MERCANTILE LAW

Fraud exception principle

LETTERS OF CREDIT When the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to confirming bank documents that contain,
expressly or by implication, material representations of fact that to his
Letter of Credit
knowledge are untrue
An engagement by a bank or other person made at the request of a
TN: This is considered as an exception to Independent principle.
customer that the issuer will honor drafts or other demands for
payment upon compliance with conditions specified in the credit.
Doctrine of strict compliance
Documents tendered must strictly conform to the terms of LC. The
Through LC, bank merely substitutes its own promise to pay for the
tender of documents by beneficiary must include all documents
promise to pay of one of its customers who in return promises to pay
required by LC.
the bank the amount of funds mentioned in the LC plus credit or
commitment fees mutually agreed upon.
Correspondent bank which departs from what has been stipulated
under LC, as when it accepts a faulty tender, acts on its own risks and
Parties
it may not thereafter be able to recover from buyer or issuing bank, as
Buyer → Bank → Seller (beneficiary)
the case may be, the money thus paid to beneficiary.
a. Buyer – procures the LC and obliges himself to reimburse the
Bank may only negotiate, accept or pay, if the documents tendered to
issuing bank upon receipt of documents of title
it are on their face in accordance with terms and conditions of
b. Issuing bank – undertakes to pay the seller upon receipt of draft
documentary credit. Since a correspondent bank principally deals only
and proper documents of title and to surrender the documents to
with documents, the absence of any document required in the
the buyer upon reimbursement
documentary credit justifies the refusal by correspondent bank to
c. Seller – ships the goods to buyer and delivers the documents of
negotiate, accept or pay beneficiary, as it is not its obligation to look
title and draft to the issuing bank to recover payment
beyond the documents. It merely has to rely on the completeness of
d. Advising (notifying) bank – utilized to convey to seller the
the documents tendered by beneficiary.
existence of the credit
e. Confirming bank – lend credence to the LC issued by lesser
Warehouseman’s lien
known issuing bank; it is directly liable to pay the seller-
Lien of a warehouseman on goods deposited or on the proceeds
beneficiary
thereof in his hands, for:
f. Paying bank – undertakes to encash drafts drawn by seller
1. All lawful charges for storage and preservation of the goods
g. Negotiating bank – instead of going to place of issuing bank to
2. All lawful claims for money advanced, interest, insurance,
claim payment, buyer may approach this bank to have the draft
transportation, labor, weighing, coopering and other charges and
discounted
expenses in relation to such goods
3. All reasonable charges and expenses for notice, and
Nature of LC
advertisements of sale, and for sale of the goods where default
• Financial device developed by merchants as a convenient and
had been made in satisfying the warehouseman’s lien
relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to part
IMPT1: It is necessary that the charges that are present at the time of
with his goods before he is paid, and a buyer, who wants to have
issuance of receipt must be so stated in the receipt with the amounts
control of the goods before paying.
thereof specified. If existing charges are not stated, the
• To break the impasse, the buyer may be required to contract a
warehouseman shall have no lien thereon. He shall have a lien only for
bank to issue a LC in favor of seller so that, by virtue of LC, the
charges for storage of goods subsequent to date of receipt unless the
issuing bank can authorize the seller to draw drafts and engage
receipt expressly enumerated other charges for which a lien is claimed.
to pay them upon their presentment simultaneously with tender
of documents required by LC.
Properties subject to the lien
• Buyer and seller agree on what documents are to be presented
1. Against all goods, whenever deposited, belonging to the person
for payment, but ordinarily they are documents of title evidencing
who is liable as debtor for the claims in regard to which the lien is
or attesting to the shipment of the goods to the buyer.
asserted
• Bank then obtains possession of the documents upon paying the
2. Against all goods belonging to others which have been deposited
seller.
at any time by the person who is liable as debtor for the claims in
• Transaction is completed when the buyer reimburses the issuing
regard to which the lien is asserted if such person had been so
bank and acquires the documents entitling him to the goods.
entrusted with the possession of goods that a pledge of the same
• Seller gets paid only if he delivers the documents of title over the
by him at the time of the deposit to one who took the goods in
goods, while the buyer acquires the said documents and control
good faith for value would have been valid
over the goods only after reimbursing the bank.
Loss of lien
Doctrine of independence
1. By surrendering possession thereof
In determining compliance with the LC, the bank is obliged to examine
2. By refusing to deliver the goods when a demand is made with
only the shipping documents presented by the seller. It is precluded
which he is bound to comply
from determining whether the main contract of sale has been strictly
complied with. Banks only deal with documents and not goods,
services or obligations to which they relate. TRUST RECEIPTS

The seller is assured of prompt payment independent of any breach in Trust Receipt
the main contract. Thus, bank has no duty to verify whether the goods A security transaction intended to aid in financing importers or dealers
described in LC and shipping documents actually tallies with what was in a merchandise by allowing them to obtain delivery of goods under
loaded. certain covenants

To say that independence principle may only be invoked by issuing

*Legend:
bank would render nugatory the purpose for which the LC are used in
TN = Take Note
commercial transactions. Independent principle works to the benefit of IMPT = Important
both the issuing bank and beneficiary/seller. GR = General Rule
XTPN = Exception

KART 1

Parties
1. Entruster (bank) - Refer to the person holding title over the
goods, documents, or instruments subject of a trust receipt
transaction, and any successor-in-interest of such person
2. Entrustee (buyer) - Refer to the person having or taking
possession of goods, documents, or instruments under a trust
receipt transaction, and any successor-in-interest of such person
for the purpose specified in the trust receipt agreement
LC is a primary obligation and not accessory contracts and while
they are security arrangements, they are not converted into
contracts of guaranty.
• Where debtor received the goods before the trust receipt itself
was entered into, the transaction in question must be considered
a simple loan. Trust Receipt Law does not seek to enforce
payment of a loan, rather it punishes dishonesty and abuse of
confidence in handling money or property to the prejudice of
another.

Rights of Entruster • Entrustee is liable for loss of goods whether or not he is

1. Entitled to the proceeds from the sale of goods released under negligent. In a trust receipt transaction where a loan feature is
the trust receipt to entrustee to the extent of the amount owing involved, the obligation for the loan is not extinguished until such
to the entruster or as appears in the trust receipt loan is paid.
2. Entitled to return of goods in case of non-sale
3. May cancel the trust and take possession of the goods and sell it
in a public sale in case of default or failure of entrustee to comply NEGOTIABLE INSTRUMENTS LAW (NIL)
with any of the terms and conditions of the trust receipt
4. May purchase the goods at the intended public sale
REQUISITES OF NEGOTIABILITY (Sec. 1, NIL)
Obligation of entruster
1. It must be in writing and signed by the maker or drawer
Releases the possession of the goods to the entrustee upon latter’s
2. Must contain an unconditional promise or order to pay a
execution of trust receipt
sum certain in money
3. Must be payable on demand, or at a fixed or determinable
Obligations of entrustee
future time
1. Binds himself to hold the goods in trust for entrustor
4. Must be payable to order or to bearer
2. Sell or otherwise dispose of the goods and to turn over to the
5. Where the instrument is addressed to a drawee, he must
entrustor the amount still owing
be named or otherwise indicated therein with reasonable
3. To return the goods if unsold
certainty
REMEDIES AVAILABLE
Must contain an unconditional promise or order to pay a sum
certain in money
a. If goods are sold or disposed by entrustee and the latter did not
remit the proceeds
Sum payable is a sum certain although it is to be paid:
1. File estafa case against entrustee
a. With interest
Elements for estafa under Art. 315(1)(b) of RPC, in relation
b. By stated installments
to Sec. 13 of Trust Receipts Law
c. By stated installments, with a provision that, upon default in
1. They received the subject goods in trust or under the
payment of any installment or of interest, the whole shall become
obligation to sell the same and to remit proceeds
due (acceleration clause)
thereof to the entrustor/bank or to return the goods if
d. With exchange, whether at a fixed rate or at the current rate
not sold
e. With costs of collection or an attorney’s fee, in case payment shall
2. They misappropriated or converted the goods and/or
not be made at maturity
proceeds of the sale
3. They performed such acts with abuse of confidence to
Interest
the damage and prejudice of estrustor/bank
Interest stipulated but not specified – legal interest
4. Demand was made on them by entrustor/bank for the
Interest not stipulated – legal interest will be paid when debtor incurs
remittance of proceeds or return of unsold goods
in delay
2. File a separate case to collect the proceeds or the money
Interest due shall earn legal interest from the time it is judicially
obligation secured by trust receipt
demanded
b. If the goods are unsold and are still with entrustee
Legal interest is 6% for loan or forbearance of any money, goods or
1. Cancel the trust and take possession of the goods,
credits and rate allowed in judgments, in the absence of express
documents or instruments subject of the trust
contract as to rate
2. After taking possession, sell the goods and apply the
proceeds of the sale to the expenses of sale and retaking of
Unqualified order or promise to pay is unconditional though
the goods and the indebtedness
coupled with:
3. As an alternative to retaking possession and sale, the
a. An indication of a particular fund out of which reimbursement is
entruster can file a case to collect the indebtedness secured
to be made or a particular account to be debited with the amount
by trust receipt
Fund for reimbursement Particular fund for payment
IMPT: Obligation of entrustee is not extinguished in case of
Drawee pays payee from his There is only one act – the
repossession and sale of goods. Entrustee is entitled to any surplus
own funds; afterwards, the drawee pays directly from
while entruster can still recover the balance of indebtedness in case of
drawee pays himself from particular fund indicated
deficiency.
the particular fund indicated Payment is subject to the
condition that the fund is
Cases:
sufficient
• Whether issuing bank should release payment to
seller/beneficiary when buyer is under rehabilitation and Stay Particular fund indicated is Particular fund indicated is
Order was issued? not the direct source of the direct source of
Yes. LC is not a claim against debtor under rehabilitation, but payment but only source of payment
against the bank which has assumed a solidary obligation with reimbursement
the buyer. Being a solidary obligation, LC is excluded from the
Stay Order. Bank must honor its obligation. b. Statement of transaction which gives rise to the instrument

KART 2
Must be payable on demand, or at a fixed or determinable
future time
Instrument is payable at a determinable future time which is
expressed to be payable:
a. At a fixed period after date or sight
After sight – means after the drawee has seen NI upon
presentment for acceptance
b. On or before a fixed or determinable future time specified therein
– period is for benefit of debtor
c. On or at fixed period after the occurrence of a specified event
which is certain to happen, though the time of happening be
uncertain
TN: If payable upon contingency, not negotiable, and happening of
event does not cure defect
Aftersight draft – payable only after expiration of stipulated period
from acceptance (legal sight)
Acceleration notes – provisions which make it possible for the maker
to pay NI at an earlier date or make it possible for holder to require
payment of NI at an earlier date
1st Class – on or before certain date
2nd Class –
a. Renders whole debt due and demandable upon failure of
obligor to comply with certain conditions (Acceleration
clause)
b. Maker shall supply additional collateral in case of
depreciation of value of original deposit, and upon default,
the note shall become due
c. Contains provisions for acceleration where holder deems
himself insecure (Insecurity clause)
Extension clause – extends maturity dates; no discharge of persons
secondarily liable if this is stipulated. If not stipulated and extension is
granted, they can be discharged
Payable on demand
a. When it is so expressed to be payable on demand, or at sight, or
on presentation
b. In which no time for payment is expressed
TN: 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.
Must be payable to order or to bearer
When payable to order
a. To the order of a specified person
b. To him or his order
c. May be drawn payable to the order of:
1. Payee who is not maker, drawer, or drawee
2. Drawer or maker
3. Drawee
4. Two or more payees jointly (“AND”)
5. One or some of several payees (“OR”)
6. Holder of an office for the time being
When payable to bearer
a. When expressed to be so payable
b. When payable to a person named therein or bearer
c. When payable to the order of a fictitious person or non-existing
person, and such fact was known to the person making it so
payable
d. When the name of payee does not purport to be the name of any
person
e. When the only or last indorsement is an indorsement in blank
Fictitious payee rule
If an actual, existing and living payee is not the intended recipient of
proceeds of check, payee is considered a “fictitious” payee and the
check is a bearer instrument. Hence, even if signature of payee was
forged, the collecting bank and drawee bank are relieved of liability.
Loss falls on drawer.
Burden: Check is presumed to be an order instrument and it is up to
the person making the contrary allegation to prove otherwise.
XPTN: A showing of commercial bad faith on the part of drawee bank
or transferee will work to strip it of this defense.
Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable
certainty
Holder must know to whom he should present it for acceptance and/or
payment; otherwise, purpose of NI as a tool in commercial dealings
will be greatly hampered.
Bill may be addressed to more than one drawee jointly, whether they
are partners or not; but not to two or more drawees in the alternative
or in succession.
Additional provisions not affecting negotiability
GR: Instrument is non-negotiable if it contains a promise or order to
do any act in addition to payment of money
Test: If promise would give rise to a cause of action for breach of
contract if the additional act is not done, the instrument is not
negotiable.
XPTNS: The following additional provisions do not affect negotiability
1. Authorizes the sale of collateral securities in case instrument be
not paid at maturity
2. Authorizes a confession of judgment if the instrument be not paid
at maturity
3. Waives the benefit of any law intended for the advantage or
protection of the obligor
4. 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 defendant,
setting forth the basis of liability and authorizing the entry of judgment
thereon
Kinds of confession of judgment
1. Cognovit actionem – literally means “he has confessed action.” It
is a written confession of action by the defendant acknowledging
his indebtedness to the plaintiff after the action has been filed. It
is given after the action is brought to save expenses.
2. Relicta verificationem – literally means “his pleadings being
abandoned.” It is confession of judgment by withdrawal of
defense.
TN: Warrants of attorney to confess judgment before action is begun,
are not authorized nor contemplated by our law. They are VOID as
against public policy because:
(i) They enlarge the field for fraud
(ii) The promisor bargains away his right to a day in court
(iii) Effect is to strikedown the right of appeal accorded by
statute
Omissions and provisions that do not affect negotiability
a. It is not dated – instrument will be considered to be dated as of
time it was issued
b. Does not specify the value given, or that any value had been
given
c. Does not specify the place where it is drawn or the place where it
is payable
d. Bears a seal
e. Designates a particular kind of current money in which payment
is to be made
Cases where date is important
1. If necessary to fix the date of maturity of NI
2. If NI is payable on demand – to determine WON NI was
presented within a reasonable period of time from issue/last
negotiation
3. If NI is interest bearing
FORGERY AND MATERIAL ALTERATION
Material alteration
Instrument is avoided
KART 3
XPTNS:
1. Against a party who has himself made, authorized, or assented to
the alteration
2. Subsequent indorsers
3. HIDC not a party to the alteration – he may enforce payment
according to its original tenor
Changes constituting material alteration
1. Date
2. Sum payable, either for principal or interest
3. Time or place of payment
4. Number or relations of the parties
5. Medium or currency in which payment is to be made
6. That which adds a place of payment where no place of payment
is specified
7. Any other change or addition which alters the effect of the
instrument in any respect
TN: Material alteration is one that alters the effect of the instrument;
one that changes the items required to be stated under Sec. 1, NIL
Spoliation – alteration made by stranger to the instrument
GR: Drawee bank is denied the right to charge against drawer’s
account the amount of an altered check
XPTN: Drawer’s negligence, before or after alteration, may estop him
from setting such alteration as against an innocent drawee bank who
has paid the check
Original tenor is altered before acceptance
1st View: Altered tenor is tenor of acceptance
2nd View: Original tenor is tenor of acceptance
Acceptance is the signification by the drawee of his assent to the order
of the drawer. The order of the drawer is the original tenor, not the
altered tenor.
Tenor of acceptance – means whether the same is general or qualified
acceptance
Case: Collecting bank cannot debit the account of payee who is a
HIDC if the collecting bank returned the amount of the altered check
to the drawee bank. It is the drawee bank that should bear the loss. If
collecting bank reimbursed the drawee bank, it is considered as acting
on its own because:
• Payment of check by the drawee includes acceptance
• Tenor of acceptance is determined by the terms of the bill as it is
when the drawee accepts
Tenor of acceptance is the tenor of instrument at the time of
acceptance.
• HIDC who relied on drawee’s clearance and payment is protected
by Sec. 62 (Liability of acceptor)
• Drawee, compared to HIDC, is in better position to verify with the
drawer the matters stated in the bill
• Principal-agent relationship between payee and collecting bank
had ceased
• Collecting bank cannot be considered as representative of drawee
bank when it debited payee’s account
• Collecting bank cannot invoke the warranty of payee who
indorsed the NI for collection since it is restrictive under Sec. 36
(no transfer of title to collecting bank). The warranties under Sec.
66 are based upon a transfer of title.
TN: When collecting bank presents instrument to drawee, it assumes
the liability of a general indorser.
TN: Any check with erasure, alteration and/or deficiency – regardless
of any signature or initial to indicate authorization of erasures and
alterations – shall no longer be eligible or acceptable for clearing
pursuant to Philippine Clearing House Corporation policy.
Forgery
Effects
1. Signature is wholly inoperative
Only the forged signature is inoperative, not the NI, not the
genuine ones
2. No right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature
3. Some parties are precluded from setting up defense of forgery
Extent of effects
a. NI can be enforced by holders whose title does not depend on
the forged signature (bearer instruments)
b. Can be enforced against those who are precluded from setting up
the forgery, like:
1. Those who by their acts, silence, or negligence, are
estopped from setting up the defense of forgery (estoppel)
2. Those who warrant or admit the genuineness of the
signature in question (warranty)
TN: Persons precluded from setting up the defense of forgery may still
recover damages under NCC provisions on quasi-delicts.
Cut-off rule
GR: Parties prior to the forged signature are cut-off from the parties
after the forgery in the sense that prior parties cannot be held liable
and can raise the defense of forgery. The holder can only enforce the
instrument against parties who became such after the forgery.
XPTN: When the prior parties are precluded from setting up the
defense of forgery (like estoppel, warranty)
Forgery of indorsement
• PN payable to order
• Party whose signature was forged and parties prior to him are not
liable
PN or Bill payable to bearer
• Only the person whose signature was forged can raise forgery
• To HIDC: Liable. Indorsement is not necessary to pass title.
• To HNIDC: Not liable. Defense is want of delivery of a
mechanically complete instrument (instrument must be complete
before the forgery)
Bill payable to order
• Drawee cannot charge the account of the drawer
• Drawer cannot recover from the collecting bank
• Drawee can recover from the collecting bank (but if it is the
drawer’s signature which was forged, drawee cannot recover
from the collecting bank)
• Payee can recover from the drawer
• Payee can recover from recipient of payment
• Payee cannot recover from the drawee
• Collecting bank bears the risk of loss, but can recover from the
person to whom it is paid
Forgery of drawer’s signature
• Drawee bank that paid is liable. It cannot go after the collecting
bank. recourse is against the forger.
Double intent in fraudulent impersonation
a. Maker or drawer intends to make the instrument payable to the
person before him – not forgery, but signature of an assumed
name
b. He intends to make the instrument payable to the person whom
he believes the stranger to be – forgery
Fraudulent impersonation – when the person issued NI by being
made to believe that the person asking for the NI is the person whom
he really intends to issue a NI
Loss is thrown upon the issuer:
1. Theory of actual intent
2. Theory of estoppel/negligence
NEGOTIATION
Negotiation – transfer of NI from one person to another made in
such a manner as to constitute the transferee the holder thereof
KART 4
Methods of negotiation
1. Order instrument – indorsement and delivery
2. Bearer instrument – delivery only
Indorsement – legal transaction effected by the writing of one’s own
name at the:
a. Back of the instrument
b. Upon a paper (allonge) attached thereto
GR: Indorsement must be of the entire instrument (but partial
indorsement may constitute a valid assignment binding between the
parties)
XPTN: Where instrument has been paid in part, it may indorsed as to
the residue
Negotiable: Pay to X and Y; Pay to X or Y
Not negotiable: Pay to X P600 and to Y P400
Kinds of indorsement
1. Special – specifies the person to whom or to whose order, the
instrument is to be payable
2. Blank – no indorsee
• Instrument is payable to bearer and may be negotiated by
delivery
• May be converted to special indorsement by writing over the
signature of indorser in blank any contract consistent with
character of indorsement
3. Restrictive – indorsement is either:
(i) Prohibits further negotiation of the instrument
- Can still be transferred through assignment
(ii) Constitutes the indorsee the agent of indorser
(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.
• (ii) and (iii) does not affect negotiability but all subsequent
negotiation are subject to such restriction
• All subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement
4. Qualified – constitutes indorser a mere assignor of title of the
instrument
• Made by adding to indorser’s signature words like “sans
recourse,” “without recourse,” “indorser not holden”, “at the
indorser’s own risk”, etc.
• Purpose is to transfer title without guaranteeing payment by
primary party
• Effect is to limit liability of qualified indorser. He is still liable
for breach of his warranties as an indorser. Thus, liable if
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
d. Fact that the instrument was valueless or not valid at
the time of the indorsement which fact was known to
him
5. Conditional – right of indorsee is made to depend on happening
on a contingent event
• Party required to pay may disregard the conditions
• This kind of indorsement has no effect on further negotiation
of instrument. Only that the person who received payment
will hold the proceeds subject to the right of conditional
indorser.
6. Absolute – indorser binds himself to pay:
(i) Upon no other condition than failure of prior parties to do so
(ii) Upon due notice to him of such failure
7. Joint – indorsement of instrument payable to 2 or more persons;
all must indorse in order for the transaction to operate as a
negotiation
XPTNS:
(i) Where payees or indorsees are partners
(ii) Where payee or indorsee indorsing has authority to indorse
for others
8. Irregular – person who, not otherwise a party to the instrument,
places thereon his signature in blank before delivery
Rules on indorsement
Effect of transfer without indorsement (order instrument)
a. Transfer vests in the transferee such title as the transferor had
therein (assignment)
b. Right to have indorsement of transferor
Indorsement of a bearer instrument
If indorsed specially, it may be further negotiated by delivery but the
person indorsing specially is liable as indorser to only such holders as
make title through his indorsement
TN: This applies only to originally bearer instrument. Originally bearer
instrument will always be a bearer instrument. As opposed to an
original order instrument becoming payable to bearer, if the same is
indorsed specially, it can no longer be negotiated further by mere
delivery, it has to be indorsed.
Striking out indorsements
Holder may at any time strike out any indorsement which is not
necessary to his title. Indorser whose indorsement is struck out and all
indorsers subsequent to him, are thereby relieved from liability on the
instrument.
a. If instrument is payable to bearer on its face, WON there are
indorsements on the back of 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 it the
indorsement would be necessary to his title since mere delivery
would have been sufficient to transfer title from one holder to
another.
b. Where instrument is payable to order on its face, indorsement of
special indorsee is necessary for further negotiation. Last
indorsement controls the method of further negotiation.
Reacquirer
When an instrument is negotiated back to a prior party, such party
may reissue and further negotiates. But he is not entitled to enforce
payment thereof against any intervening party to whom he was
personally liable.
In following cases, a prior party cannot further negotiate
1. Where it is payable to order of 3rd person, and has been paid by
drawer
2. Where it was made or accepted for accommodation and has been
paid by party accommodated
3. In other cases, where the instrument is discharged when acquired
by a prior party
RIGHTS OF THE HOLDER
Classes of holder
1. Simple holder (Sec. 51) – He may sue in his own name and
payment to him in due course discharges the instrument
2. Holder for value (Sec. 26) – where value has at any time been
given for the instrument, holder is deemed a holder for value in
respect to all parties who become such prior to that time
3. Holder in due course (Sec 52, 57)
Holder in due course (HIDC)
A 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
When title defective
Title of a person who negotiates NI is defective when he:
KART 5
1. Obtained the instrument or any signature thereto (in the
acquisition)
a. By fraud
b. By duress, or force and fear
c. By other legal means
d. For illegal consideration
2. Negotiates the NI (in the negotiation)
e. In breach of faith
f. Under such circumstances amounting to fraud
What constitutes notice of defect
Person to whom it is negotiated must have:
a. Actual knowledge of the infirmity or defect
b. Knowledge of such facts that his action in taking the instrument
amounted to bad faith
Notice before full amount is paid
Where 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.
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.
Effect: In the hands of any holder other than HIDC, NI is subject to
the same defenses as if it were non-negotiable.
What constitutes reasonable time
In determining what reasonable time is, regard is to be had to the (1)
nature of the instrument, the (2) usage of trade or business with
respect to such instruments, and the (3) facts of the particular case.
Presumption of HIDC
GR: Every holder is deemed prima facie to be HIDC. But holder must
prove first that he is a holder.
XPTN: 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
titles as HIDC (Shifting of burden of proof)
XPTN to XPTN: Does not apply in favor of a party who became
bound on the instrument prior to acquisition of such defective title
(burden not shifted)
Illustration:
M → P→ C → D
a. Fraud occurred between P and C
If M proved that D’s title is defective, the burden will not be
shifted to D because the M is a party who became bound by the
instrument prior to the fraud. XPTN to XPTN applies.
b. Fraud occurred between M and P
The exception applies. If M proved that D’s title is defective, the
burden will be shifted to D to prove that he or some person under
who he claims acquired the title as HIDC
Rights of HIDC
1. He may sue on the instrument in his own name
2. He may receive payment and if payment is in due course, the
instrument is discharged
3. He holds the instrument free from any defect of title of prior
parties
4. He holds the instrument free from defenses available to prior
parties among themselves
5. He may enforce payment of the instrument for full amount
thereof against all parties liable thereon
Payment in due course
Payment made:
1. At or after maturity of instrument
If before maturity, it becomes negotiation and not payment in
due course even if paid by maker. It is like negotiated with maker
and latter can further negotiate it.
2. To the holder thereof
3. In good faith and without notice that his title is defective
Shelter rule
A holder not in due course (HNIDC) acquires all the rights of former
holder in respect of all parties prior to the latter if he is:
1. Derives his title from a HIDC, and
Means that former holder immediately prior to him must be HIDC
2. Who is not himself a party to any fraud or illegality affecting the
instrument
TN: Burden is with holder to prove that former holder is HIDC. The
presumption of HIDC only applies to the holder and not the previous
one who is no longer a holder.
Rationale of Shelter rule: To give benefit to HIDC although HNIDC is
also benefitted but not collaterally; for HIDC not to be burdened to
look for party with whom he can negotiate the instrument.
Rights of HNIDC
1. He may sue on the instrument in his own name
2. He may receive payment and if payment is in due course,
instrument is discharged
3. He is entitled to the instrument but holds it subject to same
defenses as if it were non-negotiable
4. Can avail of shelter rule if applicable
Can a finance company be a HIDC?
This is no longer materials because the Consumer Act provides that in
cases where the instrument will be sold at a discount to a bank,
financing company or other lender, the said transferee shall be subject
to all claims and defenses which the debtor could assert against the
seller of consumer products obtained hereto or with the proceeds
thereof.
Defenses against the holder
a. Real/Absolute defenses – those that attach to the instrument
itself and are available against all holders, in due course or not
1. Alteration
TN: Alteration is only a partial real defense because a HIDC
who is not a party to the alteration can still enforce it
according to its original tenor.
2. Non-delivery of incomplete instrument
3. Duress amounting to forgery (when signature is acquired by
duress)
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 or 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
12. Forgery
13. Prescription
14. Discharge in insolvency
b. 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
1. Absence or failure of consideration
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
KART 6
 7. Acquisition of the instrument by unlawful means Case: Respondent wanted to stop bank from paying because he did
8. Acquisition of the instrument for an illegal consideration not receive the dollar he purchase. Court ruled that payment of
9. Negotiation in breach of faith manager’s and cashier’s checks is not subject to the condition that the
10. Negotiation under circumstances that amount of fraud payee should comply with his obligations to the purchaser of the
11. Mistake checks. Also, the purchaser of manager’s and cashier’s checks has no
12. Intoxication right to have the checks cancelled by filing an action for rescission of
13. Ultra vires acts of corporations where the corporation has its contract with payee.
the power to issue negotiable paper but the issuance was
not authorized for the particular purpose for which it was
issued INSURANCE
14. Want of authority of agent where he has apparent authority
15. Insanity where there is no notice of insanity on the part of
BASIC CONCEPTS
the one contracting with the insane person
16. Illegality of contract where the form or consideration is
Insurance
illegal
A risk-distributing device, a mechanism by which all members of a
group exposed to a particular risk contribute premiums to an insurer
Defenses available to solidary debtor
1. Those derived from the nature of the obligation
Contract of insurance
2. Those that are personal to him
An agreement whereby one undertakes for a consideration to
3. Those that personally belong to the others (partial defense)
indemnify another against loss, damage or liability arising from an
unknown or contingent event
CHECKS
A bill of exchange drawn on a bank payable on demand
Principal object test
Whether the assumption of risk and indemnification of loss are the
Kinds
principal object and purpose of the organization or whether they are
1. Manager’s/Cashier’s check – drawn by a bank on itself and
merely incidental to its business. If these are the principal objectives,
therefore, it is a primary obligation of the bank
the business is that of insurance. If incidental, business is not
• It is accepted in advance by the act of its issuance and is not
insurance
subject to countermand by the payor after indorsement.
• Drawer and drawee is the bank.
Elements of contract of insurance
2. Memorandum check – it is like an ordinary check except that the
1. Payment of premium – in order that an insurance policy be valid
word “memorandum,” “mem” or “memo” is written upon the face
and binding, actual payment of the premium (consideration) must
of the check, signifying that the drawer engages to pay the bona
be made
fide holder absolutely, and not upon a condition to pay upon
2. Assumption of risk – insurer undertakes to indemnify the insured
presentment at maturity and if due notice of presentment and
against loss, damage, or liability
non-payment should be given.
3. Risk of loss – happening of designated events, either unknown or
• Not to be presented for payment, but will be redeemed by
contingent, past or future, will subject the insured to some kind
drawer itself. Intent is for payee not to deposit the check to
of loss, whether in the form of injury, damage or liability
a bank
4. Insurable interest – public policy requires an insurable interest to
3. Certified check – one drawn by a depositor upon funds to his
prevent wagering under the guise of insurance
credit in a bank which a proper officer of the bank certifies will be
5. Scheme to distribute the losses – an insurance contract is a risk-
paid when duly presented for payment
spreading device: that is to distribute the actual losses among a
• Certification of check is equivalent of acceptance
large group of persons bearing a similar risk
• Primary obligation of bank TN: Insurance contract must have all the essential elements of a valid
4. Traveler’s check – one upon which the purchaser’s signature must
contract.
appear twice – at the time he buys it and also at the time he uses
it.
What may be insured
• Has characteristics of a cashier’s check of the issuer
5. Crossed check – when 2 parallel lines are drawn across its face or
Any contingent or unknown event, whether past or future, which may
across a corner thereof. If the name of bank appears between damnify a person having an insurable interest, or create a liability
parallel lines, the check is specially crossed, and payment should against him, may be insured against.
be made only if presented by the named bank. If no name TN: Even fortuitous events may be insured against.
appears between parallel lines, the check is said to be generally
crossed, and payment should be made only upon presentment by GR: Future event is the only event that can be covered by an
some bank. insurance contract
Effects of crossing a check: XPTN: Past event may be covered by a marine insurance – if the loss
a. Check may not be encashed but only deposited in the bank of the vessel in the past could not have been known by ordinary
b. Check may be negotiated only once to one who has an means of communication
account with the bank
c. Act of crossing the check serves as a warning to the holder What may be insured
that the check has been issued for a definite purpose so that a. In a life insurance – continuing existence of the person
he must inquire if he has received the check pursuant to that b. In a health insurance – health and well-being of the person
purpose c. In a property insurance – Property itself and its preservation
6. Stale check – one which has not been presented for payment
d. In a casualty insurance – Any liability that the insured may cause
within a reasonable time after its issue to third person
TN: Under BP 22, there is no liability on the part of the drawer if
payee presented the check after 90 days from date of check Insurable interest
Iron-clad rule It is an interest arising from the relation of the party obtaining the
Prohibits the countermanding of payment of certified checks insurance as will justify a reasonable expectation of advantage or
But this rule only applies when the holder is holder in due course benefit from the continuance of his life.
(HIDC)

