Have the infringing goods destroyed;

g. File criminal action;h. Administrative sanctions.

Limitations to Actions for Infringement (Sec. 159)a. No action for infringement could be

taken against a person who, in good faith and before the filing date or priority date, was using the mark for the purposes of his business or enterprise.

b. Only an injunction against future printing may be imposed upon an innocent infringing printer.

c. Similarly, only an injunction against the presentation of infringing advertising matter in future issues may be imposed on innocent infringing newspapers and magazines.

Unfair Competition (Sec. 168) the use by a person of deception or any other means contrary to good

faith by which he passes off the goods manufactured by him or in which he deals, or his business or services, for those of another person who has established goodwill in the goods of such person manufactures or deals in, or his business or services,

or who shall commit any acts calculated to produce said result.

Some acts of unfair competition are as follows:

a. giving one’s goods the general appearance of goods of another manufacturer;

b. inducing the false belief that one is offering the services of another who has identified such services in the minds of the public;

c. making any false statement calculated to discredit the goods, business or services of another.

Note: Registration of a mark is not necessary for purposes of filing a case of unfair competition or false designation of origin (secs. 168.2 and 169 IPC)

Infringement of Trademark

Unfair Competition

1. As to nature of offense

it is the unauthorized use of a trademark

it is the passing off of one’s goods as those of another

2. As to existence of fraudulent intent

fraudulent intent is unnecessary

fraudulent intent is essential

3. As to need for registration on mark

prior registration of the trademark is a prerequisite to the action

registration is not necessary.

III. LAW ON COPYRIGHT

Copyright The system of legal protection an

author enjoys in the form of expression of ideas. (World Intellectual Property Organization - WIPO)

Basic principles (Secs 172.2 & 175) works are protected by the sole fact of

their creation, irrespective of their mode or form of expression, as well as their content, quality or purpose.

protection extends only to the expression of the idea, not to the idea itself or to any procedure, system, method or operation, concept or principle, discovery, or mere data.

Principle of Automatic Protection




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the enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality. (Berne Convention)

Works Protected by Copyright1. Original works (Sec. 172)

a. Books, pamphlets, articles and other writings;

b. Periodicals and newspapers;c. Lectures, sermons, addresses,

dissertations prepared for oral delivery, whether or not reduced in writing or other material form;

d. Letters;e. Dramatic or dramatico-musical

compositions; choreographic works or entertainment in dumb shows;

f. Musical compositions, with or without words;

g. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art;

h. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art;

i. Illustrations, maps, plans, sketches, charts and three dimensional works relative to geography, topography, architecture or science;

j. Drawings or plastic works of a scientific or technical character;

k. Photographic works including works produced by a process analogous to photography; lantern slides;

l. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audiovisual recordings;

m. Pictorial illustrations and advertisements;

n. Computer programs; ando. Other literary, scholarly, scientific

and artistic works.

2. Derivative works ( Sec. 173)a. Dramatizations, translations,

adaptations, abridgments,

arrangements, and other alterations of literary or artistic works; and

b. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents

Works not protected by copyright1. Unprotected subject matter (Sec.

175)a. Idea, procedure, system, method

or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work;

b. News of the day and other miscellaneous facts having the character of mere items of press information;

c. Any official text of a legislative, administrative or legal nature, as well as any official translation thereof.

2. Works of Government(Sec. 176)a. work of the Government of the

Philippines; However, prior approval of the

government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties.

No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character.

b. Pleadings;c. Decisions of courts and tribunals.

They may therefore be freely used or quoted.




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Rights of an Author 1. Economic rights (Sec. 177)

a. right to reproduce;b. right to create derivative works; c. right to first public distribution or

first sale;d. right to rent out;e. right to public display;f. right to public performance;g. right to other communication of

the work to the public.

2. Moral Rights (Sec. 193)a. right to attribution or paternity

right;b. right to alteration or non-

publication;c. right to preservation of integrity;d. right not to be identified with work

of others or with distorted work. These rights are distinct from

economic rights and remain with the author even after he has transferred or assigned to others “other rights of copyright. (WIPO, 215)

Term of moral right: lifetime of the author and 50 years after his death. Moral right not assignable or subject to license. (Sec. 198)

Waiver of moral right:a. by a written instrument (Sec.

195)b. by contribution to a collective

work unless expressly reserved. (Sec. 196)

3. Droit de suite (Sec. 200) The right to participate in the

gross proceeds of the sale or lease of the original work.

Publisher’s Rights The right to publish granted by the

author, his heirs, or assigns The publisher shall have a copyright

consisting merely of the right of reproduction of the typographical arrangement of the published edition of the work. (Sec. 174)

The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for

publication shall constitute only a license to make a single publication unless a greater right is expressly granted. (Sec. 180.3)

Who owns the copyright in a piece of work?1. Single creator – copyright belongs to

the author of the work, his heirs or assigns.

2. Joint creation – copyright belongs to the co-authors jointly as co-owners. But if the work consists of identifiable parts, the author of each part owns the part that he has created.

3. Employee’s creation – copyright belongs to the employee if the creation is not part of his regular duties even if he uses the time, facilities and materials of the employer; otherwise it belongs to the employer

4. Commissioned work – the work belongs to the person commissioning but the copyright remains with the creator unless there is a written stipulation to the contrary.

5. Cinematographic works – the producer has copyright for purposes of exhibition; for all other purposes, the producer, the author of the scenario, the composer, the film director, the author of the work are the creators.

6. Anonymous and pseudonymous works – the publishers shall be deemed the representative of the author unless:

a. the contrary appearsb. the pseudonyms or adopted

name leaves no doubt as to the author’s identity, or

c. if the author discloses his identity. (Sec. 179)

7. Collective works – the contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 196) Collective work – a work created

by two or more persons at the initiative and under the

direction of another with the understanding that it

will be disclosed by the latter under his own name and that the contributions of natural




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persons will not be identified. (Sec. 171.2)

8. In case of transfers, the transferee shall own one or more or all of the economic rights transferred provided:

a. the assignment, if inter vivos, be in writing (Sec. 180.2)

b. the assignment be files with the National Library upon payment of the prescribed fee. (Sec. 182)

Transfer or Assignment of Copyright (Sec. 180)

a. Copyright may be assigned in whole or in part, which would entitle assignee to all rights and remedies which assignor had with respect to the copyright.

b. Copyright is not deemed assigned inter vivos in whole or in part unless there is a written indication of such intention.

c. Unless greater right is expressly granted, submission of a literary, photographic, or artistic work to a newspaper, magazine or periodical for publication shall constitute only a license to make a single publication.

d. Since copyright is distinct from the property in the material object subject to it: the transfer or assignment of

the copyright shall not itself constitute a transfer of the material object;

nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright.

e. Copyright owners or their heirs may designate a society of artists, writers or composers to enforce their economic rights and moral rights on their behalf.

In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the

gross proceeds of the sale or lease to the extent of 5%. (Droit de suite)

Term: This right shall exist during the lifetime of the author and for 50 years after his death. (sec. 200)Exception: shall not apply to prints, etchings, engravings, works of applied art, or works of similar kind wherein the author primarily derives gain from the proceeds of reproductions. (sec. 201)

Limitations of Copyright (Sec. 184)The following shall not constitute infringement of copyright:

a. recitation or performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or if made strictly;

b. making of quotations from a published work if they are compatible with fair use, provided that the source and the name of the author, if appearing on the work, are mentioned.

c. reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature, which are delivered in public if such use is for information purposes and has not been expressly reserved, provided that the source is given;

d. reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose;

e. inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use, provided that the source and the name of the author are mentioned.




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f. recording made in schools, universities, or educational institutions, provided that such recording must be deleted within a reasonable period after they were first broadcast;

g. making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast;

h. use made by or under the direction or control of the Government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use;

i. public performance or communication to the public of a work, in a place where no admission fee is charged in respect of such public performance or communication, by a club or institution for charitable or educational purpose only, whose aim is not profit-making;

j. public display of the original or a copy of the work not made by means of film, slide, television image or otherwise on screen or by means of any other device or process, provided that either the work has been published, or, that the original or the copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor in title;

k. use made for the purpose of any judicial proceedings or for giving or professional advice be legal practitioner.

Fair Use of Copyright Work (Sec. 185) The fair use of a copyrighted work for

criticism, comment, news reporting, teaching, including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright.

Factors determining Fair Usea. purpose and character of use;

including whether such use is of a

commercial nature or is for non-profit educational purposes;

b. nature of copyrighted work;c. amount and substantiality of the

portion used in relation toot the copyrighted work as a whole; and

d. effect of use upon the potential market for or value of the copyrighted work.

Note: the fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

Decompilation the reproduction of the code of

translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs may also constitute fair use.

Work of Architecture (Sec. 186) Copyright in a work of architecture

shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived form the original.

Provided that the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates.

Reproduction of Published Work (Sec. 187) Private reproduction of a published

work in a single copy, made by a natural person exclusively for research and private

study, shall be permitted without the

authorization of owner of copyright.

Such permission granted shall not extend to the reproduction of:

a. work of architecture in the form of building or other construction;




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b. an entire book, or a substantial part thereof, or of a musical work in graphic form by reprographic means;

c. compilation of data and other materials;

d. computer program except as provided in Section 189; and

e. any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the author.

Reprographic Reproduction by Libraries (Sec. 188) Any library or archive whose activities are not for profit

may, without the authorization of the

author or copyright owner, make a single copy of the work by

reprographic reproduction:a. where the work by reason of its

fragile character or rarity cannot be lent to user in its or rendered unusable, replace a copy, or to replace, in the permanent collection of original form;

b. where the works are isolated articles contained in composite works or brief portions or other published works and the reproduction necessary to supply them, when this is considered expedient, to persons requesting their loan for purposes of research or study instead of lending the volume or booklets which contain them; and

c. where the making of such copy is in order to preserve and, if necessary in the event that it is lost, destroyed another similar library or archive, a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher.

Term of copyright (Sec. 213):a. In general - lifetime of the creator and

for 50 years after his death

b. In case of joint ownership - lifetime of last surviving co-creator and for 50 years after his death

c. In case of anonymous or pseudonymous works - 50 years after the date of their first publication

Except where, before the expiration of said period, the author’s identity is revealed or is no longer in doubt, (a) and (b) shall apply

d. In case of works of applied art - 25 years from the date of making.

e. In case of photographic works - 50 years from the publication of the work, or from making the same term is given to audiovisual works produced by photography or analogous processes.

f. In case of newspaper article - lifetime of the author and fifty years thereafter. However, relative to newspapers and periodicals, Sec. 175 denies copyright protection to "news of the day and other miscellaneous facts having the character of mere items of press information." A pure news report will no longer find protection under the new law, BUT a column or published comment will. When newspapers and periodicals include works enjoying independent copyrights, the works so included continue enjoying the rights for a duration proper to them.

Calculation: The term of protection shall be counted from the first day of January of the year following the death or of last publication. (Sec. 214)

Personal Use Making a single reproduction,

adaptation, arrangement or other transformation of another's work exclusively for one's own individual use in such cases as personal research, learning or amusement.

Private Use Making a reproduction, adaptation or

other transformation of it, in a single person, as in the case of "personal use" but also for a common purpose by a specific circle of persons only.




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Reproduction of Computer Programs (Sec. 189.1) The reproduction of a computer

program is allowed on the following conditions:1. Only one copy is made;2. Lawful owner made the copy;3. Purpose for which the

reproduction is made is legal, like:a. use to which the program is

made and for which it was purchased demand the reproduction of a copy; or

b. the reproduction of a copy is necessary to guarantee against loss or destruction.

Importation for Personal Purposes (Sec. 190) The importation of a copy of a work by

an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: a. Copies of the work are not

available in the Philippines and:i. One copy at one time is

imported, for strict individual use; or

ii. By Authority of and for the use of the Philippine Government; or

iii. Religious, Charitable or Educational Society or institution imported not more than 3 copies per title (or kind) provided they are not for sale. (it is enough if the importation be for the sake of such society or institution)

b. Copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, That such copies do not exceed 3.

Related rights or neighboring rights these are those rights, akin to but

different from copyright, granted by law to

(a) performers,

(b) producers of sound recordings and (c) broadcasting organizations

Limitations:1. The use by a natural person

exclusively for his own personal purposes;

2. Using short excerpts for reporting current events;

3. Use solely for the purpose of teaching or for scientific research; and

4. Fair use. (Sec, 212)

Term of rights: For performances not incorporated

in recordings, 50 years from the end of the year in which the performance took place;

For sound or image and sound recordings and for performances incorporated therein, 50 years from the end of the year in which the recording took place.

In case of broadcasts, the term shall be 20 years from the date the broadcast took place. (Sec. 215) The extended term shall be

applied only to old works with subsisting protection under the prior law. (Sec. 55, P. D. No. 49a)

Performers have the right to authorize: a. The broadcasting and other

communication to the public of their performance; and

b. The fixation of their unfixed performance.

c. the direct or indirect reproduction of their performances fixed in sound recordings, in any manner or form;

d. first public distribution of the original and copies of their performance fixed in the sound recording through sale or rental or other forms of transfer of ownership;

e. the commercial rental to the public of the original and copies of their performances fixed in sound recordings, even after distribution of them by, or pursuant to the




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authorization by the performer; and

f. the making available to the public of their performances fixed in sound recordings, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them. (Sec. 203)

Producers of sound recordings have the right to authorize:

a. the direct or indirect reproduction of their sound recordings, in any manner or form;

b. the placing of these reproductions in the market and the right of rental or lending;

c. the first public distribution of the original and copies of their sound recordings through sale or rental or other forms of transferring ownership; and

d. the commercial rental to the public of the original and copies of their sound recordings, even after distribution by them by or pursuant to authorization by the producer. (Sec. 208)

Broadcasting organizations shall enjoy the exclusive right to carry out, authorize or prevent any of the following acts:

a. The rebroadcasting of their broadcasts;

b. The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same; and

c. The use of such records for fresh transmissions or for fresh recording.

