THE

CPA
BOARD EXAMS
OUTLINES
by theMahatma

#2

REGULATORY FRAMEWORK FOR

BUSINESS TRANSACTIONS

OBLIGATIONS
Q&A #1
Select discussions based on lectures by Atty. Dante de la Cruz, CPA
(CPAR)
Q&A: WHAT ARE THE IMPLICATIONS OF JOINT AND SOLIDARY
LIABILITY BETWEEN THE DEBTOR(S) AND CREDITOR(S)?

 There can be more than one debtors, creditors, or both. If silent,

the nature of their liability is joint

 In a joint liability (prorata, mancomunada), the share of liability of

one of the debtors/creditors is distinct from the share of the
others. That is, the debtor/creditor is only responsible/can only
receive his share. In the event that one debtor cannot pay, the
others will not be responsible for his debt. It is as if there are
several debts in one liability

 In a solidary liability (in solidum, jointly and severally, individually

and collectively), each one creditor can claim from each one
debtor the entire obligation. In the event that one solidary debtor
becomes insolvent, the others will still be responsible for his debt
in proportion to their share of liability. Also, the solidary parties are
bound by mutual agency: the acts of one binds the others, and
rights cannot be assigned without the consent of others

 If silent, the parties share the liability equally, but they may
stipulate a particular sharing scheme

ILLUSTRATION A, B, C are debtors while D, E are creditors for a

liability of Php 12,000. How much could E collect from C? Assume
equal sharing of liability
o If both debtors and creditors are liable jointly, E can collect a
total of Php 6,000. His share will be divided among the
debtors equally, so he can collect Php 2,000 from C
o If debtors are liable solidarily, E can collect his entire share
from either the debtors, so he can collect Php 6,000 from C,
just as he could from the other debtors
o If the creditors are liable solidarily, E can collect the entire
obligation. Since the debtors are joint, they will share Php
12,000 equally, so he can collect Php 4,000 from C
o If both debtors and creditors are liable solidarily, E can collect
Php 12,000 from C, just as he could from all the other
debtors

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 Assume that the debtors share the liability 1:4:5, while the
creditors share 2:1. How much could E collect from C?
o If both debtors and creditors are liable jointly, E can collect a
total of Php 4,000. This shall be divided among the debtors
according to their sharing scheme. Thus, he can collect Php
2,000 from C
o If debtors are liable solidarily, E can collect the entire Php
4,000 from C, just as he would from the other debtors
o If the creditors are liable solidarily, E can collect the entire
Php 12,000 despite the sharing. In solidary liability, such
sharing schemes work only between the co-debtors/creditors.
However, the amount will be shared by the debtors according
to the ratio since they are jointly liable. Thus, he can collect
Php 6,000 from C
o If both debtors and creditors are liable solidarily, E can collect
the entire Php 12,000 from C

If it turns out that one of the debtors cannot give consent (due to
minority, insanity or otherwise), he shall not be liable for the debt.
Thus in the first case (equal sharing, both parties joint), if C was a
minor, the debt to be paid would only be Php 8,000

As mentioned, solidary creditors cannot assign their rights to

others without prior consent, but they can condone (“forgive”) part
or the entire debt even without the consent of his co-creditors. In
the first case, if E condones C’s debt, the amount to be paid would
only be Php 8,000. However, E will be liable to D for the debt
condoned, and – if the debtors are solidarily liable – C will be
liable to his co-debtor who fully paid the debt

Q&A: SUPPOSE THERE ARE TWO SOLIDARY CREDITORS AND ONE

DEBTOR. THE TWO CREDITORS BOTH DEMAND FOR THE ENTIRE DEBT.
WHO HAS THE BETTER RIGHT?

 The creditor who first demanded has the better right. In case the
debtor pays the other one, his payment is considered invalid and
thus the obligation is not extinguished

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Q&A: WHAT HAPPENS WHEN THE PRESTATION IS LOST IN
ALTERNATIVE AND FACULTATIVE OBLIGATIONS?

 Alternative obligations are those where there are several

prestations/objects due, though the performance of one is
sufficient to extinguish the obligation. The choice may belong to
either the debtor or the creditor. Facultative obligations are those
where there’s only one prestation, but the debtor may substitute
another in its place. The choice always belongs to the debtor and
no one else

 If silent, the choice belongs to the debtor in alternative obligations.