KART 7
If there is no insurable interest, insurance contract is unenforceable. If suffer pecuniary loss or damage from its destruction, termination or
it can be established that the contract is a wager, the same can be injury by the happening of the event insured against. Specifically,
considered void for being against public policy. every person has insurable interest in the life and health of:
1. Himself, his spouse and his children
Insurable interest in Insurable interest in 2. Any person on whom he depends wholly or in part for education
property life or support, or in whom he has pecuniary interest
Extent Limited to the actual Unlimited 3. Any person under a legal obligation to him for the payment of
value of the interest XPTN: Life insurance money, or respecting property or services, of which death or
thereon effected by a creditor on illness might delay or prevent the performances
the life of debtor 4. Any person upon whose life any estate or interest vested in him
Existence of Must exist when the Enough that interest depends
insurable insurance takes effect exist at the time the TN: Where the insured is also the cestui que vie (insurance upon one’s
interest AND when the loss policy takes effect and life), a person has an insurable interest in his own life and health.
occurs, but need not need not exist at the When the owner of the policy insures the life of another – the cestui
exist in the meantime time of loss que vie – and designates a 3rd party as beneficiary, both the owner
XPTNS: and beneficiary must have an insurable interest in the life of the cestui
1. When taken by que vie. If insurable interest requirement is satisfied, a life policy is
creditor on the life assignable regardless of whether the assignee has an insurable
of debtor interest in the life of cestui que vie.
2. When insurance is
taken by employer Mortgage Redemption Insurance
on the life of Device for the protection of both mortgagee and mortgagor
employee On the part of mortgagee, it has to enter into such form of contract so
Basis of There must be legal basis Expectation of the that in the event of the unexpected demise of mortgagor during the
expectation benefit derived need not subsistence of mortgage contract, proceeds from such insurance will
have legal basis be applied to the payment of mortgage debt, thereby relieving the
Interest of Beneficiary must have an If insured secured the heirs of mortgagor from paying the obligation. In a similar vein, ample
beneficiary insurable interest in the policy, beneficiary need protection is given to the mortgagor under such a concept so that in
thing insured not have insurable the event of death, mortgage obligation will be extinguished by the
interest over the life of application of the insurance proceeds to the mortgage indebtedness.
insured
If secured by beneficiary, In property
latter must have interest Presence of insurable interest in property can be determined by asking
over the life of insured whether one will derive pecuniary benefit or advantage from its
preservation, or will suffer pecuniary loss or damage from its
Special cases on insurable interest destruction, termination, injury by the happening of the event insured
1. Carrier or depository – has an insurable interest in a thing held against
by him as such, to the extent of his liability but not to exceed the
value thereof Kinds of insurable interest in property
Its insurable interest in a contract of carriage: 1. Existing interest
a. Carrier may be damnified by the loss of the goods because 2. Inchoate interest founded on an existing interest (e.g.
he may be obligated to pay the shipper any damage to the shareholder on properties of corporation)
property. 3. Expectancy, coupled with an existing interest in that out of which
b. Depositary is obligated to take care of the thing deposited the expectancy arises
and he can be made liable if the thing deposited is damaged
2. Mortgaged property – mortgagor and mortgagee may each Goods in transit
have an insurable interest in the property mortgaged and this Vendee or buyer has insurable interest over the goods still in transit.
interest is separate and disctinct from the other. Therefore, His interest is based on the perfected contract of sale, which vested in
insurance taken by one in his name only and in his favor alone him an equitable title even before the delivery or before he performed
does not inure to the benefit of the other. the conditions of the sale. Whether shipment is FOB, CIF, or C&F is
a. Mortgagor – as owner, has an insurable interest to the immaterial since he is already vested with equitable title.
extent of the value even though the mortgage debt equals
such value. Reason is that loss or destruction of property Mortagagee independently insures his interest in the
insured will not extinguish his mortgage debt mortgaged property
b. Mortgagee – his interest is only up to the extent of the debt. Upon destruction of the property, the insurance paid to mortgagee will
Such interest continues until the mortgage debt is not inure to the benefit of the mortgagor, and amount due under the
extinguished. mortgage debt remains unchanged. However, mortgagee is not
TN: In case of an insurance taken by mortgagee alone and allowed to retain his claim against mortgagor, but passes by
for his benefit, the mortgagee, after recovery from insurer, subrogation to the insurer, to the extent of the insurance money paid.
is not allowed to retain his claim against mortgagor but it
passes by subrogation to the insurer to the extent of Measure of insurable interest in property
insurance money paid Extent to which the insured might be damnified by the loss or injury
3. Property under lease contract – lessor cannot validly be a thereof
beneficiary of a fire insurance policy taken by lessee over his
merchandise, and the provision in the lease contract providing for Existence of insurable interest in a property determined
such automatic assignment is void for being contrary to law and It is sufficient that the insured is so situated with reference to the
public policy property that he would be liable to loss should it be injured or
destroyed by the peril against which it is insured. Anyone has an
In Life/Health insurable interest in property when he derives a benefit from its
Insurable interest is that interest which a person is deemed to have in existence or would suffer loss from its destruction.
the subject matter insured, where he has a relation or connection with
or concern in it, such that the person will derive pecuniary benefit or It is not necessarily a property interest nor requires title or beneficial
advantage from the preservation of the subject matter insured and will interest.

KART 8

Standard or Union Mortgage Open or Loss Payable
Clause Mortgage Clause
Subsequent acts of the Acts of mortgagor affect the
mortgagor cannot affect the mortgagee
rights of assignee
Reason: It is as if the insurer Reason: Mortgagor does not
made a new and independent cease to be a party to the
contract with the mortgagee. contract.
Effects of Loss Payable Clause
1. Contract is deemed to be upon the interest of the mortgagor;
hence, he does not cease to be a party to the contract
2. In case of loss, mortgagee is entitled to the proceeds to the
extent of his credit
3. Any act of mortgagor prior to the loss, which would otherwise
avoid the insurance affects the mortgagee even if the property is
in the hands of mortgagee
4. Upon recovery by mortgagee to the extent of his credit, the debt
is extinguished
5. Any act, which under the contract of insurance is to be performed
by the mortgagor, may be performed by the mortgagee with the
same effect.
TN: Rule on subrogation by insurer to the right of mortgagee does not
apply in this case because premium payments have been paid by
mortgagor and not by mortgagee.
Double insurance and over-insurance
Double insurance
Exists when the same person/property is insured by several insurers
separately, in respect to the same subject and interest
Requisites
1. Two or more insures insuring separately
2. Same insured person
3. Same risk or peril insured against
4. Same interest insured
5. Same subject matter
No prohibition against double insurance. However, insurance policy
can be rescinded upon discovery of other insurance coverage that
makes the total insurance in excess of the value of the property
insured. This is not prohibited provided that the total insurance is not
in excess of the value of the property insured.
Additional or Other Insurance Clause
A clause in the policy which provides that the policy shall be void if the
insured procures additional insurance without the consent of the
insurer
Purpose: To prevent over-insurance and thus avert the possibility of
perpetration of fraud
Case: Insurance policy requires disclosure of other insurance over the
goods insured. Non-disclosure avoids liability. Insurer found that goods
are insured by other two insurance policies, hence, denied the claim.
SC: Insurer is liable. The condition in the policy is commonly known as
the additional or “other insurance” clause and has been upheld as valid
and as a warranty that no other insurance exists. Its violation would
thus avoid the policy. However, in order to constitute a violation, the
other insurance must be upon the same subject matter, the same
insurable interest, and the same risk. As to a mortgaged property, the
mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be one policy, or each may
take out a separate policy covering his interest, either at the same or
separate times. The mortgagor’s insurable interest covers the full value
of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property. The mortgagee’s insurable
interest is to the extent of the debt, since the property is relied upon
as security thereof, and in insuring he is not insuring the property but
his interest or lien thereon. A double insurance exists where the same
person is insured by several insurers separately in respect of the same
subject and cover the same interest. Since the two policies of the PFIC
do not cover the same interest as that covered by the policy in issue,
no double insurance exists. The non-disclosure is not fatal.
Application of other insurance clause
Applied when there are other insurance contract and to prevent over-
insurance
Over-insurance
Exists when the insured takes out an insurance over the property
insured in an amount which is in excess of the value of his insurable
interest.
Over-insurance Double insurance
Amount of When the amount of There may be no over-
insurance insurance is beyond the insurance as when the
value of the insured’s sum total of the amounts
insurable interest of the policies issued does
not exceed the insurable
interest of the insured
Number of There may only be one There are always several
insurers insurer involved insurers
Effect of over-insurance by double insurance
1. The insured, unless the policy otherwise provides, may claim
payment from the insurers in such order as he may select, up to
the amount for which the insurers are severally liable under their
respective contracts;
2. Where the policy under which the insured claims is a valued
policy, any sum received by him under any other policy shall be
deducted from the value of the policy without regard to the actual
value of the subject matter insured;
3. Where the policy under which the insured claims is an unvalued
policy, any sum received by him under any policy shall be
deducted against the full insurable value, for any sum received by
him under any policy;
4. Where the insured receives any sum in excess of the valuation in
the case of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves;
5. Each insurer is bound, as between himself and the other insurers,
to contribute ratably to the loss in proportion to the amount for
which he is liable under his contract.
TN: These rules will apply if there was prior consent of insurers in
taking the insurance or when double insurance is not prohibited in the
policy even if the total coverage is in excess of the value of the
property.
It is necessary to determine from whom and how much can the
insured recover. If there is over-insurance, he cannot recover beyond
his loss.
Rules for Payment of claims where there is over-insurance by
double insurance
As the contract of insurance is a contract of indemnity, the insured can
recover no more than the amount of his insurable interest whether the
insurance is contained in one policy or in several policies.
The rules provided enunciate the principle of contribution which
requires each insurer to contribute ratably to the loss or damage
considering that the several insurances cover the same subject matter
and interest against the same peril.
Nature of liability of several insurers in double insurance
Each insurer is bound to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract. The ratable
contribution of each insurer is determined using this formula:
Liability of insurer = Amount of policy / Total insurance taken X Loss
TN: Aka Principle of Contribution or Contribution Clause
Reinsurance
KART 9
It is a contract through which the insurer procures a 3rd person to
insure him against loss or liability by reason of such original insurance
(aka Reinsurance Cession). In every reinsurance, the original contract
of insurance and the contract of reinsurance are separate and distinct
from each other and covered by separate policies.
Reinsurance may be through a treaty (where there is a prior
agreement for the reinsurer to accept the insurance ceded by the
reinsured/original insurer) or facultative (where the reinsurer may
refuse to accept the ceded policy).
No privity between original insured and reinsurer
Original insured has no interest in a contract of reinsurance. Original
insured cannot file an action to recover from the reinsurer even if he
has difficulty in recovering from the original insurer.
XPTN: Original insured may be allowed to directly sue the reinsurer if
the reinsurance policy contains a stipulation pour autrui in favor of the
original insured.
Double insurance Reinsurance
Involves the same interest Insurance of different interests
Insurer remains in such capacity Insurer becomes an insured in
relation to reinsurer
Insured in the first contract is a Original insured has no interest in
party in interest in the second reinsurance contract
contract
Subject of insurance is property Subject of insurance is original
insurer’s risk
Insured has to give his consent Consent of original insured, not
necessary
No fault, suicide, and incontestability clauses
No fault clause
Injured 3rd party or passenger is given the option to file a claim for
death or injury without the necessity of proving fault or negligence of
any kind under the following conditions:
1. Total indemnity in respect of any person shall not exceed P15,000
2. The following proofs of loss, when submitted under oath, shall be
sufficient evidence to substantiate the claim:
a. Police report of accident
b. Death certificate and evidence sufficient to establish the
proper payee
c. Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed
3. Claim may be made against one motor vehicle only
From whom injured shall recover
a. If occupant of a vehicle – claim shall lie against insurer of vehicle
in which the occupant is riding, mounting or dismounting from
b. Not an occupant – claim shall lie against the insurer of the
directly offending vehicle
c. All cases – right of party paying the claim to recover against the
owner of the vehicle responsible for the accident shall be
maintained
Suicide
Insurer in life insurance contract shall be liable in case of suicide by
insured if:
a. Suicide was committed after the policy has been in force for a
period of 2 years from the date of its issue or its last
reinstatement, unless the policy provides a shorter period
b. Suicide committed in a state of insanity; it shall make the insurer
liable regardless of the date of commission of the suicide.
Incontestability clause
After a policy of life insurance made payable on the death of the
insured 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,
insurer cannot prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of the
insured or his agent.
Requisites
1. Insurance is a life insurance policy payable on the death of
insured
- Does not apply to property insurance
2. It has been in force during the lifetime of insured for at least 2
years from its date of issue or of its last reinstatement. Period of
2 years may be shortened but it cannot be extended by
stipulation.
Defenses that are not barred by incontestability clause
1. Person taking the insurance lacked insurable interest as required
by law
2. Cause of the death of insured is an excepted risk
3. Premiums have not been paid
4. Conditions of policy relating to military or naval service have been
violated
5. Fraud is of a particularly vicious type
6. Beneficiary failed to furnish proof of death or to comply with any
condition imposed by the policy after the loss has happened
7. Action was not brought within the time specified
PERFECTION OF THE INSURANCE CONTRACT
Since insurance contract is consensual, it is perfected by the meeting
of the minds of parties with respect to the object and consideration of
the contract.
Absence of policy does not bar perfection of insurance contract. It is a
consensual contract. It is perfected by mere consent and no formality
is required for its perfection. However, as mandated by law, the policy
must be in printed form.
TN:
▪ Policy may be in electronic form subject to provisions of Electronic
Commerce Act.
▪ Statute of Frauds is inapplicable in a contract of insurance.
Cognition theory
Provides that an acceptance made by letter shall bind the person
making the offer only from the date it came to his knowledge
Applied in contracts
Effect of delay in acceptance
Insurance contract is not perfected. Mere delay by the insurer,
although unreasonable, in acting upon the application raises no
implication of acceptance. It does not estop the insurer from denying
the existence of the contract. However, implied acceptance of an offer
can be established only if there are other circumstances that will
indicate such acceptance other than inaction or delay.
However, even if there is no perfected contract, the insurer may be
subject to tort liability under Articles 19 and 21 of NCC for abuse of
right or acting in a manner that is contrary to morals and good
customs based on peculiar circumstances of each case.
Reason for need of acceptance
It is a primary rule that a contract of insurance, like other contracts,
must be assented to by both parties either in person or by their
agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a
contract. For it to be binding from the date of the application, it must
have been a completed contract, one that leaves nothing to be done,
nothing to be completed, nothing to be passed upon, or determined,
before it shall take effect. There can be no contract of insurance unless
the minds of parties have met in agreement.
Delivery of policy is important
Because it is an evidence of the making of the contract and of its
terms and as communication of the insurer’s acceptance of the
insured’s offer. Also, the delivery may affect the term of the coverage.
KART 10
TN: WON the policy was delivered after its issuance depends not upon
its manual possession by the insured but rather upon the intention of
the parties which may be shown by their acts or words.
Effects of delivery of policy
a. Where delivery is conditional – non-performance of the condition
precedent prevents the contract from taking effect
b. Where delivery is unconditional – it ordinarily consummates the
contract and the policy as delivered becomes the final contract
between the parties
c. Where premium still unpaid after unconditional delivery – policy
will lapse if the premium is not paid, at the time and in the
manner specified in the policy. The insurer cannot be presumed
to have extended the credit in the absence of any clear
agreement granting credit extension
Premium payment
Insurer is entitled to the payment of premium as soon as the thing
insured is exposed to the peril insured against
Cash and Carry Rule
This is the general rule in the payment of premium
No insurance policy issued or renewed is valid and binding until actual
payment of the premium. Any agreement to the contrary is void.
XPTNS:
1. In case of life or industrial life policy, whenever the grace period
provision applies
2. Where the insurer acknowledged in the policy or contract of
insurance itself the receipt of premium, even if premium has not
been actually paid
3. Where the insurer granted the insured a credit term for the
payment of the premium, and loss occurs before expiration of
term
4. Where the parties agreed that premium payment shall be in
installments and partial payment has been made at the time of
loss
5. Where the insurer is in estoppel
Credit extension
A 90-day credit extension may be given under the broker and agency
agreement with duly licensed intermediaries.
Requisites
1. Credit extension must be provided for under the broker and
agency agreements
2. Credit extension to a duly licensed intermediary should not
exceed 90 days
Effect of acknowledgment of receipt of premium in a policy
a. It is conclusive evidence of its payment, insofar as to make the
policy binding, notwithstanding any stipulation therein that it shall
not be binding until the premium is actually paid. The conclusive
presumption extends only to the question as to the binding effect
of the policy.
b. As far as the payment of the premium itself is concerned, the
acknowledgment is only a prima facie evidence of the fact of such
payment.
Non-default options of life insurance
a. Grace period – after payment of the first premium, the insured
is entitled to a grace period of 30 days within which to pay the
succeeding premiums
b. Reinstatement – holder of the policy shall be entitled to a
reinstatement of the contract at any time within 3 years from the
date of default in the payment of premium, unless the cash
surrender value has been paid, or the extension period expired,
upon production of evidence of insurability satisfactory to the
company and the payment of all overdue premiums and any
indebtedness to the company upon said policy, with interest rate
not exceeding that which would have been applicable to said
premiums and indebtedness.
TN: This is not absolute. The insurer has the right to deny the
reinstatement if it is not satisfied as to the insurability of the
insured and if the latter does not pay all overdue premium and all
other indebtedness to the Insurer.
This is a required provision in a policy according to Insurance
Code.
c. Automatic Loan Clause – stipulation in the policy providing
that upon default in payment of premium, the same shall be paid
from the loan value of the policy until that value is consumed. In
such a case, the policy is continued in force as fully and
effectively as though the premiums had been paid by the insured
from funds derived from other sources
d. Cash Surrender Value – amount the insurer agrees to pay to
the holder of the policy if he surrenders it and releases his claim
upon it.
e. Extended Insurance – where the insurance originally
contracted for is continued for such period as the amount
available therefore will pay when such is terminated. In such
case, the insurance will be for the same amount as the original
policy but for a period shorter than the period in the original
contract
f. Paid Up Insurance – no more payments are required, and
consist of insurance for life in such an amount, as the sum
available therefore, considered as a single and final premium. It
results to a reduction of the original amount of insurance, but for
the same period originally stipulated.
TN: Purpose of these devices is to prevent the insured from losing the
entire amount already paid to the insurer in life insurance by reason of
insured’s inability to pay the succeeding premiums.
Refund of premiums
a. Whole refund
1. If the thing insured was never exposed to the risks insured
against
2. If contract is voidable due to fraud or misrepresentation of
the insurer or his agents
3. If contract is voidable because of the existence of facts of
which the insured was ignorant without his fault
4. When by any default of the insured other than actual fraud,
the insurer never incurred liability
5. When rescission if granted due to the insurer’s breach of
contract
b. Pro rata
1. When the insurance is for a definite period and the insured
surrenders his policy before the termination thereof
2. When there is over-insurance
3. In case of over-insurance by double insurance, the insurer is
not liable for the total amount of the insurance taken, his
liability being limited to the property insured. Hence, the
insurer is not entitled to that portion of the premium
corresponding to the excess of the insurance over the
insurable interest of the insured
4. In case of over-insurance by several insurers, the insured is
entitled to a ratable return of the premium, proportioned to
the amount by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at risk
TN: A person insured is not entitled to a return of premium if the
policy is annulled, rescinded or if a claim is denied by reason of fraud.
RIGHTS AND OBLIGATIONS OF PARTIES
Insurer
Undertakes to indemnify another
Assumes the risk of loss for a consideration to indemnify insured on
the happening of a specified contingency or event
It may be a partnership, association, or corporation who are duly
authorized by Insurance Commission to engage in insurance business.
An individual natural person is no longer allowed to be an insurer.
Foreign insurance corporations may be authorized by the Commission
to engage in insurance business in the Philippines.
Certificate of authority
KART 11
This is required for an insurance company to transact insurance
business in the Philippines. It expires on the last day of December, 3
years following its date of issuance, and renewable every 3 years
thereafter.
Insured
Person with capacity to contract and having an insurable interest in the
life or property of the insured
a. Public enemy – may not be insured
It is a nation, including its citizens or subjects, with whom
Philippines is at war.
Property insurance entered into before the war automatically
loses its binding effect the moment the insurer becomes a public
enemy.
b. Minors – cannot enter into an insurance contract; voidable
c. Spouses – consent of spouse not necessary for a policy taken out
by a married person on the life of the spouses themselves or his/
her children
Effect of death of owner of policy
All rights, title and interest in the policy taken out by an original owner
on the life or health of the person insured shall automatically vest in
the latter upon the death of the original owner, unless otherwise
provided for in the policy.
Beneficiary
Designated to receive proceeds of policy when risk attaches
Designation of beneficiary
When one insures his own life, he may designate any person as the
beneficiary, WON the beneficiary has an insurable interest in the life of
the insured.
XPTNS:
1. Those made between persons who were guilty of adultery or
concubinage at the time of donation
2. Conviction is not a condition precedent
3. Those made between persons found guilty of the same criminal
offense, in consideration thereof
4. Those made to a public officer or his wife, descendants or
ascendants by reason of his office
TN: Designation is void but policy is binding. Estate will get proceeds.
When forfeited
When the beneficiary is the principal, accomplice or accessory in
willfully bringing about the death of the insured; in such case, the
forfeited share shall pass on to:
1. Other beneficiaries, unless OW disqualified
2. In the absence of other beneficiaries, proceeds shall be paid in
accordance with the policy contract
3. If policy is silent, proceeds shall be paid to the estate of the
insured
Principles:
▪ Designation is revocable unless the right to revoke is expressly
waived in the policy
▪ Family Code allows innocent spouse to revoke designation of
other spouse as irrevocable beneficiary after legal separation.
▪ Insured cannot assign policy if designation is irrevocable because
beneficiary has a vested right.
▪ If there is no waiver of the right to revoke, assignment of policy
may be deemed as implied revocation.
▪ If insured refuses to pay premiums, designated irrevocable
beneficiary may continue the policy by paying premiums that are
due.
▪ If premiums are paid out of the conjugal funds, proceeds are
considered conjugal. If beneficiary is other than insured’s estate,
source of premiums would not be relevant.
RESCISSION OF INSURANCE CONTRACTS
Grounds for rescission of insurance contract
1. Non-payment of premium
2. Conviction of a crime arising out of acts increasing the hazard
insured against
3. Discovery of fraud or material misrepresentation
4. Discovery of willful or reckless acts or omissions increasing the
hazard insured against
5. Physical changes in the property insured which result in the
property becoming uninsurable
6. Discovery of other insurance coverage that makes the total
insurance in excess of the property insured
7. Determination by the Commissioner that the continuation of the
policy would violate or would place the insurer in violation of this
Code
8. When there is concealment
9. There is a breach of material warranty
TN: Breach of condition subsequent may not be considered as a
ground. All those condition in the policy-making requirements of the
insured after the loss are intended merely for evidentiary purposes and
do not form any of the conditions of liability.
Insurance code allows party to rescind or to avoid policy only in case
of material breach. Breach of an immaterial provision does not avoid
the policy.
Concealment
It is the neglect to communicate that which a party knows and ought
to communicate. Concealment, whether intentional or unintentional,
entitles the injured party to rescind the contract of insurance.
Requisites
1. Party knows a material fact which he neglects to communicate or
disclose to the other party
2. Such party concealing is duty bound to disclose such fact to the
other party
3. Such party concealing makes no warranty as to the fact
concealed
4. The other party has no means of ascertaining the fact concealed
Test of materiality
Determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the advantages of
the proposed contract, or in making his inquiries. It is sufficient if the
knowledge of it would influence the parties in making the contract.
Matters that need not be disclosed
1. 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
2. Those of which the other waives the communication
3. Those which the other already knows
4. Those which prove or tend to prove the existence of a risk
excluded by a warranty, and which are not otherwise material
5. Those which relate to a risk excepted from the policy and which
are not otherwise material.
XPTN: In answer to inquiries of the other
TN: Neither party is bound to communicate, even upon inquiry,
information of his own judgment.
Matters that must be disclosed even in the absence of inquiry
1. Those which the other has no means of ascertaining
2. Those material to the contract
3. Those as to which the party with the duty to communicate makes
no warranty
Rules on concealment
a. If there is concealment under Sec. 27, remedy of insurer is
rescission
b. Party claiming the existence of concealment must prove that
there was knowledge of the fact concealed on the part of the
party charged with concealment
c. Good faith is not a defense in concealment. Concealment,
whether intentional or unintentional, entitles the injured party to
rescind the contract
d. Matter concealed need not be the cause of the loss
KART 12
e. To be guilty of concealment, party must have knowledge of the 4. Promissory – where one party is bound by the executory
fact concealed at the time of effectivity of the policy stipulation
f. Failure to communicate information acquired after effectivity of
policy will not be a ground to rescind the contract. Ways of making an express warranty part of insurance
contract
Misrepresentation or omissions 1. Contained in the policy itself
2. In another instrument signed by the insured and referred to in
Representation the policy as making a part of it
Statement made by the insured at the time of, or prior to, the issuance
of policy as to an existing or past fact or state of facts, or concerning a Effects of breach of warranty
future happening, to give information to the insurer and otherwise a. Material
induce him to enter into the insurance contract GR: Violation of material warranty, or of a material provision of a
policy, on the part of either party, entitles the other to rescind the
Kinds of representations contract
1. Affirmative – involves statements dealing with facts existing at XPTNS:
the time the contract is made 1. Loss occurs before the time for the performance of the
2. Promissory – representation pertains to statements made by warranty
insured concerning what is to happen at the time the insurance is 2. Performance becomes unlawful at the place of the contract
already effective 3. Performance becomes impossible
3. Oral or written b. Immaterial (e.g. Other insurance clause)
GR: It will not avoid the policy
XPTN: When the policy expressly provides or declares that a
When is there misrepresentation violation thereof will avoid it
When insured makes erroneous statements of facts with the intent of LOSS
inducing the insurer to enter into the insurance contract.
a. Actual total loss
Requisites 1. Total destruction
1. Insured stated a fact which is untrue 2. Loss by sinking
2. Such fact was stated with knowledge that it is untrue and with 3. Damage rendering the thing valueless
intent to deceive or which he states positively as true without 4. Total deprivation of owner of possession of thing insured
knowing it to be true and which has a tendency to mislead b. Constructive total loss
3. Such fact in either case is material to the risk 1. Actual loss of more than ¾ of the value of the object
2. Damage reducing value by more than ¾ of the value of the
Instances in which the injured party cannot rescind the policy vessel and of cargo
on the ground of false representation 3. Expenses of shipment exceed ¾ of value of cargo
1. When there is waiver TN: In case of constructive total loss, insured may abandon the
2. When an action has already been commenced on the contract goods or vessel to the insurer and claim for whole insured value,
3. When the incontestable clause applies or he may, without abandoning vessel, claim for partial actual
loss
Effects of misrepresentation c. Abandonment
1. Injured party is entitled to rescind the contract from the time Act of insured by which, after a constructive total loss, he
when the representation becomes false declares the relinquishment to the insurer of his interest in the
2. When the insurer accepted the payment of premium with the thing insured
knowledge of the ground for rescission, there is a waiver of such Requisites:
right 1. There must be an actual relinquishment by the person
3. There is no waiver of the right of rescission if the insurer had no insured of his interest in the thing insured
knowledge of the ground therefor at the time of acceptance of 2. There must be a constructive total loss
premium payment 3. Abandonment be neither partial nor conditional
4. It must be made within a reasonable time after receipt of
Characteristics of misrepresentation reliable information of the loss
1. Refers to the date the contract goes into effect 5. It must be factual
2. Alteration or withdrawal of a representation was made before the 6. It must be made by giving notice thereof to the insurer
insurance is effected but not afterwards which may be done orally or in writing
3. Made at the time of, or before issuing the policy and not after 7. Notice of abandonment must be explicit and must specify
4. Oral or written the particular cause of the abandonment
5. Not a part of the contract but merely a collateral inducement

Breach of warranties
TRANSPORTATION
Warranty
Statement or promise set forth in the policy, or by reference
COMMON CARRIERS
incorporated therein, the untruth or non-fulfillment of which in any
respect, and without reference to whether the insurer was in fact
Concept
prejudiced by such untruth or non-fulfillment, renders the policy
voidable by the insurer
Common carrier
A person, corporation, firm or association engaged in the business of
Kinds of warranty
carrying or transporting passengers or goods or both, by land, water,
1. Express – one that is stated in the policy or any of its
or air, for compensation, offering their services to the public.
attachments
2. Implied – natural element of the contract imposed by law and are
One that holds itself out as ready to engage in the transportation of
part of the policy without the need that it be stated in the policy
goods for hire as a public employment and not as a casual occupation
3. Affirmative – an affirmation of fact that exist at the time they are
made, an undertaking that some positive allegation of fact is true