Notes: "Performers" are actors, singers,

musicians, dancers, and other persons who act, sing, declaim, play in, interpret, or otherwise perform literary and artistic work;

"Sound recording" means the fixation of the sounds of a performance or of other sounds, or

representation of sound, other than in the form of a fixation incorporated in a cinematographic or other audiovisual work;

"audiovisual work or fixation" is a work that consists of a series of related images which impart the impression of motion, with or without accompanying sounds, susceptible of being made visible and, where accompanied by sounds, susceptible of being made audible;

"Fixation" means the embodiment of sounds, or of the representations thereof, from which they can be perceived, reproduced or communicated through a device;

"Producer of a sound recording" means the person, or the legal entity, who or which takes the initiative and has the responsibility for the first fixation of the sounds of a performance or other sounds, or the representation of sounds;

"Publication of a fixed performance or a sound recording" means the offering of copies of the fixed performance or the sound recording to the public, with the consent of the right holder: Provided, That copies are offered to the public in reasonable quality;

"Broadcasting" means the transmission by wireless means for the public reception of sounds or of images or of representations thereof; such transmission by satellite is also "broadcasting" where the means for decrypting are provided to the public by the broadcasting organization or with its consent;

"Broadcasting organization" shall include a natural person or a juridical entity duly authorized to engage in broadcasting; and

"Communication to the public of a performance or a sound recording" means the transmission to the public, by any medium, otherwise than by broadcasting, of sounds of a performance or the representations of sounds fixed in




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a sound recording. For purposes of Section 209, "communication to the public" includes making the sounds or representations of sounds fixed in a sound recording audible to the public.

Infringement when there is piracy or substantial

reproduction. If so much is taken that the value of

the original work is substantially diminished or the labors of the original author are substantially and to an injurious effect extent appropriated by another. (Habana vs Robles, GR # 131522 1999)

Remedies for infringement: 1. Injunction to prevent infringement2. Damages assessed on the basis of

the proof alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court.

3. Delivery under oath of all implements employed in the production of the infringing items, as well as the infringing products themselves, for impounding or destruction as the court may order.

4. Payment of moral and exemplary damages in the discretion of the court. (Sec. 126)

The infringer also exposes himself to criminal liability wherein the law prescribes penalties of imprisonment and fines, including subsidiary imprisonment in case of insolvency. (Sec. 218)

Persons who may sue:a. Legal owner; orb. Beneficial owner; since they are

"parties in interest."

Who may be liable for infringement:a. infringerb. those who aid, abet, participate,

contribute, authorize or benefit from the infringing acts. (Sec. 217)

Prescriptive Period: No damages may be recovered

after 4 years from the time the cause of action arose. (Sec. 226)

There is no such prescriptive period in petitions for injunctive relief as well as for the impounding and destruction of infringing material. The crime of infringement is subject to the general rules of prescription of crimes.

BANKING LAWS

A. GENERAL BANKING LAW (RA No. 8791), Laws on Secrecy of Deposits and Related Laws

Declaration of Policy: to promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. Scope of Application: The GBL primarily governs universal banks and commercial banks. It suppletorily governs thrift banks, rural banks and other banking institutions.

Banks - entities engaged in the lending of funds obtained in the form of deposits. (Sec.3)

Classification:1. Universal banks 2. Commercial banks;3. Thrift banks, composed of:

i. Savings and mortgage banks;ii. Stock savings and loan

associations;iii. Private development banks,

4. Rural banks5. Cooperative banks6. Islamic banks 7. Other classifications of banks as

determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (Sec. 3)

Distinctions:a. capitalization




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b. purposec. powers and functionsd. directorse. incorporatorsf. foreign equityg. necessity of public offering

Quasi-banks – 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. (Sec. 4)

Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions. (Sec. 6)

Deposit substitutes – an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations. (Sec. 95, RA 7653)

Distinctions:

ORDINARY CORPORATION

BANKING CORPORATION

1. May be a stock or non-stock corporation

1. Must generally be a stock corporation

2. May issue par value or no par value stocks.

2. May issue par value stocks only. (Sec. 9)

3. May be registered with the SEC without any certificate of authority issued by a government agency.

3. Must secure a certificate of authority from the Monetary Board before it can register with SEC.

4. May purchase/acquire its own shares for a legitimate corporate purpose; provided that, it has unrestricted

4. May not purchase/acquire its shares or accept them as security for a loan. Except: when authorized by the Monetary

retained earnings in its books to cover the shares to be purchased/acquired.

Board. In such case, the bank must sell or dispose of said shares within 6 months from the time of their acquisition. (Sec. 10)

5. Must be composed of 5 to 15 directors, each of whom shall own at least one (1) share of the capital stock of the corporation.

5. Also composed of 5 to 15 directors w/ 2 independent directors (Sec. 15). In case of merger or consolidation, the number of directors shall not exceed 21. (Sec. 17)

Independent Director – a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.

6. May declare dividends out of its unrestricted retained earnings.

6. May not declare dividends, if any of the conditions set forth under Sec. 57 are present.

Foreign Stockholdings. Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (Sec. 11)

Grandfather Rule:The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the




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corporation, irrespective of the place of incorporation.

Note: Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 15)

Fit and Proper Rule. To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his:

a. integrity, b. experience, c. education, d. training, and e. competence. (Sec. 16)

Compensation and Other Benefits of Directors and Officers. To protect the fiunds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

a. When a bank is under comptrollership or conservatorship; or

b. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

c. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition. (Sec. 18)

Prohibition on Public Officials. - No appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws. (Sec. 19)

Exceptions: 1. as otherwise provided under Sec. 5

of the Rural Bank Act - Nothing in the Act shall be construed as prohibiting any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank.

2. where such service is incident to financial assistance provided by the government-owned or -controlled corporation to the bank

3. as otherwise provided under existing laws.

Powers of a Commercial Bank:1. the general powers incident to

corporations2. all such powers as may be necessary

to carry on the business of commercial bankinga. accepting drafts and issuing letter

of credits; b. discounting and negotiating

promissory notes, drafts, bills of exchange and other evidence of debt;

c. accepting or creating demand deposits; receiving other types of deposits and deposit substitutes;

d. buying and selling foreign exchange and other debt securities;

e. and extending credit. (Sec. 29)

Powers of a Universal Bank:1. the powers authorized for a

commercial bank;




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2. the powers of an investment house; and

3. the power to invest in non-allied enterprises. (Sec. 23)

Equity Investments:Universal Bank(Sec. 24-28)

Comm’l Bank(Sec. 30-32)

Power to invest May invest in allied and non-allied enterprises (Sec. 24)

May invest only in the equities of allied enterprises (Sec. 30)

Total investment in allied enterprises

50%of net worth

35%of net worth

Total investment in non-allied enterprises

50%of net worth

N/A

Equity investment in any one enterprise

25%of net worth

25%of net worth

Equity investment in financial allied enterprise - thrift bank, rural bank or any financial allied enterprise (Sec. 25) A publicly-listed bank may own up to 100% of the voting stock of only one other UB / CB. (Sec. 25)

100%of equity

100%of equityIn other financial allied enterprises,investment shall remain a minority holding. (Sec. 31)

Equity investment in non-financial allied enterprises

100%of equity

100%of equity

Equity investment in non-allied enterpriseEquity investment in Quasi-Banks

40%of equity

40%of equity

Net Worth -- the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net valuation reserves and other adjustments as may be required by the Bangko Sentral. (Sec. 24)

Risk-Based Capital – The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. Provided: the Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year; that such ratio shall be applied uniformly to banks of the same category (Sec. 34).

Effects of Non-compliance:1. Distribution of net profits may be

limited or prohibited and MB may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met; or

2. Acquisition of major assets and making of new investments may be restricted. EXCEPT: purchases of evidence of indebtedness guaranteed by the Government (Sec. 34).

3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio.

Bank Branches. - Universal or commercial banks may open branches or other offices within or outside the




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Philippines upon prior approval of the Bangko Sentral.

A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the financial products of its allied undertaking or of its investment house units.

A bank and its branches and offices shall be treated as one unit. (Sec. 20)

Banking Days and Hours. – all banks including their branches and offices shall transact business on all working days for at least 6 hours a day.

Exception: Unless otherwise authorized by the Bangko Sentral in the interest of the banking public.

In addition, banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least 3 hours a day:

Provided, That banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or offices shall transact business. (Sec. 21)

Strikes and Lockouts. - The banking industry is declared as indispensable to the national interest- any strike or lockout involving banks, if unsettled after 7 calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration.-The President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. (Sec. 22)

FUNCTIONS OF BANKS

A. DEPOSIT FUNCTION

Simple Loan - fixed, savings and current deposits of money in banks an similar institutions shall be governed by the provisions concerning simple loan (Art.1980, Civil Code)

1. The bank can use as its own the money deposited. (Tang Tiong Tick vs. American Aphothecaries , 65 Phil. 414)

2. The duty of a bank is to its creditor-depositor and not to third persons. If a third person has a valid right over the money deposited, he must prove the same before a competent jurisdiction. (Fulton Ironworks v. Chinabank, November 6, 1930)

3. The bank has the right to compensation. It can set off the deposits with the indebtedness of the depositor that are due and demandable. (Gullas v. PNB, 62 Phil. 519)

Depositors:

a. Minors : a. at least seven years of age ;b. able to read and write ; c. not disqualified by any

incapacityd. it should only be savings or

time deposits

Parents may deposit for their minor children or wards (Sec.1 PD No.734)

If the guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made to the guardian. (Sec. 22, Thrift Banks Act of 1995)

b. Married Women ; are allowed to open bank accounts without assistance of their husbands (RA No. 7192)

Kinds of Deposits:




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DEMAND DEPOSITS

SAVINGS ACCOUNT

1. Only a universal or commercial bank can accept or create demand deposits.2. Other banks can only accept demand deposits except upon prior approval of the Monetary Board.3. Temporary overdrawing against current accounts shall not be allowed unless caused by normal bank charges and other fees incidental to handling such accounts.4. Drawings against uncollected deposits (uncleared checks) are generally prohibited.

1. Evidenced by a passbook .2. Banks are prohibited from issuing / accepting withdrawal slips or other similar instruments to effect withdrawals without the passbooks except for bank authorized by the BSP to adopt the no passbook withdrawal system.3. A bank is negligent if it allows the withdrawal without requiring the presentation of a passbook. (BPI v. CA)

NOW ACCOUNTS(Negotiable

Order of Withdrawal)

TIME DEPOSITS

Interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings account.

An account with fixed term

Note: Demand , savings , NOW accounts , time deposits and deposit substitutes shall not be subject to interest ceilings.

Note: A bank other than a universal or commercial bank must seek approval of Monetary Board before accepting or creating demand deposits. (Sec. 33)

Deposit InsuranceAll deposits of any bank are insured with the Philippine Deposit Insurance Corporation or PDIC (Sec. 4 RA 3591 as amended)

By virtue of PD 1974, trust funds were deleted from the scope of insured deposits

What specific risks to a bank does PDIC Cover? - Only the risk of bank closures. Thus losses due to a bank theft is not covered by PDIC.

a. Amounts . Insured deposits under the law means the net amount to any depositor for deposits in an insured bank (after deducting any offsets) less any part thereof which is in excess of P 250,000. If the depositor has two or more accounts with the same bank , the maximum coverage pertains to the sum of all such accounts .

b. When Payment is made. The proceeds of the insurance shall be paid by the PDIC to the depositor whenever the insured bank is closed on the account of insolvency. An insured bank shall be deemed to have been closed on account of insolvency when ordered closed by the Monetary Board of the BSP.

c. The liability of the PDIC for insured deposits rests upon the existence of deposits with insured bank , not on the negotiability of the certificates evidencing these deposits. In fact, the claimant cannot recover even if he can present a negotiable certificate of deposit if there is actually no deposit.

(See also Notes on PDIC)

Deposits that are exempt from garnishment:




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1. Foreign Currency Deposits (Sec. 8 , FCDA)Exception: The SC ruled in Salvacion v. Central Bank of the Philippines (August 20, 1997) that the FCD of an American tourist who was found guilty of repeatedly raping a twelve (12) year old child is subject to garnishment.

2. Those exempt under the Rules of Civil Procedure like the provision for the family for four months . (Sec. 13 of Rule 39 of the 1997 Rules of Civil Procedure)

Unclaimed Balances: include credits or deposits of

money, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks , buildings and loan associations and trust corporations , as hereinafter defined , in favor of any person known to be dead or who has not made further deposits or withdrawals during the preceding ten years or more.

Deposits that have become dormant for a period of ten years may be escheated in favor of the government.

Publication of a list of unclaimed balances is also required to safeguard the right of depositors , their heirs and successors in interests to due process.

B. LOAN FUNCTION OF BANKS

Single Borrower’s Limit the total amount of loans extended

by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 20% of the net worth of such bank.

The total amount of loans may be increased by additional 10% of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title

covering readily marketable, non-perishable goods which must be fully covered by insurance;

The prescribed ceiling shall include:a. The direct liability of the maker or

acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discount paper with or sells paper to such banks;

b. In the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of the said entities to the bank;

c. In a case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and

d. In the case of a partnership, association, or other entity, the liabilities of the member thereof to such bank.

Exclusions from the Limits:a. loans secured by obligations of the

Bangko Sentral or the Philippine Government;

b. loans fully guaranteed by the government;

c. loans covered by assignment of deposits maintained in the lending bank and held in the Philippines;

d. loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and

e. other loans or credit accommodations which the MB may specify as non-risk items.