Thus, if one of the objects is lost, he is not liable to the creditor
since he can pick another to perform. If all the objects are lost, he
is liable to the creditor for the value of the last thing lost

Assume the choice belongs to the creditor. If one of the objects is

lost, the debtor is not liable to him, unless the thing lost has been
chosen as the prestation. In alternative obligations, once the
choice is communicated, it is converted to a simple obligation. If
all are lost, the debtor may be made liable for the value of any of
the things lost

The above cases assume that the loss is due to the fault of the
debtor. If due to fortuitous events or that of the creditor, debtor is
of course not liable

 In facultative obligations, the loss of the principal will make the

debtor liable for its value (assuming his fault), unless the debtor
communicates before the loss to the creditor that he will instead
perform a substitute. If the intended substitute is lost, the debtor is
not liable since until he has communicated it to the creditor, the
substitute is not a prestation of the obligation

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Q&A: WHAT ARE THE EFFECTS IF THE DEBTOR PAYS A SUM BEFORE
THE DUE DATE?

 The debtor is generally entitled for interest (at legal rate, 6% per
annum starting July 2013) for the period from the premature
payment until the due date, but this depends if the obligation is
subject to a suspensive condition or period

 If subject to a suspensive condition (i.e., the happening of the

condition gives rise to the obligation), debtor gets the interest only
if the creditors were in bad faith. If subject to a suspensive period
(i.e., the arrival of the period gives rise to the obligation), debtor
gets the interest regardless of the creditor’s knowledge of the
obligation’s pendency

Q&A: WHAT IS RETROACTIVITY IN OBLIGATIONS?

 This occurs especially in obligations subject to suspensive

conditions. Once the condition occurs, the legal effects take effect
from when the obligation was contracted. For instance, if an
obligation to deliver a thing was contracted last year, and the
condition occurs, the creditor is considered owner of the thing from
last year. The courts determine the retroactive effects in positive
and negative personal obligations (to do, not to do)

 However, the retroactive effect does not apply to the fruits, since
creditors earn real right to them when the obligation to deliver the
principal arises (which is at due date)

ILLUSTRATION Georgia sold a cat to Charlene for Php 20,000 on

October 14, agreeing that payment and delivery will occur on
Christmas day. Later on, the cat gave birth to 20 kittens. On
Christmas day, Charlene is considered owner of the cat since
October 14. Also, Charlene is entitled to all the kittens upon
delivery. Before Christmas, Georgia has the right to the kittens, so
she can freely sell the offspring to others. Charlene has to pay the

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 price of the kittens if she desires to have them, regardless of the
knowledge of the third person of the contract. Of course, Georgia
and Charlene may stipulate that the kittens will belong to Charlene
even before Christmas, so if Georgia sells them to Jean, Georgia
will be liable for damages

Q&A: WHAT IF A THIRD PERSON PAYS SOMEONE ELSE’S DEBT? CAN HE

RECOVER WHAT HE HAS PAID?

 In all cases, a third person is entitled for reimbursement from the

benefited debtor. If the debtor already paid part of the debt, he is
entitled for the reimbursement of the part unpaid. This is
regardless if the debtor consented to his act

 However, if the debtor turns insolvent, the third person may

foreclose (sell in auction) certain debtor property to satisfy the
debt, provided that the debtor consented to his payment. This is an
example of legal subrogation. If not, he cannot foreclose debtor
property

Q&A: SUPPOSE A PASSENGER BUS GETS INTO AN ACCIDENT, INJURING

ITS PASSENGERS AND A PEDESTRIAN. WHAT CHARGES COULD THE
PARTIES BRING FORTH?

 The legal relation between the passenger and the bus company is
contractual in nature. Thus, he can bring forth culpa contractual
(contractual negligence) against the driver (or culpa criminal, at
the passenger’s option). He can also charge the same to the owner
of the bus company since the servant-master rule applies here: the
negligence of the driver is also the negligence of the owner. The
passenger may also charge culpa criminal (criminal negligence)
against the owner, but this would only be his subsidiary liability

 As to the pedestrian, he can charge culpa aquiliana (extra-

contractual negligence) against the owner. However, the owner

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 may avoid this if he proves that he exercised diligence of a good
father of a family in hiring the driver. This defense is not available if
the plaintiff is a passenger. The pedestrian may also charge
aquiliana or criminal against the driver, at his option

Q&A: IF THERE’S NO STIPULATION, WHERE DOES

PAYMENT/PERFORMANCE OCCUR?