KART 13
True test: Not the quantity or extent of the business actually
transacted, or the number and character of the conveyances used in
the activity, but whether the undertaking is a part of the activity
engaged in by the carrier that he has held out to the general public as
his business or occupation.
Case: Pipeline operators are common carriers. Law does not
distinguish as to the means of transportation, as long as it is by land,
water, or air; a motor vehicle is not required.
Customs broker – whose principal business is the preparation of the
correct customs declaration and the proper shipping documents – is
still considered a common carrier if it also undertakes to deliver the
goods for its customers. The law does not distinguish between one
whose principal business activity is the carrying of goods and one who
undertakes this task only as an ancillary activity.
Common carrier vs. private carrier
Distinction between common carrier and private carrier
It lies in the character of the business, such that if the undertaking is a
single transaction, not a part of the general business or corporation,
although involving the carriage of goods for a fee, the person or
corporation offering such service is a private carrier.
Common carrier Private carrier
Holds himself out in common, Agrees in some special case with
that is, to all persons who choose some private individual to carry
to employ him, ready to carry for for hire
hire
Not bound to carry for any Bound to carry for all who offer
reason, unless it enters a special such goods as it is accustomed to
agreement to do so carry and tender reasonable
compensation for carrying them
Subject to regulation as it is a Not subject
public service
Bound to exercise extraordinary Owes only diligence of a good
diligence father of a family
Cannot stipulate that it is exempt May validly enter into such
from liability for the negligence of stipulation
its agents or employees
Such stipulation is void as it is
against public policy
Diligence required
By the nature of their business and by reason of public policy, common
carriers are bound to observe extraordinary diligence over the goods
and for the safety of the passengers transported by them, according to
all the circumstances of each case.
Extraordinary diligence
Rendition of service with the greatest skill and utmost foresight
Extraordinary diligence applied if carriage of goods
It requires common carrier to know and to follow the required
precaution for avoiding damage to, or destruction of the goods
entrusted to it for sale, carriage and delivery. It requires common
carrier to render service with greatest skill and utmost foresight and to
use all reasonable means to ascertain the nature and characteristic of
goods tendered for shipment, and to exercise due care in the handling
and stowage, including such methods as their nature requires.
Extraordinary diligence applied in carriage of passenger
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.
Are common carriers also required to exercise extraordinary
diligence for the benefit of 3rd persons?
Yes, for if the common carriers carefully observed the statutory
standard of extraordinary diligence in respect of their own passengers,
they cannot help but simultaneously benefit pedestrians and the
owners and passengers of other vehicles who are equally entitled to
the safe and convenient use of our roads and highways.
Presumption of negligence (Civil Code)
In case of loss of effects of passengers or death or injuries to
passengers, the common carrier is presumed to be at fault or have
acted negligently unless it had observed extraordinary diligence in the
vigilance thereof.
Court need not make an express finding of fault or negligence of
common carriers, the law imposes to them strict liability, as long as it
is shown that:
1. There exists a contract between the passenger or shipper of
goods to be carried and the common carrier and
2. The loss, deterioration, injury or death took place during the
existence of the contract
Mere proof of delivery of goods in good order to a common carrier and
their arrival in bad order at their destination or failure to transport
passenger safely constitutes prima facie case of fault or negligence
against carrier. If no adequate explanation is given as to how the
deterioration, loss or destruction of goods happened, transporter shall
be held responsible.
Presumption also makes doctrine of proximate cause inapplicable to
contract of carriage. Injured passenger or owner of goods need not
prove causation to establish his case. Presumption arises upon the
happening of the accident.
OBLIGATIONS AND LIABILITIES
Vigilance over goods
Responsibility of common carrier with respect to carriage of
goods
Common carriers are responsible for the loss, destruction, or
deterioration of the goods
XPTNS: Unless same is due to any of following causes
1. Flood, storm, earthquake, lightning, 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 owner of the goods
4. Character of the goods or defects in the packing or in the
containers
5. Order or act of competent public authority
6. Exercise of extraordinary diligence
7. Goods are lost as a result of a robbery which is attended by grave
or irresistible threat, violence or force (Case)
TN: List is EXCLUSIVE. If cause is outside list, common carriers are
presumed to have been at fault or acted negligently, unless they prove
that they observed extraordinary diligence.
Carrier’s liability for delay
In the absence of special contract, carrier is not an insurer against
delay in transportation of goods. When common carrier undertakes to
convey goods, the law implies a contract that they shall be delivered to
its destination within a reasonable time, in the absence of agreement
as to the time of delivery.
But where the carrier made an express contract to transport and
deliver within a specified time, it is bound to fulfill its contract and is
liable for any delay no matter from what cause it may have arisen.
Basis of determining whether delivery was made within
reasonable time
In order to determine whether the delivery of goods is made within a
reasonable time, the expected date of arrival reflected in the bill of
lading may be considered. It may also depend upon the nature of the
goods, whether it is perishable or not.
Consequences of delay in carriage of goods
a. In case of excusable delay
1. Excusable delay in carriage merely suspends but generally
does not terminate the contract of carriage. When the cause
KART 14
 is removed, the master must proceed with the voyage and
make delivery.
2. During the detention or delay, the vessel continues to be
liable as a common carrier, not a warehouseman, and
remains duty bound to exercise extraordinary diligence
b. In case of inexcusable delay
1. Carrier remains duty bound to exercise extraordinary
diligence
2. Carrier is still liable even if a natural disaster causes the
damage
3. Stipulation limiting the liability of the common carrier cannot
be availed of in case of loss or deterioration of goods
4. Carrier is liable for the damages caused by the delay
5. Consignee may exercise his right to abandon
Duration of liability
In carriage of goods, duty to exercise extraordinary diligence by
common carrier starts from the time the goods are unconditionally
placed in the possession of, and received by the carrier for
transportation. It ends at the time the goods are delivered, actually or
constructively, by the carrier to the consignee, or to the person who
has a right to receive them.
Delivery of goods
a. Delivery to carrier
Goods are deemed delivered to carrier when the goods are ready
for and have been placed in the exclusive possession, custody
and control of the carrier for the purpose of their immediate
transportation and the carrier has accepted them. When such
delivery has thus been accepted by the carrier, the liability of the
carrier commences eo instanti.
b. Delivery to consignee
There is delivery when there has been actual or constructive
delivery of the cargoes to the consignee or to the person who has
a right to receive them.
1. Actual delivery – there is actual delivery when possession
has been turned over to the consignee or to his duly
authorized agent and a reasonable time is given him to
remove the goods
2. Constructive delivery – a general term comprehending all
those acts which, although not conferring physical
possession of the thing, have been held by construction of
law equivalent to acts of real delivery. The extraordinary
liability of the common carrier 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.
Temporary unloading or storage
Common carrier’s duty to observe extraordinary diligence over the
goods remains in full force and effect even when they are temporarily
unloaded or stored in transit
XPTN: Unless shipper or owner has made use of the right of stoppage
in transitu (right of seller to stop delivery of goods when buyer
becomes insolvent)
It also continues to be operative even during the time the goods are
stored in a warehouse of the carrier at the place of destination, until
consignee has been advised of the arrival of goods and has had
reasonable opportunity thereafter to remove or dispose of them.
Liability for baggage of passengers
Checked-in baggage – extraordinary diligence is required
Baggage in possession of passengers – hand-carried baggage will be
treated as necessary deposit
Checked-in baggage Hand-carried baggage
Goods Necessary deposit
Extraordinary diligence Ordinary diligence
Safety of passengers
Common carrier is bound to carry 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.
Presumption of negligence of common carriers in the carriage
of passengers
In case of death of or injuries to passengers, common carriers are
presumed to have been at fault or to have acted negligently, unless
they prove that they observed extraordinary diligence.
Passenger
Person who purchased the ticket or token who presents himself at the
proper place and in a proper manner to be transported, having the
bona fide intention to use the facilities of the carrier
Duration of liability
Duty to exercise utmost diligence in carriage of passengers begins
a. By train – 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
b. By sea – as soon as a person with bona fide intention of taking
passage places himself in the care of the carrier or its employees
and is accepted as a passenger
c. By land – passenger jeepneys and buses are duty bound to stop
their conveyances for a reasonable length of time in order to
afford passengers an opportunity to board and enter, and they
are liable for injuries suffered by boarding passengers resulting
from the sudden starting up or jerking of their conveyances while
they do so. Rule is that once a public utility vehicle stops, it is
making a continuous offer to riding public.
TN: Duty of common carrier to provide safety to passengers obligates
it not only during the course of the trip, but for so long as the
passengers are within its premises and where they ought to be in
pursuance to the contract of carriage.
Arrival at destination
Duty continues until the passenger has, after reaching his destination,
safely alighted from carrier’s conveyance or has had a reasonable
opportunity to leave carrier’s premises and to look after his baggage
and prepare for his departure.
Liability for acts of others
a. Employees
Common carriers are liable for the death of or injuries to passengers
through the negligence or willful acts of former’s employees, although
such employees may have acted beyond the scope of their authority or
in violation of the orders of the common carriers.
Negligence or malfeasance of carrier’s employees could give ground
for an action for damages against the carrier. Passengers are entitled
to be protected against personal misconduct, injurious language,
indignities and abuses from such employees. Any rude or discourteous
conduct on the part of employees towards a passenger gives the latter
an action for damages. Common carrier may recover what it has paid
for damages from its negligent employee.
Liability does not cease upon proof that they exercised all the diligence
of a good father of a family in the selection and supervision of their
employees.
b. Other passengers and strangers
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.
KART 15
Failure to take precautionary measures to protect the safety may be exempted from liability for the loss, destruction, or
of its passengers constitute negligence deterioration of goods.
In a case, bus company did nothing to protect the safety of its
passengers despite the warning by Philippine Constabulary. Had the b. Absence of delay
bus company and its employees been vigilant, they would not have If there is absence of delay, the contract limiting the liability of
failed to see that the malefactors had a large quantity of gasoline with common carrier can be invoked.
them. Under the circumstances, simple precautionary measures to
protect the safety of passengers, such as frisking passengers and If common carrier negligently incurs in delay in transporting the goods,
inspecting their baggage, preferably with non-intrusive gadgets such a natural disaster shall not free such carrier from responsibility.
as metal detectors, before allowing them on board could have been Moreover, if delay is without just cause, the contract limiting the
employed without violating the passenger’s constitutional rights. It is liability of common carrier cannot be availed of in case of loss or
evident that the employees failed to prevent the attack on one of the deterioration of goods.
buses because they did not exercise the diligence of a good father of a
family. c. Due diligence to prevent or lessen the loss
Common carrier must still exercise due diligence to prevent or
Carrier does not give consent to become insurer of any and all minimize loss even if there is a fortuitous event. It must be exercised
risks to passengers and goods before, during and after the occurrence of flood, storm or other natural
In a case where passenger on a bus lost his left eye’s sight because of disaster in order that the common carrier may be exempted from
a stone hurled by an unidentified bystander, he was not allowed to liability for the loss, destruction, or deterioration of the goods. Same
recover from the carrier. A tort committed by a stranger which causes duty is incumbent upon the common carrier in case of an act of the
injury to a passenger does not accord the latter a cause of action. public enemy or when the loss, destruction or deterioration is caused
Negligence for which a common carrier is held responsible is the by character of the goods, or the faulty nature of the packing or of the
negligent omission by carrier’s employees to prevent the tort from containers.
being committed when the same could have been foreseen and
prevented by them. In the instant case, degree of care essential is only Proof of negligence
that of a good father of a family.
There is presumption of negligence in case of death of or injuries to
passengers. Hence, there is no need to prove negligence once death
or injury has been established.

Acts of employees Acts of other

passengers or strangers Due diligence in the selection and supervision of employees
Required Extraordinary diligence Ordinary diligence
diligence Selection – employer must examine applicants for his qualifications,
Nature of Tort; however, employee Not absolute; only when experience and record of service
liability must be on duty at the carrier’s employees failed Supervision – requires formulation of rules and regulations for the
time of act, otherwise, rule to exercise diligence of a guidance of employees and issuance of proper instructions as well as
on strangers apply to them good father of family to actual implementation and monitoring of consistent compliance with
prevent or stop the act or the rules
omission
Contributory negligence
Extent of liability for damages
Carrier and driver are solidarily liable as joint tortfeasors Conduct on the part of the injured party, contributing as a legal cause
to the harm he has suffered, which falls below the standard to which
DEFENSES AVAILABLE TO A COMMON CARRIER he is required to conform for his own protection.
1. On the part of shipper
Exempting causes Liability for damages of common carrier shall be equitably
reduced.
a. Requirement of absence of negligence 2. On the part of passenger
Does not bar recovery of damages for his death or injuries if the
Fortuitous event as a defense proximate cause thereof is the negligence of the common carrier,
To be a valid defense, it must be established that the fortuitous event but the amount of damages shall be equitably reduced.
be the proximate cause of the loss
Doctrine of last clear chance
Requisites before fortuitous event can be properly invoked as
a defense When both parties involved in the accident were both negligent,
1. Cause of the unforeseen and unexpected occurrence, or of the negligence of the one party will not be considered the proximate case
failure of the debtor to comply with his obligation must be if the other party has the last clear chance of avoiding the injury.
independent of the human will TN: This applies only in a suit between owners and drivers of colliding
2. Occurrence must be such as to render it impossible for the debtor vehicles. This cannot be used as a defense against a passenger.
to fulfill his obligation on a normal manner
3. Must be impossible to foresee the event which constitutes the EXTENT OF LIABILITY
caso fortuito or if it can be foreseen, it must be impossible to
avoid 1. Actual damages
4. Debtor must be free from any participation in or the aggravation 2. Civil indemnity for the death of passenger - P75,000
of the injury resulting to the creditor 3. Loss of earning capacity
4. Moral damages
Natural disaster as defense 5. Nominal/Temperate damages
1. It must have been the proximate cause and only cause of the 6. Liquidated damages
loss, destruction, or deterioration 7. Exemplary damages
2. Common carrier must exercise due diligence to prevent or 8. Attorney’s fees
minimize loss before, during and after the occurrence of flood,
storm or other natural disaster in order that the common carrier Stipulations limiting liability

KART 16
a. Vigilance over the goods – valid if requisites are complied with
Stipulation between common carrier and shipper or owner limiting
the liability of the former for the loss, destruction, or deterioration
of the goods to a degree less than extraordinary diligence shall be
valid, provided it be:
1. In writing, signed by the shipper or owner
2. Supported by a valuable consideration other than the service
rendered by the common carrier
3. Reasonable, just and not contrary to public policy
Purpose: For the protection of the common carrier
Such stipulation obliges the shipper/consignee to notify the
common carrier of the amount that the latter may be liable for in
case of loss of the goods. Unscrupulous shippers may undervalue
the goods in order to avail the lower rate of freight at the
expense of the carrier and claim the real value of the goods if
these goods are damaged.
TN: An agreement limiting the common carrier’s liability for delay
on account of strikes or riots is valid.
Void stipulations
Any of the following or similar stipulations shall be considered
unreasonable, unjust, and contrary to public policy:
1. Common carrier shall exercise a degree of diligence less
than that of a good father of a family, or of a man or
ordinary prudence in the vigilance over the movables
transported
2. Common carrier is totally exempted from exercising any
degree of diligence
3. Goods are transported at the risk of the owner or shipper
4. Common carrier will not be liable for any loss, destruction, or
deterioration of the goods
5. Common carrier’s liability for acts committed by thieves or of
robbers who do not act with grave or irresistible threat,
violence or force, is dispensed with or diminished
6. Common carrier shall not be responsible for the acts or
omission of his or its employees
7. Common carrier need not observe any diligence in the
custody of the goods
8. Common carrier is not responsible for the loss, destruction
or deterioration of goods on account of the defective
condition of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.
Limitation of liability to a fixed amount
Limiting liability to a fixed amount is valid if:
1. It is reasonable and just under the circumstances and
2. Has been fairly and freely agreed upon a contract
The fact that the common carrier has no competitor along the line
or route to which the contract refers shall be taken in to
consideration on whether limiting liability is reasonable, just and
in consonance with public policy.
Limitation of liability does not remove disputable
presumption of negligence
Even when there is agreement limiting liability, the common
carrier is still disputably presumed to have been negligent in case
of loss, destruction or deterioration.
If common carrier refused to carry goods of shipper
Agreement limiting the liability may be annulled by shipper or
owner if the common carrier refused to carry his goods unless
former agree to such stipulation
Limitation of liability in absence of declaration of greater
value
Stipulation limiting liability to the value of the goods appearing in
the bill of lading is valid and binding, unless the shipper or owner
declares a greater value
b. Safety of passengers – not valid
Extraordinary diligence of a common carrier cannot be dispensed
with or lessened by stipulation, by posting of notices, by
statements on tickets, or otherwise
XPTN: Stipulation limiting liability is valid when passenger is
carried gratuitously
XPTN to XPTN: It does not include willful acts or gross
negligence
TN: Reduction of fare does not justify any limitation of the
common carrier’s liability.
Limitations under the Warsaw Convention
Warsaw Convention
An agreement among sovereign countries concerning the regulation in
a uniform manner of the conditions of international transportation by
air in respect of the documents used for such transportation and the
liability of the carrier
Limitation of liability
a. Passengers – 250,000 francs/passenger
XPTNS:
1. By special contract, carrier and passenger may agree to a
higher limit of liability
2. Limit for passenger death or injury is $75,000 inclusive of
legal fees and costs where the US is the origin, destination
or stopping place
b. Checked-in baggage and cargo – 250 francs/kilogram
XPTNS:
1. If passenger or consignor has made, at the time when the
package was handed over to carrier, a special declaration of
interest in delivery at destination and has paid a
supplementary sum if the case so requires. In that case,
carrier will be able to pay a sum not exceeding the declared
sum, unless he proves that sum is greater than the actual
value to the consignor at delivery
2. In case the damage or loss was due to willful misconduct
3. In case the damage or loss was due to gross negligence
4. Absence of a baggage check
5. Carrier did not issue a ticket
6. In case of waiver by carrier
c. Hand-carried baggage – 5,000 francs/passenger
CORPORATION LAW
(Provisions of BP 68, not affected by RA 11232)
GENERAL PRINCIPLES
Nationality of corporations
Place of incorporation test
Nationality of the private corporation is that of the state under whose
laws such corporation was organized
Control test
Nationality of the private corporation is determined by the citizenship
of the controlling stockholders
Twin requirements:
1. At least 60% of the capital stock outstanding and entitled to vote
of each of both corporations must be owned and held by citizens
of the Philippines
2. At least 60% of the members of the board of directors of each of
both corporations must be citizens of the Philippines
Grandfather rule
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 corporate shareholders are present, by
KART 17
attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder.
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. The
combined totals in the investing corporation and the investee
corporation must be traced to determine the total percentage of
Filipino ownership. The ultimate Filipino ownership of the shares must
first be traced to the level of investing corporation and added to the
shares directly owned in the investee corporation.
IOW: Consider the direct and indirect ownership
Narra Nickel Mining
Corporate layering is admittedly allowed by FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal.
The corporations interested in circumventing our laws would clearly
strive to have "60% Filipino Ownership" at face value. It would be
senseless for these applying corporations to state in their respective
articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the
application of the Constitution.
Control test is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II
of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines.
When in the mind of the Court there is doubt, based on the attendant
facts and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the Grandfather rule.
The Control Test and the Grandfather Rule can, if appropriate, be used
cumulatively in the determination of the ownership and control of
corporations engaged in fully or partly nationalized activities.
The Grandfather Rule, standing alone, should not be used to
determine the Filipino ownership and control in a corporation, as it
could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather Rule
may be applied. Put in another manner, if the subject corporation's
Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino
to foreign equity requirement can be considered a Filipino corporation
if there is no doubt as to who has the "beneficial ownership" and
"control" of the corporation. In that instance, there is no need for a
dissection or further inquiry on the ownership of the corporate
shareholders in both the investing and investee corporation or the
application of the Grandfather Rule. As a corollary rule, even if the 60-
40 Filipino to foreign equity ratio is apparently met by the subject or
investee corporation, a resort to the Grandfather Rule is necessary if
doubt exists as to the locus of the "beneficial ownership" and "control."
“Doubt” refers to various indicia that the "beneficial ownership" and
"control" of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders.
Where to apply 60% of capital? What does “capital” mean?
SEC MC No. 8 is the prevailing rule
For purposes of determining compliance with the constitutional and
statutory ownership requirement, the required percentage of Filipino
ownership shall be applied to both:
1. Total number of outstanding shares of stock entitled to vote in
the election of directors; AND
2. Total number of outstanding capital stock, whether or not entitled
to vote in the election of directors
This was upheld in Roy vs. Herbosa when said MC was assailed.
Doctrine of separate juridical personality
A corporation has a separate and distinct personality from those who
represent it. Its officers are solidarily liable only when exceptional
circumstances exist, such as cases enumerated in Sec. 31 of
Corporation Code.
Doctrine of piercing the corporate veil
Applies only in 3 basic instances:
1. When the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used as a
vehicle for evasion of an existing obligation
2. In fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime
3. In alter ego cases, i.e., where a corporation is essentially a farce,
since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its
affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation
Three-pronged test to determine the application of the alter-ego
theory:
1. Instrumentality/Control test – 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 attached so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of
its own
2. Fraud test – such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right
3. Harm test – aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of
A corporation not impleaded in a suit cannot be subject to the
court’s process of piercing the veil of its corporate fiction
In that situation, the court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken against that
corporation and its property would infringe on its right to due process.
The doctrine of piercing the veil of corporate fiction comes to play only
during the trial of the case after the court has already acquired
jurisdiction over the corporation. Before this doctrine can be applied,
the court must first have jurisdiction over the corporation.
Two kinds of piercing the corporate veil
1. Traditional veil-piercing. A court disregards the existence of the
corporate entity so a claimant can reach the assets of a corporate
insider. The shareholders thus become liable for obligations of the
corporation.
2. Reverse-piercing. The plaintiff seeks to reach the assets of a
corporation to satisfy claims against a corporate insider. It flows
in the opposite direction and makes the corporation liable for the
debt of the shareholders. Reverse-piercing further has two
subtypes:
a. Outsider reverse piercing. An outside party with a claim
against an individual or corporation attempts to be repaid
with assets of a corporation owned or substantially
controlled by the defendant.
b. Insider reverse piercing. Controlling members will attempt to
ignore the corporate fiction in order to take advantage of a
benefit available to the corporation, such as an interest in a
lawsuit or protection of personal assets.
A non-stock corporation may be subjected to the doctrine of
piercing the veil of corporate fiction
The mere fact that the corporation involved is a non-profit corporation
does not by itself preclude a court from applying the equitable remedy
of piercing the corporate veil. While it may appear to be impossible for
a person to exercise ownership control over a non-stock, non-profit
KART 18
corporation, a person can be held personally liable under the alter ego
theory if the evidence shows that the person controlling the
corporation did in fact exercise control, even though there was no
stock ownership.
STOCK VS. NON-STOCK CORPORATIONS
Stock corporations are those which have capital stock divided into
shares and are authorized to distribute to the holders of such shares,
dividends, or allotments of the surplus profits on the basis of the
shares held. All other corporations are non-stock corporations. (Sec. 3)
Non-stock corporations is one where no part of its income is
distributable as dividends to its members, trustees, or officers:
Provided, that any profit which it may obtain incidental to its
operations shall, whenever necessary or proper, be used for the
furtherance of the purpose/s for which the corporation was organized,
subject to the provisions of this Title.
Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to
the special provisions of this Title governing particular classes of non-
stock corporations.
DE FACTO CORPORATIONS AND CORPORATIONS BY
ESTOPPEL
SEC. 19. De facto Corporations. – The due incorporation of any
corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
De Facto Corporation
A corporation where there exists a flaw in its incorporation.
Requisites
1. Existence of a valid law under which it may be incorporated
2. Bona fide attempt to incorporate a corporation under such law
3. Actual exercise in good faith of corporate powers
SEC. 20. Corporation by Estoppel. – All persons who assume to act as
a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be
allowed to use its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such cannot
resist performance thereof on the ground that there was in fact no
corporation.
Corporation by estoppel
Group of persons which holds itself out as a corporation and enters
into a contract with a 3rd person on the strength of such appearance
cannot be permitted to deny its existence in an action under said
contract
Case: All those who derived benefit from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took advantage
of.
Corporation by estoppel De facto corporation
Misrepresented themselves as a Colorable compliance with the
corporation without complying requirements set by law; they did
with any requirements provided not substantially comply with the
by law to become a corporation requirements provided by law to
become a corporation
State and 3rd parties can attack Only the state can attack its
them collaterally since the law did existence in a direct action (quo
not recognize their existence warranto)
There is no privilege given by Privilege is given as a corporation
law, but because of equity, the
contracting parties are bound to
perform their obligations
BOARD OF DIRECTORS AND TRUSTEES
Basic principles
BOD/T shall exercise the corporate powers, conduct all business, and
control all properties of the corporation.
Doctrine of centralized management
All business of the corporation shall be conducted and all its properties
shall be controlled and held by BOD/T. A corporation can act only
through its directors and officers.
Rationale: Concentration of powers in the board is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered, and unfamiliar with the business of the corporation to
conduct it directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise
the conduct of corporate business.
Power exercised by individual director
But individual directors may exercise corporate powers as long as
validly delegated. Absent such delegation, the declarations of
individual director are not binding on the corporation.
Instances when corporate powers can be exercised by
persons other than BOD
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,
partnership, or another corporation.
3. In case of close corporations, stockholders may directly manage
the business of corporation instead, if the articles of incorporation
so provide.
Business judgment rule
Questions of policy or management are left solely to the honest
decision of officers and directors of a corporation and the courts are
without authority to substitute their judgment for the judgment of BOD
The board is the business manager of the corporation and as long as it
acts in good faith, its orders are not reviewable by courts or SEC.
XPTNS: (When BOD decision is reviewable)
1. Amendment of the articles of incorporation;
2. Adoption and amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge, or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.
Duties, liabilities, and responsibility for unlawful acts
Liability of Directors, Trustees or Officers
1. When directors or trustees willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or
2. When directors or trustees are guilty of gross negligence or bad
faith in directing the affairs of the corporation or
3. When directors or trustees acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees
KART 19
4. When director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file
with the corporate secretary his written objection
5. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation
6. When a director, trustee or officer is made, by specific provision
of law, personally liable for his corporate action
TN: Jointly and severally liable for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons
a. Right to dividends
Power to declare dividends
BOD of stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by
them.
GR: Stockholders cannot demand the declaration of dividends
XPTN: When there is improper accumulation of profits

A director, trustee, or officer shall not attempt to acquire, or acquire GR: Stock corporations are prohibited from retaining surplus profits in
any interest adverse to the corporation in respect of any matter which excess of 100% of their paid-in capital stock
has been reposed in them in confidence, and upon which, equity XPTNS:
imposes a disability upon themselves to deal in their own behalf; 1. When justified by definite corporate expansion projects or
otherwise the said director, trustee, or officer shall be liable as a programs approved by BOD
trustee for the corporation and must account for the profits which 2. When the corporation is prohibited under any loan agreement
otherwise would have accrued to the corporation. with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such
Case: No penal sanctions imposed for Sections 31 (Liability of consent has not yet been secured
directors, trustees or officers) and 34 (Disloyalty of a director); only 3. When it can be clearly shown that such retention is necessary
civil liability. under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies
POWERS OF CORPORATIONS
If stock dividend
How powers are exercised Requires approval of stockholders representing not less than 2/3 of the
outstanding capital stock at a regular or special meeting duly called for
The corporate powers shall be exercised, all business conducted and the purpose
all property of the corporation controlled and held by the board of
directors or trustees. In case of delinquent stocks
a. Cash dividend – first be applied to the unpaid balance on the
subscription plus costs and expenses
b. Stock dividend – withheld from the delinquent stockholder until
his unpaid subscription is fully paid
Ultra vires doctrine
b. Right to inspect
No corporation under the Code shall possess or exercise any corporate A stockholder has the right to inspect the records, minutes and stock
powers except those conferred by the Code or by its articles of and transfer book of the corporation.
incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred. Requisites for exercise of right
1. Must be exercised at reasonable hours on business days
Illegal acts Ultra vires acts 2. Stockholder has not improperly used any information he secured
Contemplates doing of an act Not illegal or void ab initio, but through any previous examination
which are contrary to law, morals are not merely within the scope 3. Demand is made in good faith or for a legitimate purpose
or public policy or public duty of the articles of incorporation
Void Voidable TN: Mandamus is a proper remedy if stockholder is being improperly
Cannot serve as basis of a court May become binding and deprived of his right to inspect
action nor acquire validity by enforceable when ratified by the
performance, ratification or stockholders Cases:
estoppel  For denial of the right to inspect, a criminal action based on the
violation of Sec. 74, paragraphs 2 and 4, can be maintained
Trust fund doctrine against corporate officers or such other persons acting on behalf
of the corporation. It is inconsequential the fact that Section 74
The rescission of a Pre-Subscription Agreement will effectively result in expressly mentions the application of Section 144 only to a
the unauthorized distribution of the capital assets and property of the specific act, as Section 144 penalizes violations of “any provision”
corporation, thereby violating the Trust Fund Doctrine and the of the Corporation Code “not otherwise specifically penalized
Corporation Code, since rescission of a subscription agreement is not therein.”
one of the instances when distribution of capital assets and property of  Nonetheless, when what is sought to be enforced is the
the corporation is allowed. The Trust Fund Doctrine provides that proprietary right to be in possession of the records, such right
subscriptions to the capital stock of a corporation constitute a fund to cannot be enforced by a criminal prosecution based on a violation
which the creditors have a right to look for the satisfaction of their of the second and fourth paragraphs of Section 74.
claims.  The right of the shareholder to inspect the books and records of
the petitioner should not be made subject to the condition of a
STOCKHOLDERS AND MEMBERS showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination
Doctrine of equality of shares proper. If the right were to be denied, the burden of proof is
upon the corporation to show that the purpose of the shareholder
Except as otherwise provided in the articles of incorporation and stated is improper, by way of defense.
in the certificate of stock, each share shall be equal in all respects to  No specific amount of interest required. The Corporation Code
every other share. has granted to all stockholders the right to inspect the corporate
books and records, and in so doing has not required any specific
Proprietary rights amount of interest for the exercise of the right to inspect.