DOSRI accounts Restrictions on bank exposure to

Directors, Officers, Stockholder and their Related Interests (DOSRI)

No director or officer of any bank shall, directly or indirectly, for




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himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned (Sec. 36)

Requisites:1. The borrower is a director,

officer or any stockholder of a bank (and related interests)

2. He contracts a loan or any form of financial accommodation.

3. The loan or accommodation is from: a. his bank , or b. a bank that is a subsidiary of

a bank holding company of which both his bank and lending bank are subsidiaries

c. a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank;

4. The loan or financial accommodation is in excess of 5% of capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower.

Principles Involved: Dealings of a bank with any of

its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others;

After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act;

DOSRI account shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank.

Provided: That loans, credit

accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit

That loans, credit accommodations and advances to officers in the form of fringe benefits granted shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.

Note: Stockholdings of individuals related to each other within the 4th degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. (Sec. 12)

Secured Loans:1. Those secured by real estate shall

not exceed 75% of the appraised value of the real estate security, plus 60% of the appraised value of the insured improvements. (Sec. 37)

2. Those secured by chattels and intangible properties (such as patents, trademarks, trade names and copyrights) shall not exceed 75% of the appraised value of the security. (Sec. 38)

Grant and Purpose of Loans and Other Credit Accomodations.A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to




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be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices. (Sec. 39)The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. (Sec. 41)

Requirement for Grant of Loans:Before granting a loan, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

1. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information.

2. Should such statements prove to be false or incorrect, the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation. (Sec. 40)

Rules on Redemption:1. In the event of foreclosure of real

estate mortgage, whether judicially or extra-judicially, the mortgagor shall have the right to redeem the property within 1 year after the sale by paying:a. by paying the amount due under

the mortgage deed, b. interest rate specified in the

mortgage, and c. all the costs and expenses incurred

by the bank or institution from the sale and custody of the property less the income derived by the less the derived income

Note: Under Act No. 3135 governing extra-judicial foreclosure, the mortgagor has 1 year to redeem the property from the time that the date of registration of the with the Register of Deeds. However for judicial foreclosure, there is no right of redemption under Rule 68.

2. Juridical persons, whose real property is being sold pursuant to an extrajudicial foreclosure, shall have

the right to redeem the property before: a. registration of the certificate of

sale with the Register of Deeds or b. within 3 months after foreclosure,

whichever is earlier.

Note: In case the mortgagor is a natural person, the redemption period is 1 year from registration of sale with Register of Deeds (Sec. 1(3) SC Cir. AM No. 99-10-05)

3. Purchaser at the auction sale whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale. To enjoin or restrain the conduct of foreclosure proceedings, the petitioner must file a bond conditioned that he will pay all the damages which the bank may suffer by the injunction. (Sec. 47)(See also Notes on Real and Chattel Mortgage)

Ceiling on Investments in Certain Assets. Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business, provided:

a. That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed 50% of combined capital accounts;

b. That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank’s total investment in real estate, unless otherwise provided by the Monetary Board. (Sec. 51)

Acquisition of Real Estate by Way of Satisfaction of Claims. Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

a. Such as shall be mortgaged to it in good faith by way of security for debts;




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b. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or

c. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of 5 years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use. (Sec. 52)

C. OTHER BANKING SERVICES:1. Receive in custody funds,

documents and valuable objects;2. Act as financial agent and buy and

sell, by order of and for the account of their customer, shares, evidences of indebtedness and types of securities;

3. Make collection and payments for the account of others and perform such other services for their customer as are not incompatible with banking business;

4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/consultancy accounts; and

5. Rent out safety deposit boxes.

Note: The bank shall act as depositary or as an agent shall keep the funds, securities and other effects which it receives duly separated from its own assets and liabilities. (Sec. 53)

Suspension of Payment on its Deposit LiabilitiesIn case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than 30 days, the Monetary Board may summarily and without need for prior hearing close such

banking institution and place it under receivership of the Philippine Deposit Insurance Corporation. (Sec. 53)

Prohibitions:1. Prohition to act as insurer - A bank

shall not directly engage in insurance business as the insurer. (Sec. 54)

2. Prohibited transactions by bank officials - No director, officer, employee, or agent of any bank shall -a. Make false entries in any bank

report or statement or participate in any fraudulent transaction;

b. Without order of a court of component jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity;

c. Accept gifts or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

d. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or

e. Outsource inherent banking functions.

3. Prohibited acts by borrower - No borrower of a bank shall -a. Fraudulently overvalue property

offered as security for a loan from the bank;

b. Make misrepresentations for the purpose of obtaining, renewing, or increasing a loan or extending the period thereof;

c. Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

d. Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

4. Prohibited acts by BSP offiers - No examiner, officer or employee of the




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Bangko Sentral or any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall make false reports or suppress material facts.

5. No bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. (Sec. 55)

6. Conducting Business in an Unsafe or Unsound Manner - In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances:

The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;

The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general;

The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or

The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasi-bank or trust entity,

whether or not the director or officer profited or will profit thereby

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (Sec. 56)

7. Prohibition on dividend declaration – No bank or quasi-bank shall declare dividends, if at the time of declaration: a. Its clearing account with the

Bangko Sentral is overdrawn; b. It is deficient in the required

liquidity floor for government deposits for 5 or more consecutive days;

c. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration;

d. It has committed a major violation as may be determined by the Bangko Sentral. (Sec. 57)

Foreign Banks The entry of foreign banks in the

Philippines through the establishment of branches shall be governed by the provisions of the Foreign Bank Liberalization Act. (Sec. 72)

The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. (Sec. 78)

Trust Operations Only a stock corporation or a

person duly authorized by the




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Monetary Board shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behalf of others. (Sec. 79)

B. THE NEW CENTRAL BANK ACT(R.A. No. 7653, effective August 24,

1993)

Declaration of Policy- The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharege of its mandated responsibilities concerning money, banking and credit.

Bangko Sentral - a government-owned corporation established as an independent central monetary authority

Responsibility and Primary Objective1. Provide policy directions in the areas of money, banking, and credit2. Supervise the operations of banks and exercise such regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions.

Powers and Functions1. Issuer of Currency (Sec. 50)2. Custodian of Reserves (Sec. 94)3. Clearing Channel or House -

especially where the PCHC does not operate

4. Banker of the Government - the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings. (Secs. 110 and 111)

5. Financial Advisor of the Government (Sec. 123) Under Article VII, Sec. 20 of the

1987 Constitution, the President may contract or guarantee foreign loans but with the prior concurrence of the Monetary Board.

6. Source of Credit (Sec. 81)

7. Supervisor of the Banking System (Sec. 25)Shall include the power to:a. Examine – extends to

enterprises wholly or majority-owned or controlled by the bank. (Sec. 7, RA 8791); this power may not be restrained by a writ of injunction unless there is convincing proof that the action of the BSP is plainly arbitrary. (Sec. 25)

b. Place a bank under receivership or liquidation (Sec. 30)

c. Initiate criminal prosecution of erring officers of banks.

Monetary BoardThe powers and functions of BSP are exercised by the Monetary Board, composed of 7 members appointed by the President of the Philippines for a term of 6 years:

1. The governor as Chairman2. A member of the Cabinet

designated by the President3. 5 members who shall come from

the private sector, all of whom shall serve full-time;

No member of the Monetary Board may be reappointed more than once. (Sec. 6)

Qualifications of Members of the Monetary Board:

1. must be natural-born citizens of the Philippines,

2. at least 35 years of age, with the exception of the Governor who should at least be 40 years of age,

3. of good moral character, of unquestionable integrity, of known probity and patriotism, and

4. with recognized competence in social and economic disciplines. (Sec. 8)

Disqualifications and Inhibition on Governor and Board Members:

1. disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the




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Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office (Sec. 9);

2. those coming from the private sector shall not hold any other public office or public employment during their tenure (Sec. 9);

3. cannot be connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment (Sec. 9);

4. cannot be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution (Sec. 9);

5. the Governor of the Bangko Sentral and the full-time members of the Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. Accordingly, they may not accept any other employment, whether public or private, remunerated or ad honorem, with the exception of positions in eleemosynary, civic, cultural or religious organizations or whenever, by designation of the President, the Governor or the full-time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country (Sec. 20);

6. in case any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Board shall disclose his interest to the Board and shall retire from the meeting when the matter is taken up (Sec. 14).

Supervision and Examination of Banks

The BSP shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.

Subsidiary – a corporation more than 50% of the voting stock of which is owned by a bank or quasi-bank

Affiliate – a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or quasi-bank or which is related or linked to such institution or intermediary through common stockholders or other factors determined by the Monetary Board

No Restraining Order Against BSPNo restraining order or injunction shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to supervision or examination by the Bangko Sentral, unless there is convincing proof that the action of the Bangko Sentral is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the Bangko Sentral, in an amount to be fixed by the court. (Sec. 25)

Refusal to Make Reports or Permit Examination. - Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by the Bangko Sentral who, being required in writing by the Monetary Board or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such institution shall be punished under the Act. (Sec. 34)

False Statement. - The willful making of a false or misleading statement on a material fact to the




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Monetary Board or to the examiners of the Bangko Sentral shall be punished. (Sec. 35)

Prohibitions on Bank Officers, Directors, Lawyers, AgentsPersonnel of the Bangko Sentral are hereby prohibited from:

1. being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral;Exception: non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act;

2. directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral;

3. revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, information relating to the condition or business of any institution;

4. borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board. (Sec. 27)

ConservatorshipWhenever the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator to:

a. Take charge of the assets, liabilities, and the management thereof;

b. Reorganize the management;c. Collect all monies and debts due

said bank; andd. Exercise all powers necessary to

restore its viability, with the power to overrule or rebuke the actions of the previous management and board of directors of the bank or quasi-bank.

Such power to revoke cannot extend to post facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. Sec. 28-A gives the conservator power to revoke contracts that are deemed defective – i.e., void, voidable, unenforceable or rescissible. (First Phil. Int’l Bank v. CA, 252 SCRA 259)

Duration – Period not exceeding one year

When conservatorship terminated:1. When the Monetary Board is

satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary;

2. But if the continuance in business of the bank would involve probable loss to its depositors or creditors, proceedings for receivership and liquidation shall be pursued (Sec. 29).

Receivership:Whenever the Monetary Board finds that a bank or quasi-bank:

1. is unable to pay its liabilities as they become due in the ordinary course of business. But shall not include inability to pay cause by extraordinary demands induced by financial panic in the banking community;

2. has insufficient realizable assets to meet its liabilities;

3. cannot continue business without involving probable losses to its depositors or creditors; or

4. has willfully violated a cease and desist order involving acts or transactions which amount to




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fraud or a dissipation of the assets of the institution. (Sec. 30)

Note: The designation of a conservator is not a precondition to the designation of a receiver.

Liquidation - If the receiver determines that the bank cannot be rehabilitated:

1. He shall file ex parte, with the proper RTC, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board.

2. He shall convert the assets of the institution to money for the purpose of paying the debts of the institution. (Sec. 30)

Effect of appointment of receiver / liquidation on creditor’s claims: The assets under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment, levy, attachment or execution (Sec. 30). Close Now and Hear Later SchemeSec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. The purpose of the scheme is to protect the depositors, creditors, stockholders and general public (Central Bank v. CA, 220 SCRA 536).

Legal Tender – all notes and coins issued by the Bangko Sentral and fully guaranteed by the Government. (Sec. 52)Note: Coins shall be legal tender in amounts:

a. Not exceeding P50.00 - 25 centavos or above

b. Not exceeding P20.00 - 10 centavos or less.

The BSP may call in for replacement notes for any series

or denomination which are more than 5 years old and coins which are more than 10 years old.

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

Demand Deposits – all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. (Sec. 58)Checks representing demand deposits 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. However, a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account (Sec. 60).

3 Important Tools to Achieve Price Stability:1. Loans to Banks (Sec. 83)

- If BSP wants to increase money supply, it opens rediscount window

- If BSP wants to decrease money supply, it closes rediscount window or charges very high interest rates for rediscounted notes

2. Open Market Operations (Sec. 90)- If BSP wants to increase money

supply, it buys government securities

- If BSP wants to decrease money supply, it sells government securities

3. Reserve Requirements




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- The required reserves of each bank shall be proportional to the volume of its deposit liabilities

Since the required reserves are imposed primarily to control the volume of money, the Bangko Sentral shall not pay interests thereon. (Sec. 94)

Deposits maintained with the Bangko Sentral as part of the reserve requirements shall be exempt from attachment, garnishment, or any other order or process of any court or agency. (Sec. 103)

Prohibitions on the BSP:1. The BSP shall not acquire shares of

any kind or accept them as collateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly; and

2. It shall not engage in development banking and financing. (Sec. 128)

C. OTHER RELATED LAWS

ANTI-MONEY LAUNDERING ACT (RA 9160 as amended by RA 9194)

Money Laundering – a crime whereby the proceeds of an unlawful activity as herein defined are transacted, thereby making them appear to have originated from legitimate sources. (Sec. 4, RA 9160 as amended by RA 9194)

It is committed by the following:a. Any person knowing that any

monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transacts said monetary instrument or property.

b. Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above.

c. Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so.

Prevention of Money Laundering:1. Customer Identification. - Covered

institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf.

Note: The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts.

2. Record Keeping. - All records of all transactions of covered institutions shall be maintained and safely stored for 5 years from the dates of transactions. With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved and safely stored for at least 5 years from the dates when they were closed.

3. Reporting of Covered and Suspicious Transactions. -- Covered institutions shall report to the AMLC all covered transactions and suspicious transactions within 5 working days from occurrences thereof, unless the Supervising




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Authority prescribes a longer period not exceeding 10 working days. (Sec. 9)

Prohibitions:When reporting covered or suspicious transactions to the AMLC, covered instituting and their officers and employees

shall not be deemed to have violated bank secrecy laws

are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Effect of violation: criminally liable.

administrative, criminal or civil proceedings shall not lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act of any other law.

may not have such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. Effect of violation: the concerned officer and employee of the covered institution and media shall be held criminally liable. (Sec. 9)

Covered institution - refers to: 1. banks, non-banks, quasi-banks, trust

entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP);

2. insurance companies and all other institutions supervised or regulated by the Insurance Commission; and

3.

a. securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant;

b. mutual funds, close-end investment companies, common trust funds, pre-need companies and other similar entities;

c. foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities; and

d. other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange Commission. (Sec. 3[a])

Covered transaction - a transaction in cash or other equivalent monetary instrument involving a total amount in excess P500,000 within 1 banking day.