 The place of payment/performance of the debtor depends on the

nature of the prestation. If the object is determinate, it is made
where the thing is at the time the obligation was constituted. If the
object is generic and consists of money, it is made at the residence
of the debtor

 These rules does not apply in contract of sales, where payment and
delivery is made normally at the place of business

Q&A: WHAT ARE THE EFFECTS OF IMPOSSIBILITY IN OBLIGATIONS?

 If the object of the obligation is impossible (e.g., obligation to give

one’s literal heart to a girl out of pure love), the obligation is
considered as not having been agreed upon

If the positive suspensive condition of the obligation is impossible

(e.g., obligation to give a phone if planet Uranus is destroyed), the
obligation is also void. If the negative suspensive condition is
impossible (e.g., obligation to give a phone if aliens will not invade
Earth), the obligation is immediately demandable

If the penal clause if impossible (e.g. thrown off inside a volcano if

the phone is not delivered), the obligation remains valid

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Q&A: SUPPOSE THERE ARE SEVERAL DEBTS DUE AND THE DEBTOR
DOES NOT HAVE ENOUGH CASH TO PAY THEM ALL. TO WHAT DEBTS
SHOULD THE PAYMENT BE APPLIED?

ILLUSTRATION Karen has a total of Php 10,000 in assets. She

has three outstanding debts: to JP for Php 9,000, to Emerson for Php
10,000, and to Arvin for Php 12,000. Emerson’s debt is secured with
a chattel mortgage on Karen’s car. All are due. To whom shall she
pay?
 If silent, payment must first be made to the most onerous
(“burdensome”) debts, which in this case is Emerson’s because of
the chattel mortgage. If there’s no mortgage, the payment is
applied prorata
 Karen cannot choose to pay Arvin first, since creditors cannot be
compelled to accept partial performance/payment

Q&A: WILL THE DEBTOR BE LIABLE IF THE OBJECT IS LOST DUE TO HIS
FAULT IN OBLIGATIONS WITH SUSPENSIVE CONDITIONS?

ILLUSTRATION Pepper is bound to deliver to Salt ten sacks of

sugar tomorrow if her sister does not invite her to her wedding. Due to
Pepper’s negligence, the room where the sacks are kept has been left
open and the sugar is feasted by hordes of ants. Is Pepper liable for
damages?
 A condition gives rise to the obligation provided its occurrence.
Thus, before the wedding, Pepper is not bound to Salt for anything.
If Pepper is not invited, she will be liable for damages. If she is
invited, she will not be liable for anything since the condition is not
fulfilled

Q&A: IF THE DEBTOR IS REPLACED BY ANOTHER THROUGH NOVATION,

AND IT TURNS OUT HE IS INSOLVENT, WILL THE ORIGINAL DEBTOR BE
LIABLE AGAIN?

 Novation is among the modes of extinguishing obligations made by

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 changing the terms of the obligation, the prestation, or the parties
thereto. The debtor may be replaced through his initiative
(delegacion) or through the new debtor’s initiative (expromission).
The creditor is replaced through subrogation

 Generally, once either delegacion or expromission occurs, the

original debtor is no longer liable to the creditor. However, if it
turns out the new debtor is insolvent at the time of delegacion and
expromission, and that the original debtor/the public is aware of
his insolvency (delegacion) or that he consented to the change
(expromission), his debt will be revived

Q&A: DIFFERENTIATE DACION EN PAGO AND PAYMENT IN CESSION

 Dacion en pago is payment in kind for a preexisting debt. In this

case, the debtor remains solvent, there is only one creditor and
only affects particular properties of the debtor. Possession and
ownership of the property is transferred to the creditor, at which
point the obligation is extinguished regardless if the value of the
property is sufficient to cover the debt

 On the other hand, payment in cession is made when the debtor is

insolvent and there are many creditors going after him. All
properties of the debtor are subject to the payment. Only
possession is transferred to the creditors, who will sell the property
in auction to apply the proceeds to their claims. The obligation is
extinguished only to the extent of the proceeds of the sale

Q&A: WHAT IS THE LEGAL TENDER FOR PAYMENT?

 Payment may be made in any currency stipulated, or in Philippine

peso if silent. Coin denominations less than Php 1.00 may be used
for payments up to Php 100, and those coins Php 1.00 and above
for payments up to Php 1,000. Payment by check will not
extinguish the obligation until it has been made into cash