KART 20
 his own name representation of commenced by
c. Pre-emptive right others similarly stockholder
situated after due
All stockholders of a stock corporation shall enjoy pre-emptive right to proceedings
subscribe to all issues or disposition of shares of any class, in had been taken
proportion to their respective shareholdings Defendant Defendant could Same with Defendant is a
XPTNS: be corporation, individual person against
1. Pre-emptive right is denied by the articles of incorporation or an its directors or whom
amendment thereto officers, and/or corporation has
2. Right does not extend to shares to be issued in compliance with other a cause of
laws requiring stock offerings or minimum stock ownership by the stockholders action
public Who has Stockholder in Stockholder in his Corporation in
3. Right does not extend to shares to be issued in good faith with cause of his personal personal and its own name
the approval of the stockholders representing 2/3 of the action capacity representative
outstanding capital stock, (a) in exchange for property needed for capacity
corporate purposes or (b) in payment of a previously contracted
debt FOREIGN CORPORATIONS

d. Right of first refusal Foreign corporation – one formed, organized or existing under any
laws other than those of the Philippines and whose laws allow Filipino
Stockholder who wants to sell his shares to any third person must offer citizens and corporations to do business in its own country or state. It
it either to the corporation or to the other existing stockholders usually shall have the right to transact business in the Philippines after it shall
under the same terms and conditions have obtained a license to transact business and a certificate of
authority from the appropriate government agency
Pre-emptive right Right of first refusal
Right claimed against corporation Right exercisable against another What constitutes “doing business”
on unissued shares of its capital stockholder of corporation on his
stock shares of stock 1. Soliciting orders, service contracts, opening offices, whether
Portion of authorized capital stock Shares already issued called “liaison” offices or branches
not yet subscribed 2. Appointing representatives or distributors domiciled in the
Purpose is to prevent dilution of Purpose is to maintain close Philippines or who in any calendar year stay in the country for a
interest corporation period/s totaling 180 days or more
3. Participating in the management, supervision or control of any
Intra-corporate disputes domestic business, firm, entity or corporation in the Philippines
4. Any other act/s that imply a continuity of commercial dealings or
Those which arise between stockholder and corporation or among arrangements and contemplate to that extent the performance of
stockholders involving internal affairs of the corporation acts or works, or the exercise of some of the functions normally
Subject matters incident to, and in progressive prosecution of commercial gain or
1. Devices schemes employed by, or any act of, the BOD, business of the purpose and object of the business organization
associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the Exclusions: It does not include –
public and/or of the stockholders, partners, or members of any 1. Mere investment as a shareholder by a foreign entity in domestic
corporation, partnership, or association corporations duly registered to do business, and/or the exercise
2. Controversies arising out of intra-corporate, partnership, or of rights as such investor
association relations, between and among stockholders, 2. Having a nominee director or officer to represent its interests in
members, or associates; and between, any or all of them and the such corporation
corporation, partnership or association of which they are 3. Appointing a representative or distributor domiciled in the
stockholders, members or associates, respectively Philippines which transacts business in its own name and for its
3. Inspection of corporate bookds own account
4. Controversies in the election or appointment of directors, 4. Publication of a general advertisement through any print or
trustees, officers or managers of corp, partnerships, or assoc broadcast media
5. Derivative suits 5. Maintaining a stock of goods in the Philippines solely for the
Court with jurisdiction purpose of having the same processed by another entity in the
Appropriate RTC which is designated as Special Commercial Court Philippines
6. Consignment by a foreign entity of equipment with a local
Actions available to stockholders to protect his rights company to be used in the processing of products for export
1. Individual suits – an action brought by shareholder in his own 7. Collecting information in the Philippines
name against the corporation when a wrong is directly inflicted 8. Performing services auxiliary to an existing isolated contract of
against him personally and to determine his individual right sale which are not on a continuing basis, such as installing in the
2. Representative suits – an action brought by stockholder in behalf Philippines machinery it has manufactured or exported to the
of himself and all other stockholders similarly situated when a Philippines, servicing the same, training domestic workers to
wrong is committed against a group of stockholders operate it, and similar incidental services
3. Derivative suits – an action brought by one or more stockholders
or members in the name and on behalf of the corporation to Cases:
redress wrongs committed against it or to protect or vindicate  The appointment of a distributor in the Philippines is not sufficient
corporate rights, whenever the officials of the corporation refust to constitute doing business unless it is under the full control of
to sue or are the ones to be sued or hold control of the the foreign corporation. If the distributor is an independent entity
corporation which buys and distributes products, other than those of the
foreign corporation, for its own name and its own account, the
Individual vs. representative vs. derivative suits latter cannot be considered doing business.
 A foreign company that merely imports goods from a Philippine
Individual Representative Derivative exporter, without opening an office or appointing an agent in the
Plaintiff Stockholder in Stockholder in Corporation but Philippines, is not doing business in the Philippines. To constitute

KART 21
 “doing business,” the activity undertaken in the Philippines should
involve profit-making.
Personality to sue and suability
Cannot sue but can be sued
If transacting business without a license, the foreign corporation, its
successors or assigns shall not be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency of
the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
Instances when foreign corporation without a license may sue
in the Philippines
1. Isolated transaction – it is isolated when there is no intention to
engage in a progressive pursuit of the purpose and object of a
corporation’s business
2. Violation of intellectual property rights in defending the goodwill
of the business
3. When foreign corporation entered into a transaction not related in
its business
4. When foreign corporation would enforce a right not arising out of
a business transaction (e.g. tort)
5. When parties have contractually stipulated that the Philippines
shall be the venue of actions between them
6. When party sued is barred by principle of estoppel and/or
principle of unjust enrichment from questioning the capacity of
the foreign corporation
7. Recovery of misdelivered property
MERGERS AND CONSOLIDATIONS
Concept
Merger
Union whereby one or more existing corporations are absorbed by
another corporation which survives and continues the combined
business
De facto merger
One where a corporation acquires all or substantially all of the
properties of another corporation in exchange of shares of stock of the
acquiring corporation
The acquiring corporation would end up with the business enterprise
of the target corporation; whereas, the target corporation would end
up with its shares in the acquiring corporation as its remaining assets
Consolidation
Union of two or more existing corporations to form a new corporation
Nell doctrine
Transfer of all the assets of a corporation to another shall not render
the latter liable to the liabilities of the transferor
XPTNS:
1. Where the purchaser expressly or impliedly agrees to assume
such debts
2. Where the transaction amounts to a consolidation or merger of
the corporations
3. Where the purchasing corporation is merely a continuation of the
selling corporation
4. Where the transaction is entered into fraudulently in order to
escape liability for such debts
Effects and limitations
Effects or 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.
Prohibited mergers and acquisitions
Merger or acquisition agreements that substantially prevent, restrict, or
lessen competition in the relevant market or in the market for goods or
services as may be determined by the Commission shall be prohibited
as anti-competitive
Exemptions from prohibited mergers and acquisitions
When the parties establish either of the following:
a. The concentration has brought about or is likely to bring about
gains in efficiencies that are greater than the effects of any
limitation on competition that result or likely to result from the
merger or acquisition agreement; or
b. A party to the merger or acquisition agreement is faced with
actual or imminent financial failure, and the agreement
represents the least anti-competitive arrangement among the
known alternative uses for the failing entity’s assets:
TN: Acquisition of the stock or other share capital of one or more
corporations solely for investment and not used for voting or exercising
control and not to otherwise bring about, or attempt to bring about the
prevention, restriction, or lessening of competition in the relevant
market shall not be prohibited.
Notification requirement
1. Aggregate annual gross revenues in, into or from the Philippines,
or value of the assets in the Philippines of the ultimate parent
entity of at least one of the acquiring or acquired entities,
exceeds P5 billion; and
2. Value of the transaction exceeds P2 billion
SECURITIES REGULATION CODE (RA 8799)
REGISTRATION REQUIREMENT; EXEMPTIONS
Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by SEC. Prior to such sale, information on the securities, in
such form and with such substance as the SEC may prescribe, shall be
made available to each prospective purchaser.
Prohibitions
If registration statement is not filed and approved, the following are
prohibited:
1. Sale of securities in the Philippines
KART 22
2. Offer to sell or distribute securities within the Philippines
3. Disseminate information relating to an offering of securities
For registration requirement to apply, the sale or offer has to be a
public offering.
Public offering
Any offering of securities to the public or to anyone, whether solicited
or unsolicited
Any solicitation or presentation of securities for sale through any of the
following modes shall be presumed to be a public offering:
1. Publication in any newspaper, magazine or printed reading
material which is distributed within the Philippines
2. Presentation in any public or commercial place
3. Advertisement or announcement on radio, television, telephone,
electronic communications, information communication
technology or any other forms of communication
4. Distribution and/or making available flyers, brochures or any
offering material in a public or commercial place or to prospective
purchasers
Purpose of registration requirement
The company can comply with the full and fair disclosure
When SEC renders the registration effective, this means that the issuer
has disclosed all material information regarding that security in its
registration statement.
Exempt Securities
Registration requirement does not apply to any of the following classes
of securities:
Under Section 9 of SRC
1. Issued by the government, subdivisions or instrumentalities
2. Issued by foreign government with which the Philippines has
diplomatic relations
3. Issued by receiver/trustee in bankruptcy approved by court
4. Sale or transfer of security under the supervision and regulation
of Insurance Commission, HLURB or BIR
5. Security issued by a bank except its own shares of stock
Under 2015 IRR
6. Any evidence of indebtedness issued by financial institution
licensed by BSP to engage in banking or quasi-banking
7. Evidence of indebtedness issued by BSP under its open market
and/or rediscounting operations
8. Bills of exchange arising from a bona fide sale of goods and
services that are distributed and/or traded by banks or
investment houses duly licensed by the SEC and BSP through an
organized market operated under the rules approved by SEC
9. Security issued or guaranteed by Multilateral Financial Entities
(MFEs) established through a treaty or any other binding
agreement to which Philippines is a party or becomes a member;
or by facilities or funds established, administered and supported
by MFEs; Provided, issuer shall file an offering circular/memo
containing:
a. Information about issuer and security to the issued
b. Information about MFE
c. Information about guarantee
10. Evidence of indebtedness that meet the following conditions:
a. Payable to specific person
b. Issued to not more than 19 non-institutional lenders
c. Neither negotiable nor assignable and held on to maturity
d. Not exceeding P150,000,000 or such higher amount as SEC
may prescribe
Exempt Transactions (Sec. 10)
Registration requirement does not apply to sale of any security in any
of the following transactions:
1. At any judicial sale, or sale by executor, administrator, guardian
or receiver or trustee in insolvency or bankruptcy
2. Sale by pledgee/mortgage or any lienholder to liquidate a bona
fide debt
3. Isolated transactions by owner/ agent who is not an underwriter
4. Distribution of securities by corporation to its stockholders as a
stock dividend or surplus
5. Sale of capital stock of corporation to its own stockholders
exclusively, where no remuneration is paid or given directly or
indirectly in connection with sale of such capital stock
− Sale to own stockholders
6. Issuance of bonds or notes secured by mortgage upon real estate
or tangible personal property, where the entire mortgage
together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale
7. Issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion,
provided the security so surrendered has been registered or was,
when sold, exempt from registration
− Converted securities
8. Broker’s transactions executed upon customer’s orders
− Listed securities
9. Share subscription prior to incorporation or in pursuance of an
increase in authorized capital stock
− Subscriptions to comply with minimum requirements
− Up to 25% only
10. Exchange of securities by issuer with its existing security holders
exclusively, where no remuneration is paid for soliciting exchange
− Exchanged securities
11. Sale by issuer to fewer than 20 persons during any 12-month
period
− Private placements
12. Sale of securities to any number of following qualified buyers:
a. Bank
b. Registered investment house
c. Insurance company
d. Pension fund or retirement plan maintained by government
or managed by bank or others authorized by BSP to engage
in trust functions
e. Investment company
f. Others determined by SEC
− Qualified buyers are those determined by law to have
knowledge and experience regarding investments; hence, no
need of protection
Difference between exempt security issued by receiver or trustee in
bankruptcy approved by court and exempted transaction of sale of
security at any judicial sale or sale by receiver or trustee in insolvency
or bankruptcy
Exempt security Exempt transaction
Always exempt no matter how Exemption applies in particular
many times traded instance only
Issuer of security is receiver or Issuer is anyone
trustee
PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER
TRADING
Manipulative devices and practices
It shall be unlawful for any person acting for himself or through a
dealer or broker, directly or indirectly:
a. To create a false or misleading appearance of active trading in
any listed security traded in an Exchange of any other trading
market
1. Wash sales – engaging in transactions in which there is no
change in beneficial ownership of a security
2. Improper matched orders – entering an order/s for the
purchase or sale of such security with the knowledge that a
simultaneous order/s of substantially the same size, time
and price, for the sale or purchase of any such security, has
or will be entered by or for the same or different parties
3. Market rigging or jiggling – performing similar act where
there is no change in beneficial ownership
b. To effect a series of transactions in securities that (i) raise their
price to induce purchase of security, (ii) depresses their price to
induce sale of security, or (iii) creates active trading such as:
KART 23
 1. Marking the close – buying and selling securities at the
close of the market in an effort to alter the closing price of
the security
2. Painting the tape – engaging in a series of transactions in
securities that are reported publicly to give the impression of
activity or price movement in a security
3. Hype and dump – engaging in buying activity at
increasingly higher prices and then selling securities in the
market at the higher prices or vice versa
4. Squeezing the float – taking advantage of a shortage of
securities in the market by controlling the demand side and
exploiting market congestion during such shortages in a way
as to create artificial prices
5. Boiler room operations – securities are non-existent
c. To circulate or disseminate information that the price of any
security listed in an Exchange will or is likely to rise or fall
because of manipulative market operations of any one or more
persons conducted for the purpose of raising or depressing the
price of security for the purpose of inducing the purchase or sale
of such security
d. To make false or misleading statement with respect to any
material fact, which he knew or had reasonable ground to believe
was so false or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded in an Exchange
e. To effect any series of transactions for the purchase and/or sale
of any security traded in an Exchange for the purpose of pegging,
fixing or stabilizing the price of security, unless otherwise allowed
by SRC or rules of SEC
Short sale
a. Any sale of a security which the seller does not own; or
b. Any sale which is consummated by the delivery of a security
borrowed by or for the account of the seller with the commitment
of the seller or securities borrower to return or deliver said
securities or their equivalent to the lender on a determined or
determinable future time
TN: It is a speculative practice, not a manipulative one, subject to
regulation by SEC.
GR: Short sales are allowed if it complies with regulation of SEC and
PSE
XPTN: If person doing short sale is a director, officer or principal
stockholder; such sale is not valid
Short Sale Uptick Rule
No broker or dealer shall use any facility of a securities exchange to
effect a short sale of any security unless:
a. At a price higher than the last sale
b. At the price of the sale if that price is above the next preceding
different sale price on such day
Short Swing Transaction or Profit
Any profit realized by any beneficial owner, director, or officer from
any purchase and sale, or any sale and purchase, of any equity
security of issuer within a period of less than 6 months shall inure to
and be recoverable by the issuer, irrespective of any intention of
holding the security purchased or of not repurchasing the security sold
for a period exceeding 6 months
XPTN: Security acquired in good faith in connection with a debt
previously contracted
IOW: A director, officer or principal stockholder cannot do a buy and
sell transaction or a sale transaction in less than 6 months. Any profit
derived from it belongs to issuer.
Mandatory Close Out Rule
Contract involving a short sale which has not resulted in a delivery by
the broker dealer within the settlement period must be closed by the
broker dealer by purchasing for cash or guaranteed delivery securities
of like, kind and quantity on the next business day after settlement
date, unless such purchase cannot be effected within said period for
justifiable reasons in which case, notification in writing shall be made
with SEC.
Fraudulent Transactions
Unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:
a. Employ any device, scheme, or artifice to defraud
b. Obtain money or property by means of any untrue statements of
a material fact of any omission to state a material fact necessary
in order to make the statements made not misleading
c. Engage in any act, transaction, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person
Insider Trading
An illegal practice where an insider transacts a security while holding
material non-public information and without disclosing it to the other
party
Elements of insider trading
1. Insider
a. Issuer
b. Director, officer or principal stockholder
c. Government employee
d. Second-hand insider (2)
2. Transact
a. Buy
b. Sell
3. Material
a. Affects market price
b. Affects decision to buy or sell
4. Non-public
a. Not yet disclosed
b. Already disclosed but no sufficient time to digest
5. Information
a. Intrinsic – information about the operations, directors,
officers of issuer
b. Extrinsic – information does not have to pertain to the issuer
but it affects the particular security being transacted
Insider
1. Issuer
2. Director or officer (or person performing similar functions) of, or a
person controlling the issuer
- Includes principal stockholder
3. Person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer
or the security that is not generally available to the public
4. 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
5. Person who learns such information by a communication from any
of the foregoing insiders
Presumption
A purchase or sale of a security of the issuer made by an insider or his
spouse or relatives by affinity or consanguinity within the 2nd degree,
legitimate or common-law, shall be presumed to have been effected
while in possession of material non-public information if transacted
after such information came into existence but prior to dissemination
of such information to the public and the lapse of a reasonable time
for the market to absorb such information.
This shall be rebutted upon a showing by purchaser or seller that he
was not aware of the material non-public information at the time of
purchase or sale
Material non-public information
a. It has not been generally disclosed to the public and would likely
affect the market price of the security after being disseminated to
the public and the lapse of a reasonable time for the market to
absorb the information; or
KART 24
 − Can potentially affect market price of security being
transacted
b. Would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy,
sell or hold a security
− It affects the decision to buy, sell, or hold security
Non-public
a. If not yet disclosed to the public
b. It is disclosed but reasonable time has not yet lapsed for the
public to digest the information and analyze what that particular
information means for the issuer
Block-off period (PSE Rules)
If a corporation discloses the material information to the public, all
insiders are prohibited from transacting the shares for 2 days which is
considered as sufficient time for the public to absorb the information
TN: Since this is from PSE Rules, it only applies to listed companies
Possible defenses of insider
1. When the insider proves that the information was not gained
from the relationship to the issuer
2. If the other party selling to or buying from the insider is
identified, the insider proves that he disclosed the information to
the other party or that he had reason to believe that the other
party is also in possession of the information
PROTECTION OF INVESTORS
Tender offer rule
Tender offer
Publicly announced intention by a person acting alone or in concert
with other persons to acquire:
1. Outstanding equity securities of a public company or
2. Outstanding equity securities of an associate or related company
of such public company which controls the said public company
Public company
Any corporation with:
1. A class of equity securities listed on an Exchange (PSE); or
2. Assets in excess of P50M and has 200 or more holders each
holding at least 100 shares of a class of its equity securities
Mandatory tender offers
1. Creeping transaction – 15%
Any person or group of persons acting in concert, who intends to
acquire 15% of equity securities in a public company in one or
more transactions within a period of 12 months
 File a declaration to that effect with the SEC
2. Creeping transaction – 35%
Any person or group of persons acting in concert, who intends to
acquire 35% of the outstanding voting shares or such
outstanding voting shares that are sufficient to gain control of the
board in a public company in one or more transactions within a
period of 12 months
 Make a tender offer for the percentage sought to all holders
of such securities within the said period
 If tender offer is oversubscribed, the aggregate amount of
securities to be acquired at the close of such tender offer
shall be proportionately distributed across selling
shareholders with whom the acquirer may have been in
private negotiations and other shareholders.
 TN: Last sale that meets the threshold shall not be
consummated until the closing and completion of the tender
offer
3. Block sale – 35%
Any person or group of persons acting in concert, who intends to
acquire 35% of the outstanding voting shares or such
outstanding voting shares that are sufficient to gain control of the
board in a public company directly from one or more stockholders
 Make tender offer for all the outstanding voting shares
 TN: Sale of shares pursuant to the private transaction or
block sale shall not be completed prior to the closing and
completion of the tender offer
4. If any acquisition that would result in ownership of over
50% of the total outstanding equity securities of a public
company
 Make tender offer for all the outstanding equity securities to
all remaining stockholders at a price supported by a fairness
opinion provided by an independent financial advisor or
equivalent 3rd party.
 Acquirer in such tender offer shall be required to accept all
securities tendered
PSE Trading System Transaction
Acquisition of securities through PSE are not required to make a tender
offer
Exemptions to Tender offer rule
1. Any purchase of securities from the unissued capital stock
XPTN: Acquisition will result to a 50% or more ownership of
securities by the purchaser or such percentage that is sufficient to
gain control of the board
TN: Tender offer rule applies only to a secondary purchase; from
an existing stockholder
2. Any purchase of securities from an increase in authorized capital
stock
Reason for exemption: Increase in ACS requires approval of
board and stockholders. Hence, stockholders are aware of the
purchase of securities.
3. Purchase in connection with foreclosure proceedings involving a
duly constituted pledge or security arrangement where the
acquisition is made by the debtor or creditor
4. Purchases in connection with a privatization undertaken by the
government of the Philippines
5. Purchases in connection with corporate rehabilitation under court
supervision
6. Purchases in the open market at the prevailing market price
7. Merger or consolidation
Rules on proxy solicitation
Proxy solicitation
1. Any request for a proxy or authorization
2. Any request to execute or not to execute, or to revoke a proxy or
authorization
3. Furnishing of a form of proxy or other communication to security
holders under a circumstance reasonably calculated to result in
the procurement, withholding, or revocation of a proxy
Rules on proxy solicitation
1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by SEC
2. Must be in writing, signed by the stockholders or his duly
authorized representative and filed before the scheduled meeting
with the corporate secretary
3. Valid only for the meeting for which it is intended, unless
provided in the proxy. No proxy shall be valid and effective for a
period longer than 5 years at one time
4. No broker or dealer shall give any proxy authorization, in respect
of any security carried for the account of a customer, to a person
other than the customer, without the express written
authorization of such customer
5. Broker or dealer who holds or acquires the proxy for at least 10%
or such percentage as the Commission may prescribe of the
outstanding share of the issuer, shall submit a report identifying
the beneficial owner within 10 days after such acquisition, to the
issuer of the security, to the Exchange where the security is
traded and to the Commission.
Disclosure rule
All companies, listed or applying for listing, are required to divulge
truthfully and accurately, all material information about themselves
KART 25
and the securities they sell for the protection of the investing public 1. MB shall terminate the conservatorship when it is satisfied that
and under pain of administrative, criminal and civil sanctions. Thus the institution can continue to operate on its own and the
provision which requires disclosure of all material information during conservatorship is no longer necessary.
registration embodies disclosure rule. • MB finds that the bank is already liquid enough and can
continue operations
2. The conservatorship shall likewise be terminated should the MB,
THE NEW CENTRAL BANK ACT (RA 7653, as amended on the basis of the report of the conservator or of its own
by RA 11211) findings, determine that the continuance in business of the
institution would involve probable loss to its depositors or
creditors, in which case the provisions of Section 30 shall apply.
Conservatorship
• Bank cannot continue its operations without resulting to
probable loss to its depositors and creditors – will proceed to
Nature of Conservatorship
receivership
It is a tool in restoring the viability of banks and quasi-banks. It
consists of carrying out a package of administrative, organizational,
Closure
financial and/or other measures to address the state of continuing
inability or unwillingness to maintain a condition of liquidity deemed
“Close now, Hear later” scheme
adequate to protect the interest of depositors and creditors.
In cases of existence of the grounds for receivership, MB may
summarily and without need for prior hearing forbid the institution
Power to appoint conservator
from doing business in the Philippines and designate PDIC as receiver
Exclusively with MB
of banking institution.
Who can be appointed conservator
It is a valid practice for following reasons:
The conservator should be competent and knowledgeable in bank
1. It is a measure for the protection of the public interest; swift
operations and management.
action is called for on the part of the BSP when it finds that a
bank is in dire straits. Unless adequate and determined efforts are
Grounds for appointment of conservator
taken by the government against distressed and mismanaged
1. Continuing inability – involuntary
banks, public faith in the banking system is certain to deteriorate
2. Unwillingness to maintain a condition of liquidity deemed
to the prejudice of the national economy itself, not to mention the
adequate to protect depositors and creditors – intentional
losses suffered by the bank depositors, creditors, and
stockholders, who all deserve the protection of government
Appointment of Conservator
2. It is to prevent unwarranted dissipation of bank’s assets and as a
Whenever, on the basis of a report submitted by appropriate
valid exercise of police power to protect the depositors, creditors,
supervising or examining department, the Monetary Board (MB) finds
stockholders and general public. The action of MB on this matter
that a bank or a quasi-bank is in the Monetary Board may appoint a
is final and executory. Such exercise may nonetheless be subject
conservator with such powers as the Monetary Board shall deem
to judicial inquiry and can be set aside if found to be in excess of
necessary to take charge of the assets, liabilities, and the management
jurisdiction or with grave abuse of discretion as to amount to lack
thereof, reorganize the management, collect all monies and debts due
or excess of jurisdiction.
said institution, and exercise all powers necessary to restore its
viability. The conservator shall report and be responsible to the
Remedy under Sec. 30
Monetary Board and shall have the power to overrule or revoke the
• The actions taken by MB shall be final and executory, and may
actions of the previous management and BOD of the bank or quasi-
not be restrained or set aside by the court except on petition for
bank. (Sec. 29)
certiorari on the ground that the action taken was (1) in excess of
jurisdiction or (2) with such grave abuse of discretion as to
Requisites for declaration of conservatorship
amount to lack or excess of jurisdiction.
1. There must a report submitted by supervising or examining
• The petition for certiorari may only be filed by the stockholders of
department of BSP.
record representing the majority of the capital stock within 10
2. Finding made by MB that the bank is unable or unwilling to
days from receipt by the BOD of the institution of the order
maintain a condition of its liquidity deemed adequate to protect
directing receivership, liquidation or conservatorship.
the interest of depositors and creditors.
• The authority of MB to summarily and without need for prior
• Bank is still solvent but it cannot pay its liabilities as they
hearing forbid the bank or quasi-bank from doing business in the
become due. Total assets are greater than liabilities but
Philippines as provided above may also be exercised over non-
current assets are not sufficient to satisfy liabilities.
stock savings and loan associations, based on the same
3. BOD must be informed in writing of the order of the MB directing
applicable grounds.
conservatorship
Receivership
Powers and duties of conservator
1. Report to MB
Purpose of receivership
2. Take charge of all assets, liabilities and the management of the
To receive collectibles, preserve the assets of the bank in substitution
bank
of its former management, and to prevent the dissipation of its assets
3. Reorganize the management
to the detriment of the creditors of the bank.
4. Collect all monies and debts due to the said institution
5. Exercise all powers necessary for the viability of the bank
Power to appoint receiver
6. Power to revoke or overrule the actions of the previous
Exclusively with MB
management and BOD of the bank or quasi-bank
• Limited only to contracts which are revocable or annullable,
Who may be appointed as receiver
void, or rescissible. Congress cannot even repudiate valid
a. For bank – only PDIC
contracts, how much more can the conservator. Congress
b. For quasi-bank – any person of recognized competence in
cannot give a power which it does not possess.
banking, credit or finance
Duration of conservatorship
Requisites for receivership
It shall not exceed 1 year.
1. There must a report submitted by the supervising or examining
XPTN: Grounds for pre-termination
department of BSP