Monetary instrument - refers to: 1. coins or currency of legal tender of

the Philippines, or of any other country;

2. drafts, checks and notes; 3. securities or negotiable

instruments, bonds, commercial papers, deposit certificates, trust certificates, custodial receipts or deposit substitute instruments, trading orders, transaction tickets and confirmations of sale or investments and money market instruments; and

4. other similar instruments where title thereto passes to another by endorsement, assignment or delivery. (Sec. 3[c])

Suspicious transactions - transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist:




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1. there is no underlying legal or trade obligation, purpose or economic justification;

2. the client is not properly identified; 3. the amount involved is not

commensurate with the business or financial capacity of the client;

4. taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act;

5. any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution;

6. the transactions is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or

7. any transactions that is similar or analogous to any of the foregoing.

Unlawful activity - refers to any act or omission or series or combination thereof involving or having direct relation to following:

1. Kidnapping for ransom 2. Drug trafficking 3. Graft and corrupt practices 4. Plunder 5. Robbery and extortion 6. Jueteng and Masiao 7. Piracy on the high seas 8. Qualified theft 9. Swindling 10.Smuggling 11.Violations of the Electronic

Commerce Act of 2000 12.Hijacking, destructive arson and

murder, including acts of terrorism against non-combatant persons and similar targets

13.Fraudulent practices under the Securities Regulation Code of 2000;

14.Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. (Sec. 3[i])

There can be separate convictions for money-laundering offense and unlawful activity constituting it

However unlawful activity shall be given precedence over money laundering charge without prejudice to freezing and other remedies provided by the Act

Jurisdicion: All cases on money- laundering

shall be within the jurisdiction of the RTC

Those committed by public officers and private persons in conspiracy with such public officers shall be within the jurisdiction of the Sandiganbayan

Freezing of Monetary Instrument or Property

the Court of Appeals , upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity , may issue a freeze order which shall be effective immediately.

The freeze order shall be for a period of 20 days unless extended by the court. (Sec. 9, as amended by RA 9194)

Authority to Inquire into Bank DepositsGeneral Rule: the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution:

a. upon order of any competent court in cases of violation of the Act

b. existence of probable cause that the deposits or investments are related to an unlawful activities as defined in Section 3(i) or a money laundering offense under Section 4

Exception: no court order shall be required in cases involving kidnapping for ransom (Sec. 3[i]1); drug trafficking (Sec. 3[i]2); hijacking, destructive arson and murder, including acts of terrorism




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against non-combatant persons and similar targets (Sec. 3[i]12). (Sec. 11)

Anti-Money Laundering Council (AMLC) Composition:

1. BSP Governor – AMLC Chairman2. Insurance Commission Chairman3. SEC Chairman

TRUTH IN LENDING ACT (RA 3765)

Purposes: To protect users of credit from a lack

of awareness of the true cost of such credit by requiring a full disclosure of such cost. The law assumes that the uninformed use of credit is detrimental to the national economy.

To protect a debtor from the effects of misrepresentation or concealment

Avoid circumvention of usury laws. Permitting him to fully appreciate and

evaluate the real costs of his borrowing

Definitions:

Finance charges – amounts to be paid by the debtor incident to the extension of credit such as interests, discounts, collection fees, credit investigation fees and attorney’s fees.

Non-finance charges – amounts advanced by a creditor for items normally associated with the ownership of property or the availment of the services purchased which are not incident to the extension of credit

Creditor – any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sell or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge. Disclosure Requirement Any creditor shall furnish to each

person to whom credit is extended, prior to the consummation of the

transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board , the following information ;1. the cash price or delivered price of

the property or service to be acquired ;

2. the amounts , if any , to be credited as down payment and /or trade-in ;

3. the difference between the amounts set forth under clauses (1) and (2)

4. the charges , individually itemized , which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit ;

5. the total amount to be financed ;6. the finance charge expressed in

terms of pesos and centavos7. the percentage that the finance

bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. (Sec. 4)

Transactions covered:1. any loan, mortgage, deed of trust,

advance, or discount; 2. any conditional sales contract; any

contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract;

3. any rental purchase contract; 4. any contract or arrangement for

the hire, bailment, or leasing of property;

5. any option or demand, lien, pledge or other claim against, or for delivery of, property or money;

6. any purchase, or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing; and

7. any transaction or series of transactions having similar purpose or effect.




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Transactions outside the scope of the Act:

1. those that do not involve the payment of any finance charge by the debtor

2. those in which the debtor is the one specifying a definite and fixed set o credit terms such as bank deposits, insurance contracts, sale of bonds, etc. (Sec. 3, CB Circular No. 158)

Effect of non-compliance: authorize the debtor to recover any interest payment made.Penal clause: failure to comply with the law makes creditor liable for double finance charges plus attorney’s feesPrescriptive period: 1 year.

SECRECY OF BANK DEPOSITS LAW (R.A. No. 1405)

Purpose: to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country (Sec. 1)

Acts prohibited:1. the examination and inquiry or

looking into all deposits of whatever nature with banks or banking institutions in the Philippines (including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities) by any person, government official, bureau or office (Sec. 2)

2. the disclosure by any official or employee of any bank to any unauthorized person of any information concerning the said deposits (Sec. 3)

General Rule:All deposits of whatever nature

with banks or banking institutions in the Philippines are considered as of an

absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office (Sec. 2)

Exceptions:1. upon written permission of the

depositor; 2. in cases of impeachment; 3. upon order of a competent court in

cases of bribery or dereliction of duty of public officials;

4. In cases where the money deposited or invested is the subject matter of the litigation; (Sec. 2)

5. upon order of the court in cases of unexplained wealth under Section 8 of the Anti-Graft and Corrupt Practices Act (PNB vs Gancayco 15 SCRA 91)

6. upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a decedent for the purpose of determining such decedent’s gross estate (Sec. 6[F][1], NIRC)

7. upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a taxpayer who has filed an application for compromise of his tax liability under Section 204(A)(2) of the NIRC by reason of financial incapacity to pay his tax liability (Sec. 6[F][2], NIRC)

8. upon order of the court in cases filed by the Ombudsman and upon the latter’s authority to examine and have access to bank accounts and records (Marquez, et al. vs Desierto, et al., GR No. 135882 in relation to Sec. 15[8], RA 6770)

9. disclosure of the Treasurer of the Philippines for dormant deposits for at least 10 years under the Unclaimed Balances Act (Sec. 2, RA 3936)

10.without need of a court order if the Anti-Money Laundering Council determines that a particular deposit or investment with any banking institution is related to any one of the following unlawful activities:




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a. kidnapping for ransom under Article 267 of the Revised Penal Code, as amended

b. violations of sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of the Comprehensive Dangerous Act of 2002 (RA 9165)

c. hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets

11.upon order o the court, if the AMLC determines that a particular deposit or investment with any banking institution is related to any one of the unlawful activities under Section 3 (i), except those refereed to in Section(i)[1], [2] and [12] of RA 9160 or a money laundering offense under Section 4 (sec. 11, RA 9160)

12.inquiry into or examination of any deposit or investment with any banking institution when the examination is made by the Bangko Sentral ng Pilipinas to insure compliance with the Anti-Money Laundering Law in the course of a periodic or special examination in accordance with the rules of examination of the BSP (Sec. 11, RA 9160; see also Sec. 4, RA 8791)

Foreign Currency Deposit Act (RA No. 6426)

All foreign currency deposits authorized under the Act are declared as and considered of an absolutely confidential nature and in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office.

Except:

1.when there is written consent of depositor under Sec 8 of the Foreign Currency Deposits Act ;

2. upon order of the court (or even without court order in proper cases) when there is probable cause of money laundering as provided for under Sec.11 of the Anti-Money Laundering Act.

Extent of examination: the permitted inquiry into illegally

acquired properties in anti-graft cases extends to instances where such property is concealed by being held by or recorded in the name of other persons. (Banco Filipino vs Purisima 161 SCRA 576)

even in cases not involving prosecution under the Anti-Graft and Corrupt Practices Act, an inquiry into the whereabouts of the amount converted necessarily extends to whatever is concealed (by being held or recorded in the name of persons other than the one responsible for the illegal acquisition) inasmuch as the case is aimed at recovering the amount converted (Mellon Bank vs Magsino 190 SCRA 633)

garnishment of bank deposit of judgment debtor does not violate RA 1405. The lower court merely required the cashier of the bank to inform the court whether or not the defendant had a deposit in said bank only for purposes of garnishment issued by it (China Banking Corporation v. Ortega, 49 SCRA 355).

before an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the account




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identified in the pending case. (Marquez vs Desierto GR No. 135882)

PHILIPPINE DEPOSIT INSURANCE CORPORATION

(RA 3591, as amended by RA 9302, August 12, 2004)

Purpose: shall insure the deposits of all banks

which are entitled to the benefits of insurance under this Act

shall promote and safeguard the interests of the depositing public by providing permanent and continuing insurance coverage on all insured deposits

Board of Directors:a. Secretary of Finance – ex-officio

Chairman of the Board without compensation

b. Governor of the BSP – ex-officio member without compensation

c. President of the PDIC – appointed by the President of the Philippines from either the government or private sector to serve on a full-time basis for a term of 6 yrs.; also serve as Vice-Chair of the Board

d. 2 members from the private sector – appointed for a term of 6 years without reappointment by the President of the Phils.; of these first appointed, the first appointee shall serve for 2 years

The presence of 3 members shall constitute a QUORUM.

All decisions of the BODs shall require the concurrence of at least 3 members.

The BOD shall have the authority:1. To prepare and issue rules and

regulations2. To direct the management,

operations and administration of the PDIC

3. To establish a human resource management system which shall govern the selection, hiring,

appointment, transfer, promotion or dismissal of all personnel

4. To appoint, establish the rank, fix the remuneration, approve local and foreign training of, and remove any officer or employee of the PDIC, for cause, subject to pertinent civil service laws

5. To adopt an annual budget for, and authorize such expenditures by the PDIC

6. To approve the methodology for determining the level and amount of provisioning for insurance and financial assistance losses, which shall establish reasonable levels of deposit insurance reserves.

Main functions of the PDIC:1. Risk Management:

deals with the insurance assessment and premium collection from member banks.

monitors the health of member banks, examines and identifies “risk” areas in banks, or their weaknesses.

institutes corrective measures to prevent closures thru bank rehabilitation and provides financial assistance to distressed banks and assists in the reopening of closed banks, provided all PDIC requirements are met.

2. Claims, Receivership and Liquidation. claims refers to the settlement of

claims for insured deposits receivership deals with the

takeover and control of all assets, liabilities and affairs of closed banks

liquidation covers the conversion of loans, disposal of fixed assets into cash deposits, and the implementation of final settlement with creditors.

Insurance coverage: The deposit liabilities of any bank

or banking institution, which is engaged in the business of receiving deposits, or which thereafter may engage in the business of receiving deposits,




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shall be insured with the PDIC. (Sec. 5)

Deposit - the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit. any obligation of a bank which is

payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit

subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch (Sec. 4)

Extent of liability: not to exceed P250,000 as of the date of the bank’s closure(Sec. 4)

Rules: In determining such amount due to

any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefit either in his own name or in the name of others.

A joint account regardless of whether the conjunction “and,” “or,” “and/or” is used, shall be insured separately from any individually-owned deposit account, provided that 1. If the account is held jointly by

two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is

stipulated in the document of deposit, and

2. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity

The aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P250,000.00.

Liability is per bank basis.

When liable: Whenever an insured bank shall have been closed by the Monetary Board. (Sec. 14)Form of payment: payment shall be made as soon as possible either by

1. cash or 2. making available to each depositor

a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor

Transfer Deposit - a deposit in an insured bank made available to a depositor by the PDIC as payment of insured deposit of such depositor in a closed bank and assumed by another insured bank.

The PDIC may withhold payment of such portion of the insured deposit of any depositor in a closed bank as may be required to provide for the payment of any liability of such depositor as a stockholder of the closed bank, or of any liability of such depositor to the closed bank or its receiver, which is not offset against a claim due from such bank, pending the determination and payment of such liability by such depositor or any other liable therefor. (Sec. 16)

Except as otherwise prescribed by the Board of Directors, neither the PDIC nor such other insured bank




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shall be required to recognize as the owner of any portion of a deposit appearing on the records of the closed bank under a name other than that of the claimant, any person whose name or interest as such owner is not disclosed on the records of such closed bank as part owner of said deposit, if such recognition would increase the aggregate amount of the insured deposits in such closed bank. (Sec. 16)

Effect of payment:1. The PDIC, upon payment of any

depositor shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment.

Extent: Such subrogation shall include the right on the part of the PDIC to receive the same dividends and payments from the proceeds of the assets of such closed bank and recoveries on account of stockholders’ liability as would have been payable to the depositor on a claim for the insured deposits

Limitation: The depositor shall retain his claim for any uninsured portion of his deposit.

Nature of payments: All payments by the PDIC of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code. (Sec. 15)

2. Payment of an insured deposit to any person by the PDIC shall discharge the PDIC, and payment of a transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been made available shall discharge the PDIC and such new bank or other

insured bank, to the same extent that payment to such person by the closed bank would have discharged it from liability for the insured deposit. (Sec. 16)

Period to settle claims by PDIC: 6 months from the date of filing of claim for insured deposit.Liability for failure to settle: will subject the directors, officers or employees of the PDIC responsible for the delay to imprisonment upon conviction from 6 months to 1 year, where such failure was due to:

a. grave abuse of discretion, b. gross negligence, c. bad faith, or d. malice,

the PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim

the period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency or by the PDIC together with such other office, body or agency. (Sec. 14)

Prescription: Unless otherwise waived by the PDIC, all of the depositor’s rights with respect to the insured deposit shall be barred if the said depositor in the closed bank fails to claim his insured deposits with the PDIC:

a. within 2 years from actual takeover, or

b. does not enforce his claim within 2 years after the 2-year period to file a claim.

Effects: all rights of the depositor

against the PDIC with respect to the insured deposit shall be barred




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all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the PDIC may have become subrogated, shall thereupon revert to the depositor

the PDIC shall be discharged from any liability on the insured deposit

Sanctions Against Unsafe and Unsound Banking Practices

1. Whenever upon examination by the PDIC, it shall be disclosed that an insured bank or its directors or agents have committed, are committing or about to commit unsafe or unsound practices, or have violated, are violating or about to violate any law or regulation, the BOARD OF DIRECTORS SHALL SUBMIT THE REPORT OF THE EXAM TO THE MONETARY BOARD to secure corrective action.

2. If no such action is taken within 45 days from the submission of the report, the BOARD OF DIRECTORS shall, motu proprio, INSTITUTE CORRECTIVE ACTION it deems necessary.

3. Board of Directors may thereafter issue a CEASE AND DESIST ORDER, and require bank or its directors or agents to correct the practices or violations within 45 days.

4. If the practice or violation is likely to cause insolvency or seriously weaken the bank’s condition or prejudice the interests of depositors and the PDIC, the period to take corrective action shall not be more than 15 days.

Powers as a Corporate Body1. To adopt and use a corporate seal2. To have succession until dissolved

by an Act of Congress3. To make contracts4. To sue and be sued in any court of

law in the Phils. NO attachment or execution shall be issued against the PDIC or its property before

final judgment in any suit, action, or proceeding in any court

5. To appoint by its BOD such officers and employees

6. To prescribe, by its BOD, by-laws not inconsistent with law

7. To exercise by its BOD, or duly authorized officers or agents, all powers granted by this Act

8. To conduct examination of banks with prior approval of the Monetary Board. Provided, that no exam can be conducted within 12 months from the last exam date

9. To act as receiver10.To prescribe by its BOD such rules

and regulations11.To establish its own provident fund12.To compromise, condone or

release any claim or settled liability to the PDIC, regardless of the amount involved

Permanent Insurance Fund shall be three billion pesos

(P3,000,000,000.00)

Deposit Insurance Fund shall be the capital account of the

PDIC and shall consist of the ff.: (i) the Permanent Insurance Fund; (ii) assessment collections; (iii) reserves for insurance and financial assistance losses; and (iv) retained earnings

Prohibitions:The penalty of prision mayor or a fine of not less than P50,000 but not more than P2,000,000, or both, shall be imposed upon any director, officer, employee or agent of a bank:

1. for any willful refusal to submit reports as required by law, rules and regulations;

2. any unjustified refusal to permit examination and audit of the deposit records or the affairs of the institution;

3. any willful making of a false statement or entry in any bank report or document

4. submission of false material information in connection with any




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financial assistance extended to the bank

5. splitting of deposits or creation of fictitious loans or deposit accounts. occurs whenever a deposit

account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down and transferred into two or more accounts in the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names:a. within 30 days immediately

preceding or during a bank-declared bank holiday, or

b. immediately preceding a closure order issued by the Monetary Board of the Bangko Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage. (Sec. 21)

6. refusal to allow PDIC to take over a closed bank under its receivership

7. refusal to turn over or destroying or tampering bank records

8. fraudulent disposal, transfer or concealment of any asset, property or liability of the closed bank

9. violation or causing any person to violate, the exemption from garnishment, levy, attachment or execution

10.any willful failure or refusal to comply with any provision of this Act.

SPECIAL LAWS

Bulk Sales Law(Act No. 3952 as amended)

Purpose: To prevent secret or fraudulent sales or conveyances of goods in bulk

and, thereby, protect the creditors of the seller.

Bulk sale: Any sale, transfer, mortgage, or

assignment of: (SBE)1. a stock of goods, wares,

merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of business; (S)

2. all, or substantially all, of the business or trade theretofore conducted; (B) and

3. all, or substantially all, of the fixtures and equipment used in and about the business (Sec. 2). (E)

Exceptions: (COJAP)1. written waiver from all the

creditors; (Sec. 2) (C)2. sale or transfer is made in the

ordinary course of business; (O)3. sale by virtue of a judicial order;

(Sec. 8) (J)4. those sold by assignee or those

beyond the right of creditors; (A) and

5. sale of properties exempt from attachment or execution. (Rule 39, Sec.13, Rules of Court) (P)

Duties of seller, mortgagor or assignor in bulk: (SPIN-R)

1. to deliver to the vendee, mortgagee, or his agent or representative a sworn written statement of the names and addresses of all the creditors to whom the vendor or mortgagor may be indebted, together with the amount of indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of said creditors. (Sec. 3) (S)

2. to apply the purchase or mortgage money to the pro rata payment of the bona fide claims of the creditors of the vendor or mortgagor. (Sec. 4) (P)

3. at least 10 days before the sale, transfer or execution of a mortgage upon any stock of goods,




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wares, merchandise, provisions or materials, in bulk, to make a full detailed inventory thereof and to preserve the same showing the quantity and, to the extent possible, the cost price to the vendor, transferor, mortgagor or assignor of each article to be included in the sale, transfer or mortgage. (Sec. 5) (I)

4. notify every creditor whose name and address is set forth in the verified statement of the vendor, transferor, mortgagor, or assignor, at least 10 days before transferring possession, of the price, terms conditions of the sale, transfer, mortgage, or assignment. (Sec. 5) (N)5. to register the sworn

statement containing the names and addresses of all creditors o the vendor or mortgagor with the Bureau of Trade Regulation and Consumer Protection. (Sec. 9) (R)

Effects of violation:1. On the transaction:

VALID as between the parties. VOID as to affected creditors.

2. On the purchaser:1. holds the property in trust for

seller (whether in good faith or bad faith);

2. acquires no right in the property purchased as against the creditors of the seller; and

3. liable to seller’s creditors for properties forming part of bulk and already disposed by him.

Note: The law imposes no direct obligation on the buyer, mortgagee, transferee or assignee in bulk sale. Strictly speaking, therefore, since criminal provisions are to be construed strictly in favor of the accused, a buyer in bulk sale cannot be deemed to be subject to criminal liability under the law, although it may be argued that the buyer would be a principal by

indispensable cooperation, if he was aware of the intent of the seller or conspired with the seller. (Villanueva 2002 Ed. Pg 1027)

3. On the seller, mortgagor,

transferor or assignor:

Criminal liability for: (FKT)a. failure to prepare and deliver the

sworn statement listing his creditors and the application pro-rata of the proceeds thereof to the listed creditors (Sec. 4) (F)

b. knowingly or willfully make, or deliver or cause to be made or delivered, a statement which shall not include the names of all such creditors, with the correct amount due and to become due to each of them, or shall contain any false or untrue statement (Sec. 6) (K)

c. transfer of title without consideration or for a nominal consideration only (Sec. 7) (T)

Distinction on fraudulent transfer against creditors:

Bulk Sales Law

New Civil Code

Null and void Rescissible (Article 1381-1389)

WAREHOUSE RECEIPTS LAWACT NO. 2137

Coverage Seeks to encourage transactions on

negotiable warehouse receipts, which may only be issued by a warehouseman who is engaged in the business of receiving commodities on deposits for storage.

In correlation with:a. Articles 706 to 718 of Code of

Commerce (Bill of Ladings); b. Articles 1507 to 1520 of Civil Code

(Documents on Title) The Civil Code provisions have

repealed the Code of




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Commerce provisions on the Bill of Lading.

Despite the fact that we have Warehouse Receipts Law, the Civil Code still have provisions on quedans.

The sugar centrals which issue quedans are not warehousemen, since their service is offered only to sugar planters and not to the public.

Purposes of the Law: (PR)a. to prescribe the rights and duties

of a warehouseman ; (P)b. to regulate the relationship

between a warehouse man and i.) the depositor of goods, or ii) the holder of a warehouse receipt for the goods, or iii) the person lawfully entitled to the possession of the good, or iv) other persons. (R)

Warehouseman (Sec. 58 [a]) A person lawfully engaged in the

business of storing goods for profit.

Warehouseman Receipt (Sec. 2) A written acknowledgement by a

warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued.

Form: No particular form. However, it must contain the following terms: (ROAD-LLARD)

a. receipt number; (R)b. language indicating if the

warehouseman is an owner, solely or jointly with others, of the goods deposited; (O)

c. statement of advances made by the warehouseman for which he claims a lien; (A)

d. date of issue; (D)e. location of the warehouse; (L)f. language to indicate if the receipt

were negotiable or non-negotiable, that is, whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order; (L)

g. signature of the warehouse or his agent; (A)

h. rate of storage charges; (R) andi. description of the goods or the

packages containing them. (D)

Prohibited terms: a. such additional terms that are

contrary to the provisions of the Warehouse Receipts Law;

b. terms that reduces the degree of diligence imposed by law. (Sec. 3)

Function of Warehouse Receipt The negotiation of a warehouse

receipt carries with it the transfer of title over the commodity covered by the receipt, so also with a negotiable bill of lading.

Exception: Where a negotiable warehouse receipt is indorsed and delivered to a creditor as collateral for a loan.

Note: in case of loss of the commodity covered by the receipt through a fortuitous event, it will be the debtor who will bear the loss as the true intent to the parties is not the negotiation of the warehouse receipt with its consequent transfer of title but merely as security.

Kinds (Secs. 4 & 5)1. Negotiable – one which states that the

goods received by the warehouse will be delivered:

a. to the bearer or b. to the order of any person

named in such receipt.

2. Non-Negotiable – one which states that the goods received by the warehouseman will be delivered to the depositor or to any other specified person.




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Distinctions between Negotiable Instrument and Negotiable Warehouse Receipt:

Distinctions between Negotiable Warehouse Receipt and Non-Negotiable Warehouse Receipt:

Negotiable Warehouse

Receipt

Non-Negotiable Warehouse

ReceiptMay be acquired through

Negotiation Transfer or assignment

Rights of the person to whom it is negotiate

Title to the goods of the person negotiating the receipt

title of the goods, as against the transferor (merely

d (holder)/ transferee

and title of the person to whose order the goods were to be delivered.

Direct obligation of the warehouseman to hold possession of the goods for him as if the warehouseman directly contracted with him (Sec. 41

steps into the shoes)

right to notify the warehouseman of the transfer and acquire the direct obligation of the warehouseman to hold the goods for him. (Sec. 42)

Negotiation defeats the lien of the seller of the goods.

Attachment or levy by execution of goods represented

Cannot unless in proper circumstances

Can be subject to such

Note: Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner of the goods. Negotiation carries with it both the title to and possession of the property. (Philippine Trust Co. vs. National Bank, 42 Phil. 413)

Kinds of Negotiation: 1. Negotiation by delivery:

a. Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer; or

b. Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer. (Sec. 37)




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As to:

Negotiable

Instrument

Negotiable

Warehouse Receipt

Subject Money MoneyObject of value

Instrument itself

Goods deposited

Liability of intermediate parties

Secondary liability

None for failure to

deliver the goods

Effect of deliberate alteration

Null and void

Valid but enforceable only in

accordance with its original tenor

Conversion from bearer to order

An originally

bearer instrument will always

be such

Can be converted to an order warehouse receipt if

specifically endorsed

Significance of a HIDC

May obtain a better

title

Obtains only the

title which the party

negotiating had over the goods




Note: A bearer document of title is not always a bearer document in the sense that a special indorsement has the effect of converting the bearer instrument into an order instrument

2. Indorsement coupled with delivery a. A negotiable receipt may be

negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable.

b. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiation may be made in like manner. (Sec. 38)

Effect of delivery without indorsement: (ANT)

The transferee acquires title against the transferor; (A)

There is no direct obligation of the warehouseman; (N) and

The transferee can compel the transferor to complete the negotiation by indorsing the instrument. (Sec. 43) (T)

Note: The negotiation takes effect on the date of indorsement only.

Effects of Negotiation:Warranties on sale of receipt: A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants(Sec. 44): (GRIT)

a. that the receipt is genuine; (G)

b. that he has legal right to negotiate or transfer it; (R)

c. that he has knowledge of no fact which would impair the validity or worth of the receipt; and (I)

d. that he has a right to transfer title to the goods and that the goods are merchantable. (T)

Notes: Sec. 44 is similar to Sec. 65 of NIL on warranties of a qualified indorser.

Indorser not a guarantor - The indorsement of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations (Sec. 45).

Negotiation defeats vendor's lien - Where a negotiable receipt has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation (Sec. 49).

Warehouseman’s obligation to deliver the goods (Sec. 8) upon demand made either:

a. by the holder of a receipt for the goods;

b. by the depositor, provided that such demand is accompanied by: i. an offer to satisfy the

warehouseman’s lien; ii. an offer to surrender the

receipt if it is negotiable; and iii. a readiness and willingness to

sign an acknowledgment, when such goods are delivered, that they have been delivered if such is requested by the warehouseman.

Commingling of Goods ( Secs. 22 and 23)




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General Rule: Warehouseman must keep the goods of a depositor from the goods of other depositors, or from the goods of the same depositor for which a separate receipt has been issued.

Purpose: in order to permit the inspection and redelivery of the goods deposited at all times.

Exception: Commingling of goods is allowed if:

a. the goods are fungible; and b. the commingling is authorized

by agreement or by custom.