KART 26
 What is required is a report and not examination. Report is
basically a statement of information or facts. No explanation or
analysis required.
2. Finding by MB that any of the grounds for receivership exist
3. MB may summarily and without need of prior hearing forbid the
institution from doing business in the Philippines
4. Furnish a copy of its order of closure to BOD of bank
Grounds in declaring receivership (Sec. 30, 36 of NCBA and Sec.
53 of GBL)
1. Unable to pay its liabilities as they become due in the ordinary
course of business (Equity test)
Provided that this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking
community
2. Has insufficient realizable assets, as determined by BSP, to meet
its liabilities (Balance sheet/Insolvency test)
3. Cannot continue in business without involving probable losses to
its depositors or creditors (Probable losses)
4. Has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution
(violation of cease and desist order)
5. Bank continues to operate in an unsafe or unlawful manner (Sec.
36)
6. Bank announces bank holiday (Sec. 53, GBL)
Bank holiday – when bank closes its branches or in any manner
suspends the payment of its deposit liabilities continuously for
more than 30 days
In such case, MB may summarily and without need for prior
hearing close such banking institution and place it under
receivership of PDIC.
TN: No requirement that a bank has to undergo conservatorship
before it can go to receivership. Designation of a conservator is not a
precondition to the designation of a receiver.
Duty of Receiver
1. Immediately gather and take charge of all assets and liabilities of
the institution
2. Administer the same for the benefit of its creditors
3. Exercise the general powers of a receiver under ROC
4. Determine as soon as possible, but not later than 90 days from
takeover, whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may be permitted
to resume business with safety to its depositors and creditors and
the general public, provided that any determination for the
resumption of business of the institution shall be subject to prior
approval of MB.
IMPT: Receiver shall not pay or commit any act that will involve the
transfer or disposition of any asset of the institution, provided that the
receiver may deposit or place the funds of institution in nonspeculative
investments
XPTN: Administrative expenditures
Liquidation
It is a court-assisted proceeding which connotes winding up or settling
with creditors and debtors. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss – in order to
distribute assets to those entitled to receive them.
Voluntary liquidation
Written notice of such liquidation shall be sent to MB before such
liquidation is undertaken and MB shall have the right to intervene and
take such steps as may be necessary to protect the interest of
creditors.
Involuntary liquidation
Bank is first placed under receivership by MB and subsequently under
liquidation
If the receiver determines that the institution cannot be rehabilitated
or permitted to resume, the MB shall notify in writing the BOD of its
findings and direct the receiver to proceed with the liquidation of the
institution. The receiver shall:
(1) File ex parte with the proper RTC, and without requirement of
prior notice or any other action, a petition for assistance in the
liquidation of the institution pursuant to a liquidation plan
adopted by the PDIC for general application to all closed banks.
In case of quasi-banks, the liquidation plan shall be adopted by
the MB. Upon acquiring jurisdiction, the court shall, upon motion
by the receiver after due notice, adjudicate disputed claims
against the institution, assist the enforcement of individual
liabilities of the stockholders, directors and officers, and decide on
other issues as may be material to implement the liquidation plan
adopted. The receiver shall pay the cost of the proceedings from
the assets of the institution.
(2) Convert the assets of the institution to money, dispose of the
same to creditors and other parties, for the purpose of paying the
debts of such institution in accordance with the rules on
concurrence and preference of credit under the Civil Code and he
may, in the name of the institution, and with the assistance of
counsel as he may retain, institute such actions as may be
necessary to collect and recover accounts and assets of, or
defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
SECRECY OF BANK DEPOSITS (RA 1405, as amended,
and RA 6426, as amended)
Prohibited acts
1. All deposits of whatever nature with the banks in the Philippines,
including investments in bonds issued by government, its political
subdivisions, and its instrumentalities, may not be examined,
inquired or looked into by any person, government official,
bureau or office
2. Any official or employee of a banking institution may not disclose
to any person other than those mentioned in Sec. 2 any
information concerning said deposits.
Case: Camera inspection of the bank deposit records is also not
allowed and is also in the nature of examination
A. Peso Deposits
Exceptions from coverage
Under RA 1405, as amended (Bank Secrecy Law)
1. When there is written permission of the depositor or investor
In case of insolvency, conformity of receiver is necessary for the
written waiver to be valid
2. Impeachment cases
3. Upon order of a competent court in cases of bribery or dereliction
of duty of public officials
4. Upon order of a competent court in cases where the money
deposited or invested is the subject of litigation
Under other laws
5. RA 3019: Upon order of the competent court or tribunal in cases
involving unexplained wealth under the Anti-Graft and Corrupt
Practices Act
6. NIRC: CIR is authorized to inquire into bank deposits of:
a. A decedent to determine his gross estate; and
b. Any taxpayer who has filed an application for compromise of
his tax liability under NIRC by reason of financial incapacity
to pay his tax liability – but taxpayer has to waive in writing
his privilege under the bank secrecy laws and it shall
KART 27
 constitute the authority of CIR to inquire into the bank
deposits of taxpayer.
c. Specific taxpayer/s subject of a request for the supply of tax
information from a foreign tax authority pursuant to an
international convention or agreement to which Philippines is
a signatory or a party
7. AMLA, as amended:
a. Report of covered persons to AMLC of covered and/or
suspicious transactions (Sec. 9)
b. Upon the order of a competent court on an ex parte
application by the AMLC where there is probable cause that
the deposits or investments are related to an unlawful
activity defined by AMLA or a money laundering offense
(Sec. 11)
c. Without court order, examination by AMLC in the 4 cases
(Sec. 11)
(i) Kidnapping for ransom
(ii) Violations of Comprehensive Dangerous Drugs Act
(iii) Hijacking, destructive arson and murder
(iv) Terrorism and conspiracy to commit terrorism
8. RA No. 10168: For purposes of executing its authority to
investigate financing of terrorism, AMLC is authorized to inquire
into or examine deposits and investments with any banking
institution or non-bank financial institution and their subsidiaries
and affiliates without a court order. (Sec. 10)
“AMLC, either upon its own initiative or at the request of ATC, is
authorized to investigate:
(a) Any property or funds that are in any way related to
financing of terrorism or acts of terrorism
(b) Property or funds of any person in relation to whom there is
probable cause to believe that such person is committing or
attempting or conspiring to commit, or participating in or
facilitating the financing of terrorism or acts of terrorism”
9. Human Security Act of 2007: Upon order of CA, examination by
law enforcement officers in terrorism cases (Sec. 27)
“Justices of CA designated as a special court to handle anti-
terrorism cases after satisfying themselves of the existence of
probable cause in a hearing called for that purpose that (1)
person charged with or suspected of the crime of terrorism or
conspiracy to commit terrorism (2) of a judicially declared and
outlaws terrorist organization, association, or group of persons
and (3) of a member of such judicially declared and outlawed
organization, association, or group of persons, may authorize in
writing any police or law enforcement officer and the members of
his/her team duly authorized in writing by anti-terrorism council
to:
a. Examine, or cause the examination of, deposits, placements,
trust accounts, assets and records in a bank or financial
institution; and
b. Gather or cause the gathering of any relevant information
about such deposits, placements, trust accounts, assets, and
records from a bank or financial institution.
The bank or financial institution concerned shall not refuse to
allow such examination or to provide the desired information,
when so ordered by and served with the written order of CA.”
10. Unclaimed Balances Act: Disclosure to the treasurer of the
Philippines for dormant deposits for at least 10 years
11. RA No. 3591, as amended: PDIC’s inquiry into and examination of
deposit accounts and all information related thereto in case there
is a finding of unsafe or unsound banking practice
12. Examination and inquiry into deposit records by PDIC when there
is failure of prompt corrective action as declared by MB due to
capital deficiency
13. Where there is a waiver in case of DOSRI loans
14. Disclosure to BSP in the course of examination to ensure
compliance with the AMLC and testing of numbered accounts
B. Foreign currency deposits
Exceptions from coverage
1. When there is written permission of depositor under FCDA (RA
6426, as amended)
2. AMLA: Same with peso deposits (Secs. 9 and 11)
3. RA No. 10168: Same with peso deposits (Sec. 10)
4. NIRC: Examination and disclosure to the CIR
5. Disclosure to BSP in the course of examination to ensure
compliance with AMLA
6. PDIC’s inquiry into and examination of deposit accounts and all
information related thereto in case there is a finding of unsafe or
unsound banking practice under RA No. 3591, as amended
Garnishment of deposits, including foreign deposits
Bank accounts may be garnished by creditors of depositor. There is no
violation of Law on Secrecy of Bank Deposits if accounts are garnished.
Prohibition against examination of or inquiry into a bank deposit does
not preclude its being garnished to insure satisfaction of a judgment.
Indeed there is no real inquiry in such a case, and if the existence of
the deposit is disclosed, the disclosure is purely incidental to the
execution process. The amount of deposit is actually not disclosed and
it is not within the intent of the legislature to enable debtors to evade
payment of their just debts through the expedient of converting their
assets into cash and depositing the same in a bank.
Exempted deposits
1. Foreign currency deposits (FCDA)
Foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body
whatsoever. (Sec. 8)
TN: Case involving a transient foreigner who illegally detained
and raped a minor Filipina is an exception because Court allowed
garnishment of foreign currency deposits due to its peculiar
circumstances. The exemption should be used to prevent
injustice, otherwise, it would negate Art. 10, NCC, which provides
that in case of doubt in the interpretation or application of laws, it
is presumed that the law-making body intended right and justice
to prevail.
2. Those exempt under Rules of Civil Procedure like provision for the
family for 4 months
Can the owner of US Dollar checks unlawfully taken and
deposited with another bank inquire into the said deposits?
Yes. Since he is name co-payee of the checks which was deposited in
the bank of his co-payee, he is likewise a depositor thereof. It was not
the intent of legislature when it enacted the law to perpetuate justice.
But this is pro hac vice ruling.
GENERAL BANKING LAW OF 2000 (RA 8791)
Nature of bank funds and bank deposits (Cases)
Relationship between depositor and bank with respect to the
money deposited
There is debtor-creditor relationship created between the bank and its
depositor. Bank is debtor while depositor is creditor. Depositor lends
money to the bank and bank agrees to pay depositor on demand.
Nature of bank funds and deposits
They are treated as simple loans, because they earn interest. These
deposits, whether fixed, savings, or current, are covered by the law on
loans. Bank deposits are in the nature of irregular deposits.
As a consequence of this:
1. Bank can make use as its own the money deposited. It is not held
in trust or safe-keeping.
2. Officers of the bank cannot be held liable for estafa if they
authorized the use of the money deposited by the depositor.
3. 3rd persons who may have a right to the money deposited cannot
hold the bank responsible, unless there is a court order.
4. Banks can set off the deposits with the indebtedness of the
depositor that are due and demandable.
Diligence required of banks (Cases
KART 28
A bank is required to exercise the highest degree of diligence in its
transactions because it is impressed with public interest. However, the
highest degree of diligence is not expected to be exerted by banks in
commercial transactions that do not involve a bank’s fiduciary
relationship with its depositors.
TN: Fiduciary relationship means that the bank’s obligation is to
observe high standards of integrity and performance. It is deemed
written into every deposit agreement between a bank and its
depositor.
A bank has a vital role in providing an environment conducive to the
sustained national economy. Banking is fiduciary in nature that
requires high standards of integrity and performance. (Sec. 2, GBL)
Rationale for extraordinary diligence required for handling of
deposits
Nature of banking business is affected with public interest; hence, the
bank is under obligation to treat the accounts of its depositors and
meticulous care, always having in mind the fiduciary nature of their
relationship. A blunder on the part of bank, such as dishonor of a
check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and
criminal litigation. The depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few
hundred pesos or of millions.
Prohibited transactions by bank directors and officers
GBL
Restrictions are imposed on borrowings and security arrangement by
directors, officers and stockholders of bank directors, officers,
stockholders and their related interests (DOSRI).
1. Procedural requirement
There should be a written approval of majority of the directors of
the bank excluding the director concerned.
2. Arms length rule
The account should be upon terms not less favorable to the bank
than those offered to others
3. Reportorial requirement
Resolution approving the loan shall be entered in the records of
the bank and a copy of the entry shall be transmitted forthwith to
the supervising and examination sector of BSP
4. Aggregate ceilings
MB may regulate the amount of loans, credit accommodations
and guarantees that may be extended, directly or indirectly, by a
bank to its DOSRI, as well as investments of such bank in
enterprises owned or controlled by said DOSRI. MORB provides
that the aggregate is 15% of the total loan portfolio of the bank
or 100% of the combined capital accounts whichever is lower.
5. Individual ceilings
Outstanding loans, credit accommodations and guarantees which
a bank may extend to each of its DOSRI shall be limited to an
amount equivalent to their respective unencumbered deposits
and book value of their paid-in capital contribution in the bank.
XPTNS: Ceilings do not apply to loans, credit accommodations
and guarantees:
1. Secured by assets considered by MB as non-risk items
2. Under a fringe benefit plan approved by BSP
3. Extended by cooperative banks to its cooperative
stockholders
Prohibited transactions by director, officer, employee or agent
of any bank (Sec. 55, GBL)
1. Make false entries in any bank report or statement or participate
in any fraudulent transaction, thereby affecting the financial
interest of, or causing damage to, the bank or any person
2. Without order of a court of competent 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, provided that with
respect to bank deposits, the provision of existing laws shall
prevail
• These are funds or properties other than deposit because
deposits are covered by Bank Secrecy Law. Any other
property within the custody of the bank is subject to
confidentiality under this provision
3. Accept gifts, fees or commissions or any other form of
remuneration in connection with the approval of a loan or other
credit accommodation from said bank;
4. Overvalue or aid in overvaluing any security for the purpose of
influencing in any way the actions of the bank or any bank; or
5. Outsource inherent banking functions
• Inherent banking functions include deposit and loan
functions. Hence, outsourcing the approval of loans or
deposit or withdrawal transactions is not allowed.
• Consistent with RA 1405, no bank shall employ casual or
non-regular personnel or too lengthy probationary personnel
in the conduct of its business involving bank deposits.
NCBA, as amended
When DOSRI is required to waive secrecy of bank deposits
and investments (Sec. 26)
Any DOSRI who contracts a loan or any form of financial
accommodation from: (1) his bank; or (2) from a bank which is a
subsidiary of a bank holding company of which both his bank and the
lending bank are subsidiaries or (3) from 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, in excess of five
percent (5%) of the capital and surplus of the bank, or in the
maximum amount permitted by law, whichever is lower, shall be
required by the lending bank to waive the secrecy of his deposits of
whatever nature in all banks in the Philippines.
Any information obtained from an examination of his deposits shall be
held strictly confidential and may be used by the examiners only in
connection with their supervisory and examination responsibility or by
the Bangko Sentral in an appropriate legal action it has initiated
involving the deposit account.
PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT
(RA 3591, as amended)
Maximum deposit insurance coverage
Not to exceed P500,000 per depositor (per bank)
TN: Wrong to say per account because a depositor may have many
accounts but he can only have one coverage.
Insured deposit
The amount due to any bona fide depositor for legitimate deposits in
an insured bank as of the date of closure but not to exceed P500,000.
Such amount shall be determined according to such regulations as
BOD may prescribe.
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 or her benefit either in his or her own name or in
the name of others.
If joint account
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:
Provided, further, that the aggregate of the interest of each co-owner
over several joint accounts, whether owned by the same or different
KART 29
combinations of individuals, juridical persons or entities, shall likewise application: Provided, That the application which has validly
be subject to the maximum insured deposit of P500,000. claimed the filing date of an earlier application under Section 31
of this Act, shall be prior art with effect as of the filing date of
Example: Mr. A has joint account with Mr. B in X Bank such earlier application: Provided, further, That the applicant or
P300,000 joint account with B. the inventor identified in both applications are not one and the
P400,000 joint account with B. same.
P800,000 joint account with B.
Q: How much is Mr. A going to get in the insolvency of Inventive Step
Bank X? An invention involves an inventive step if, having regard to prior art, it
Deposit Share of Mr. A Insured Amount is not obvious to a person skilled in the art at the time of the filing
300,000 150,000 150,000 date or priority date of the application claiming the invention.
400,000 200,000 200,000
800,000 400,000 250,000 only since total deposit is In the case of drugs and medicines, there is no inventive step if the
above P500,000, they divide the invention results from the mere discovery of a new form or new
max of P500,000 among themselves property of a known substance which does not result in the
Total (Insured amount from 600,000 enhancement of the known efficacy of that substance, or the mere
Joint Accounts 1-3) discovery of any new property or new use for a known substance, or
Total insured amount that Mr. 500,000 only the mere use of a known process unless such known process results in
A can claim a new product that employs at least one new reactant.

Important points: Non-prejudicial Disclosure (Sec. 25)

▪ Maximum of P500,000 per DEPOSITOR, in the same bank,
regardless of the number of accounts from different branches.
▪ INDIVIDUAL accounts have separate insurance from JOINT
accounts.
▪ If JOINT account exceeds P500,000, the maximum insured
deposit will be equally divided between the co-depositors.
▪ ALL THE JOINT ACCOUNTS (with same or different co-depositors)
of a depositor will be aggregated and subjected to the maximum
insured deposit of P500,000.
Splitting of deposits
Occurs whenever a deposit account with an outstanding balance of
more than the statutory maximum amount of insured deposit
maintained under the name of natural or juridical person is broken
down and transferred into 2 or more accounts in the name/s of natural
or juridical persons or entities who have no beneficial ownership on
transferred deposits in their names within 120 days immediately
preceding or during a bank-declared bank holiday, or immediately
preceding a closure order issued by MB of BSP for the purpose of
availing of the maximum deposit insurance overage
INTELLECTUAL PROPERTY CODE (RA 8293)
PATENTS
Patentable Invention
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
refer to a product, or process, or an improvement of any of the
foregoing.
Requisites
1. any technical solution of a problem in any field of human
activity;
2. must be new and involves an inventive step;
3. Industrial applicability
Must be new and involves inventive step
Novelty
An invention shall not be considered new if it forms part of a prior art.
The disclosure of information contained in the application during the
twelve (12) months preceding the filing date or the priority date of the
application shall not prejudice the applicant on the ground of lack of
novelty if such disclosure was made by:
(a) The inventor;
(b) A patent office and the information was contained (a) in another
application filed by the inventor and should not have been
disclosed by the office, or (b) in an application filed without the
knowledge or consent of the inventor by a third party which
obtained the information directly or indirectly from the inventor;
or
(c) A third party which obtained the information directly or indirectly
from the inventor.
Industrial applicability
An invention that can be produced and used in any industry shall be
industrially applicable.
Non Patentable Inventions
1. Discoveries, scientific theories and mathematical methods, and in
the case of drugs and medicines, the mere discovery of a new
form or new property of a known substance which does not result
in the enhancement of the known efficacy of that substance, or
the mere discovery of any new property or new use for a known
substance, or the mere use of a known process unless such
known process results in a new product that employs at least one
new reactant.
2. Schemes, rules and methods of performing mental acts, playing
games or doing business, and programs for computers;
3. Methods for treatment of the human or animal body by surgery
or therapy and diagnostic methods practiced on the human or
animal body. This provision shall not apply to products and
composition for use in any of these methods;
4. Plant varieties or animal breeds or essentially biological process
for the production of plants or animals. This provision shall not
apply to micro-organisms and non-biological and microbiological
processes.
5. Aesthetic creations; and
6. Anything which is contrary to public order or morality.
Ownership of a patent

Prior Art Who has a right to a patent?

Shall consist of:
1. Everything which has been made available to the public anywhere
in the world, before the filing date or the priority date of the
application claiming the invention; and
2. The whole contents of an application for a patent, utility model,
or industrial design registration, published in accordance with this
Act, filed or effective in the Philippines, with a filing or priority
date that is earlier than the filing or priority date of the
GR: The inventor, his heirs or assigns (Sec. 28)
XPTNS:
1. Commissioned works – the person who commissioned the work
2. Invention by employee in the course of his employment – it
depends on whether or not the inventive activity is part of his
regular duties
Inventions Created Pursuant to a Commission

KART 30
The person who commissions the work shall own the patent, unless
otherwise provided in the contract.
In case the employee made the invention in the course of his
employment contract, the patent shall belong to:
(a) The employee, if the inventive activity is not a part of his regular
duties even if the employee uses the time, facilities and materials of
the employer.
(b) The employer, if the invention is the result of the performance of
his regularly-assigned duties, unless there is an agreement, express or
implied, to the contrary.
First to File Rule
If two (2) or more persons have made the invention separately and
independently of each other, the right to the patent shall belong to the
person who filed an application for such invention, or where two or
more applications are filed for the same invention, to the applicant
who has the earliest filing date or, the earliest priority date.
Right of Priority
An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty,
convention, or law affords similar privileges to Filipino citizens, shall be
considered as filed as of the date of filing the foreign application:
Provided, That: (a) the local application expressly claims priority; (b) it
is filed within twelve (12) months from the date the earliest foreign
application was filed; and (c) a certified copy of the foreign application
together with an English translation is filed within six (6) months from
the date of filing in the Philippines.
Grounds for cancellation of a patent
Any interested person may, upon payment of the required fee, petition
to cancel the patent or any claim thereof, or parts of the claim, on any
of the following grounds:
1. That which is claimed as the invention is not new or patentable
2. 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
3. That the patent is contrary to public order or morality
Remedy of the true and actual inventor
If a person, who was deprived of the patent without his consent or
through fraud is declared by final court order or decision to be the true
and actual inventor, the court shall order for his substitution as
patentee, or at the option of the true inventor, cancel the patent, and
award actual and other damages in his favor if warranted by the
circumstances.
Rights Conferred by Patent
A patent shall confer on its owner the following exclusive rights:
(a) Where the subject matter of a patent is a product, to restrain,
prohibit and prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing that product;
(b) Where the subject matter of a patent is a process, to restrain,
prevent or prohibit any unauthorized person or entity from using
the process, and from manufacturing, dealing in, using, selling or
offering for sale, or importing any product obtained directly or
indirectly from such process.
Patent owners shall also have the right to assign, or transfer by
succession the patent, and to conclude licensing contracts for the
same.
Rights Conferred by a Patent Application After Publication
The applicant shall have all the rights of a patentee under Section 76
against any person who, without his authorization, exercised any of
the rights conferred under Section 71 of this Act in relation to the
invention claimed in the published patent application, as if a patent
had been granted for that invention: Provided, That the said person
had:
1. Actual knowledge that the invention that he was using was the
subject matter of a published application; or
2. Received written notice that the invention that he was using was
the subject matter of a published application being identified in
the said notice by its serial number: Provided, That the action
may not be filed until after the grant of a patent on the published
application and within four (4) years from the commission of the
acts complained of.
Limitations of Patent Rights
a. Following acts are not prohibited:
1. Owner’s consent – Using a patented product which has been
put on the market in the Philippines by the owner of the
product, or with his express consent, insofar as such use is
performed after that product has been so put on the said
market
2. Parallel importation – Importation of drugs and medicines by
a government agency or by any private 3rd party; Private
parties must secure a license to import from BFAD
3. Non-commercial – Acts done privately and on a non-
commercial scale or for a non-commercial purpose
4. Condition: Act does not significantly prejudice the economic
interests of the owner of the patent
5. Experimental use – Act consists of making or using
exclusively for experimental use of the invention for scientific
purposes or educational purposes and such other activities
directly related to such scientific or educational experimental
use
6. Drugs and medicine – Testing, using, making or selling the
invention including any data related thereto of drugs and
medicine, solely for purposes reasonably related to the
development and submission of information and issuance of
approvals by government regulatory agencies required under
any law of the Philippines or of another country that
regulates the manufacture, construction, use or sale of any
product
7. Medicine individual preparation – Preparation for individual
cases, in a pharmacy or by a medical professional, of a
medicine in accordance with a medical prescription after a
drug or medicine has been introduced in the Philippines or
anywhere else in the world by the patent owner, or by any
party authorized to use the invention.
8. Patent exhaustion – Exclusive right of the patent owner is
exhausted after the first authorized sale, meaning, the
purchaser may thereafter use, repair and resell the product.
However, the purchaser may not reconstruct the product
from the parts of products that were already used.
b. Use by Prior User
Any prior user, who, in good faith was using the invention or has
undertaken serious preparations to use the invention in his
enterprise or business, before the filing date or priority date of
the application on which a patent is granted, shall have the right
to continue the use thereof as envisaged in such preparations
within the territory where the patent produces its effect.
The right of the prior user may only be transferred or assigned
together with his enterprise or business, or with that part of his
enterprise or business in which the use or preparations for use
have been made.
c. Use by Government
Government or a 3rd person authorized by it may use the patent
without authority of the patent owner if:
1. Public interest so requires
2. Manner of exploitation by the owner of the patent is anti-
competitive
3. In case of drugs and medicines, there is a national
emergency or other circumstance of extreme urgency
requiring the use of the invention
4. In case of drugs and medicines, when there is a public non-
commercial use of the patent by the patentee, without
satisfactory reason
KART 31
 5. In case of drugs and medicines, when the demand for the
patented article in the Philippines is not being met to an
adequate extent and under reasonable terms
Patent Infringement
The making, using, offering for sale, selling, or importing a patented
product or a product obtained directly or indirectly from a patented
process, or the use of a patented process without the authorization of
the patentee
How to determine infringement:
1. Literal infringement
a. Exactness rule: the item is exactly similar to the patent
claim; and
b. Addition rule: the item contains all the elements of the
patent claim plus other elements
2. Doctrine of Equivalents - there is infringement when a device
appropriates a prior invention by incorporating its innovative
concept and, although with some modifications and change,
performs substantially the same function in substantially the same
way to achieve substantially the same result (function-means-
result test)
Infringement Action by a Foreign National
Any foreign national or juridical entity who meets the requirements of
Sec. 3 and not engaged in business in the Philippines, to which a
patent has been granted or assigned under this Act, may bring an
action for infringement of patent, whether or not it is licensed to do
business in the Philippines under existing law.
Defenses in an action for infringement
Defendant may show the invalidity of the patent, or any claim therof,
on any of the grounds on which a petition of cancellation can be
brought
Grounds for Compulsory Licensing
The Director General of the Intellectual Property Office may grant 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 any of the following circumstances:
1. National emergency
2. Where the public interest requires as determined by the
appropriate agency of the Government
3. Anti-competitive use or exploitation as determined by a judicial or
administrative body
4. Public non-commercial use of the patent
5. If the patented invention is not being worked in the Philippines on
a commercial scale
6. Where the demand for patented drugs and medicines is not being
met to an adequate extent and on reasonable terms
TRADEMARKS
Marks vs. Collective Marks vs. Trade names
Trademark – Any visible sign capable of distinguishing the goods
(trademark) or service (service mark) of an enterprise and shall include
a stamped or marked container of goods (Sec. 121.1).
Collective mark – 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 – Name or designation identifying or distinguishing an
enterprise (Sec. 121.3)
Trade Names or Business Names
A name or designation may not be used as a trade name if by its
nature or the use to which such name or designation may be put, it is
contrary to public order or morals and if, in particular, it is liable to
deceive trade circles or the public as to the nature of the enterprise
identified by that name.
Notwithstanding any laws or regulations providing for any obligation to
register trade names, such names shall be protected, even prior to or
without registration, against any unlawful act committed by third
parties.
In particular, any subsequent use of the trade name by a third party,
whether as a trade name or a mark or collective mark, or any such use
of a similar trade name or mark, likely to mislead the public, shall be
deemed unlawful.
Acquisition of ownership
A. Marks
Rights in a mark shall be acquired through registration with the
Intellectual Property Office (IPO).
Registration is necessary before one can file an action for
infringement. But it is not necessary in the following:
1. To sue for unfair competition and false designation of origin
2. To protect the goodwill that identifies in the mind of the public
the goods he manufactures or deals in
Certificate of registration of a mark
Prima facie evidence of the:
(1) Validity of registration,
(2) Registrant’s ownership of the mark, and
(3) Registrant’s exclusive right to use the same
This means that registrant’s right may be questioned by a person who
has a better right, including a prior actual user. This also includes
persons with internationally known marks.
Right is acquired from the time of registration
This refers to the filing date of application.
a. Filing date of an application shall be the date on which the IPO
received the following indications and elements:
1. Express or implicit indication that the registration of the
mark is sought
2. Identity of the applicant
3. Indications sufficient to contact the application or his
representative
4. Reproduction of the mark
5. List of goods or services for which registration is sought
b. Right may also be protected from the priority date. Subject to the
rules on reciprocity, where the application is filed in the
Philippines and the same applicant previously filed an application
in the countries covered by the reciprocity rule under Section 3,
the application is deemed filed as of the day the application was
first filed in the foreign country. However, there will be no
registration in the Philippines until registered in such a foreign
country.
Duration
A certificate of registration shall remain in force for ten (10) years:
Provided, That the registrant shall 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, as prescribed by the Regulations,
within one (1) year from the fifth anniversary of the date of the
registration of the mark. Otherwise, the mark shall be removed from
the Register by the Office.
Concept of Actual use
Prior use in the Philippines is not required before registration.
However, there must be actual use after registration.
Registrant shall file a declaration of actual use of the mark with
evidence to that effect within 3 years from the filing date of application
otherwise it may be cancelled. The registrant is required to file a
declaration of actual use and evidence to that effect, or shall show
KART 32
valid reasons for non-use within 1 year from the 5th anniversary date
of registration.
Puma Sportsshenfabriken vs. IAC, G.R. No. 75067, Feb. 26, 1988
What kind of use that may give rise to rights even without
registration?
3 requirements:
1. Widespread
2. Favourably received
3. Bears name of manufacturer
B. Trade name
Trade name (including corporate name) need not be registered with
IPO before an infringement suit may be filed by its owner against the
owner of an infringing trademark.
Non-registrable marks
(a) Consists of immoral, deceptive or scandalous matter, or matter
which may disparage or falsely suggest a connection with
persons, living or dead, institutions, beliefs, or national symbols,
or bring them into contempt or disrepute;
(b) Consists of the flag or coat of arms or other insignia of the
Philippines or any of its political subdivisions, or of any foreign
nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular
living individual except by his written consent, or the name,
signature, or portrait of a deceased President of the Philippines,
during the life of his widow, if any, except by written consent of
the widow;
(d) Is identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date, in
respect of:
(i) The same goods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to deceive
or cause confusion;
(e) Is identical with, or confusingly similar to, or constitutes a
translation of a mark which is considered by the competent
authority of the Philippines to be well-known internationally and
in the Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services:
Provided, That in determining whether a mark is well-known,
account shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including knowledge
in the Philippines which has been obtained as a result of the
promotion of the mark;
(f) Is identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance with
the preceding paragraph, which is registered in the Philippines
with respect to goods or services which are not similar to those
with respect to which registration is applied for: Provided, That
use of the mark in relation to those goods or services would
indicate a connection between those goods or services, and the
owner of the registered mark: Provided, further, That the
interests of the owner of the registered mark are likely to be
damaged by such use;
(g) Is likely to mislead the public, particularly as to the nature,
quality, characteristics or geographical origin of the goods or
services;
(h) Consists exclusively of signs that are generic for the goods or
services that they seek to identify;
(i) Consists exclusively of signs or of indications that have become
customary or usual to designate the goods or services in
everyday language or in bona fide and established trade practice;
(j) Consists exclusively of signs or of indications that may serve in
trade to designate the kind, quality, quantity, intended purpose,
value, geographical origin, time or production of the goods or
rendering of the services, or other characteristics of the goods or
services;
(k) Consists of shapes that may be necessitated by technical factors
or by the nature of the goods themselves or factors that affect
their intrinsic value;
(l) Consists of color alone, unless defined by a given form; or
(m) Is contrary to public order or morality.
Well-known marks
Those 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, 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, shall be pertinent.
Persons who may question the mark (that is, oppose registration,
petition for cancellation thereof, sue for unfair competition) include
persons whose internationally well-known mark, whether or not
registered, is identical with or confusingly similar to or constitutes a
translation of a mark that is sought to be registered or is actually
registered.
There is also protection for internationally known marks registered in
the Philippines for goods that are not similar with respect to which
registration is applied for.
TN: SC ruled that foreign marks that are not registered are still
accorded protection against infringement and/or unfair competition
under the Paris Convention and Nice Convention.
Priority Right
131.1. An application for registration of a mark filed in the Philippines
by a person referred to in Section 3, 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.
131.2. No registration of a 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.
131.3. Nothing in this section shall entitle the owner of a registration
granted under this section to sue for acts committed prior to the date
on which his mark was registered in this country: Provided, That,
notwithstanding the foregoing, the owner of a well-known mark as
defined in Section 123.1(e) of this Act, that is not registered in the
Philippines, may, against an identical or confusingly similar mark,
oppose its registration, or petition the cancellation of its registration or
sue for unfair competition, without prejudice to availing himself of
other remedies provided for under the law.
Doctrine of Secondary Meaning
A generic or descriptive mark may later acquire the characteristic of
distinctiveness and can later on acquire a meaning which is different
from its ordinary connotation.
Requires exclusive and continuous commercial use for a period of at
least 5 years
As regards signs or devices mentioned in paragraphs (j), (k), and (l),
nothing shall prevent the registration of any such sign or device which
has become distinctive in relation to the goods for which registration is
requested as a result of the use that have been made of it in
commerce in the Philippines. The Office may accept as prima facie
evidence that the mark has become distinctive, as used in connection
with the applicant’s goods or services in commerce, proof of
substantially exclusive and continuous use thereof by the applicant in
commerce in the Philippines for five (5) years before the date on which
the claim of distinctiveness is made.
Rights Conferred with Registration
KART 33

147.1. Except in cases of importation of drugs and medicines allowed
under Section 72.1 of this Act and of off-patent drugs and medicines,
the owner of a registered mark shall have the 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 a likelihood of
confusion. In case of the use of an identical sign for identical goods or
services, a likelihood of confusion shall be presumed.
There shall be no infringement of trademarks or trade names of
imported or sold patented drugs and medicines allowed under Section
72.1 of this Act, as well as imported or sold off-patent drugs and
medicines: Provided, That, said drugs and medicines bear the
registered marks that have not been tampered, unlawfully modified, or
infringed upon, under Section 155 of this Code. (As amended by RA
9502)
147.2. The exclusive right of the owner of a well-known mark defined
in Subsection 123.1(e) which is registered in the Philippines, shall
extend to goods and services which are not similar to those in respect
of which the mark is registered: Provided, That use of that mark in
relation to those goods or services would indicate a connection
between those goods or services and the owner of the registered
mark: Provided further, That the interests of the owner of the
registered mark are likely to be damaged by such use.
1. Right to the exclusive use of the mark for one’s own goods or
services
2. Right to prevent others from the use of the same mark for
identical goods or services in the course of trade
3. Right to the exclusive use of one’s already registered mark even
for goods or services into which one’s venture expands, if used by
others for dissimilar xxx is likely to damage the business interest
of the venturer.
Cancellation of Registration
A petition to cancel a registration of a mark may be filed with the
Bureau of Legal Affairs by any person who believes that he is or will be
damaged by the registration of a mark as follows:
(a) Within five (5) years from the date of the registration of the mark
(b) At any time, if the registered mark
1. Becomes the generic name for the goods or services, or a
portion thereof, for which it is registered, or
▪ If the registered mark becomes the generic name for
less than all of the goods or services for which it is
registered, a petition to cancel the registration for only
those goods or services may be filed.
▪ A registered mark shall not be deemed to be the
generic name of goods or services solely because such
mark is also used as a name of or to identify a unique
product or service.
▪ The primary significance of the registered mark to the
relevant public rather than purchaser motivation shall
be the test for determining whether the registered
mark has become the generic name of goods or
services on or in connection with which it has been
used.
2. Has been abandoned, or
3. Its registration was obtained fraudulently or contrary to the
provisions of IPL, or
4. 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 services 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 three (3) years or longer.
The court or the administrative agency vested with jurisdiction to hear
and adjudicate any action to enforce the rights to a registered mark
shall likewise exercise jurisdiction to determine whether the
registration of said mark may be cancelled in accordance with this Act.
The filing of a suit to enforce the registered mark with the proper court
or agency shall exclude any other court or agency from assuming
jurisdiction over a subsequently filed petition to cancel the same mark.
On the other hand, the earlier filing of petition to cancel the mark with
the Bureau of Legal Affairs shall not constitute a prejudicial question
that must be resolved before an action to enforce the rights to same
registered mark may be decided.
In any action involving a registered mark, the court may determine the
right to registration, order the cancellation of a registration, in whole
or in part, and otherwise rectify the register with respect to the
registration of any party to the action in the exercise of this. Judgment
and orders shall be certified by the court to the Director, who shall
make appropriate entry upon the records of the Bureau, and shall be
controlled thereby. (Sec 161)
Trademark Infringement
Elements
1. The trademark being infringed is registered with the IPO (not
necessary for trade name);
2. The trademark or name is reproduced, counterfeited, copied or
colorably imitated;
3. The infringing mark or name is used commercially;
4. The use of the infringing mark or name is likely to cause
confusion or deceive purchasers;
5. The use is without consent of the owner of the trademark or
trade name.
Types of Confusion
a. Confusion of goods – when a prudent purchaser is induced to
purchase one product in the belief that he is purchasing another,
in which case defendant’s goods are then bough as the plaintiff’s
goods and its poor quality reflects badly on plaintiff’s reputation
b. Confusion of business – goods of the parties are different but
the defendant’s product can reasonably (though mistakenly) be
assumed to originate from the plaintiff, thus deceiving the public
into believing that there is some connection between the plaintiff
and defendant which, in fact, does not exist
Tests to Determine Confusion
a. Dominancy Test - focuses on the similarity of the prevalent
features of the competing trademarks which might cause
confusion or deception, and thus infringement. If the competing
trademark contains the main, essential or dominant features of
another, and confusion or deception is likely to result,
infringement takes place.
b. Holistic Test - requires that the entirety of the marks in
question be considered in resolving confusing similarity.
Comparison of words is not the only determining factor. The
trademarks in their entirety as they appear in their respective
labels or hang tags must also be considered as applied to the
goods to which they are attached.
Sketchers USA Inc. vs. Inter Pacific Industrial Trading Corp.
(G.R. No. 164321 March 28, 2011)
The essential element of infringement under RA. No. 8293 is that the
infringing mark is likely to cause confusion. Relative to the question on
confusion of marks and trade names, jurisprudence has noted two (2)
types of confusion, viz.: (1) confusion of goods (product confusion),
where the ordinarily prudent purchaser would be induced to purchase
one product in the belief that he was purchasing the other; and (2)
confusion of business (source or origin confusion), where, although the
goods of the parties are different, the product, the mark of which
registration is applied for by one party, is such as might reasonably be
assumed to originate with the registrant of an earlier product, and the
public would then be deceived either into that belief or into the belief
KART 34
that there is same connection between the two parties, though those of another and giving one’s
inexistent. goods the appearance of that of
another
While respondent’s shoes contain some dissimilarities with Fraudulent intent need not be Necessary to establish fraudulent
petitioner’s shoes, this Court cannot close its eye to the fact established intent
that for all intents and purpose, respondent had deliberately Registration of trademark is Prior registration is not necessary
attempted to copy petitioners mark and overall design and necessary
features of the shoes. Let it be remembered, that defendants This is broader than infringement
in cases of infringement do not normally copy but only make
colorable changes. The most successful form of copying is to COPYRIGHT
employ enough points of similarity to confuse the public, with
enough points of difference to confuse the courts. Copyrightable works

UFC Philippines vs. Barrio Fiesta Manufacturing Corp. (G.R. A. Original works - Literary and Artistic Works
No. 198889, Jan. 20, 2016) Original intellectual creations in the literary and artistic domain
protected from the moment of their creation and shall include in
Under the Dominancy Test, the dominant features of the competing particular:
marks are considered in determining whether these competing marks 1. Books, pamphlets, articles and other writings;
are confusingly similar. Greater weight is given to the similarity of the 2. Periodicals and newspapers;
appearance of the products arising from the adoption of the dominant 3. Lectures, sermons, addresses, dissertations prepared for oral
features of the registered mark, disregarding minor differences. The delivery, whether or not reduced in writing or other material
visual, aural, connotative, and overall comparisons and impressions form;
engendered by the marks in controversy as they are encountered in 4. Letters;
the realities of the marketplace are the main considerations. If the Requisite: For short message sending (sms) or text messages
competing trademark contains the main or essential or dominant sufficient intellectual effort.
features of another, and confusion and deception is likely to result, 5. Dramatic or dramatico-musical compositions; choreographic
infringement takes place. works or entertainment in dumb shows;
TN: Laban notation – transcription of choreographic notes
Duplication or imitation is not necessary; nor is it necessary that the 6. Musical compositions, with or without words;
infringing label should suggest an effort to imitate. Actual confusion is TN: With or Without words – because there two separate rights
not required: Only likelihood of confusion on the part of the buying for the composition and lyrics.
public is necessary so as to render two marks confusingly similar so as 7. Works of drawing, painting, architecture, sculpture, engraving,
to deny the registration of the junior mark. lithography or other works of art; models or designs for works of
art;
Damages TN: Furnitures have functional purpose. Ching Case:
Owner of registered mark may recover damages. 8. Original ornamental designs or models for articles of
The measure of damages suffered shall be either: manufacture, whether or not registrable as an industrial design,
1. Reasonable profit which the complaining party would have made and other works of applied art;
had the defendant not infringed his rights 9. Illustrations, maps, plans, sketches, charts and three-dimensional
2. Profit which the defendant actually made out of the infringement works relative to geography, topography, architecture or science;
3. In the event such measure of damages cannot be readily 10. Drawings or plastic works of a scientific or technical character;
ascertained with reasonable certainty, the court may award as 11. Photographic works including works produced by a process
damages a reasonable percentage based upon the amount of analogous to photography; lantern slides;
gross sales of the defendant or value of the services in 12. Audiovisual works and cinematographic works and works
connection with which the mark was used. produced by a process analogous to cinematography or any
process for making audiovisual recordings;
Requirement of notice 13. Pictorial illustrations and advertisements;
Owner of registered mark shall not be entitled to recover profits or 14. Computer programs; and
damages unless the acts have been committed with knowledge that TN: Computer program are copyrightable in this jurisdiction but
such imitation is likely to cause confusion, or to cause mistake, or to not patentable.
deceive. Knowledge is presumed if: 15. Other literary, scholarly, scientific and artistic works.
1. Registrant gives notice that his mark is registered by displaying
the mark with words “registered mark” or letter R within a circle 172.2. Works are protected by the sole fact of their creation,
2. Defendant had actual notice of the registration irrespective of their mode or form of expression, as well as of their
content, quality and purpose.
Unfair Competition
B. Derivative works
This involves employing deception or any other means contrary to 1. Dramatizations, translations, adaptations, abridgments,
good faith by which a person passes off his goods or business or arrangements, and other alterations of literary or artistic works;
services for those of one who has already established goodwill thereto and
2. Collections of literary, scholarly or artistic works, and compilations
Elements of unfair competition of data and other materials which are original by reason of the
1. Confusing similarity in the general appearance of the goods selection or coordination or arrangement of their contents.
2. Fraud or intent to deceive the public and defraud a competitor
When does copyright protection commence?
Test of unfair competition From the moment of creation: Works are protected by the sole fact of
Whether the acts of the defendant have the intent of deceiving or are their creation, irrespective of their mode or form of expression, as well
calculated to deceive the ordinary buyer making his purchases under as of their content, quality and purpose. (Sec. 172.2)
the ordinary conditions of the particular trade to which the controversy
relates What is the term of the protection?
During the lifetime of the creator and for fifty (50) years after his
Trademark infringement Unfair competition death (Sec. 213)
Unauthorized use of a trademark Passing off of one’s goods as

KART 35
Non-copyrightable works
A. Unprotected Subject Matter
No protection shall extend, under this law, to:
1. Any idea, procedure, system, method or operation, concept,
principle, discovery or mere data as such, even if they are
expressed, explained, illustrated or embodied in a work;
2. News of the day and other miscellaneous facts having the
character of mere items of press information; or
3. Any official text of a legislative, administrative or legal nature, as
well as any official translation thereof.
B. Works of the Government
No copyright shall subsist in any work of the Government of the
Philippines.
Work of the Government of the Philippines
Work created by an officer or employee of the Philippine
Government or any of its subdivisions and instrumentalities,
including government-owned or controlled corporations as a part
of his regularly prescribed official duties.
Prior approval necessary if exploited for profit
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.
XPTN: 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.
The author of speeches, lectures, sermons, addresses, and
dissertations mentioned in the preceding paragraphs shall have the
exclusive right of making a collection of his works.
Government is not precluded from receiving and holding copyrights
transferred to it by assignment, bequest or otherwise; nor shall
publication or republication by the Government in a public document of
any work in which copyright is subsisting be taken to cause any
abridgment or annulment of the copyright or to authorize any use or
appropriation of such work without the consent of the copyright
owner.
Rights conferred by copyright
1. Copyright or economic rights – shall consist of the exclusive right
to carry out, authorize or prevent the following acts:
a. Reproduction of the work or substantial portion of the work;
b. Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work;
c. The first public distribution of the original and each copy of
the work by sale or other forms of transfer of ownership;
d. Rental of the original or a copy of an audio-visual or
cinematographic work, a work embodied in a sound
recording, a computer program, a compilation of data and
other materials or a musical work in graphic form,
irrespective of the ownership of the original or the copy
which is the subject of the rental;
e. Public display of the original or a copy of the work;
f. Public performance of the work; and
g. Other communication to the public of the work
2. Moral rights
The author of a work shall, independently of the economic rights
or the grant of an assignment or license with respect to such
right, have the right:
a. Right to attribution or paternity right – To require that the
authorship of the works be attributed to him, in particular,
the right that his name, as far as practicable, be indicated in
a prominent way on the copies, and in connection with the
public use of his work;
b. Right to alteration or non-publication – To make any
alterations of his work prior to, or to withhold it from
publication;
c. Right to preservation of integrity – To object to any
distortion, mutilation or other modification of, or other
derogatory action in relation to, his work which would be
prejudicial to his honor or reputation; and
d. Right to be identified with work of others with distorted work
– To restrain the use of his name with respect to any work
not of his own creation or in a distorted version of his work
3. Right to participate in the gross proceeds of the sale or lease of
the original work or droit de suite
TN: These rights remain with the author even after he has transferred
or assigned to another other rights of copyright. Moral rights allow the
author to take certain actions to preserve the personal link between
himself and the work but they must be asserted.
Ownership of a copyright
Creator To whom it belongs
Single creator Author of work, his heirs or assigns
Joint creator a. If work consists of unidentifiable parts:
Co-authors jointly as co-owners, unless
there is agreement to the contrary
b. If work consists of identifiable parts:
Author of each part owns the part that
he has created
Employee’s creation a. If creation is part of his regular duties:
Employer, unless there is agreement to
the contrary
b. If creation is not part of his regular
duties: Employee, even if he uses the
time, facilities and materials of employer
Commissioned work a. The commissioned work shall belong to
the person who commissioned the work;
b. Copyright belongs to the creator, unless
there is written stipulation to the
contrary.
According to purpose:
a. For exhibition purposes: Producer
b. For all other purposes: Producer, author
of the scenario, composer, film director,
author of the work
Anonymous and Publishers are deemed representatives of the
pseudonymous author, unless:
works 1. Contrary appears
2. Pseudonyms or adopted name leaves no
doubt as to author’s identity; or author
discloses his identity
Collective works Contributor is deemed to have waived his
right, unless he expressly reserves it
Letters Writer
However, the court may authorize their
publication or dissemination if the public good
or the interest of justice so requires
Limitations on copyright
1. Acts which do not constitute infringement of copyright:
(a) The recitation or performance of a work, once it has been lawfully
made accessible to the public, if done privately and free of charge
or if made strictly for a charitable or religious institution or
society;
(b) The making of quotations from a published work if they are
compatible with fair use and only to the extent justified for the
purpose, including quotations from newspaper articles and
periodicals in the form of press summaries: Provided, That the
source and the name of the author, if appearing on the work, are
mentioned;
(c) The reproduction or communication to the public by mass media
of articles on current political, social, economic, scientific or
religious topic, lectures, addresses and other works of the same
KART 36
 nature, which are delivered in public if such use is for information
purposes and has not been expressly reserved: Provided, That
the source is clearly indicated;
(d) The reproduction and communication to the public of literary,
scientific or artistic works as part of reports of current events by
means of photography, cinematography or broadcasting to the
extent necessary for the purpose;
(e) The inclusion of a work in a publication, broadcast, or other
communication to the public, sound recording or film, if such
inclusion is made by way of illustration for teaching purposes and
is compatible with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are mentioned;
(f) The recording made in schools, universities, or educational
institutions of a work included in a broadcast for the use of such
schools, universities or educational institutions: Provided, That
such recording must be deleted within a reasonable period after
they were first broadcast: Provided, further, That such recording
may not be made from audiovisual works which are part of the
general cinema repertoire of feature films except for brief
excerpts of the work;
(g) The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use in its own
broadcast;
(h) The use made of a work by or under the direction or control of
the Government, by the National Library or by educational,
scientific or professional institutions where such use is in the
public interest and is compatible with fair use;
(i) The public performance or the communication to the public of a
work, in a place where no admission fee is charged in respect of
such public performance or communication, by a club or
institution for charitable or educational purpose only, whose aim
is not profit making, subject to such other limitations as may be
provided in the Regulations;
(j) Public display of the original or a copy of the work not made by
means of a film, slide, television image or otherwise on screen or
by means of any other device or process: Provided, That either
the work has been published, or, that 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; and
(k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a legal
practitioner.
2. Fair use of work
3. Work of architecture
4. Reproduction of published work
5. Reprographic reproduction by libraries
6. Reproduction of computer program
7. Importation for personal purposes
Doctrine of Fair Use
Fair use is a privilege to use the copyrighted material in a reasonable
manner without the consent of the copyright owner or as copying the
theme or ideas rather than their expression.
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 infringement.
Factors to consider to determine whether use is fair or not:
1. Purpose and character of the use
Use must be for the following purposes:
Criticism, comment, news reporting, teaching including multiple
copies for classroom use, scholarship, research and similar
purposes
Transformative test – court looks into whether the copy of the
work adds new expression, meaning or message to transform it
into something else
Meta-use can also occur without necessarily transforming the
copyrighted work used; only changes the purpose of the work
2. Nature of copyrighted work – if the nature of the work is more
factual than creative, fair use will be weighed in favor of the user
3. Amount and substantiality of the portions used – an exact
reproduction of a copyrighted work, compared to a small portion
of it, can result in the conclusion that its use is not fair
4. Effect of the use upon the potential market of the copyrighted
work – if court finds that the use had or will have a negative
impact on the copyrighted work’s market, use is deemed unfair
Copyright Infringement
How made
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 extent appropriated by another.
Person infringes a copyright when he:
1. Directly commits an infringement
2. Benefits from the infringing activity of another person who
commits an infringement if the person benefiting has been given
notice of the infringing activity and has the right and ability to
control the activities of the other person
3. With knowledge of infringing activity, induces, causes or
materially contributes to the infringing conduct of another
Remedies
a. Judicial
1. Action for damages
2. Criminal action
3. Injunction
4. Court order for impounding or destruction of infringing
materials
5. Payment of moral and exemplary damages even in case of
acquittal by accused
6. Seizure and impounding of infringing materials for the
purpose of evidence
b. Administrative
1. Administrative action
2. Cease and desist order
3. Forfeiture of paraphernalia used in committing the offense
4. Administrative fines
ABS-CBN v. Gozon, et. al. (G.R. No. 195956, March 11, 2015)
The Intellectual Property Code is clear about the rights afforded to
authors of various kinds of work. Under the Code, “works are
protected by the sole fact of their creation, irrespective of their mode
or form of expression, as well as of their content, quality and
purpose.” These include “[a]udiovisual works and cinematographic
works and works produced by a process analogous to cinematography
or any process for making audio-visual recordings.”
Contrary to the old copyright law, the Intellectual Property Code does
not require registration of the work to fully recover in an infringement
suit. Nevertheless, both copyright laws provide that copyright for a
work is acquired by an intellectual creator from the moment of
creation.
It is true that under Section 175 of the Intellectual Property Code,
“news of the day and other miscellaneous facts having the character of
mere items of press information” are considered unprotected subject
matter. However, the Code does not state that expression of the news
of the day, particularly when it underwent a creative process, is not
entitled to protection.
An idea or event must be distinguished from the expression of that
idea or event. An idea has been likened to a ghost in that it “must be
spoken to a little before it will explain itself.” It is a concept that has
eluded exact legal definition. To get a better grasp of the
idea/expression dichotomy, the etymology of the term “idea” is traced:
The word “idea” is derived from a Greek term, meaning “a form, the
look or appearance of a thing as opposed to its reality, from idein, to
see.”
KART 37

The copyright does not extend to an idea, procedure, process, system,
method of operation, concept, principle, or discovery, regardless of the
form in which it is described, explained, illustrated, or embodied in
such work.
News or the event itself is not copyrightable. However, an event can
be captured and presented in a specific medium. As recognized by
this court in Joaquin, television “involves a whole spectrum of visuals
and effects, video and audio.” News coverage in television involves
framing shots, using images, graphics, and sound effects. It involves
creative process and originality. Television news footage is an
expression of the news.
It is axiomatic that copyright protection does not extend to news
“events” or the facts or ideas which are the subject of news reports.
But it is equally well-settled that copyright protection does extend to
the reports themselves, as distinguished from the substance of the
information contained in the reports. Copyright protects the manner of
expression of news reports, “the particular form or collocation of words
in which the writer has communicated it.”
News as expressed in a video footage is entitled to copyright
protection. Broadcasting organizations have not only copyright on but
also neighboring rights over their broadcasts. Copyrightability of a
work is different from fair use of a work for purposes of news
reporting.
This court defined fair use as “a privilege to use the copyrighted
material in a reasonable manner without the consent of the copyright
owner or as copying the theme or ideas rather than their expression.”
Fair use is an exception to the copyright owner’s monopoly of the use
of the work to avoid stifling “the very creativity which that law is
designed to foster.”
Determining fair use requires application of the four-factor test.
Section 185 of the Intellectual Property Code lists four (4) factors to
determine if there was fair use of a copyrighted work:
a. The purpose and character of the use, including whether such
use is of a commercial nature or is for non-profit educational
purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the portion used in relation to
the copyrighted work as a whole; and
d. The effect of the use upon the potential market for or value of
the copyrighted work
ANTI-MONEY LAUNDERING ACT (RA 9160, as
amended)
COVERED INSTITUTIONS AND THEIR OBLIGATIONS
Covered persons
Natural or juridical, refer to:
(1) Banks, non-banks, quasi-banks, trust entities, foreign exchange
dealers, pawnshops, money changers, remittance and transfer
companies and other similar entities and all other persons and
their subsidiaries and affiliates supervised or regulated by the
Bangko Sentral ng Pilipinas (BSP);
(2) Insurance companies, pre-need companies and all other persons
supervised or regulated by the Insurance Commission (IC);
(3) (i) securities dealers, brokers, salesmen, investment houses and
other similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-
end investment companies, common trust funds, and other
similar persons, and (iii) 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);
(4) Jewelry dealers in precious metals, who, as a business, trade in
precious metals, for transactions in excess of One million pesos
(P1,000,000.00);
(5) Jewelry dealers in precious stones, who, as a business, trade in
precious stones, for transactions in excess of One million pesos
(P1,000,000.00);
(6) Company service providers which, as a business, provide any of
the following services to third parties: (i) acting as a formation
agent of juridical persons; (ii) acting as (or arranging for another
person to act as) a director or corporate secretary of a company,
a partner of a partnership, or a similar position in relation to other
juridical persons; (iii) providing a registered office, business
address or accommodation, correspondence or administrative
address for a company, a partnership or any other legal person or
arrangement; and (iv) acting as (or arranging for another person
to act as) a nominee shareholder for another person; and
(7) Persons who provide any of the following services:
(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or
management of companies; and
(iv) creation, operation or management of juridical persons or
arrangements, and buying and selling business entities.
(8) Casinos, including internet and ship-based casinos, with respect
to their casino cash transactions related to their gaming
operations.
Notwithstanding the foregoing, the term ‘covered persons’ shall
exclude lawyers and accountants acting as independent legal
professionals in relation to information concerning their clients or
where disclosure of information would compromise client confidences
or the attorney-client relationship: Provided, That these lawyers and
accountants are authorized to practice in the Philippines and shall
continue to be subject to the provisions of their respective codes of
conduct and/or professional responsibility or any of its amendments.
Obligations
(a) 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. 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 nonchecking
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.
(b) Record Keeping. - All records of all transactions of covered
institutions shall be maintained and safely stored for five (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 five (5) years from the dates when they were
closed.
(c) Reporting of Covered Transactions. – Covered institutions
shall report to the AMLC all covered transactions within five (5)
working days from occurrence thereof, unless the Supervising
Authority concerned prescribes a longer period not exceeding ten
(10) working days.
COVERED AND SUSPICIOUS TRANSACTIONS
Covered transactions
1. A transaction in cash or other equivalent monetary instrument
involving a total amount in excess of ₱500,000.00 within one (1)
banking day;
2. For casinos, a single casino transaction involving an amount in
excess of ₱5,000,000.00 or its equivalent in any other currency
Suspicious transactions
KART 38
Transactions with covered institutions, regardless of the amounts
involved, where any of the following circumstances exist:
1. There is no underlying legal or trade obligation, purpose or
economic justification
2. Client is not properly identified
3. Amount involved is not commensurate with the business of
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
5. Any circumstance relating to the transaction which is observed to
deviate from the profile of the client and/or client’s past
transactions with the covered institution
6. Transaction is in any way related to an unlawful activity or
offense under AMLA that is about to be, is being or has been
committed
7. Any transaction that is similar or analogous to any of the
foregoing
SAFE HARBOR PROVISION
Lawyers and accountants acting as independent legal professionals are
not required to report covered and suspicious transactions if the
relevant information was obtained in circumstances where they are
subject to professional secrecy or legal professional privilege.
No administrative, criminal or civil proceedings, shall lie against any
person for having made a covered or suspicious transaction report in
the regular performance of his duties and in good faith, whether or not
such reporting results in any criminal prosecution under AMLA or any
other law.
WHEN IS MONEY LAUNDERING COMMITTED (INCLUDING
PREDICATE CRIMES)
Money Laundering Offense
1. Money laundering is committed by any person who, knowing that
any monetary instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
(a) Transacts said monetary instrument or property;
(b) Converts, transfers, disposes of, moves, acquires, possesses
or uses said monetary instrument or property;
(c) Conceals or disguises the true nature, source, location,
disposition, movement or ownership of or rights with respect
to said monetary instrument or property;
(d) Attempts or conspires to commit money laundering offenses
referred to in paragraphs (a), (b) or (c);
(e) Aids, abets, assists in or counsels the commission of the
money laundering offenses referred to in paragraphs (a), (b)
or (c) above; and
(f) Performs or fails to perform any act as a result of which he
facilitates the offense of money laundering referred to in
paragraphs (a), (b) or (c) above.
2. Money laundering is also committed by any covered person who,
knowing that a covered or suspicious transaction is required
under this Act to be reported to the AMLC, fails to do so.”
Unlawful activities / Predicate crimes
1. Kidnapping for ransom
2. Drug offenses (violation of Comprehensive Dangerous Drugs Act)
3. Graft and corrupt practices
4. Plunder
5. Robbery and extortion
6. Jueteng and masiao punished as illegal gambling
7. Piracy on the high seas
8. Qualified theft
9. Swindling
10. Smuggling
11. Violations of Electronic Commerce Act
12. Hijacking, destructive arson and murder
13. Terrorism and conspiracy to commit terrorism
14. Financing of terrorism
15. Bribery and Corruption of public officers
16. Frauds and Illegal exactions and transactions
17. Malversation of public funds and property
18. Forgeries and counterfeiting
19. Anti-Trafficking in Persons Act
20. Violations of Revised Forestry Code
21. Violations of Philippine Fisheries Code
22. Violations of Philippine Mining Act
23. Violations of Wildlife Conservation and Protection Act
24. Violations of National Caves and Cave Resources Management
Protection Act
25. Violations of Anti-Carnapping Act
26. Violations of laws on illegal/unlawful possession of firearms
27. Violations of Anti-Fencing Law
28. Violations of Migrant Workers and Overseas Filipinos Act
29. Violations of Intellectual Property Code
30. Violations of Anti-Photo and Video Voyeurism Act
31. Violations of Anti-Child Pornography Act
32. Violations of RA 7610 (Child Abuse Law)
33. Fraudulent practices and other violations of SRC
34. Felonies or offenses of similar nature that are punishable under
penal laws of other countries
AUTHORITY TO INQUIRE INTO BANK DEPOSITS
Under AMLA
a. With court order
AMLC may inquire into or examine any particular deposit or
investment, including related accounts, with any banking institution or
non-bank financial institution upon order of any competent court based
on an ex parte application in cases of violations of this Act, when it has
been established that there is probable cause that the deposits or
investments, including related accounts involved, are related to an
unlawful activity or a money laundering offense.
TN: This is notwithstanding the provisions of the Bank Secrecy Law,
Foreign Currency Deposit Act, General Banking Law, and other laws
The Court of Appeals shall act on the application to inquire into or
examine any deposit or investment with any banking institution or
non-bank financial institution within 24 hours from filing of the
application.
b. Without court order
No court order shall be required in cases involving the following:
1. Kidnapping for ransom
2. Violations under Dangerous Drugs Act
3. Hijacking, destructive arson and murder
4. Terrorism and conspiracy to commit terrorism
Related accounts
Refer to accounts, the funds and sources of which originated from
and/or are materially linked to the monetary instrument or property
subject of the freeze order.
Limitations
The authority to inquire into or examine the main account and the
related accounts shall comply with the requirements of Article III,
Sections 2 (unlawful search & seizure) and 3 (privacy of
communication & correspondence) of the Constitution.
Under RA No. 10168 (Terrorism Financing Prevention & Suppression
Act)
For purposes of executing its authority to investigate financing of
terrorism, AMLC is authorized to inquire into or examine deposits and
investments with any banking institution or non-bank financial
institution and their subsidiaries and affiliates without a court order.
(Sec. 10)
AMLC, either upon its own initiative or at the request of ATC, is
authorized to investigate:
KART 39
1. Any property or funds that are in any way related to financing of
terrorism or acts of terrorism
2. Property or funds of any person in relation to whom there is
probable cause to believe that such person is committing or
attempting or conspiring to commit, or participating in or
facilitating the financing of terrorism or acts of terrorism
FREEZING AND FORFEITURE
Under AMLA
Freezing of Monetary Instrument or Property (Sec. 10)
Upon a verified ex parte petition 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 as defined in AMLA, CA may
issue a freeze order which shall be effective immediately, for a period
of 20 days.
Within the 20-day period, CA shall conduct a summary hearing, with
notice to the parties, to determine whether or not to modify or lift the
freeze order, or extend its effectivity. The total period of the freeze
order issued by the CA shall not exceed 6 months. This is without
prejudice to an asset preservation order that the RTC having
jurisdiction over the appropriate anti-money laundering case or civil
forfeiture case may issue on the same account depending upon the
circumstances of the case, where the CA will remand the case and its
records.
If there is no case filed against a person whose account has been
frozen within the period determined by CA, not exceeding 6 months,
the freeze order shall be deemed ipso facto lifted.
TN: New rule shall not apply to pending cases in the courts.
In any case, the court should act on the petition to freeze within 24
hours from filing of the petition. If the application is filed a day before
a no working day, the computation of the 24-hour period shall exclude
the nonworking days.
The freeze order or asset preservation order issued under this Act shall
be limited only to the amount of cash or monetary instrument or value
of property that the court finds there is probable cause to be
considered as proceeds of a predicate offense, and the freeze order or
asset preservation order shall not apply to amounts in the same
account in excess of the amount or value of the proceeds of the
predicate offense.
Forfeiture (Sec. 12)
Civil Forfeiture
Upon determination by the AMLC that probable cause exists that any
monetary instrument or property is in any way related to an unlawful
activity or a money laundering offense, AMLC shall file with the
appropriate court through the OSG, a verified ex parte petition for
forfeiture, and the Rules of Court on Civil Forfeiture shall apply.
The forfeiture shall include those other monetary instrument or
property having an equivalent value to that of the monetary
instrument or property found to be related in any way to an unlawful
activity or a money laundering offense, when with due diligence, the
former cannot be located, or it has been substantially altered,
destroyed, diminished in value or otherwise rendered worthless by any
act or omission, or it has been concealed, removed, converted, or
otherwise transferred, or it is located outside the Philippines or has
been placed or brought outside the jurisdiction of the court, or it has
been commingled with other monetary instrument or property
belonging to either the offender himself or a third person or entity,
thereby rendering the same difficult to identify or be segregated for
purposes of forfeiture.
Claim on Forfeited Assets
Where the court has issued an order of forfeiture of the monetary
instrument or property in a criminal prosecution for any money
laundering offense, the offender or any other person claiming an
interest therein may apply, by verified petition, for a declaration that
the same legitimately belongs to him and for segregation or exclusion
of the monetary instrument or property corresponding thereto. The
verified petition shall be filed with the court which rendered the
judgment of forfeiture, within fifteen (15) days from the date of the
finality of the order of forfeiture, in default of which the said order
shall become final and executory. This provision shall apply in both
civil and criminal forfeiture.
Payment in Lieu of Forfeiture
Where the court has issued an order of forfeiture of the monetary
instrument or property subject of a money laundering offense, and
said order cannot be enforced because any particular monetary
instrument or property cannot, with due diligence, be located, or it has
been substantially altered, destroyed, diminished in value or otherwise
rendered worthless by any act or omission, directly or indirectly,
attributable to the offender, or it has been concealed, removed,
converted, or otherwise transferred to prevent the same from being
found or to avoid forfeiture thereof, or it is located outside the
Philippines or has been placed or brought outside the jurisdiction of
the court, or it has been commingled with other monetary instruments
or property belonging to either the offender himself or a third person
or entity, thereby rendering the same difficult to identify or be
segregated for purposes of forfeiture, the court may, instead of
enforcing the order of forfeiture of the monetary instrument or
property or part thereof or interest therein, accordingly order the
convicted offender to pay an amount equal to the value of said
monetary instrument or property. This provision shall apply in both
civil and criminal forfeiture.
Under RA No. 10168 (Terrorism Financing Prevention & Suppression
Act)
Authority to Freeze (Sec. 11)
AMLC, either upon its own initiative or at the request of the ATC, is
authorized to issue ex parte order to freeze without delay:
1. Property or funds that are in any way related to financing of
terrorism or acts of terrorism
2. Property of funds of any person, group of persons, terrorist org,
or association in relation to whom there is probable cause to
believe that they are committing or attempting or conspiring to
commit, or participating in or facilitating the commission of
financing of terrorism or acts of terrorism
Effectivity of freeze order
Freeze order shall be effective for a period not exceeding 20 days.
Upon a petition filed by AMLC before expiration of the period, the
effectivity of freeze order may be extended up to 6 months upon order
of CA, provided that the 20-day period shall be tolled upon filing of a
petition.
Exceptions for investigative requirements
AMLC may decide to defer the issuance of a freeze order for as long as
necessary for any specific investigative/prosecutorial purposes.
Humanitarian Exemptions
Person whose property or funds have been frozen may withdraw such
sums as the court determines to be reasonably needed for monthly
family needs and sustenance including services of counsel and family
medical needs of such person
ELECTRONIC COMMERCE ACT (RA 8792)
Sphere of Application
This Act shall apply to any kind of data message and electronic
document used in the context of commercial and non-commercial
activities to include domestic and international dealings, transactions,
arrangements, agreements, contracts and exchanges and storage of
information. (Sec. 4)
Electronic Data message – refers to information generated, sent,
received or stored by electronic, optical or similar means.
KART 40