What the Warehouseman can do in case of several claims: (Sec. 17 and 18)

a. He can refuse to deliver the goods to anyone of them until he has had reasonable time to ascertain the validity of the various claims;

b. He can require all claimants to interplead, either as a defense to an action brought against him for non-delivery of the goods, or as an original suit, whichever is appropriate.

When justified in delivering the goods - the person lawfully entitled to the possession of the goods (Sec. 9): (EP)

1. the person who is himself entitled to delivery of goods by the terms of a non-negotiable receipt or who has been authorized to take delivery of the goods by the person entitled to such delivery; (E)

2. the person in possession of a negotiable instrument receipt by the person to whom delivery was promised by the terms of the receipt by immediate endorsee. (P)

When liable for misdelivery (sec.10): 1. if he delivers the goods to one who

is not in fact lawfully entitled to the possession of the goods;

2. If he delivers to a person holding a non-negotiable receipt or a negotiable receipt, if prior to the delivery he had either:

a. been requested not to make such delivery by the person lawfully entitled to a right of property or possession in the goods; or

b. had information that delivery about to be made was to one not lawfully entitled to the possession of the goods.

When may delivery be legally refused: (SHAPE-W)

1. where the goods have already been lawfully sold to third persons to satisfy the warehouseman’s lien or disposed of because of their perishable nature; (S)

2. when the holder of the receipt does not satisfy the conditions prescribed in Section 8 of the Act; (H)

3. In case of adverse claimants; (A)4. prior to delivery (P): (RI)

a. if he has been requested by a person lawfully entitled to a right of property or possession in the goods not to make delivery to any person; (R)

b. if he had information that the delivery to be made was to one not lawfully entitled to the passion of the goods. (I)

5. In the valid exercise of the warehouseman’s lien;(E) and

6. when the warehouseman has a legal title in himself on the goods such title or right being derived directly or indirectly from the transfer made by the depositor at the time or subsequent to the deposit for storage or from the warehouseman’s lien. (W)

Other liabilities of a warehouseman: (FANCID-COMS)1. for issuing

receipts containing false statements (Sec. 51); (F)

2. for altered receipts (Sec. 13); (A)

3. for the non-existence or misdescription of goods (Sec. 20); (N)

4. for commingled goods (Sec. 24); (C)




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5. for issuing receipt for goods not received (Sec. 50); (I)

6. for issuing duplicate receipts not so marked (sec. 52); (D)

7. for failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when the goods are partly delivered (Sec. 12); (S)

8. for commingled goods (Sec. 24); (C)

9. for delivery of goods without obtaining negotiable receipt (sec. 54). (O)

10. for failure to mark a receipt intended to be non-negotiable (Sec.7); (M)

11. for issuing receipts for the warehouseman’s goods which do not state that fact (Sec. 53); (S)

Warehouseman’s LienExtent:

1. lawful charges for storage and preservation of the goods;

2. lawful claims for money advanced; and (

3. reasonable charges and expenses for notice and advertisement of the sale, and the sale of goods. (Sec. 27)

Remedies available to warehouseman to enforce his lien: (SOR)

1. To refuse to deliver the goods until his lien is satisfied; (Sec. 31) (R)

2. To sell the goods and apply the proceeds to the value of the lien; (Sec.33 and 34) (S)

3. By the other means allowed by law to a creditor against his debtor, for the collection from the depositor of all charges and advances which the depositor contracted with the warehouseman to pay, (Sec. 32); or such other remedies allowed by law for the enforcement of a lien against personal property. (Sec. 35) (O)

Against what property lien may be enforced:

1. All deposited goods of the person liable for the lien; and

2. All goods belonging to others deposited by the person liable for the lien. (Sec. 28)

How lien may be lost: (SR)1. By surrendering possession

thereof; (S) or2. By refusing to deliver the goods

when a demand is made with which he is bound to comply. (Sec. 29) (R)

Rules on attachment / execution of goods deposited:

1. If a negotiable receipt is issued , the goods cannot be attached or levied in execution unless:

a. The receipt is first surrendered; or

b. Its negotiation is enjoined; orc. The receipt is impounded by the

court. (Sec. 25)

2. If a non-negotiable receipt is issued , goods can be attached provided it is done prior to the notification of the warehouseman of the transfer, (Sec. 42)

Reason: Absent such notice, both the warehouseman and the sheriff have a right to assume that the goods are still owned by the person whose name appears in the receipt.

Creditor's remedies to reach negotiable receipts. entitled to such aid from courts of

appropriate jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim by means thereof as is allowed at law or in equity in these islands in regard to property which can not readily be attached or levied upon by ordinary legal process. (Sec. 26)

Duty to insure the goods: a. where the law provides;




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b. where it was an inducement for the depositor to enter into the contract;

c. established practice; d. where the warehouse receipt

contains a representation to that effect.

GENERAL BONDED WAREHOUSE LAW

ACT 3893, AS AMENDED

Purpose of the law (Sec. 3)1. to regulate the business of receiving

commodities for storage in order; 2. to protect persons who may want to

avail themselves of warehouse facilities; and

3. to encourage the establishment of more warehouses.

to achieve this purpose, any person who wants to engage in the business of receiving commodities fro storage is required by the Act to first secure a license therefore from the Department of Trade and Industry.

Any warehouseman receiving commodities for storage, milling, or commingling must:

1. obtain prior license from the Bureau of Commerce;

2. file a bond in an amount equivalent to 33 1/3% of the capacity of the warehouse against which bond depositors may sue directly (pour autrui);

3. open to the public; no discrimination allowed;

4. liable for double market value should he accept if goods are damaged or destroyed.

a warehouse accepting tobacco for flueing is covered by law.

Itinerant miller of palay who keeps palay in process of milling under a camalig falls within the law.

A mill which must store palay temporarily must still get the license from the Bureau.

Warehouseman (Sec. 2) - A person engaged in the business of receiving commodity for storage.

Included in the business of receiving commodity for storage (Sec. 2)

It includes entering into any contract or transaction wherein;

a. the warehouseman is obligated to return the very same commodity delivered to him or to pay its value;

b. commodity delivered to him or to pay its value;

c. the commodity delivered is to be milled for the owner thereof;

d. the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or to pay its value.

Commodities stored in a bonded warehouse (Sec. 2) Generally, these commodities could

be any raw, processed, manufactured or finished product or by-product, goods, article, or merchandise, either domestic or foreign production or origin, which may be traded or dealt in openly and legally.

Prohibited substances, the possession of which is proscribed by law, may not be validly received for storage in a bonded warehouse.

Bond required to be put up by the warehouseman (Sec. 4)

1. the bond may either be:a. a cash bond;b. a bond secured by real estate; orc. a bond issued by a duly authorized

bonding company.2. the amount of the bond must not

be less than 33 1/3% of the market value of the maximum quantity of the commodity to be received by the warehouseman.

3. It shall be so conditioned to respond for the market value of the commodity actually delivered at any




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time by the warehouseman in case the latter is unable to return the commodity or to pay its value.

Duties of a Bonded Warehouseman: 1. to receive for storage any

commodity the kind customarily stored by him in the warehouse, so far as his license and the capacity of his warehouse will permit, without making any discrimination between person desiring to avail themselves of warehouse facilities (sec. 8);

2. to keep a complete record of all commodities received by him, of the receipts issued therefore, of the withdrawals, of the liquidation, and of all receipts returned to and cancelled by him (Sec. 9).

Rights of Injured Person against Warehouseman (Sec. 7): He may sue on the bond put up by the

warehouseman to recover the damages he may have sustained on account of such breach.

In case the bond is not sufficient to cover the full market value of the commodity stored, he may sue on any property or assets of the warehouseman not exempt by law from attachment and execution.

Offenses penalized under the Act: a. engaging in the business of

receiving commodities for storage without the proper license (Sec. 11);

b. receiving a quantity of commodity greater than that specified in the license of the warehouseman (Sec. 12);

c. conniving or entering into a combination with an unlicensed warehouseman for the purpose of avoiding compliance with the requirement of obtaining a license before engaging in the business of receiving commodities for storage (Sec. 13).

Letters of Credit

Defined: An engagement by a bank or other person made at the request of a customer that the issuer will honor a draft or other demands for payments or other complaints with the conditions specified in the credit.

In a letter of credit, there are 3 distinct and independent contracts:

1. contract of sale between buyer and seller,

2. contract of the buyer with issuing bank, and

3. letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein.

Essential Conditions: 1. sued in favor of a definite person; 2. amount fixed or specified; 3. duration of 6 months, if used in the

Phil. or 1 year, if used abroad, unless the parties provide for a different period.

Perfection: Letters of credit are deemed perfected from the time the correspondent bank makes payment to persons in whose favor the letter of credit has been opened.

Parties to a Letter of Credit transaction:

1. Buyer - procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title;

2. Issuing bank - undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and

3. Seller - ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment.

Other parties:1. Advising / notifying bank - notify

and/or transmit to the beneficiary the existence of the letter of credit.

2. Negotiating bank - buys or discounts a draft under the letter of credit.




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3. Confirming bank - assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.

4. Paying bank - undertakes to encash the drafts drawn by the exporter.

Assignment of credit - the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor.

An assignor is liable for the legality of the credit and for his capacity as transferor, but not for the solvency of the debtor unless there is an agreement to the contrary.

An assignee cannot acquire a greater right than that pertaining to the assignor.

Rules relating to Letters of Credit:1. In the absence of any particular

provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed;

2. An advising or notifying bank does not incur any obligation by such notification and is only bound to check the apparent authenticity of the letter of credit. (Bank of America vs. CA, G.R. No. 105395)

3. an advising or notifying bank is not privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. (Feati Bank vs. CA, G.R. No. 94209)

4. a negotiating bank has a right of recourse against the issuer bank and, until reimbursement is obtained, the drawer of the draft continues to assume a contingent liability thereon;

5. between the seller and negotiating bank there is the usual relationship existing between a drawer and the purchaser of drafts; the involved bank deals

only with documents and not on the goods describes in the documents.

Independence Principle means that a bank, in determining

compliance with the terms of a letter of credit;

is required to examine only the shipping documents presented by the seller; and

is precluded from determining whether the main contract is actually accomplished or not.

Rule of Strict Compliance means that the documents tendered

by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e., they must include all documents required by the letter of credit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary thus the rule of strict compliance. (Feati Bank & Trust Company vs. CA, G.R. No. 94209)

Standby letter of credit a bank-issued option on a loan

whereby the beneficiary has the right to trigger the loan option if the account party fails to meet its commitment, in which case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer.

Common types of letters of credit:1. Irrevocable - obligates the issuing

bank to honor drafts drawn in compliance with the credit and can




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be neither cancelled nor modified without the consent of all parties, including in particular the beneficiary/ exporter.

2. Revocable - can be cancelled or amended at any time before payment which is intended to serve as a means of arranging payment but not as a guarantee of payment.

3. Confirmed - a letter of credit issued by one bank which may be confirmed by another, by which both banks are obligated to honor drafts drawn in compliance with the credit.

4. Unconfirmed - the obligation to confirm the letter of credit belongs only to the issuing bank.

5. Revolving - a letter of credit, which is valid for several transactions over a given period of time.

6. Non-revolving - a letter of credit that is valid for one transaction only.

7. Cumulative - a revolving letter of credit where an undrawn amount is carried over to future periods.

8. Non-cumulative - a revolving letter of credit by which any amount not used by the beneficiary during the specified period may not be drawn against in a later period.

Draft - an order written by an exporter/seller instructing an importer/buyer or its agent to pay a specified amount of money at a specified time.

Types of Drafts1. Sight draft - payable on

presentation to the drawee and the drawee must pay at once or dishonor the draft.

2. Time draft - allows a delay in payment. Once accepted, the time draft becomes a promise to pay by the accepting party.

3. Clean draft - an order to pay unaccompanied by any other documents.

4. Documentary draft - various shipping documents are attached to the draft.

Documents needed as condition of the letter of credit for honoring a draft:

1. Bill of lading2. Commercial invoice3. Consular invoice4. Certificate of analysis5. Packing list6. Export declaration

Trust Receipts Law (P.D. 115)

Defined: A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank.

It is a written / printed document signed by the entrustee;

in favor of the entruster; whereby the latter releases the goods,

documents or instruments to the possession of the former upon the entrustee’s promise:

a. to hold said goods in trust for the entruster;

b. to sell the goods; c. turn over the proceeds thereof

to the extent of what is owing to the entruster; or

d. to return the goods if unsold or for other purposes. (Sec. 4)

The Trust Receipt Law does not seek to enforce the payment of loans. Thus, there can be no violation of the right against imprisonment for non-payment of a debt. It is not an offense against property but an offense against public order. (People vs. Nitafan, 207 SCRA 726)

Parties:1. Entrustee – refer to the person

having or taking possession o goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement.




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2. Entrustor – person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.

Note: on issuing trust receipts, the bank, if not paid what is due it, will be preferred over other creditors of the entrustee. He is not liable to the buyer of the goods as vendor.

Rights of the entruster: (PROCE)1. Entitled to the proceeds from the

sale of goods, documents or instruments; (P)

2. Entitled to the return of goods , etc. in case of non-sale; (R)

3. Enforce all other rights conferred on him under the trust receipts; (O)

4. May cancel the trust and take possession of goods, etc. on case of breach of trust agreement; (C) and

5. Give at least 5 days notice to the entrustee of the intention to sell the goods, etc.; he my purchase at a public sale. (E)

The entruster is not the owner of the goods but merely a holder of a security title.

The entruster’s security interest shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. Security interest of the entruster’s advances will have to be settled first before the entrustee can consolidate his ownership over the goods.

He is not liable as principal or vendor under any sale or contract to sell made by the entrustee.

No agency relationship is established in Trust Receipts Law.