Electronic signature – refers to any distinctive mark, characteristic
and/or sound in electronic form, representing the identity of a person
and attached to or logically associated with the electronic data
message or electronic document or any methodology or procedures
employed or adopted by a person and executed or adopted by such
person with the intention of authenticating or approving an electronic
data message or electronic document.
IOW: An electronic signature is used to identify a person and to
authenticate, sign, or approve an electronic document.
Electronic document – refers to information or the representation of
information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded, transmitted, stored,
processed, retrieved or produced electronically.
Fax transmissions are not electronic documents
Photocopies of fax transmissions are not admissible unless the non-
production of the original fax transmission is accounted for. Fax
transmissions are not electronic documents or electronic evidence.
(MCC Industrial Corporation v. Ssangyong Corp., 17 October 2007)
Electronic documents with manual signatures or handwritten
notations
If not all the contents of a document are generated or recorded
electronically, such as if the document contains a manual signature
and handwritten notations, then a photocopy of such document will
not be considered as an equivalent of the original. (Case)
LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES,
DOCUMENTS, AND SIGNATURES
Legal Recognition of Data Messages
Information shall not be denied legal effect, validity or enforceability
solely on the grounds that it is in the data message purporting to give
rise to such legal effect, or that it is merely referred to in that
electronic data message. (Sec. 6)
Principle of Non-Discrimination
E-Docs should not be discriminated against but should be given the
same legal status as their paper-based counterparts.
Legal Recognition of Electronic Documents
Electronic documents shall have the legal effect, validity or
enforceability as any other document or legal writing, and
(a) Where the law requires a document to be in writing, that
requirement is met by an electronic document if the said
electronic document maintains its integrity and reliability and can
be authenticated so as to be usable for subsequent reference, in
that -
(i) The electronic document has remained complete and
unaltered, apart from the addition of any endorsement and
any authorized change, or any change which arises in the
normal course of communication, storage and display; and
(ii) The electronic document is reliable in the light of the
purpose for which it was generated and in the light of all the
relevant circumstances.
Laws requiring documents to be in writing
1. Statute of frauds
2. Negotiable instruments
3. Donation of personal property which is more than P5,000
4. Stipulation to pay interest
5. Power of attorney to sell land or interest
(b) Paragraph (a) applies whether the requirement therein is in the
form of an obligation or whether the law simply provides
consequences for the document not being presented or retained
in its original form.
(c) Where the law requires that a document be presented or retained
in its original form, that requirement is met by an electronic
document if -
(i) There exists a reliable assurance as to the integrity of the
document from the time when it was first generated in its
final form; and
(ii) That document is capable of being displayed to the person
to whom it is to be presented:
Provided, That no provision of this Act shall apply to vary
any and all requirements of existing laws on formalities
required in the execution of documents for their validity.
Functional equivalence of electronic documents
For evidentiary purposes, an electronic document shall be the
functional equivalent of a written document under existing laws.
This Act does not modify any statutory rule relating to the admissibility
of electronic data messages or electronic documents, except the rules
relating to authentication and best evidence.
Electronic documents as functional equivalent of paper-based
documents (Rules on Electronic Evidence)
Whenever a rule of evidence refers to the term writing, document,
record, instrument, memorandum or any other form of writing, such
term shall include an electronic document.
Some evidentiary rules requiring evidence to be in writing
1. Best evidence rule
2. Statute of frauds
3. Parol evidence rule
4. Business entries exception to hearsay
5. Official records exception to hearsay
6. Public documents
Parity Rule
Electronic documents shall have the same legal effect, validity or
enforceability as any other document or legal writing.
Legal Recognition of Electronic Signatures
An electronic signature on the electronic document shall be equivalent
to the signature of a person on a written document if that signature is
proved by showing that a prescribed procedure, not alterable by the
parties interested in the electronic document, existed under which -
(a) A method is used to identify the party sought to be bound and to
indicate said party’s access to the electronic document necessary
for his consent or approval through the electronic signature;
(b) Said method is reliable and appropriate for the purpose for which
the electronic document was generated or communicated, in the
light of all the circumstances, including any relevant agreement;
(c) It is necessary for the party sought to be bound, in order to
proceed further with the transaction, to have executed or
provided the electronic signature; and
(d) The other party is authorized and enabled to verify the electronic
signature and to make the decision to proceed with the
transaction authenticated by the same.
An electronic or digital signature authenticated in the manner
prescribed hereunder is admissible in evidence as the functional
equivalent of the signature of a person on a written document. (Rules)
TN: Electronic signature on an electronic document shall be equivalent
to a manual signature.
Digital signature
A particular form of electronic signature
Refers to an electronic signature consisting of the encryption of an E-
Doc using an asymmetric or public cryptosystem such that the relying
party can safely rely on the identity of the digital signer and the
authenticity of the E-Doc
Advantages of a digital signature
A valid digital signature gives a recipient reason to believe that:
1. Message was created by known sender (identification)
2. Sender cannot deny having sent the message (non-repudiation)
KART 41
3. Message was not altered in transit (non-alteration) testimony or transcript of their contents can be introduced provided
the predicate is laid.

Testimony regarding text message is not hearsay if text message itself

PRESUMPTION RELATING TO ELECTRONIC SIGNATURES is covered by hearsay exception or exclusion (like party admission)
Text messages are to be proved by the testimony of a person who was
In any proceeding involving an electronic signature, it shall be a party to the same or has personal knowledge of them.
presumed that -
(a) The electronic signature is the signature of the person to whom it OBLIGATION OF CONFIDENTIALITY
correlates; and
(b) The electronic signature was affixed by that person with the Except for the purposes authorized under this Act, any person who
intention of signing or approving the electronic document unless obtained access to any electronic key, electronic data message, or
the person relying on the electronically signed electronic electronic document, book, register, correspondence, information, or
document knows or has notice of defects in or unreliability of the other material pursuant to any powers conferred under this Act, shall
signature or reliance on the electronic signature is not reasonable not convey to or share the same with any other person.
under the circumstances.
(c) Methods or processes utilized to affix or verify the electronic DATA PRIVACY ACT (RA 10173)
signature operated without error or fault
TN: Presumption applies, unless the person relying on the
PERSONAL VS. SENSITIVE PERSONAL INFORMATION
electronically signed electronic document knows or has notice of
defects in or unreliability of the signature or reliance on the electronic
Personal information
signature is not reasonable under the circumstances.
Refers to any information whether recorded in a material form or not,
from which the identity of an individual is apparent or can be
Presumption relating to digital signatures
reasonably and directly ascertained by the entity holding the
Upon authentication of a digital signature, it shall be presumed that:
information, or when put together with other information would
1. The information contained in a certificate is correct
directly and certainly identify an individual
2. Digital signature was created during the operational period of a
certificate
Sensitive personal information
3. No cause exists to render a certificate invalid or revocable
Refers to personal information:
4. Message associated with a digital signature has not been altered
1. About an individual’s race, ethnic origin, marital status, age, color,
from the time it was signed
and religious, philosophical or political affiliations
5. Certificate had been issued by the certification authority indicated
2. About an individual’s health, education, genetic or sexual life of a
therein
person, or to any proceeding for any offense committed or
alleged to have been committed by such person, the disposal of
TN: If you want the recipients of your documents to be able to verify
such proceedings, or the sentence of any court in such
the authenticity of your digital signature then you must obtain a digital
proceedings
certificate from a reputable certificate authority. This assures the
3. Issued by government agencies peculiar to an individual which
recipient that it was genuinely sent by you and not by some
includes, but not limited to, social security numbers, previous or
impersonator.
current health records, licenses or its denials, suspension or
revocation, and tax returns
Digital certificate
4. Specifically established by an executive order or an act of
Electronic document issued by a certification authority to support a
Congress to be kept classified.
digital signature which purports to confirm the identity of the digital
signer and his association to a public key.
SCOPE
ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC
Application
DATA MESSAGE OR ELECTRONIC DOCUMENT
This Act applies to the processing of all types of personal information
and to any natural and juridical person involved in personal
Admissibility
information processing including those personal information controllers
In any legal proceedings, nothing in the application of the rules on
and processors who, although not found or established in the
evidence shall deny the admissibility of an electronic data message or
Philippines, use equipment that are located in the Philippines, use
electronic document in evidence -
equipment that are located in the Philippines, or those who maintain
(a) On the sole ground that it is in electronic form; or
an office, branch or agency in the Philippines subject to the
(b) On the ground that it is not in the standard written form and
immediately succeeding paragraph: Provided, that the requirements of
electronic data message or electronic document meeting, and
Section 5 are complied with.
complying with the requirements under Sections 6 or 7 hereof
shall be the best evidence of the agreement and transaction
Section 5. Protection afforded to journalists and their sources
contained therein.
Nothing in this Act shall be construed as to have amended or repealed
the provisions of RA No. 53, which affords the publishers, editors or
Evidential weight
duly accredited reporters of any newspaper, magazine or periodical of
In assessing the evidential weight of an electronic data message or
general circulation protection from being compelled to reveal the
electronic document, the reliability of the manner in which it was
source of any news report or information appearing in said publication
generated, stored or communicated, the reliability of the manner in
which was related in any confidence to such publisher, editor, or
which its originator was identified, and other relevant factors shall be
reporter.
given due regard.
XPTN: This Act does not apply to the following –
Ephemeral electronic communication
(a) Information about any individual who is or was an officer or
Electronic forms of communication the evidence of which is not
employee of a government institution that relates to the position
recorded or retained
or functions of individual, including:
Examples: phone talks, text messages, streaming audio, video
1. The fact that the individual is or was an officer or employee
Once recorded or retained, however, they become electronic
of the government institution
documents and are subject to the best evidence rule. Hence,
2. The title, business address and office telephone number of
the individual

KART 42
 3. Classification, salary range and responsibilities of the
position held by the individual
4. Name of the individual on a document prepared by the
individual in the course of employment with the government
(b) Information about an individual who is or was performing service
under contract for a government institution that relates to the
services performed, including the terms of the contract, and the
name of the individual given in the course of the performance of
those services
(c) Information relating to any discretionary benefit of a financial
nature such as the granting of a license or permit given by the
government to an individual, including the name of the individual
and the exact nature of the benefit
(d) Personal information processed for journalistic, artistic, literary or
research purposes
(e) Information necessary in order to carry out the functions of public
authority which includes the processing of personal data for the
performance by the independent central monetary authority and
law enforcement and regulatory agencies of their constitutionally
and statutorily mandated functions. Nothing in this Act shall be
construed as to have amended or repealed RA 1405 (Secrecy of
Bank Deposits Act), RA 6426 (FCDA), and RA 9510 (Credit
Information System Act)
(f) Information necessary for banks and other financial institutions
under the jurisdiction of the independent central monetary
authority or BSP to comply with RA 9510 and RA 9160, as
amended (AMLA)
(g) Personal information originally collected from residents of foreign
jurisdictions in accordance with the law of those foreign
jurisdictions, including any applicable data privacy laws, which is
being processed in the Philippines.
PROCESSING OF PERSONAL INFORMATION
General Data Privacy Principles
The processing of personal information shall be allowed, subject to
compliance with the requirements of this Act and other laws allowing
disclosure of information to the public and adherence to the principles
of transparency, legitimate purpose and proportionality.
Personal information must, be:
(a) Collected for specified and legitimate purposes determined and
declared before, or as soon as reasonably practicable after
collection, and later processed in a way compatible with such
declared, specified and legitimate purposes only;
(b) Processed fairly and lawfully;
(c) Accurate, relevant and, where necessary for purposes for which it
is to be used the processing of personal information, kept up to
date; inaccurate or incomplete data must be rectified,
supplemented, destroyed or their further processing restricted;
(d) Adequate and not excessive in relation to the purposes for which
they are collected and processed;
(e) Retained only for as long as necessary for the fulfillment of the
purposes for which the data was obtained or for the
establishment, exercise or defense of legal claims, or for
legitimate business purposes, or as provided by law; and
(f) Kept in a form which permits identification of data subjects for no
longer than is necessary for the purposes for which the data were
collected and processed: Provided, That personal information
collected for other purposes may lie processed for historical,
statistical or scientific purposes, and in cases laid down in law
may be stored for longer periods: Provided, further,That
adequate safeguards are guaranteed by said laws authorizing
their processing.
The personal information controller must ensure implementation of
personal information processing principles set out herein.
Criteria for Lawful Processing of Personal Information
The processing of personal information shall be permitted only if not
otherwise prohibited by law, and when at least one of the following
conditions exists:
(a) The data subject has given his or her consent;
(b) The processing of personal information is necessary and is related
to the fulfillment of a contract with the data subject or in order to
take steps at the request of the data subject prior to entering into
a contract;
(c) The processing is necessary for compliance with a legal obligation
to which the personal information controller is subject;
(d) The processing is necessary to protect vitally important interests
of the data subject, including life and health;
(e) The processing is necessary in order to respond to national
emergency, to comply with the requirements of public order and
safety, or to fulfill functions of public authority which necessarily
includes the processing of personal data for the fulfillment of its
mandate; or
(f) The processing is necessary for the purposes of the legitimate
interests pursued by the personal information controller or by a
third party or parties to whom the data is disclosed, except where
such interests are overridden by fundamental rights and freedoms
of the data subject which require protection under the Philippine
Constitution.
Sensitive Personal Information and Privileged Information
The processing of sensitive personal information and privileged
information shall be prohibited
XPTN:
(a) The data subject has given his or her consent, specific to the
purpose prior to the processing, or in the case of privileged
information, all parties to the exchange have given their consent
prior to processing;
(b) The processing of the same is provided for by existing laws and
regulations: Provided, That such regulatory enactments
guarantee the protection of the sensitive personal information
and the privileged information: Provided, further, That the
consent of the data subjects are not required by law or regulation
permitting the processing of the sensitive personal information or
the privileged information;
(c) The processing is necessary to protect the life and health of the
data subject or another person, and the data subject is not legally
or physically able to express his or her consent prior to the
processing;
(d) The processing is necessary to achieve the lawful and non-
commercial objectives of public organizations and their
associations: Provided, That such processing is only confined and
related to the bona fide members of these organizations or their
associations: Provided, further, That the sensitive personal
information are not transferred to third parties: Provided, finally,
That consent of the data subject was obtained prior to
processing;
(e) The processing is necessary for purposes of medical treatment, is
carried out by a medical practitioner or a medical treatment
institution, and an adequate level of protection of personal
information is ensured; or
(f) The processing concerns such personal information as is
necessary for the protection of lawful rights and interests of
natural or legal persons in court proceedings, or the
establishment, exercise or defense of legal claims, or when
provided to government or public authority.
Subcontract of Personal Information
A personal information controller may subcontract the processing of
personal information: Provided, That the personal information
controller shall be responsible for ensuring that proper safeguards are
in place to ensure the confidentiality of the personal information
processed, prevent its use for unauthorized purposes, and generally,
comply with the requirements of this Act and other laws for processing
of personal information. The personal information processor shall
comply with all the requirements of this Act and other applicable laws.
Extension of Privileged Communication
Personal information controllers may invoke the principle of privileged
communication over privileged information that they lawfully control or
process. Subject to existing laws and regulations, any evidence
gathered on privileged information is inadmissible.
KART 43
RIGHTS OF THE DATA SUBJECT
Rights of the Data Subject
The data subject is entitled to:
(a) Be informed whether personal information pertaining to him or
her shall be, are being or have been processed;
(b) Be furnished the information indicated hereunder before the entry
of his or her personal information into the processing system of
the personal information controller, or at the next practical
opportunity:
(1) Description of the personal information to be entered into
the system;
(2) Purposes for which they are being or are to be processed;
(3) Scope and method of the personal information processing;
(4) The recipients or classes of recipients to whom they are or
may be disclosed;
(5) Methods utilized for automated access, if the same is
allowed by the data subject, and the extent to which such
access is authorized;
(6) The identity and contact details of the personal information
controller or its representative;
(7) The period for which the information will be stored; and
(8) The existence of their rights, i.e., to access, correction, as
well as the right to lodge a complaint before the
Commission.
Any information supplied or declaration made to the data subject
on these matters shall not be amended without prior notification
of data subject: Provided, That the notification under subsection
(b) shall not apply should the personal information be needed
pursuant to a subpoena or when the collection and processing are
for obvious purposes, including when it is necessary for the
performance of or in relation to a contract or service or when
necessary or desirable in the context of an employer-employee
relationship, between the collector and the data subject, or when
the information is being collected and processed as a result of
legal obligation;
(c) Reasonable access to, upon demand, the following:
(1) Contents of his or her personal information that were
processed;
(2) Sources from which personal information were obtained;
(3) Names and addresses of recipients of the personal
information;
(4) Manner by which such data were processed;
(5) Reasons for the disclosure of the personal information to
recipients;
(6) Information on automated processes where the data will or
likely to be made as the sole basis for any decision
significantly affecting or will affect the data subject;
(7) Date when his or her personal information concerning the
data subject were last accessed and modified; and
(8) The designation, or name or identity and address of the
personal information controller;
(d) Dispute the inaccuracy or error in the personal information and
have the personal information controller correct it immediately
and accordingly, unless the request is vexatious or otherwise
unreasonable. If the personal information have been corrected,
the personal information controller shall ensure the accessibility of
both the new and the retracted information and the simultaneous
receipt of the new and the retracted information by recipients
thereof: Provided, That the third parties who have previously
received such processed personal information shall he informed
of its inaccuracy and its rectification upon reasonable request of
the data subject;
(e) Suspend, withdraw or order the blocking, removal or destruction
of his or her personal information from the personal information
controller’s filing system upon discovery and substantial proof
that the personal information are incomplete, outdated, false,
unlawfully obtained, used for unauthorized purposes or are no
longer necessary for the purposes for which they were collected.
In this case, the personal information controller may notify third
parties who have previously received such processed personal
information; and
(f) Be indemnified for any damages sustained due to such
inaccurate, incomplete, outdated, false, unlawfully obtained or
unauthorized use of personal information.
Transmissibility of Rights of the Data Subject
The lawful heirs and assigns of the data subject may invoke the rights
of the data subject for, which he or she is an heir or assignee at any
time after the death of the data subject or when the data subject is
incapacitated or incapable of exercising the rights as enumerated in
the immediately preceding section.
Right to Data Portability
The data subject shall have the right, where personal information is
processed by electronic means and in a structured and commonly used
format, to obtain from the personal information controller a copy of
data undergoing processing in an electronic or structured format,
which is commonly used and allows for further use by the data
subject. The Commission may specify the electronic format referred to
above, as well as the technical standards, modalities and procedures
for their transfer.
Non-Applicability
The immediately preceding sections are not applicable if the processed
personal information are used only for the needs of scientific and
statistical research and, on the basis of such, no activities are carried
out and no decisions are taken regarding the data subject: Provided,
That the personal information shall be held under strict confidentiality
and shall be used only for the declared purpose. Likewise, the
immediately preceding sections are not applicable to processing of
personal information gathered for the purpose of investigations in
relation to any criminal, administrative or tax liabilities of a data
subject.
FINANCIAL REHABILITATION, INSOLVENCY,
LIQUIDATION and SUSPENSION OF PAYMENTS (RA
10142, FR Rules [A.M. No. 12-12-11-SC], and FLSP
Rules [A.M. No.15-04-06-SC])
BASIC CONCEPTS
FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010
(FRIA)
Declaration of Policy
Encourage debtors, both juridical and natural persons, and their
creditors to collectively and realistically resolve and adjust competing
claims and property right.
Nature of Proceedings
a. In rem - Jurisdiction over all persons affected is acquired upon
publication of the notice of the commencement of the
proceedings in any newspaper of general circulation
b. Summary and non-adversarial
Exclusions
Term debtor does not include:
1. Banks – governed by NCBA
2. Insurance companies – Insurance Code
3. Pre-need companies
4. National and local government agencies or units
TN: Government financial institutions (GFIs) other than banks and
GOCCs shall be covered by FRIA, unless their charter provides
otherwise.
Rules of Procedure
1. FR Rules (A.M. No. 12-12-11-SC) – Financial Rehabilitation Rules
of Procedure (2013)
 Apply to petitions for rehabilitation of corporations,
partnerships, and sole proprietorships, file pursuant to FRIA
 All further proceedings in suspension of payments and
rehabilitation cases already pending
KART 44
  XPTN: To the extent that, in the opinion of the court, its
application would not be feasible or would work injustice, in
which event the procedures originally applicable shall
continue to govern.
2. FLSP (A.M. No.15-04-06-SC) – Financial Liquidation and
Suspension of Payments Rules of Procedure for Insolvent Debtors
(2015)
 Govern the practice, pleading, and procedure for the
liquidation of insolvent juridical and individual debtors, and
suspension of payments of insolvent individual debtors
pursuant to the FRIA
 All further proceedings in insolvency cases already pending
 XPTN: To the extent that, in the opinion of the court, its
application would not be feasible or would work injustice, in
which event the procedures originally applicable shall
continue to govern.
Rehabilitation
Refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated
Insolvent
Refer to the financial condition of a debtor that is generally unable to
pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets
Liquidation
a. Insolvency of Juridical Debtor
1. Voluntary Liquidation
2. Involuntary Liquidation
b. Insolvency of Individual Debtor
1. Suspension of Payment
2. Voluntary Liquidation
3. Involuntary Liquidation
Liability of Individual Debtor, Owner of a Sole Proprietorship,
Partners in a Partnership, or Directors and Officers
Liable for (1) double the value of the property sold, embezzled or
disposed of or (2) double the amount of the transaction involved,
whichever is higher, if they, having notice of commencement of
proceedings, or having reason to believe that proceedings are about to
be commenced, or in contemplation of the proceedings, willfully
commit the following:
1. Dispose or cause to be disposed of any property of debtor other
than in the ordinary course of business or authorize or approve
any transaction in fraud of creditors or in a manner grossly
disadvantageous to the debtor and/or creditors
2. Conceal, or authorize or approve the concealment, from creditor,
or embezzles or misappropriates, any property of the debtor
TN: This provision is also in FLSP Rules
A. REHABILITATION
Types of Rehabilitation proceedings
1. Court-supervised Rehabilitation
a. Voluntary – by debtor
b. Involuntary – by creditor
2. Pre-negotiated Rehabilitation
3. Out-of-court or Internal Restructuring Rehabilitation Plan
COURT-SUPERVISED REHABILITATION
Filing of petition
A. Voluntary – initiated by insolvent debtor
a. Sole proprietor – owner
b. Partnership – majority of the partners
c. Corporation – majority of the BOD/T and authorized by
stockholders holding at least 2/3 of OCS or 2/3 of members
How: By filing a petition for rehabilitation with the court; Petition
shall be verified to establish the insolvency of the debtor and the
viability of its rehabilitation
Group of debtors may jointly file a petition for
rehabilitation when:
1. When one or more of its members foresee the impossibility
of meeting debts when they respectively fall due; and
2. Financial distress would likely adversely affect the financial
condition and/or operations of the other members of the
group or the participation of the other members of the group
is essential under the terms and conditions of the proposed
Rehabilitation Plan.
B. Involuntary – initiated by a creditor or group of creditors with a
claim of, or the aggregate of whose claim is, at least P1 million or
at least 25% of the subscribed capital stock (if corporation) or
partners’ contributions (if partnership), whichever is higher
How: By filing a petition for rehabilitation with the court if:
1. There is no genuine issue of fact or law on the claim/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least 60 days
2. Debtor has failed generally to meet its liabilities as they fall
due
3. At least one creditor, other than the petitioner/s, has
initiated foreclosure proceedings against the debtor that will
prevent the debtor from paying its debts as they become
due or will render it insolvent
Action on the petition
a. Court finds petition to be sufficient in form and substance – court
shall issue Commencement Order within 5 working days from
filing of petition
b. Court finds petition deficient in form or substance – court may
give petitioner/s not exceeding 5 working days from receipt of
notice of order within which to amend or supplement petition or
submit documents as may be necessary or proper to put the
petition in proper order. If not complied with, court shall dismiss.
Commencement of Proceedings
Rehabilitation proceedings shall be deemed to have commenced from
date of filing of petition
Commencement Order
a. State its legal effects
b. Declare that the debtor is under rehabilitation
c. Appoint rehabilitation receiver
d. Direct creditors to file their verified notices of claims with the
court at least 5 days before the initial hearing date, with a
warning that their failure to do so on time will bar them from
participating in the rehabilitation proceedings but will not
prejudice their right to receive distributions if recommended by
rehabilitation receiver and approved by the court
e. Authorize payment of administrative expenses as they become
due
f. Set case for initial hearing at a date no later than 40 days from
date of filing of petition for the purpose of determining whether
there is substantial likelihood for debtor to be rehabilitated
g. State that all contracts not confirmed in writing by the debtor
within 90 days following the issuance of the commencement
order shall be considered automatically terminated
h. Include Stay or Suspension Order, which shall:
1. Suspend all actions or proceedings in court or otherwise, for
the enforcement of all claims against the debtor
2. Suspend all actions to enforce any judgment, attachment or
other provisional remedies against debtor
3. Prohibit the debtor from selling, encumbering, transferring
or disposing in any manner any of its properties except in
the ordinary course of business
4. Prohibit debtor from making any payment of its liabilities
outstanding as of the commencement date except as may
be provided herein
KART 45
 XPTNS to Stay or Suspension Order
a. Cases already pending appeal in SC as of commencement
date, provided that any final and executory judgment arising
from such appeal shall be referred to the rehabilitation court
for appropriate action
b. Subject to the discretion of the court, to cases pending or
filed with a specialized court or quasi-judicial agency which,
upon determination by rehabilitation court upon motion
made, is capable of resolving the claim more quickly, fairly
and efficiently than the court, provided that any final and
executory judgment of such court or agency shall be
referred to the court and shall be treated as a non-disputed
claim
c. Enforcement of claims against sureties and other persons
solidarily liable with the debtor, and 3rd party or
accommodation mortgagors as well as issuers of LC, unless
the property subject of the 3rd party or accommodation
mortgage is necessary for the rehabilitation of the debtor
d. Any form of action of customers or clients of a securities
market participant to recover or otherwise claim moneys and
securities entrusted to the latter in the ordinary course of
the latter’s business as well as any action of such securities
market participant or the appropriate regulatory agency or
self-regulatory organization to pay or settle such claims or
liabilities
e. Actions of a licensed broker or dealer to sell pledged
securities of a debtor pursuant to a securities pledge or
margin agreement for the settlement of securities
transactions in accordance with the provisions of the SRC
and its IRR
f. Clearing and settlement of financial transactions through the
facilities of a clearing agency or similar entities duly
authorized, registered and/or recognized by the appropriate
regulatory agency like BSP and SEC, as well as any form of
actions of such agencies or entities to reimburse themselves
for any transactions settled for the debtor
g. Any criminal action against individual debtor or owner,
partner, director or officer of a debtor.
XPTN: Enforcement of civil liability arising from the offense
charged, deemed instituted with criminal action, shall be
covered by Stay Order
Issuance of Stay Order does not affect right to commence actions
or proceedings in order to preserve ad cautelam a claim against
debtor and to toll running of prescriptive period to file claim.
Effects of Commencement Order
Effects retroact to the date of filing of petition and shall:
1. Vest rehabilitation receiver with all powers and functions provided
for under FRIA
2. Prohibit or otherwise serve as the legal basis for rendering null
and void the results of any extrajudicial activity or process to
seize property, sell encumbered property, or otherwise attempt to
collect on or enforce a claim against debtor after commencement
date
3. Serve as legal basis for rendering null and void any set-off after
commencement date of any debt owed to the debtor by any
debtor by any of the debtor’s creditors
4. Serve as legal basis for rendering null and void the perfection of
any lien against debtor’s property after the commencement date
5. Consolidate all legal proceedings by and against debtor to the
court, provided, however, that the court may allow continuation
of cases in other courts where the debtor had initiated the suit
6. Exempt debtor from liability for taxes and fees, including
penalties, interests and charges due to the national government
or LGU
Effectivity and duration of commencement order
Effective for the duration of rehabilitation proceedings
XPTN:
1. Earlier lifted by court
2. Rehabilitation plan is seasonably confirmed or approved
3. Rehabilitation proceedings are ordered terminated by court
Notice of claim
Every creditor of debtor or any interested party whose claim is not yet
listed in the schedule of debts and liabilities shall file his verified notice
of claim not later than 5 days before the first initial hearing date fixed
in the Commencement Order
Jurisdictional requirements
Petitioner shall file (1) publisher’s affidavit showing that the publication
requirements and (2) petitioner’s affidavit showing that the service
requirement for local creditors and notification requirement for foreign
creditors had been complied with
Action at initial hearing
1. Determine creditors who made timely and proper filing of notice
of claim
2. Hear and determine any objection to qualifications and
appointment of rehabilitation receiver
3. Direct creditor to discuss their comments on petition and
Rehabilitation plan
4. Direct rehabilitation receiver to evaluate financial condition of
debtor and to prepare and submit to court the report which shall
state whether:
a. Debtor is insolvent and any unlawful or irregular acts
committed by debtor
b. Underlying assumptions, financial goals and procedures
under Rehab plan are realistic, feasible and reasonable
c. Substantial likelihood that debtor could be successfully
rehabilitated
d. Petition should be dismissed
e. Debtor should be dissolved and/or liquidated
5. Determine reasonableness of rehab receiver’s fees – presumed
reasonable unless creditors object to it
Rehabilitation Receiver
Refer to the person/s, natural or juridical, appointed as such by the
court pursuant to FRIA and which shall be entrusted with such powers
and duties as set forth herein.
TN: Receiver who is a juridical entity must designate, as its
representative, a natural person who possesses all qualifications and
none of disqualifications.
Juridical entity and representative are solidarily liable for all obligations
and responsibilities of rehabilitation receiver.
Conflict of interest
No person may be appointed as a rehab receiver or as a member of
management committee, or be engaged by rehab receiver or
management committee if he has a conflict of interest.
Individual shall be deemed to have conflict of interest if he is so
situated as to be materially influenced in the exercise of his judgment
for or against any party to the proceedings. Conflict of interest of
individual employed or contracted by rehab receiver or management
committee or its members shall be deemed to be a conflict of interest
of rehabilitation receiver or management committee.
Without limiting the generality of following, a rehab receiver may be
deemed to have conflict of interest if:
1. He is a creditor, owner, partner or stockholder of the debtor
2. He is engaged in a line of business which competes with debtor
3. He is, or was within 5 years from filing of the petition, a director,
officer, owner, partner, or employee or auditor or accountant of
debtor
4. He is, or was within 2 years from filing of the petition, an
underwriter of the outstanding securities of the debtor
5. He is related by consanguinity or affinity within 4th civil degree to
any individual creditor, or owner/partner/stockholder, director,
officer, employee or underwriter of insolvent debtor
6. He has any other direct or indirect material interest in the debtor
or any creditor
Disclosure of conflict of interest
KART 46
Should be disclosed at all times throughout the proceedings to the
court and to creditors
Disclosure must be made by:
1. Nominees for the position of rehab receiver
2. Rehab receiver and its designated representative in case of
juridical person
3. Persons who assist rehab receiver or management committee as
professionals, experts or employees
Objection to conflict of interest
Any party to the proceeding adversely affected by appointment of
persons above may filed his objection to appointment of rehab receiver
or member of management committee. Court may disregard conflict of
interest if it finds that it will not be detrimental to general interest of
stakeholders.
Failure to file timely objection is deemed a waiver of conflict of interest
rule.
Powers, duties and functions of rehab receiver
He shall be deemed an officer of the court with the principal duty of
preserving and maximizing the value of the assets of the debtor during
the rehab proceedings, determining the viability of the rehab of the
debtor, preparing and recommending Rehabilitation Plan to the court,
and implementing the approved Rehab Plan.
He may sue and recover, with the approval of the court, all amounts
owed to, and all properties pertaining to the debtor, including all
property or money of the debtor paid, transferred or disbursed in fraud
of debtor or its creditors, or which constitute undue preference of
creditor/s
Oath and bond
Prior to entering upon his powers, duties and responsibilities, rehab
receiver shall take an oath and file a bond in the amount fixed by
court, conditioned upon the faithful and proper discharge of his
powers, duties and responsibilities
Displacement of existing management by rehab receiver or
management committee
Upon motion of any interested party, court may appoint and direct
rehab receiver or management committee to assume the powers of
management of debtor, upon clear and convincing evidence of any of
following circumstances:
1. Actual or imminent danger of dissipation, loss, wastage or
destruction of debtor’s assets or other properties
2. Paralyzation of the business operations of debtor
3. Gross mismanagement of debtor, fraud or other wrongful conduct
on the part of, or gross or willful violation of FRIA by existing
management of debtor or the owner/partner/director, officer or
representative in management of debtor
Management Committee
Composed of persons, natural or juridical, appointed by the court
Composed of 3 qualified members appointed by court:
1st member – nominated by debtor
2nd member – nominated by creditor/s holding more than 50% of the
total obligations of debtor
3rd member – chairman; nominated by 1st and 2nd members
TN: In case of failure to nominate, court shall make appointment.
Role of Management Committee
Management committee shall have power to take custody of and
control all assets and properties owned or possessed by debtor. It shall
take the place of management and governing body of the debtor, and
assume their powers, rights and responsibilities.
May overrule or revoke the actions of previous management or
governing body of debtor
Action by management committee
Majority of all members shall be necessary for the management
committee to act or make a decision
Immunity from suit
Rehab receiver, members of management committee and all persons
they engage shall not be subject to any action, claim or demand for
any act or omission in good faith in the exercise of their powers and
functions under FRIA, these Rules, or other actions approved by the
court.
Determination of Claims
Registry of claims
Rehab receiver shall establish a preliminary registry of claims based on
schedule of debts and liabilities provided in the petition. He shall make
registry available for public inspection and give notice to debtor,
creditors and stakeholders on where and when they may inspect it.
All claims included in registry of claims must be duly supported by
sufficient evidence.
Opposition or challenge of claims
Debtor, creditors, stakeholders and other interested parties may
submit to the court a challenge to the claim/s
Rehab receiver shall submit to court the registry of claims which shall
include the following:
1. Claims that have not been subject to challenge
2. Claims resolved by rehabilitation receiver after these have been
challenged
3. Disputed but unresolved claims
Appeal
Aggrieved party may seek the review of decision of rehab receiver on a
claim by filing a motion with rehabilitation court within 5 days from
receipt of rehab receiver’s assailed decision, which shall be decided by
the court at the soonest possible time.
Rehabilitation Plan
Plan by which the financial well- being and viability of an insolvent
debtor can be restored using various means including, but not limited
to:
1. Debt forgiveness
2. Debt rescheduling
3. Reorganization or quasi-reorganization
4. Dacion en pago
5. Debt-equity conversion and sale of the business as a going
concern
6. Setting up of new business entity
7. Other similar arrangements approved by the court or creditors
Minimum Requirements of a Rehabilitation Plan
1. Material financial commitment to support the rehab plan and
2. Proper liquidation analysis
Material financial commitment
▪ This becomes significant in gauging the resolve, determination,
earnestness, and good faith of the distressed corporation in
financing the proposed rehab plan.
▪ Commitment may include voluntary undertakings of stockholders
or would-be investors of debtor-corporation indicating their
readiness, willingness, and ability to contribute funds or property
to guarantee the continued successful operation of debtor-
corporation during the period of rehab
▪ Nothing short of legally binding investment commitment/s from
third parties is required to qualify as a material financial
commitment
Liquidation analysis
▪ This shows the total liquidation assets and estimated liquidation
return to the creditors, as well as the FMV vis-à-vis the forced
liquidation value of the fixed assets
KART 47
▪ If not shown, court could not ascertain if petitioning debtor’s
creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated
Test in evaluating the economic feasibility of the plan
▪ To determine the feasibility of proposed Rehab Plan, it is
imperative that a thorough examination and analysis of distressed
corporation’s financial data must be conducted
▪ If results of such examination and analysis show that there is real
opportunity to rehabilitate the corporation in view of the
assumptions made and financial goals stated in the proposed
rehab plan, then it may be said that a rehab plan is feasible
▪ On the other hand, if the results of financial examination and
analysis clearly indicate that there lies no reasonable probability
that the distressed corporation could be revived and that
liquidation would, in fact, better subserve the interests of its
stakeholders, then, it may be said that rehabilitation would not be
feasible. In such case, rehab court may convert proceedings into
one for liquidation.
Characteristics of an economically feasible rehab plan
a. Debtor has assets that can generate more cash if used in its daily
operations than if sold
b. Liquidity issues can be addressed by a practicable business plan
that will generate enough cash to sustain daily operations
c. Debtor has a definite source of financing for the proper and full
implementation of Rehab Plan that is anchored on realistic
assumptions and goals
TN: Requirements put emphasis on liquidity
Present value recovery
In addition to the tests, FRIA emphasizes on rehabilitation that
provides for better present value recovery for its creditors.
This acknowledges that, in order to pave way for rehab, the creditor
will not be paid by debtor when credit falls due, court may order
suspension of payments to set rehab plan in motion; in the meantine,
creditor remains unpaid. By the time creditor is paid, financial and
economic conditions will have been changed. It is unfair if creditor
merely receives the face value of debt. Present value of credit takes
into account the interest that the amount of money would have earned
if creditor were paid on time.
Characteristics of rehab plan that is infeasible
1. Absence of a sound and workable business plan
2. Baseless and unexplained assumptions, targets and goals
3. Speculative capital infusion or complete lack thereof for the
execution of business plan
4. Cash flow cannot sustain daily operations
5. Negative net worth and the assets are near full depreciation or
fully depreciated
Principles:
▪ Corporation with debts that have already matured may still file a
petition for corp. rehab
▪ Determination of validity and approval of rehab plan is not the
responsibility of the rehab receiver, but remains the function of
the court
Creditor Approval of Rehabilitation Plan
Rehab receiver shall notify the creditors and stakeholders that the
Rehab Plan is ready for their examination. Within 20 days from date of
notification, rehab receiver shall convene the creditors, either as a
whole or per class, for purposes of voting on the approval of Rehab
Plan.
Rehab Plan is deemed approved by a class of creditors if members of
said class holding more than 50% of the total claims of the said class
vote in favor of Plan. Votes of creditors shall be based solely on the
amount of their respective claims based on registry of claims
submitted by rehab receiver.
Rehab receiver shall notify the court, the creditors or creditors’
committee and stakeholders of the approval or rejection.
Notwithstanding the rejection of Rehab Plan, court may, motu proprio
or upon motion of any interested party within 10 days from notice of
rejection, confirm the Plan if all of the following circumstances are
present:
1. Rehab Plan complies with the requirements specified in FRIA and
FR Rules
2. Rehab receiver recommends the confirmation of the Rehab Plan
3. Shareholders, owner or partners of the juridical debtor lose at
least their controlling interest as a result of the Rehab Plan
4. Rehab Plan would likely provide the objecting class of creditors
with compensation, which has a net present value greater than
that which they would have received if the debtor were under
liquidation
Procedure
1. Rehab Plan will be submitted to the court for confirmation
2. Court shall notify creditors
3. Creditor may file objection to the Rehab Plan
Objection shall be limited to:
a. Creditors’ support was induced by fraud
b. Documents or data relied upon in the Rehab Plan are
materially false or misleading
c. Rehab Plan is in fact not supported by the voting creditors
4. Hearing on the objections shall be conducted.
a. Court finds merit in objection – order rehab receiver or other
party to cure defect
b. Court determines that debtor acted in bad faith or that
curing the defect is not feasible – court to convert
proceedings into one for liquidation
Confirmation of the Rehabilitation Plan
Court shall issue an order confirming the Plan in any of the following
instances:
a. No objections are filed within 20-day period from receipt of notice
from court that Plan was submitted
b. Court finds the objections lacking in merit
c. Basis for the objection has been cured
d. Debtor has complied with order to cure the objection
Court may confirm Plan notwithstanding unresolved disputes over
claims if Plan has made adequate provisions for paying such claims.
If court finds that there is no substantial likelihood that the debtor can
be rehabilitated, it shall not confirm and, instead, declare failure of
rehab
Court shall have the power to approve or implement the Plan despite
the lack of approval, or objection from the owners, partners or
stockholders of insolvent debtor, provided that the terms are
necessary to restore financial well-being and viability of insolvent
debtor.
Effects of Confirmation
1. Plan shall bind the debtor and all persons who may be affected
thereby, including creditors, WON such persons have participated
in the proceedings or opposed the Plan or WON their claims have
been scheduled
2. Debtor shall comply with provisions of Plan and shall take all
actions necessary to carry them out
3. Payments shall be made to creditors in accordance with
provisions of Plan
4. Contracts and other arrangements between debtor and its
creditors shall remain valid and continue to apply to the extent
that they do not conflict with provisions of the Plan
5. Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on the creditors
regardless of WON the Plan is successfully implemented
KART 48
6. Claims arising after the approval of Plan that are otherwise not
treated by Plan are not subject to any Suspension Order
Period for confirmation of Rehab Plan
Court shall have a maximum period of 1 year from the date of filing of
petition to confirm Plan. If no confirmation within the period,
proceedings may, upon motion by interested party, rehab receiver, or
motu proprio, be converted into one for liquidation of debtor.
Discharge of Rehab Receiver
Upon confirmation, receiver shall submit report and accounting to
court for approval. Upon approval, court shall order receiver’s
discharge, unless Plan specifically describes role of receiver and/or
requires him to assume certain duties and responsibilities even after
confirmation.
Termination of proceedings
At any time from filing of petition, any interested party or rehab
receiver may file motion for termination. After hearing, court may
order proceedings terminated by either:
a. Declaring successful implementation
b. Failure of rehabilitation
Failure of Rehabilitation
1. Dismissal of petition by the court
2. Failure to submit a Rehabilitation Plan
3. Rehabilitation Plan is not confirmed by the court
4. Under the Rehabilitation Plan submitted by the debtor, there is no
substantial likelihood that the debtor can be rehabilitated within a
reasonable period
5. Rehabilitation Plan or its amendment is approved by the court but
in the implementation thereof, the debtor fails to perform its
obligations thereunder or there is failure to realize the objectives,
targets or goals set forth therein, including the timelines and
conditions for the settlement of the obligations due to the
creditors and other claimants
6. Determination that the Rehabilitation Plan may no longer be
implemented in accordance with its terms, conditions, restrictions,
or assumptions
7. There is finding that fraud was committed in securing the
approval of the Rehabilitation Plan or its amendment
8. In cases falling under Sec. 65 of this Rule, where, after finding
merit in the objection/s raised against the confirmation of the
Rehabilitation Plan, the defect is not cured within such time as
the court may order, or if the court determines that the debtor
acted in bad faith, or that it is not feasible to cure the defect
9. Failure of debtor to comply with these Rules, ROC, or any order
of the court
TN: If failure of rehab, proceedings shall be immediately converted to
liquidation
PRE-NEGOTIATED REHABILITATION
Filing of Petition
An insolvent debtor, by itself or jointly with any of its creditors, may
file a verified petition with the court for the approval of a Pre-
Negotiated Rehabilitation Plan
Petition shall be supported by an affidavit showing written approval or
endorsement of creditors holding at least 2/3 of total liabilities of
debtor, including secured creditors holding more than 50% of total
secured claims of debtor and unsecured creditors holding more than
50% of total unsecured claims of debtor.
Issuance of Order
Court determines that the petition is sufficient in form and substance,
it shall issue an Order which shall have same effects as
Commencement Order. It shall retroact to the date of filing of petition
and shall be effective for 120 days from filing of petition unless earlier
lifted by court on account of (1) approval of Pre-Negotiated Rehab
Plan or (2) termination of rehab proceedings.
Approval of Plan
If no verified objection, court shall approve the rehab plan.
Approved rehab plan shall not be implemented until after lapse of 20
days from date of 2nd publication of the Order
Grounds for Objection to the Petition
1. Allegations in the petition or Plan, or attachments thereto, are
materially false or misleading
2. Majority of any class of creditors do not in fact support the Plan
3. Support of the creditors or any of them was induced by fraud
4. Plan fails to accurately account for a claim against the debtor and
claim is not categorically declared as a contested claim
Hearing
Court shall set a hearing on the objections and comments.
If court finds it meritorious – direct debtor to cure defect
If court determines that debtor or creditors supporting the Plan acted
in bad faith or objection is non-curable – court may convert
proceedings to liquidation
TN: A finding that the objection has no substantial merit or that the
same has been cured shall be deemed an approval of Plan.
Period for approval of Plan
Court shall have maximum of 120 days from filing of petition to
approve or disapprove Plan. If court fails to act on it, Plan shall be
deemed approved
Effects of approval
Same with confirmation of rehab plan
OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENT
OR REHABILITATION PLAN (OCRA)
Minimum Requirements
a. Approval by:
1. Debtor
2. Creditors representing at least 67% of secured obligations of
debtor
3. Creditors representing at least 75% of unsecured obligations
of debtor
4. Creditors holding at least 85% of total liabilities, secured and
unsecured, of debtor
b. Publication of notice of OCRA once a week for at least 3
consecutive weeks in a newspaper of general circulation in the
Philippines
Standstill Period
Creditors cannot enforce their claim against the debtor during the 120-
day standstill period pending the negotiation and finalization of OCRA
May be agreed upon by parties and shall effective and enforceable not
only against the contracting parties but also against other creditors,
provided that:
a. Agreement is approved by creditors representing more than fifty
percent (50%) of the total liabilities of the debtor;
b. Notice thereof is published in a newspaper of general circulation
in the Philippines once a week for two (2) consecutive weeks; and
c. The standstill period does not exceed one hundred twenty (120)
days from the date of effectivity.
TN: Binding on all creditors once majority is met.
Expiration of Standstill Period
It shall expire upon:
1. Lapse of 120 days from effectivity of standstill agreement
2. Effectivity of OCRA
3. Termination of negotiations for OCRA as declared by creditors
representing more than 50% of total liabilities of debtor,
whichever comes first
KART 49

Publication of OCRA
Published once a week for at least 3 consecutive weeks in newspaper
of general circulation in the Philippines
OCRA shall take effect upon lapse of 15 days from date of last
publication of its notice.
Cram Down Effect
▪ Rehab Plan may be approved even over the opposition of the
creditors holding a majority of the corporation’s total liabilities if
there is a showing that rehabilitation is feasible and opposition of
the creditors is manifestly unreasonable
▪ It forces creditors to accept the terms and conditions of Rehab
Plan, preferring long-term viability over immediate but incomplete
recovery.
▪ OCRA that is approved shall have the same legal effect as
confirmation of Rehab Plan under a court-supervised
rehabilitation
“Manifestly unreasonable”
▪ Opposition is manifestly unreasonable if it counter-proposes
unrealistic payment terms and conditions which would more likely
than not, impede rather than aid its rehabilitation
▪ Unreasonableness becomes further manifest if the rehab plan, in
fact, provides for adequate safeguards to fulfill the majority
creditor’s claims and yet the latter persists on speculative or
unfounded assumptions that his credit would remain unfulfilled.
Effect of court action or other proceedings
RTC, as court of general jurisdiction, shall have jurisdiction over:
1. Petition for court assistance to execute or implement the standstill
agreement of OCRA
2. Petition for annulment of standstill agreement or OCRA
Any court action or other proceedings arising from, or relating to,
OCRA shall not stay its implementation, unless a TRO or preliminary
prohibitory injunction is issued by CA in an original action.
B. LIQUIDATION
Insolvency
Refer to the financial incapacity of the debtors to pay their liabilities as
they fall due in the ordinary course of business or whenever their
liabilities are greater than their assets
Liquidator
Refer to the natural person or juridical entity appointed as such by
court and entrusted with such powers and duties set forth in the Rules
If liquidator is a juridical entity, it must designate a natural person who
possesses all the qualifications and none of disqualifications as its
representative, it being understood that the juridical entity and the
representative are solidarily liable for all obligations and responsibilities
of liquidator.
How jurisdiction acquired
a. Voluntary liquidation (juridical or individual) – jurisdiction over all
persons affected is acquired upon publication of Liquidation Order
b. Involuntary liquidation
1. Juridical – jurisdiction over all persons affected is acquired
upon publication of petition or motion
2. Individual debtors
(i) jurisdiction over person of debtor – acquired upon
service of summons
(ii) jurisdiction over all other persons affected – acquired
upon publication of Liquidation Order
c. Suspension of payments – jurisdiction over all persons affected is
acquired upon publication of Suspension of Payments order
LIQUIDATION OF INSOLVENT JURIDICAL DEBTOR
a. Voluntary Liquidation
Filing of Petition
Insolvent juridical debtor may file verified petition for liquidation
in RTC which has jurisdiction over its principal office. Where
principal office is in Metro Manila, petition must be filed in RTC of
city or municipality where head office is located.
Motion to convert rehab proceedings into liquidation
proceedings
When there is pending court-supervised or pre-negotiated rehab
proceedings, debtor may file a motion in same court where it is
pending to convert rehab into liquidation proceedings.
Action on petition or motion
a. Court finds petition or motion sufficient in form and
substance – issue Liquidation order
b. If not sufficient – dismiss petition or deny motion
b. Involuntary Liquidation
Filing of petition
Three (3) or more creditors the aggregate of whose claims is at
least either P1M or at least 25% of the subscribed capital stock or
partners’ contributions of the insolvent juridical debtor, whichever
is higher, may file a petition for liquidation of an insolvent juridical
debtor in RTC which has jurisdiction over principal office of
debtor. Where it is in Metro Manila, petition must be filed in RTC
of place where head office is located.
Petition must show that:
1. There is no genuine issue of fact or law on the claim/s of the
petitioner/s, and that the due and demandable payments
thereon have not been made for at least 180 days or that
the debtor has failed generally to meet its liabilities as they
fall due; and
2. There is no substantial likelihood that the debtor may be
rehabilitated
Conversion of rehabilitation proceedings into liquidation
proceedings
1. Motion to convert rehabilitation into liquidation
proceedings
When there is a pending court-supervised or pre-negotiated
rehabilitation proceedings, 3 or more creditors the aggregate
of whose claims is at least either P1M or at least 25% of
subscribed capital or partners’ contributions, of the debtor,
whichever is higher, may file a motion in same court where
rehab proceedings are pending to convert it into liquidation.
Action on petition or motion
Court finds it sufficient in form and substance – issue an
order directing publication and directing parties to file their
comment and that copy of petition/motion be served on
debtor and all known creditors
2. Conversion by court of rehab into liquidation
After notice and hearing, court where rehab proceedings are
pending may also order conversion in those cases authorized
by law, or at any other time upon recommendation of rehab
receiver or management committee that the rehab of debtor
is no longer feasible.
INSOLVENCY OF INDIVIDUAL DEBTORS
a. Suspension of payments
Filing of petition
KART 50
 Individual debtor who has assets that exceed his liabilities but
foresees the impossibility of paying his debts when they
respectively fall due may file a verified petition for suspension of
payments in court having jurisdiction over the province or city
where he has resided for 6 months prior to filing of petition.
Suspension of Payments Order
If court finds petition sufficient in form and substance, it shall
issue within 5 working days from filing of petition a Suspension of
Payments Order
1. Prohibiting creditors from suing or instituting proceedings for
collection against the debtor
XPTNS:
1. Creditors having claims for personal labor,
maintenance, expense of last illness and funeral of the
wife or children of debtor incurred within 60 days
immediately prior to the filing of the petition and
2. Secured creditors
IMPT: These creditors may refrain from attending the
creditors’ meeting and from voting therein. They shall not be
bound by and agreement arrived at in such meeting, unless
they attend the meeting, participate in the discussions and
vote therein.
2. Calling creditor’s meeting
3. Directing creditors to present written evidence of their claims
4. Directing publication of said order
5. Directing clerk of court to send copy to all creditors
6. Prohibiting petitioner from selling, transferring, encumbering
or disposing his property
XPTN: Those used in the ordinary operations of commerce
or of industry in which the petitioner is engaged as long as
the proceedings are pending
7. Prohibiting petitioner from making any payment outside of
the necessary or legitimate expenses of his business or
industry as long as proceedings are pending
8. Appointing commissioner to preside over creditors’ meeting
b. Voluntary Liquidation
Filing of petition
Individual debtor whose liabilities exceed his assets and whose
debts exceed P500,000 may file a verified petition for liquidation
in the court having jurisdiction over the province or city where he
has resided for 6 months prior to filing of petition.
Action on petition
a. Court finds it sufficient in form and substance – issue
Liquidation Order
b. Not sufficient – dismiss petition
c. Involuntary Liquidation
Filing of petition
Any creditor/s with a claim of, or the aggregate of whose claims
is, at least P500,000 may file a verified petition for liquidation of
an insolvent debtor with the court of province or city where the
debtor resides
Acts of insolvency
1. Debtor is about to depart or has departed from the
Philippines, with intent to defraud his creditors
2. Being absent from the Philippines, with intent to defraud his
creditors, he remains absent
3. Debtor conceals himself to avoid the service of legal process
for the purpose of hindering or delaying the liquidation or of
defrauding his creditors
4. Debtor conceals, or is removing, any of his property to avoid
its being attached or taken on legal process
5. Debtor has allowed his property to remain under attachment
or legal process for 3 days for the purpose of hindering or
delaying the liquidation or defrauding any creditor
6. Debtor has confessed or offered to allow judgment in favor
of any creditor for the purpose of hindering or delaying the
liquidation or of defrauding any creditor
7. Debtor has wilfully allowed judgment to be taken against
him by default for the purpose of hindering or delaying the
liquidation or of defrauding his creditors
8. Debtor has suffered or procured his property to be taken on
legal process with intent to give a preference to one or more
of his creditors and thereby hinder or delay the liquidation or
defraud any one of his creditors
9. Debtor has made any assignment, gift, sale, conveyance or
transfer of his estate, property, rights or credits with intent
to hinder or delay the liquidation or defraud his creditors
10. Debtor has, in contemplation of insolvency, made any
payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits
11. Being a merchant or tradesman, debtor has generally
defaulted in the payment of his current obligations for a
period of 30 days
12. For 30 days, debtor has failed, after demand, to pay any
money deposited with him or received by him in a fiduciary
capacity
13. An execution having been issued against him on final
judgment for money, debtor shall have been found to be
without sufficient property subject to execution to satisfy the
judgment
Bond for filing petition
Petitioning creditor/s shall post a bond with the court
Liquidation Order
1. Declare debtor insolvent
2. Order liquidation of debtor and, in the case of a juridical debtor,
declare it as dissolved
3. Order the sheriff to take possession and control of all the
property of debtor
XPTN: Those that may be exempt from execution
4. Order the publication of Liquidation Order, together with the
petition, or motion to convert rehab proceedings into liquidation
proceedings, if any, in a newspaper of general circulation in the
Philippines once a week for 2 consecutive weeks
5. Direct payments of any claims and conveyance of any property
due the debtor to the liquidator
6. Prohibit payments and transfer of any property by the debtor
7. Direct all creditors to file their claims with liquidator
8. Authorize payment of administrative expenses as they become
due
9. State that the debtor and creditors who are not petitioner/s may
submit the names of other nominees to the position of liquidator
10. Set the case for hearing for election and appointment of liquidator
Effects of Liquidation Order
1. Juridical debtor shall be deemed dissolved and its corporate or
juridical existence terminated
2. Legal title to and control of all the assets of the debtor shall be
deemed vested in the liquidator or, pending his election or
appointment, with the court
XPTN: Those that may be exempt from execution
3. All contracts of debtor shall be deemed terminated and/or
breached, unless liquidator, within 90 days from time he takes his
oath of office, declares otherwise and the contract counter-party
agrees
4. No separate action for collection of an unsecured claim shall be
allowed. Actions already pending will be transferred to the
liquidator for him to accept and settle or contest. If the liquidator
contests or disputes the claim, court shall allow, hear, and resolve
such contest, except when the case is already on appeal. In such
a case, the suit may proceed to judgment, and any final and
executory judgment therein for a claim against the debtor shall
be filed and allowed in court
KART 51
5. No foreclosure proceeding shall be allowed for a period of 180
days from the date of the order.
TN: Liquidation Order shall not affect the right of secured creditor to
enforce his lien in accordance with applicable contract or law
XPTN: When he waives his right

Determination of claims

Right of set-off
If debtor and creditor are mutually debtor and creditor of each other,
one debt shall be set off against the other and only the balance, if any,
shall be allowed in the liquidation proceedings

Opposition or challenge to claims

Within 30 days from expiration of period for filing of claims, a creditor,
debtor, or other interested party may submit to the court an opposition
or challenge to any claim/s, serving a certified copy on the liquidator
and creditor holding the challenged claim. Upon expiration of the
period, liquidator shall submit to the court the registry of claims
containing the undisputed claims that have not been subject to
challenge. Such claims shall become final upon the filing of the register
and may be subsequently set aside only on grounds of fraud, accident,
mistake or excusable neglect.

Submission of disputed claims to the court

Liquidator shall resolve disputed claims and submit his findings thereon
to the court for final approval. Liquidator may disallow claims, subject
to final approval of the court.

PROCEDURAL REMEDIES

Rehabilitation
a. Order issued prior to approval of Plan – MR; no Rule 65
b. Order issued after approval of Plan – reviewable only through
SCA for certiorari (Rule 65)
c. Order approving or disapproving rehab plan – reviewable only
through petition for certiorari to CA (Rule 65) within 15 days from
notice of decision or order

Suspension of Payments
a. Suspension of Payments Order or any order issued by court prior
to its order confirming or disapproving the proposed agreement –
MR; no Rules 65
b. Dismissal of petition for suspension of payments on ground of
insufficiency in form and substance resulting in non-issuance of
Suspension of Payments Order and its order confirming or
disapproving proposed agreement – reviewable only through a
petition for certiorari to CA (Rule 65) within 15 days from notice
of decision or order

Liquidation
a. Order issued prior to issuance of Liquidation Order – MR; no Rule
65
b. Liquidation Order and order approving or disapproving Liquidation
Plan – reviewable only through petition for certiorari to CA (Rule
65) within 15 days from notice of decision or order

KART 52