Obligations of entrustee: (RAIDS-ROH)

1. Receive the proceeds in trust for the entruster; (R)

2. Turn over the proceeds to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (A)

3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (I)

4. Dispose the goods, etc. strictly in accordance with the terms and conditions of the trust receipt; (D)

5. Keep said goods or proceeds thereof separate and capable of identification as property of the entruster; (S)

6. Return the goods, etc. in the event of non-sale or upon demand of the entruster; (R)

7. Observe all other terms and conditions of the trust receipt not contrary to law. (O) and

8. Hold the goods, etc. in trust for the entruster; (H)

The risk of loss shall be borne by the entrustee. Loss of goods, etc. pending disposition, whether due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

It is assumed that the title and possession is turned over to the entrustee. The law does not cover sales on credit with the title or other interest being retained by the seller as security thereof.

A purchaser for value and in good faith acquires said goods, etc. free from the entruster’s security interest.

Civil Law Concepts

Trust Receipts Law

Concept

Where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected. (Art. 1505)

Although the trustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor), anyone who acquires the goods from the entrustee acquires good title over the goods.

Owner will bear Although the




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the risk of loss of the object.

entrustee is not the owner of the goods covered by a trust receipt, he bears the risk of loss.

Effects of breach of obligation: (DEEM) Acts involving the violation of trust

receipts agreement, such as failure to turn over the goods or the proceeds realized from the sale thereof, shall render the offender liable for estafa under Article 315, par. 1-b of the Revised Penal Code. (E)

If the violation or offense is committed by a corporation, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Pilipinas Bank vs. Ong, G.R. No. 133176) (D)

In the event of default by the entrustee the entruster need not demand the return of the unsold goods to be able to enforce his rights under the trust receipt. (E)

Fraud and deceit need not be proven for the offense is punished as malum prohibitum regardless of intent or malice. (M)

Surrender of the goods to the bank, if unsold merely extinguishes the entrustee’s criminal liability but is not relieved of its obligation to pay for the money borrowed.

Note: Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD No. 115. However, what is being punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. The mala prohibita nature of the offense notwithstanding, intent to misuse or misappropriate the goods or their proceeds has to be established by the records. (Pilipinas Bank vs. Ong, G.R. No. 133176)

Trust Receipt PledgeThe property is in the possession of the person financed.

The person doing the financing has possession of the property.

There is no sale of the property from the entruster to the entrustee.

Conditional SaleThere is a sale of the property from the seller to the buyer.

Does not involve the creation of a lien.

Chattel Mortgage

Involves the creation of a lien upon the property.

The seller does not retain title to the property but transfers such title to the entruster.

ConsignmentThe consignor retains title to the property to secure the indebtedness due form the consignee.

CHATTEL MORTGAGE LAW(Act No. 1508)

CHATTEL MORTGAGE An accessory contract by virtue of

which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. (Art. 2140, NCC)

It is no longer considered as a conditional sale.

SUBJECT MATTER: personal or movable property :

(MISS-MORBI)1. Machinery treated as personal

property subsequently installed on leased land; (Davao Sawmill v. Castillo, 61 Phil. 709) (M)

2. Interest in business; (I)3. House of strong materials-

personal property for purposes of executing a chattel mortgage as the parties to the contract so agrees and no innocent third party will be prejudiced. (S)




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4. Shares of stock; (need not be registered in the stocks and transfer book.) (S)

5. House of mixed materials; (M)6. Vessels recorded in the office of

the Philippine Coast Guard to be effective as to third persons; not necessary to be recorded in the Office of the Registry of Deeds; (O)

7. Motor Vehicles mortgage registered in LTO (for vehicles used for public services); (R)

8. House built on rented land; (B)GR: still immovable property Exception: by estoppel treated as movable (the chattel mortgage is valid as between the parties but not against third persons.)

9. House intended to be demolished. (I)

EXTENT OF CHATTEL MORTGAGE1. After-acquired properties:

GR: covers only the property described therein and not like or substituted property acquired by the mortgagor and placed in the same depository as the property originally mortgaged (Sec. 7 par. 4).

Exception: This provision does not apply to stores open to public for retail business where the goods are constantly sold and substituted with new stock (Torres v. Limjap, 56 Phil 141).

Note: A stipulation in the chattel mortgage which includes goods that are acquired in renewal of or in substitution of goods on hand when the mortgage was executed is valid and binding. (Northern Motors, Inc. v. Coquia, 66 SCRA 415).

2. After-incurred obligations

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage can only cover

obligations existing at the time the mortgage is constituted.

Promise expressed in a chattel mortgage to cover debts yet to be contracted may be binding but security itself arise only after amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. (Acme Shoe Rubber and Plastic Corp. v. CA, 260 SCRA 714)

A deed of chattel mortgage is void where it provides that the security stated therein is for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee.

Essential requisites: (CADO)1. Constituted to secure the

fulfillment of a principal obligation; (C)

2. The mortgagor be the absolute owner of the thing mortgaged; (A)

3. The persons constituting the mortgage have the free disposal of the property or in the absence thereof, that they are legally authorized for the purpose; (D)

4. The object be personal or movable property. (O)

Formal requisites: (SAMR or MARS)1. Signed by the person executing

the same in the presence of 2 witnesses; (S)

2. Accompanied by an affidavit of good faith and a certificate of oath; (A)

3. Mortgaged property must be described in such a manner as to enable anybody reading the document, after reasonable inquiry and investigation, to be able to identify the same; (M) and

4. Registration (R)

Affidavit of Good Faith Included in the contract of chattel

mortgage wherein the parties “severally swear that the mortgage is made:




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for the purpose of securing the obligation specified in conditions thereof, and

for no other purpose and that the same is just and valid obligation and

one not entered into for the purpose of fraud.” (Sec. 5)

The affidavit gives the mortgagee a preferred status; it enjoys preference of third person.

Effect of its absence: the contract is valid between the parties but will not bind third person without notice.

Where registered: Resident: place of residence Non-resident: where the property is

situated Where the mortgagor resides in a

place different from where the property is situated: in the place where the mortgagor resides and where the property is situatedException: Where the amount of the mortgage is more than P500,000 registration of the mortgage in the province where the property is situated is sufficient (Sec. 4).

Note: where motor vehicles are involved, the contract must be recorded also in the Land Transportation Office where the vehicle is registered (Sec. 5(e), Revised Motor Vehicles Law); where the vehicle is a public utility

and the mortgage is executed to guaranty a loan not payable within 1 year, the approval of the Land Transportation Franchising and Regulatory Board is required.

Effect of failure to register: the contract is valid between the parties but will not bind third person without notice.

Remedies of Mortgagee in case of default by mortgagor: 1. Foreclose the mortgage 30 days after

the condition is broken (Sec. 14);

General Rule: public auction

Exception: there is an agreement for private sale; hence, the mortgagor is in estoppel to question itException to the exception: when there is fraud or duress

2. Bring ordinary action to recover money;

Remedies are alternative.

Distribution of proceeds of foreclosure sale: 1. payment of the costs of keeping

and sale; 2. payment of the obligation secured

by such mortgage; 3. payment of the obligation secured

by subsequent mortgages; and4. balance, if any shall be paid to the

mortgagor (Sec. 14).

RULE ON RECOVERY OF DEFICIENCY:General Rule: There is recovery of deficiency in all mortgages (chattel and real). Reason: Mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation. The action may be brought within 10 years from the time the cause of action accrues.

Exceptions:1. chattel mortgage on the thing sold (Art. 1485, 1486 NCC)2. pledge (Art. 2115, NCC)

EQUITY OF REDEMPTION The following may redeem after the

condition of the chattel mortgage is broken but before the sale thereof:

1. mortgagor;2. a person holding a subsequent

mortgage;3. a subsequent attaching

creditor.

An attaching creditor who redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage (Sec. 13).




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No right of redemption in chattel mortgage after foreclosure sale (Cabral vs. Evangelista 28 SCRA 1000).

Right acquired by 2nd mortgagee and subsequent purchaser:

1. Before payment of debt After the mortgage is executed,

the mortgagor has only an equity of redemption and only this right passes to the 2nd mortgagee in case of a 2nd mortgage.

As between the 1st and the 2nd

mortgagee, the latter can only recover the property from the former by paying him the mortgage debt.

2. after payment of debt The judgment or attaching creditor

who purchased the property at the execution sale could not acquire anything except such right of redemption.

He is not entitled to the actual possession and delivery of the property without first paying the mortgage debt.

RECTO LAW (Article 1484 and 1485, NCC)

In sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (ECF)

1. Exact fulfillment of the obligation, should the vendee fail to pay; (E)

2. Cancel the sale, should the vendee’s failure to pay cover 2 or more installments; (C) and

3. Foreclose the chattel mortgage on the thing sold, should the vendee’s failure to pay cover 2 or more installments. He can not recover any unpaid balance of the price. Any agreement to the contrary shall be void. (F)

The foregoing also applies to contracts purporting to be leases of

personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.

The remedies are alternative, not cumulative.

Foreclosure of chattel mortgage on the things sold shall bar recovery of any deficiency, including recovery from a guarantor.

If the seller-mortgagee opts to exercise remedy #1, he shall be deemed to have waived his right as a mortgagee but may still levy on the mortgaged property.

Offenses involving chattel mortgage under the Art. 319 of the RPC:

1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; and

2. Selling or pledging personal property already mortgages, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chattel Mortgage Register.

The property removed or repledged, as the case may be, should be the same or identical property that was mortgaged or pledged before such removal or pledging.

The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full, or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged, though the sale is valid.




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Distinctions between chattel mortgage and pledge:

As to: Chattel Mortgage

Pledge

Delivery of the personal property

Not necessary

Necessary

Registration of the property

Necessary for the validity of the mortgage.

Not necessary

Procedure Sec. 14 of Act No. 1508

Art. 2112 of the Civil Code

Right of the debtor to the excess

Has a right to the excess

No right tot eh excess

Deficiency Creditor may recover

Creditor cannot recover

Consent of the mortgagee/ pledgee

Must be in writing and annotated on the back of the mortgage instrument.

Need not be in writing and may be oral.

Affidavit

Mortgagor must execute an affidavit of good faith.

Not required

Distinctions between a chattel mortgage and a pacto de retro sale:


Pacto de Retro Sale

Nature of the contract

Accessory Principal

Title to the thing

Not transferred

Transferred subject to the right of redemption

Affidavit of good faith

Required Not required

Distinctions between chattel mortgage and real estate mortgage:


Real Estate

Mortgage

ObjectPersonal or movable property

Real or immovable

Affidavit of good faith

RequiredNot required

Consent of the mortgagee in order to alienate the property

Consent must be written

No consent needed and any such prohibition is void

Right of redemption

No such right

Right exists in extrajudicial and judicial foreclosure by banks

Future obligations

Cannot guarantee

Can guarantee

REAL ESTATE MORTGAGE (Act No. 3135)

REMEDIES OF A REAL ESTATE MORTGAGEE:1. Ordinary action for sum of money;2. Foreclosure

a. judicial – file a petition in court under Rule 68 if there is no stipulation authorizing extrajudicial foreclosure.

b. extrajudicial (ACT 3135) – file a petition with sheriff’s office provided there is a stipulation authorizing extrajudicial foreclosure.

KINDS OF REDEMPTION1. Equity redemption – the right of the

mortgagor to redeem the mortgaged




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property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of the sale.

2. Right of redemption – the right of the mortgagor to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt.

RIGHT OF REDEMPTION1. Judicial foreclosure

GR: No right of redemption. Only equity of redemption within 90 days after judgment becomes final or even after foreclosure sale but prior to confirmation of sale (Limpin v. IAC, 166 SCRA 87).Exceptions:

a. mortgagee is a bank – 1 year from registration of the sale (Sec. 47, General Banking Law)

b. the purchaser consents

Procedure: (AIM-CA)a. An action for the purpose should

be filed. (A)b. The court will order the mortgagor

to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment. (I)

c. If the mortgagor fails to pay at such time, the court, upon motion, shall order the property to be sold to the highest bidder at public auction. (M)

d. Confirmation of sale by the court upon motion. (C)

e. Application of proceeds of sale (A): (CAJB)1. costs of the sale; (C)2. the amount due to the

mortgagee; (A)3. claims of junior encumbrances

or persons holding subsequent mortgages in the order of their priority; (J) and

4. the balance, if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it. (B)

2. Extrajudicial foreclosure (ACT 3135)GR: There is right of redemption within 1 year from registration of the sale with Registry of Deeds. (Sec. 6, Act No. 3135)Exception: where the mortgagee is a bank and the mortgagor is a juridical person, redemption period is:

a. 3 months after foreclosure; or b. before registration of the sale;

whichever is earlier. (Sec. 47, General Banking Law)

Shall be made at public auction within the province where the property is situated

Sale is made after: posting the notice of the sale for

not less than 20 days in at least 3 public places at the municipality or city where the property is situated: Sheriff’s Office Assessor’s Office, and the Register of Deeds, and

The publication thereof once a week for 3 consecutive weeks in a newspaper of general circulation in said municipality or city if the property is worth more than 400 pesos.

Personal notice to the mortgagor.GR: not requiredException: contrary stipulation in the mortgage contract.

REDEMPTION PRICE:GR: Bid / purchase price, 1% interest per month from date of registration to redemption, costs and expenses of sale. (Rule 39 Sec. 28)Exception: In banks, the amount of loan, interest, costs and expenses of sale less income derived by the bank (Sec. 47, General Banking Law).

Who may redeem:1. Mortgagor or one in privity of

title with mortgagor; (M)2. Successor-in-interest:

a. the one to whom the debtor has transferred his right of redemption; or

b. one to whom the debtor has conveyed his interest in the




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property for the purpose of redemption; or

c. one who succeed to the interest of the debtor by operation of law; or

d. one or more joint debtors who were joint owners of the property sold; or

e. the wife as regards her husband’s homestead by reason of the fact that some portion of her husband’s title passes to her.

INSOLVENCY LAW (ACT NO. 1956)

PURPOSES:1. To provide a mechanism for the

equitable distribution of assets of an insolvent debtor among his creditors.

2. To relieve the debtor of his liabilities enabling him to start anew free from such debts.

SUSPENSION OF PAYMENTS The state desired by a

debtor who, possessing sufficient property to cover all his debts, foresees the impossibility of meeting them when they respectively fall due.

The object of a suspension of payment is to defer the payment of debts until such time as the debtor has converted his assets into cash to pay his obligations.

The Regional Trial Court has jurisdiction over the petition for suspension of payments. Note: Sec. 5.2 R.A. No. 8799 transferred petitions by corporations, partnerships, or associations to be declared in the state of suspension of payments to the RTC.

The following may file a petition for suspension of payments:

1. Individual Debtor He may petition the court of the

province or city in which he has resided for six (6) months preceding the filing of his petition that he be declared in the state of suspension of payments (Sec. 2).

2. Corporate Debtor The corporation may possess

sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation has no assets to cover its liabilities but is under management of a Rehabilitation Receiver or Management Committee. (Sec. 5 [d], PD 902-A)

Procedure: (PIPA-OC)1. Filing of petition by the debtor

(Sec. 2). (P) Annexed is the schedule of

creditors, a statement of debtors assets and liabilities, and the debtor’s proposal for the suspension of payments

2. Issuance by the court of an order calling for a meeting of the creditors (Sec.3). (I)

3. Publication of the order and service thereof on the creditors (Sec. 4). (P)

4. Meeting of creditors for the approval or disapproval of the debtor’s proposition (Sec. 8). (A) The presence of creditors

representing at least 3/5 of the liabilities of the debtor is the quorum required for the debtor’s proposal to be properly approved (Sec. 8).

Double Majority Rule: To obtain a majority vote, at least 2/3 of the creditors representing at least 3/5 of the total liabilities of the debtor must vote on the same proposition. (Sec. 8 [e])

5. Objection, if any and if justified, to the decision of the meeting of the creditors (Sec. 11). (O)Grounds for objection:

a. defects in the call for the meeting, in holding thereof, or in deliberations ha thereat, which prejudiced creditor’s rights

b. fraudulent connivance between one or more creditors and debtor to vote in




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favor of the proposed agreement

c. fraudulent connivance of claims to obtain a majority (Sec. 12)

6. Court order to complement the agreement (Sec. 11). (C)

Suspension of payments is a proceeding in rem; thus, for the court to acquire proper jurisdiction, the application must be published as often as the court may require.

Effects of Filing of Petition by Individual Debtor for Suspension of Payments: (EODL or DOLE)

1. All pending executions against debtor’s property are suspended, except executions against properties specially mortgaged (Sec. 8); (E)

2. No ordinary creditor may file an action in court against the debtor (Sec. 9); (O)

3. Debtor may not dispose of his property, except in the ordinary course of the business in which he is engaged; (D)

4. Debtor cannot make any payments outside of the necessary or legitimate expenses of his business (Sec. 3). (L)

Effects of an affirmative or negative decision of the creditors: (Sec.11) (AN)

1. If the decision is in the affirmative, and there is no objection or the court has denied the objection, the parties are bound thereby. (A)

2. If the decision is in the negative, or if no decision is had, the proceedings shall be deemed terminated and the parties shall be at liberty to enforce their rights. (N)

Distinctions between the insolvency law and PD 902:

INSOLVENCY LAW

PD 902-A

Applies to either Only to

individual or corporate debtor

corporate debtors

Suspensive effect does not cover secured creditors

Suspensive effect covers secured and unsecured creditors

In absence of any agreement among creditors, automatic stay expire after 3 mos.

No time limit as long as corporate debtor under management committee/ rehabilitation receiver

Agreement subject to qualifying majority votes

No need to obtain approval of creditors

INSOLVENCY PROCEEDINGS

A. VOLUNTARY INSOLVENCY The state desired by a debtor

owing debts exceeding the amount of P1, 000. He may be discharged from his liabilities by filing a petition with the RTC of the province or city in which he has resided for 6 months next preceding the filing of the petition. (Sec. 14)

Procedure: (PIPAC-LDOA)1. Filing of petition by the debtor. (Sec. 14) (P)2. Issuance by the court of

an order declaring, among other things, that the petitioner is insolvent (Sec. 18). (I)

3. Publication of order and service thereof on the creditors (Sec. 19). (P)

4. Meeting of Creditors for assignment of assignee in insolvency (Sec. 30). (A)

5. Conveyance of debtor’s property to assignee in insolvency (Sec. 32). (C)

6. Liquidation of assets and payment of debts (Sec. 33). (L)

7. Discharge of the debtor (Sec. 66). (D)

8. Objections to the discharge, if any (Sec. 66). (O)




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9. Appeal to the Supreme Court in certain cases (Sec. 82). (A)

Effects of Order Declaring Debtor Insolvent: (SPAT)1. all debtor’s assets placed in

sheriff’s custody until a receiver or assignee has been appointed; (S)

2. payment to debtor of any debt due him, or delivery of any property due to him, and the transfer or conveyance of any property by him, are forbidden; time and place fixed for a meeting of creditors to select the assignee in insolvency; (P)

3. all civil proceedings against the insolvent are stayed, except those pertaining to foreclosure of secured liens; (A) and

4. time and place fixed for a meeting of creditors to select the assignee in insolvency. (T)

Voluntary Insolvency of Partnership (Sec. 51) on the petition of partners same requisites and conditions for

natural persons will also apply partnerships duly registered with the

SEC are now governed by PD 902-A when it comes to rehabilitation / suspension of payments

Voluntary Insolvency of Corporation (Sec. 52) How:

upon petition by any officer of the corporation, duly authorized by the board of directors, or upon the written assent of majority of the board. Exception: if the articles or by-laws of the corporation provides otherwise, such method shall be followed

Same rules for natural persons shall applyException: corporations engaged principally in the banking business or to any other corporation governed by special laws providing for rules of liquidation in case of insolvency

no discharge shall be granted to any corporation

B. INVOLUNTARY INSOLVENCY

The state to which the debtor may be placed by:

3 or more creditors who are residents of the

Philippines whose credits accrued in the

Philippines in the amount not less than 1,000

pesos The creditors may file, with the RTC

of the province or city in which the debtor resides or has his principal place of business, a petition which must allege the commission by the debtor of one or more acts of insolvency. (Sec. 20)

Procedure: (FOSAT-FPECL-DOS)1. Filing of petition by the creditors

of the debtor (Sec. 20). (F)2. Order of the court requiring the

debtor to show cause why he should not be declared insolvent (Sec. 21). (O)

3. Service of the order on the debtor (Sec. 22). (S)

4. Filing of answer or motion to dismiss by the debtor (Sec. 23). (A)

5. Trial of the case (Sec. 23). (T)6. If the court favors the debtor, then

the proceedings shall be dismissed (Sec. 23); if the court favors the creditors or the debtor defaults, then the court shall issue an order-adjudging debtor insolvent (Sec. 24). (F)

7. Publication of order and service thereof on the creditors (Sec.25). (P)

8. Meeting of creditors for election of the assignee in insolvency (Sec. 30). (E)

9. Conveyance of debtor’s property to assignee in insolvency (Sec. 32). (C)

10. Liquidation of assets and payment of debts (Sec. 33). (L)




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11. Discharge of the debtor (Sec. 66). (D)

12. Objections to the discharge, if any (Sec. 66). (O)

13. Appeal to the Supreme Court in certain cases (Sec. 82). (S)

Acts of Insolvency: (CRAFT-ACAPIDI)

1. Concealment of debtor to avoid legal processes. (C)

2. Concealment or removal of his property to avoid legal processes. (R)

3. Absence from the Philippines to defraud creditors. (A)

4. Failure to pay money on deposit or received in a fiduciary capacity for a period of thirty (30) days. (F)

5. Transferring his property in contemplation of insolvency. (T)

6. Allowing his property to be taken under legal process in preference of a particular creditor to defraud other creditors. (A)

7. Confession of judgment in favor of any creditor to defraud other creditors. (C)

8. Making conveyance, assignment, or transfer of his property to defraud other creditors. (A)

9. Default of merchant or tradesman to pay his current obligations for a period of thirty (30) days after demand. (P)

10.Intention to depart from the Philippines to defraud creditors. (I)

11.Allowing default judgment in favor of a creditor to defraud other creditors. (D)

12.Insufficiency of property to satisfy an execution issued against him. (Sec. 20) (I)

Distinctions between suspension of payments and insolvency:

Suspension of Payments

Insolvency

The debtor has sufficient property to cover all his debts but foresees the

The debtor does no sufficient property to pay


Insolvency

impossibility of meeting them when they respectively fall due

his debts

The purpose is to suspend the payment of debts.

The purpose is to discharge the debtor from the payment of certain debts.

Distinctions between suspension of payments and insolvency:


Insolvency

The debtor has sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due

The debtor does no sufficient property to pay his debts

The purpose is to suspend the payment of debts.

The purpose is to discharge the debtor from the payment of certain debts.

The amount of the indebtedness is not affected.

Some of the creditors may receive less than their credits

The number of creditors is immaterial.

In case of involuntary insolvency, 3 or more creditors are required.

Distinctions between voluntary insolvency and involuntary insolvency:

As to: Voluntary Insolvenc

y

Involuntary Insolvency

Number of One is 3 or more




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creditors sufficient are required

Who must file

By the debtor

By 3 or more qualified creditors

Reason for filing

No need for the commission of acts of insolvency

Debtors must have committed any acts of insolvency

Amount of indebtedness

Exceeds P1,000.00

Must not be less than P1,000.00

Bond Not required

Required

as to creditors

None

The creditors must be Philippine residents whose credits accrued in the Philippines and none of them become a creditor by assignment within 30 days prior to the filing of the petition.

The order of adjudication

May be granted ex parte

Granted only after a hearing

Where to file petition

Petition must be filed with the RTC where petitioner-debtor resided 6 months prior to filing

Length of residence is immaterial

Effects of Adjudication of Insolvency:1. Forbid the payment to the debtor

of any debt due to him and the delivery to him of any property belonging to him; (P)

2. Forbid the transfer of any property to him; (T)

3. Stay of all pending civil proceedings against the insolvent. (Secs. 18 and 24). (S) Unpaid claims of wages are

subordinate to legal and contractual claims.

The Insolvency Law still governs the procedure when a corporate debtor seeks to pursue voluntary insolvency proceedings.

Date of Cleavage Date when the petition is filed, from

which we count backward or forward, in determining the effects provided for under the Insolvency Law

When important: A creditor by

assignment of credit made within 30 days from date of cleavage shall be disqualified as petitioning creditor (Sec. 20)

Attachment levied upon within a period of 30 days before the date of cleavage may be set aside by the assignee (Sec. 32)

Judgments on cases filed and decided within 0 days prior to the date of cleavage may be set aside by the assignee (Sec. 32)

Judgments on cases filed before 30 days from the date of cleavage but decided within 0 days because of confession o judgment or declaration of default of debtor may be set aside by action of assignee (Sec. 32)

Properties acquired after date of cleavage, after discharge of debtor in good faith shall not be liable for debts incurred prior to date of cleavage

Fraudulent references made within 30 days prior to the date of cleavage may be set aside in an action brought by assignee. (Sec. 70)

Composition




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An agreement whereby the creditors of an insolvent agree to accept a certain percentage of their claims in full settlement of such claims. It is the method of dividing the estate of the insolvent debtor among his creditors.

Discharge The release of the debtor from his

liabilities, which may be proved in the insolvency proceedings such that they are no longer a charge upon him.

Only natural persons may ask for a discharge (Sec. 52)

Requirements:a. debtor must have complied with

statutory requirements regarding surrender of his assets for the benefit of credits and regarding the rendition of an account of his assets and liabilities.

b. He must have applied for discharge

c. Debtor must not have committed any of the acts of insolvency (Sec. 65) preventing discharge of a debtor.

When may a debtor apply for discharge: Anytime after the expiration of 3

months from the adjudication of insolvency BUT not later than 1 year from such adjudication.

Failure to apply within the said period, debtor loses his right to be discharged. (Sec. 64)

But the debtor is still entitled to a SECOND DISCHARGE. The second discharge takes place:

after 6 years from the first discharge or,

within 6 years from the first discharge, if the second insolvency proceeding is INVOLUNTARY. (Sec. 65)

Legal Effects of Discharge: (R-COS-C)

1. The insolvent debtor is released from:

a. all his debts and liabilities set forth in the schedule, and

b. all debts, liabilities or claims which were or might have been proved against the estate in insolvency (Sec. 69)

2. Takes effect not from the date it was granted but retroacts to the date of the commencement of the proceedings in insolvency. (C)

3. It operates as a discharge of the insolvent and future acquisitions, but permits mortgagees and other lien creditors to have their satisfaction out of the mortgage or subject of the lien. (O)

4. It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands. (S)

5. Where a debtor is judicially declared insolvent, the remedy of the guarantor or surety would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety is not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. (C)

The following are not discharged: (SOFT-NO)1. claims of secured creditor. (S)2. debts created by defalcation by public

officer or while acting in fiduciary capacity. (O)

3. debt created by fraud or embezzlement. (F)

4. taxes or assessment due to the National or local government. (T)

5. debts not listed in debtor’s schedule unless creditor had notice or actual knowledge of the insolvency proceedings. (N)

6. debts owing to creditors who were listed in the schedule, but were not duly notified of the proceedings (Secs. 67-69). (O)

Fraudulent Preferences (Sec. 70) If a debtor transferred property to any

person to give him preference, such transfer may be set aside by proper court action by the assignee and the property will be returned to the insolvent’s estate for equitable distribution among his creditors.




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Period: the transfer should take place within the 30 day period from the date of cleavage.

Presumed fraudulent transfer: (NUN)a. not in the ordinary course of business; (N)b. under confession of judgment; (U)c. not for valuable consideration.

(N)

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Commercial Law Memory Aid

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